S-1 1 d228907ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on September 22, 2011

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

HEXION U.S. FINANCE CORP.

(Exact name of registrant as specified in its charter)

 

Delaware   2821   20-1362484

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

HEXION NOVA SCOTIA FINANCE, ULC

(Exact name of registrant as specified in its charter)

 

Nova Scotia, Canada   2821   None

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

GUARANTORS LISTED ON SCHEDULE A HERETO

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

 

 

Douglas A. Johns, Esq.

Hexion U.S. Finance Corp.

180 East Broad Street

Columbus, Ohio 43215 (614) 225-4000

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

 

 

With a copy to:

Gregory A. Ezring, Esq.

David S. Huntington, Esq.

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, New York 10019

(212) 373-3000

 

 

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered   Amount to be
Registered
  Proposed Maximum
Offering Price Per
Note
  Proposed Maximum
Aggregate Offering
Price (1)
  Amount of
Registration Fee

9.00% Second-Priority Senior Secured Notes Due 2020

  $134,016,000   100%   $134,016,000   $15,560

Guarantees of 9.00% Second-Priority Senior Secured Notes Due 2020 (2)

       

 

 

(1) Estimated solely for purposes of calculating the registration pursuant to Rule 457(a) under the Securities Act of 1933, as amended (the “Securities Act”).
(2) Pursuant to Rule 457(n) of the rules of regulations under the Securities Act, no separate fee for the guarantees is payable.

 

 

 


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SCHEDULE A

 

Guarantor

   State or Other
Jurisdiction of
Incorporation or
Organization
  

Address of Registrants’ Principal

Executive Offices

   I.R.S. Employer
Identification
Number

Momentive Specialty Chemicals Inc.

   New Jersey    180 East Broad Street Columbus, Ohio 43215 (614) 225-4000    13-0511250

Momentive Specialty Chemicals Investments Inc.

   Delaware    180 East Broad Street Columbus, Ohio 43215 (614) 225-4000    51-0370359

Borden Chemical Foundry, LLC

   Delaware    180 East Broad Street Columbus, Ohio 43215 (614) 225-4000    31-1766429

HSC Capital Corporation

   Delaware    180 East Broad Street Columbus, Ohio 43215 (614) 225-4000    76-0660306

Lawter International Inc.

   Delaware    180 East Broad Street Columbus, Ohio 43215 (614) 225-4000    36-1370818

Momentive International Inc.

   Delaware    180 East Broad Street Columbus, Ohio 43215 (614) 225-4000    20-2833048

Oilfield Technology Group, Inc.

   Delaware    15115 Park Row, Ste. 160 Houston, TX 77984 (218) 646-2800    20-2873694

Momentive CI Holding Company (China) LLC

   Delaware    180 E. Broad St., Columbus, OH 43215 (614) 225-4000    20-3907441

NL Coop Holdings LLC

   Delaware    180 E. Broad St., Columbus, OH 43215 (614) 225-4000    27-2090696


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

 

Subject to Completion, Dated September 22, 2011

PROSPECTUS

LOGO

 

  Hexion U.S. Finance Corp.   Hexion Nova Scotia Finance, ULC

$134,016,000

9.00% Second-Priority Senior Secured Notes due 2020

 

 

This prospectus covers resales by a selling security holder of the 9.00% Second-Priority Senior Secured Notes due 2020 issued by Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC, each of which are wholly-owned subsidiaries of Momentive Specialty Chemicals Inc. (“MSC”) (each a “Co-Issuer” and also referred to herein as, an “Issuer” or the “Issuers”) on November 5, 2010, which we refer to herein as the “Notes.”

The Notes mature on November 15, 2020. Interest on the Notes is payable in cash at a rate of 9.00% per annum, from the Issue Date or from the most recent date to which interest has been paid or provided for, payable semiannually to holders of record at the close of business on May 1 or November 1 immediately preceding the interest payment date on May 15 and November 15 of each year.

At any time prior to November 15, 2015, the Issuers may redeem, in whole or in part, the Notes at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest and additional interest, if any, to the redemption date and a “make-whole” premium. Thereafter, the Issuers may redeem the Notes, in whole or in part, at the redemption prices set forth in this prospectus. In addition, at any time and from time to time on or prior to November 15, 2013, the Issuers may redeem up to 35% of the aggregate principal amount of Notes with the net cash proceeds from certain equity offerings by MSC or any direct or indirect parent of MSC at the redemption price of 109% of the principal amount of the Notes redeemed plus accrued and unpaid interest and additional interest, if any, to the redemption date.

The Notes are senior obligations of the Issuers. Each of the Notes are irrevocably and unconditionally guaranteed on a second-priority secured basis by MSC and certain of its domestic subsidiaries which guarantee our obligations under our senior secured credit facilities (the “Note Guarantors”).

The guarantees will be secured by second priority liens on substantially all of MSC’s and each subsidiary guarantor’s tangible and intangible assets, except for those assets excluded as collateral under our senior secured credit facilities, and all of MSC’s and each subsidiary guarantor’s capital stock of certain direct subsidiaries, other than the capital stock which is prohibited from being pledged pursuant to the indentures governing our other outstanding debentures, each subject to certain exceptions and limitations.

We have not applied, and do not intend to apply, for listing of the Notes on any national securities exchange or automated quotation system.

The selling security holder may sell the Notes covered by this prospectus in one or more transactions, directly to purchasers or through underwriters, brokers or dealers or agents, in public or private transactions, at fixed prices, prevailing market prices at the times of sale, prices related to the prevailing market prices, varying prices determined at the times of sale or negotiated prices. See “Plan of Distribution.”

MSC will not receive any proceeds from the resale of the Notes hereunder.

See “Risk Factors” beginning on page 19 of this prospectus for a discussion of certain risks that you should consider before investing in the Notes.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                     , 2011.


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     19   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     44   

MARKET AND INDUSTRY DATA AND FORECASTS

     46   

USE OF PROCEEDS

     47   

CAPITALIZATION

     48   

UNAUDITED PRO FORMA FINANCIAL INFORMATION

     49   

COVENANT COMPLIANCE

     52   

SELECTED HISTORICAL FINANCIAL AND OTHER INFORMATION

     54   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     56   

BUSINESS

     87   

MANAGEMENT

     103   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     126   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     128   

DESCRIPTION OF OTHER INDEBTEDNESS

     132   

DESCRIPTION OF THE NOTES

     139   

MATERIAL TAX CONSEQUENCES

     209   

SELLING SECURITY HOLDER

     215   

PLAN OF DISTRIBUTION

     216   

LEGAL MATTERS

     218   

EXPERTS

     218   

WHERE YOU CAN FIND MORE INFORMATION

     218   

SERVICE OF PROCESS AND ENFORCEABILITY OF CIVIL LIABILITIES

     218   

EXCHANGE RATE DATA

     219   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

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We have not authorized anyone to give you any information or to make any representations about us or the transactions we discuss in this prospectus other than those contained in this prospectus. If you are given any information or representations about these matters that is not discussed in this prospectus, you must not rely on that information. This prospectus is not an offer to sell or a solicitation of an offer to buy securities anywhere or to anyone where or to whom we are not permitted to offer or sell securities under applicable law. The delivery of this prospectus does not, under any circumstances, mean that there has not been a change in our affairs since the date of this prospectus. Subject to our obligation to amend or supplement this prospectus as required by law and the rules of the Securities and Exchange Commission, or the SEC, the information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of these securities. We will update this prospectus to the extent required by law.

The Notes may not be offered or sold in or into the United Kingdom by means of any document except in circumstances that do not constitute an offer to the public within the meaning of the Public Offers of Securities Regulations 1995 or under any applicable provision of the prospectus directive as adopted in the United Kingdom. All applicable provisions of the Financial Services and Markets Act 2000 must be complied with in respect of anything done in relation to the Notes in, from or otherwise involving or having an effect in the United Kingdom.

The Notes have not been and will not be qualified under the securities laws of any province or territory of Canada. The Notes are not being offered or sold, directly or indirectly, in Canada or to or for the account of any resident of Canada in contravention of the securities laws of any province or territory thereof.

 

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PROSPECTUS SUMMARY

This summary highlights information about Momentive Specialty Chemicals Inc. and the Notes contained elsewhere in this prospectus. This summary may not contain all the information that may be important to you. You should carefully read the entire prospectus before making an investment decision, especially the information presented under the heading “Risk Factors.” In this prospectus, except as otherwise indicated herein, or as the context may otherwise require (i) all references to “MSC,” “the Company,” “we,” “us” and “our” refer to Momentive Specialty Chemicals Inc. and its subsidiaries and (ii) all references to “Issuers” refer to Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC, the Co-Issuers of the Notes, and their successors, each of which are wholly owned subsidiaries of Momentive Specialty Chemicals Inc.

Overview

Momentive Specialty Chemicals Inc. (formerly known as Hexion Specialty Chemicals, Inc.), a New Jersey corporation with predecessors dating from 1899, is the world’s largest producer of thermosetting resins, or thermosets, and a leading producer of adhesive and structural resins and coatings. Thermosets are a critical ingredient in virtually all paints, coatings, glues and other adhesives produced for consumer or industrial uses. The type of thermoset used, and how it is formulated, applied and cured, determines its key attributes, such as durability, gloss, heat resistance, adhesion, or strength of the final product. Thermosetting resins include materials such as phenolic resins, epoxy resins, polyester resins, acrylic resins and urethane resins.

Hexion Formation

The Company was formed on May 31, 2005 by combining three companies affiliated with Apollo Management, L.P.: Resolution Performance Products, LLC (“Resolution Performance”), Resolution Specialty Materials, Inc. (“Resolution Specialty”) and Borden Chemical, Inc. (“Borden Chemical”), including Bakelite Aktiengesellschaft (“Bakelite”). We refer to this combination as the “Hexion Formation.” Since the Hexion Formation, we have expanded our specialty chemicals businesses through several strategic acquisitions.

Momentive Combination

On October 1, 2010, our parent, Momentive Specialty Chemicals Holdings LLC (formerly known as Hexion LLC) (“MCS Holdings”) and Momentive Performance Materials Holdings Inc. (“MPM Holdings”), the parent company of Momentive Performance Materials Inc. (“MPM”), became subsidiaries of a newly formed holding company, Momentive Performance Materials Holdings LLC (“Momentive Holdco”). We refer to this transaction as the “Momentive Combination.”

At the time of the Momentive Combination, Hexion LLC changed its name to Momentive Specialty Chemicals Holdings LLC and Hexion Specialty Chemicals, Inc. changed its name to Momentive Specialty Chemicals Inc. As a result of the Momentive Combination, Momentive Holdco became the ultimate parent entity of MPM and MSC. Momentive Holdco is controlled by investment funds (the “Apollo Funds”) managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”). Apollo may also be referred to as the Company’s owner.

Our business is organized based on the products that we offer and the markets that we serve. At June 30, 2011, we had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins.

As of June 30, 2011, we had 76 active production sites around the world. Through our worldwide network of strategically located production facilities, we serve more than 7,800 customers in over 100 countries.

Our position in certain additives, complementary materials and services further enables us to leverage our core thermoset technologies and provide our customers a broad range of product solutions. As a result of our

 

 

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focus on innovation and a high level of technical service, we have cultivated long-standing customer relationships. Our global customers include leading companies in their respective industries, such as 3M, Ashland Chemical, BASF, Bayer, DuPont, GE, Halliburton, Honeywell, Huntsman, Louisiana Pacific, Owens Corning, PPG Industries, Sumitomo, Valspar and Weyerhaeuser.

Our Business

We are a large participant in the specialty chemicals industry. Thermosetting resins are generally considered specialty chemical products because they are sold primarily on the basis of performance, technical support, product innovation and customer service. However, as a result of the impact of the recent global economic downturn and overcapacity in certain markets, chemical companies have focused more on price to retain business and market share. We have a broad range of thermoset resin technologies in our industry, with high quality research, applications development and technical service capabilities. We provide a broad array of thermosets and associated technologies, and have significant market positions in each of the key markets that we serve.

Our products are used in thousands of applications and are sold into diverse markets, such as forest products, architectural and industrial paints, packaging, consumer products and automotive coatings, as well as higher growth markets, such as composites and electrical components. Major industry sectors that we serve include industrial/marine, construction, consumer/durable goods, automotive, wind energy, aviation, electronics, architectural, civil engineering, repair/remodeling, graphic arts and oil and gas field support. The diversity of our products limits our dependence on any one market or end-use. We have a history of product innovation and success in introducing new products to new markets, as evidenced by more than 1,600 patents, the majority of which relate to the development of new products and processes for manufacturing.

The table below illustrates our net sales to external customers for the year ended December 31, 2010 as well as the major product lines, major industry sectors served, major end-use markets and key differentiating characteristics relative to our products.

 

    

Epoxy, Phenolic and Coating

Resins

      

Forest Products Resins

2010 Net Sales

   $3.0 billion      $1.6 billion

Major Products

  

  

Epoxy resins and intermediates

Phenolic specialty resins

Versatic acids and derivatives

Phenolic encapsulated substrates

Polyester resins

Acrylic resins

    

   Formaldehyde based resins and formaldehyde

Major Industries

Served

  

  

Wind Energy

Energy: Oil and gas field drilling and development

Transportation and industrial

Construction

Electrical equipment and appliances

Electronic products

Marine and recreational (boats, RVs)

Chemical manufacturing

Home building and maintenance

Consumer durable and non-durable products

General manufacturing

    

  

Home building and maintenance

Home repair and remodeling

Furniture

Agriculture

 

 

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Epoxy, Phenolic and Coating

Resins

      

Forest Products Resins

Core End-Use Markets

  

  

Oil and gas field proppants

Wind energy

Auto coatings and friction materials

Marine and industrial coatings

Electronics

Commercial and residential construction

Engineered materials

Decorative paints

    

  

Commercial and residential construction

Plywood, particleboard, medium-density fiberboard (“MDF”), oriented strand board (“OSB”)

Furniture

Agrochemical

Key Product

Characteristics

  

  

Strength and adhesion

Durability

Resistance (water, UV, corrosion, temperature)

    

  

Strength and adhesion

Durability

Moisture resistance

The discussion that follows is based on our organizational structure and reportable segments in 2011.

Epoxy, Phenolic and Coating Resins

We believe that we are a leading global supplier of epoxy, phenolic and coating resins which are used in a variety of industrial and consumer applications to increase strength, adhesion and provide durability. These products are used in numerous end-markets including: oil and gas, wind energy, electronics, protective coatings, engineered materials, automotive, decorative paints, specialty coatings and residential, commercial and industrial construction.

Epoxy resins are the fundamental component of many types of materials and are used either as replacements for traditional materials such as metal, or in applications where traditional materials do not meet demanding engineering applications. Phenolic resins are used in applications that require extreme heat resistance and strength, such as after-market automotive and OEM truck brake pads, aircraft components and electrical laminates. Additionally, epoxy-based surface coatings are among the most widely used industrial coatings due to their structural stability and broad application functionality combined with overall economic efficiency. The demand for epoxy, phenolic and coating resins is driven by both economic growth generally and technological innovation, including environmentally friendly and energy efficient applications.

Supporting the growth in our business, we operate two of the three largest epoxy resins manufacturing facilities in the world, including the world’s only continuous-flow manufacturing process facility. We believe our global scope and our ability to internally produce key raw materials gives us a significant competitive advantage versus our non-integrated competitors. For example, we produce and internally consume the majority of our bisphenol-A, or BPA, and virtually all of our epichlorohydrin, or ECH, the key base chemicals in the downstream manufacturing of base epoxy resins and epoxy specialty resins.

Forest Products Resins

We are a leading global supplier of formaldehyde-based resins used in a variety of industrial and consumer applications. These products are used in numerous end-markets including: residential, commercial and industrial construction, furniture and agriculture. The demand for forest products resins is driven by general economic growth and environmental sustainability and we benefit from a manufacturing footprint that is strategically located in close proximity to our customers. Demand for our formaldehyde-based resins is also primarily driven by the residential housing market globally and in particular North America.

 

 

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We are the leading producer of formaldehyde-based resins used in a wide range of applications for the North American forest products industry and also hold significant positions in Europe, Latin America, Australia and New Zealand. We are also the world’s largest producer of formaldehyde, a key raw material used to manufacture thousands of products and we internally consume the majority of our formaldehyde production. We believe this strategic back-end integration gives us significant incremental economic value.

Competitive Strengths

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

Leading Positions in Diverse End Markets. We benefit from holding a longstanding number one or two position in a diverse group of consumer and industrial segments. Markets we serve on a global basis include, among other markets, energy, automotive, construction and consumer products, each further stratified by our strategic regional manufacturing capabilities. We believe the diversification they provide will continue to support our ability to create significant value throughout the economic cycle and mitigate the financial impact of a downturn in a single market. Furthermore, we believe our strategic choice to backward integrate into selected base formulations gives us a competitive advantage over many of our smaller competitors.

Strong Presence in High Growth Regions and End Markets. Across our strategic manufacturing footprint serving over 100 countries, we have made tactical investments in high growth specialty formulations globally as well as in select geographies generally that are expected to generate outsized demand for our products over the next several years. For example, we have achieved 60% revenue growth in our oil field resins business since 2007, as a result of strategic capital allocation and our ongoing leadership in global shale development.

In addition to investing in various high growth technologies we have a strong presence in key emerging markets including Brazil, China, Russia and other key developing economies. For example in 2008 and 2009, we invested approximately $55 million in a new forest products resins manufacturing complex to serve the growing engineered wood market in southern Brazil.

Going forward, we believe our leading share in these key markets and technologies will allow us to outperform our peers and continue our strong financial performance.

Well-Invested Global Asset Base with Low-Cost Position. We support our global market position with our strategically-located, low-cost manufacturing presence. Our low-cost position is the result of our production and manufacturing facilities strategically located throughout the world and our integrated supply position in several critical intermediate materials. We believe our ability to internally produce raw and intermediate materials provides us with a cost advantage over our competitors. Furthermore, our large market position and scale in each of our key product markets provides us with purchasing and manufacturing efficiencies. We also benefit from having the contractual ability to pass-through material input price increases for many of our contracts.

Solutions-based Selling Proposition Drives Customer Loyalty and Sales Growth. The majority of our customers require solutions that are tailored to their individual production needs and require a high degree of technical service and customized product formulations. We believe that the value-added nature of these services allows us to earn higher and more stable margins than general material producers who do not offer the same level of service. Our diverse portfolio of differentiated chemicals and materials allows us to leverage related technologies across geographies, customers and end-markets in order to provide a broad range of product and technical service solutions. As a result, we have cultivated stable, long-standing customer relationships.

 

 

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Experienced and Highly Motivated Management Team with Proven Track Record. We believe that we have a world-class management team led by Craig O. Morrison, our chairman and chief executive officer, and William H. Carter, our chief financial officer. Our management team has demonstrated expertise in growing our business organically, integrating acquisitions and executing on significant cost cutting programs.

Growth and Strategy

We believe that we have opportunities for growth through the following strategies:

Develop and Market New Products. We will continue to expand our product offerings through research and development initiatives and research partnership formations with third parties. Through these innovation initiatives we will continue to create new generations of products and services which will drive revenue and earnings growth.

Expand Our Global Reach in Faster Growing Regions. We intend to continue to grow internationally by expanding our product sales to our customers around the world. Specifically, we are focused on growing our business in markets in the high growth regions of Asia-Pacific, Eastern Europe, Latin America, India and the Middle East, where the usage of our products is increasing. Furthermore, by consolidating sales and distribution infrastructures via the Momentive Combination, we expect to accelerate the penetration of our high-end, value-added products into new markets, thus further leveraging our research and application efforts and existing global footprint.

Increase Shift to High-Margin Specialty Products. We continue to proactively manage our product portfolio with a focus on specialty, high-margin applications and the reduction of our exposure to lower-margin products. As a result of this capital allocation strategy and strong end market growth underlying these specialty segments including wind energy and oilfield applications, they will continue to be a larger part of our broader portfolio. Consequently, we have witnessed a strong organic improvement in our profitability profile as a whole over the last several years which we believe will continue.

Continue Portfolio Optimization and Pursue Targeted Add-On Acquisitions and Joint Ventures. The specialty chemicals and materials market is comprised of numerous small and mid-sized specialty companies focused on niche markets, as well as smaller divisions of large chemical conglomerates. As a large manufacturer of specialty chemicals and materials with leadership in the production of thermosets, we have a significant advantage in pursuing add-on acquisitions and joint ventures in areas that allow us to build upon our core strengths, expand our product, technology and geographic portfolio, and better serve our customers. We believe we can consummate a number of these acquisitions at relatively attractive valuations due to the scalability of our existing global operations and deal-related synergies. In addition, we have and will continue to monitor the strategic landscape for opportunistic divestments consistent with our broader specialty strategy. For example, we recently completed the sale of our global inks and adhesive resins business, or IAR business, and North American coatings and composite resins business, or CCR business.

Capitalize on the Momentive Combination to Grow Revenues and Realize Operational Efficiencies. We believe the Momentive Combination will present opportunities to increase our revenues by leveraging each of ours and MPM’s respective global footprints and technology platforms. For example, in Asia, we anticipate being able to accelerate the penetration of our products. Further, we anticipate that the Momentive Combination will provide opportunities to streamline our business and reduce our cost structure. We are currently targeting $58 million in annual cost savings related to the Momentive Combination. We anticipate these savings to come from logistics optimization, reduction in corporate expenses and reductions in the costs for raw materials and other inputs. Through June 30, 2011, we implemented $27 million of these savings on a run-rate basis, and anticipate fully realizing the remaining anticipated savings over the next 18 to 24 months.

 

 

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Generate Free Cash Flow and Deleverage. We expect to generate strong free cash flow due to our size, advantaged cost structure, and reasonable ongoing capital expenditure requirements. Furthermore, we have demonstrated expertise in managing our working capital, which has been further augmented as a result of our increased sales from the Momentive Combination. Our strategy of generating significant free cash flow and deleveraging is complimented by our long-dated capital structure with no near-term maturities and strong liquidity position. This financial flexibility allows us to prudently balance deleveraging with our focus on growth and innovation.

Risk Factors

Despite our competitive strengths discussed above, investing in the Notes involves a number of risks, including:

 

   

As of June 30, 2011, we had $3,641 million of consolidated outstanding indebtedness. Our substantial debt could adversely affect our operations and prevent us from satisfying our obligations under our debt obligations. Based on interest rates as of June 30, 2011, our annualized cash interest expense is projected to be approximately $326 million.

 

   

If global economic conditions weaken again, it will negatively impact our business, results of operations and financial condition;

 

   

We may be unable to achieve the cost savings or synergies that we expect to achieve from our strategic initiatives, including the Momentive Combination, which would adversely affect our profitability and financial condition;

 

   

Fluctuations in direct or indirect raw material costs could have an adverse impact on our business; and

 

   

We depend on certain of our key executives and our ability to attract and retain qualified employees.

For discussion of the significant risks associated with our business, our industry and investing in the Notes, you should read the section entitled “Risk Factors.”

 

 

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Organizational Structure

Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC, the Issuers of the Notes, are both direct wholly owned subsidiaries of MSC. No separate financial information has been provided in this prospectus for Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC because (1) Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC have no independent operations other than acting as finance companies of MSC, (2) Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC have no material assets and (3) MSC and certain of its domestic subsidiaries guarantee the Notes. The indenture governing the Notes restricts the Issuers of the Notes from conducting any business operations other than those in connection with the issuance of the Notes.

The chart below is a summary of the organizational structure of MSC (which excludes our affiliate, MPM) and illustrates the long-term debt outstanding as of June 30, 2011.

LOGO

 

(1) Direct and indirect ownership
(2) Indirect ownership

 

 

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MSC is a New Jersey corporation, with predecessors dating back to 1899. Our principal executive offices are located at 180 East Broad Street, Columbus, Ohio 43215. Our telephone number is (614) 225-4000. We maintain a website at www.momentive.com where general information about our business is available. The internet address is provided for informational purposes only and is not intended to be a hyperlink. The information contained on our website is not a part of this prospectus.

Our Equity Sponsor

Apollo Global Management, LLC is a leading global alternative asset manager with offices in New York, Los Angeles, London, Frankfurt, Luxembourg, Singapore, Hong Kong and Mumbai. As of June, 30, 2011, Apollo had assets under management of approximately $72 billion invested in its private equity, capital markets and real estate businesses. Apollo may also be referred to as our owner.

Recent Divestitures

Ink and Adhesive Resins Business

On January 31, 2011, we completed the sale of our global IAR business to Harima Chemicals Inc. for a net cash purchase price of $120 million. The IAR business had 2010 net sales of $356 million, and its divestiture served to increase our consolidated margin profile and furthered our alignment of resources with our core specialty chemicals and materials product portfolio. We divested the complete business, including 11 manufacturing facilities on five continents, the IAR global product portfolio and all intellectual property primarily related to the IAR business. We refer to this sale as the IAR Divestiture.

North American Coatings and Composites Business

On May 31, 2011, we sold our North American CCR business to PCCR USA, Inc., a subsidiary of Investindustrial, a European investment group. The CCR business employed 225 people at four manufacturing facilities and generated 2010 net sales of approximately $220 million. We refer to this sale as the CCR Divestiture.

2010 Financing Developments

November Refinancing Transaction

In November 2010, we refinanced $533 million in outstanding principal amount of our 9.75% Second-Priority Senior Secured Notes due 2014 through the original issuance of $574 million aggregate principal amount of the Notes. As a result, we effectively extended our total weighted average debt maturities by one year (“November Refinancing Transaction”).

January Refinancing Transactions

In January 2010, we amended and restated our senior secured credit facilities. Under the amendment and restatement, we extended the maturity of approximately $959 million of our senior secured credit facility term loans from May 5, 2013 to May 5, 2015 and increased the interest rate with respect to such term loans from LIBOR plus 2.25% to LIBOR plus 3.75%. In addition to, and in connection with, this amendment and restatement agreement, we issued $1,000 million aggregate principal amount of 8.875% senior secured notes due 2018. We used the net proceeds of $993 million ($1,000 million less original issue discount of $7 million) from the issuance to repay $800 million of our U.S. term loans under the senior secured credit facility, pay certain related transaction costs and expenses and provide incremental liquidity (“January Refinancing Transactions” and, along with the November Refinancing Transaction, the “January and November Refinancing Transactions”).

 

 

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Offering Summary

The following summary highlights all material information contained elsewhere in this prospectus but does not contain all the information that you should consider before investing in the Notes. We urge you to read this entire prospectus, including the “Risk Factors” section and the consolidated financial statements and related notes.

 

Co-Issuers

Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC.

 

Notes Offered

Up to $134,016,000 aggregate principal amount of 9.00% Second-Priority Senior Secured Notes Due 2020.

 

  In November 2010, Apollo, our controlling stockholder, acquired the Notes in exchange for certain of our existing Notes held by Apollo. Apollo owned approximately $134 million principal amount of the Notes as of June 30, 2011. Apollo has the right to have its Notes registered pursuant to a registration rights agreement with the Company. See “Certain Relationships and Related Party Transactions.”

 

Maturity Date

The Notes will mature on November 15, 2020.

 

Interest

The Notes bear interest at a rate per annum equal to 9.00%, payable semi-annually in arrears, on May 15 and November 15 of each year.

 

Guarantees

The Notes are guaranteed, jointly and severally, irrevocably and unconditionally, on a senior secured basis, by MSC and certain of its existing domestic subsidiaries that guarantee our obligations under our senior secured credit facilities and MSC’s future domestic subsidiaries that guarantee any debt of MSC, the Issuers or any guarantor. See the footnotes to our consolidated financial statements herein for separate financial information on these guarantors. See “Description of the Notes—Guarantees” and “—Certain Covenants—Future Guarantors.”

 

Ranking

The Notes and the guarantees are our senior secured obligations. The Notes and the guarantees rank:

 

   

pari passu in right of payment with all of our and our guarantors’ existing and future senior indebtedness, including debt under our senior secured credit facilities, our senior secured notes and the guarantees thereof;

 

   

effectively junior in priority as to collateral with respect to our and our guarantors’ existing and future first-priority secured debt obligations under our senior secured credit facilities, our senior secured notes and any other future obligations secured by a first-priority lien on the collateral (subject to certain exceptions as described in “Description of Notes—Security for the Notes”) to the extent of the collateral securing such debt;

 

 

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equal in priority as to collateral with respect to our and our guarantors’ existing and future obligations under any obligations secured by a second-priority lien on the collateral, including our Existing Second Lien Notes (as defined in the indenture);

 

   

senior in right of payment to all of our and our guarantors’ existing and future subordinated indebtedness; and

 

   

effectively junior in right of payment to all existing and future indebtedness and other liabilities of any subsidiary that does not guarantee the Notes, including our foreign subsidiaries. The Notes will also be effectively junior to the liabilities of our non-guarantor subsidiaries, including our foreign subsidiaries.

 

  As of June 30, 2011:

 

  (1) MSC and its subsidiaries had $3.6 billion aggregate principal amount of total indebtedness outstanding (including the Notes and the guarantees);

 

  (2) MSC and its subsidiaries had $1.4 billion aggregate principal amount of secured senior indebtedness consisting of term loans and revolving loans outstanding under our senior secured credit facilities, which constitute first-priority lien obligations. In addition, as of such date we had $200 million of availability under our revolving facility (excluding the incremental term loan commitments) under our senior secured credit facilities, all of which is secured by a first-priority lien on the collateral securing the Notes;

 

  (3) MSC and its subsidiaries had $1 billion aggregate principal amount of secured indebtedness outstanding constituting lien obligations junior to our senior secured credit facilities and senior to second-priority lien obligations, consisting of our existing senior secured Notes and guarantees thereof, which constitute first-priority lien obligations with respect to the Notes;

 

  (4) MSC and its subsidiaries had $694 million aggregate principal amount of indebtedness outstanding constituting second-priority lien obligations, consisting of secured indebtedness under the Notes and the guarantees and the Existing Second Lien Notes; and

 

  (5) of the $3.6 billion aggregate principal amount of indebtedness outstanding, MSC’s subsidiaries that are not obligors with respect to the Notes had total indebtedness of approximately $712 million (excluding intercompany liabilities of subsidiaries that are not obligors).

 

  In addition, we had $300 million of unutilized capacity under our senior secured revolving credit facility and our liquidity facility provided by affiliates of Apollo.

 

 

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  See “Description of the Notes—Ranking” and “Use of Proceeds.”

 

Collateral

The Notes and the guarantees are secured by second priority liens on:

 

   

substantially all of our and each subsidiary guarantor’s tangible and intangible assets (including, but not limited to, accounts receivable, inventory, general intangibles and proceeds of the foregoing), except for those assets excluded as collateral under our senior secured credit facilities; and

 

   

all of our and each subsidiary guarantor’s capital stock of certain direct subsidiaries other than the capital stock which is prohibited from being pledged pursuant to the indentures governing our other outstanding debentures, provided that no more than 65% of the capital stock of first-tier foreign subsidiaries will be required to be pledged; subject to certain exceptions as described below if any such pledge would require that separate financial statements with respect to any such pledged entity (other than certain “Momentive Canada Entities,” as defined in the indenture governing the Notes; including, currently, Momentive International Holdings Coöperatief U.A. (“Momentive Coop”)) would be required pursuant to Rule 3-16 of Regulation S-X to be provided in connection with the filing of a registration statement related to the Notes or any other filing we are required to make with the SEC. See “Description of the Notes—Security for the Notes—Limitations on Stock Collateral.”

 

 

Notwithstanding the foregoing, the collateral securing the Notes does not include (A) any real estate or Principal Property (as such term is defined in the indentures governing certain of our existing debentures and means generally any manufacturing or processing plant or warehouse owned or leased by us or any of our subsidiaries and located within the United States), (B) any property or assets owned by any of our foreign subsidiaries, (C) any assets which, if included in the collateral, would require our existing debentures to be ratably secured with the Notes pursuant to the terms of the indentures for such existing debentures, (D) any vehicle covered by a certificate of title or ownership, (E) any assets not required to be pledged as security for holders of first-priority lien obligations, (F) any letter of credit rights to the extent any Issuer or guarantors is required by applicable law to apply the proceeds of a drawing of such letter of credit for a specified purpose, (G) any right, title or interest of any Issuer or the guarantors in any license, contract or agreement to which such Issuers or guarantor is a party or any of its right, title or interest thereunder to the extent that such a grant would result in a breach of the terms of, or constitute a default under, any license, contract or agreement to which such Issuer or guarantor is a party or (H) any equipment or other asset owned by any Issuer or guarantor that is subject to a purchase money lien or a capitalized lease obligation, if the contract or other agreement in which such lien is granted prohibits

 

 

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or requires the consent of any person other than the Issuers or guarantors as a condition to the creation of any other security interest on such equipment (sometimes referred to in this prospectus as “excluded collateral”).

 

  See “Risk Factors—Risks Related to an Investment in the Notes—Rights of holders of Notes in the collateral may be adversely affected by bankruptcy proceedings.”

 

  The book value of the assets of MSC and the assets of the domestic subsidiary guarantors, which are included in the collateral, was $725 million as of June 30, 2011.

 

  Certain of our first-tier foreign subsidiaries, from time to time, could have a value in excess of 20% of the principal amount of the Notes, and pledges of the capital stock of such entities would require that separate financial statements pursuant to Rule 3-16 of Regulation S-X be provided in connection with the filing of a registration statement related to the Notes or any other filing we are required to make with the SEC. However, pursuant to collateral cut-back provisions in the indenture governing the Notes, our pledge of such stock as collateral for the Notes will be limited to less than 20% of the principal amount of the Notes. Notwithstanding the foregoing, as of the date of this prospectus, our pledge of the capital stock of Momentive Coop, will not be cut back in accordance with the terms of the indenture governing the Notes. Momentive Coop indirectly owns Momentive Specialty Chemicals Canada Inc., Momentive Specialty Chemicals B.V. and various of our other foreign subsidiaries through which substantially all of our foreign operations are conducted. See “Description of the Notes—Security for the Notes—Limitations on Stock Collateral.”

 

  The obligations under our senior secured credit facilities also benefit from a security interest in the assets of certain of our foreign subsidiaries that are borrowers or loan parties thereto. The Notes will not have the benefit of a security interest in such foreign assets. The pledge of the stock of certain of our foreign subsidiaries as collateral for the obligations under our senior secured credit facilities also is not subject to any collateral cut back provisions of the type that are applicable to the collateral for the Notes.

 

 

The priority of the collateral liens securing the Notes will be junior to the collateral liens securing the senior secured credit facilities, our senior secured Notes and other obligations secured by first-priority liens as described under “Description of the Notes—Security for the Notes.” The value of collateral securing the Notes at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. The liens on the collateral may be released without the consent of the holders of Notes if collateral is disposed of in a transaction that complies with the

 

 

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applicable indenture, security documents and intercreditor agreement and otherwise as provided in the indenture and the intercreditor agreement. In the event of a liquidation of the collateral, the proceeds may not be sufficient to satisfy the obligations under the Notes and any other indebtedness secured on a senior or pari passu basis thereto. See “Risk Factors—Risks Related to an Investment in the Notes—It may be difficult to realize the value of the collateral securing the Notes.”

 

Optional Redemption

We may also redeem some or all of the Notes before November 15, 2015 at a redemption price of 100% of the principal amount plus accrued and unpaid interest and additional interest, if any, to the redemption date, plus a make-whole premium. Thereafter, the Notes may be redeemed at our option on the redemption dates and at the redemption prices specified under “Description of the Notes—Optional Redemption.”

 

Optional Redemption After Certain Equity Offerings

On or prior to November 15, 2013, we may redeem up to 35% of the aggregate principal amount of Notes with the net cash proceeds of one or more equity offerings at the redemption prices specified under “Description of the Notes—Optional Redemption.”

 

Change of Control

If we experience a change of control (as defined in the indenture governing the Notes), we will be required to make an offer to repurchase the Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. See “Description of the Notes—Change of Control.”

 

Asset Sale Offer

If we sell assets under certain circumstances and do not use the proceeds for specified purposes, we must reduce the principal amount of the Notes by making a redemption under the optional redemption provisions, repurchase the Notes through open market purchases at or above 100% of the principal amount of the Notes repurchased and/or make an offer to repurchase the Notes at 100% of the principal amount of the Notes repurchased, plus accrued and unpaid interest to the applicable repurchase date. See “Description of the Notes—Certain Covenants—Asset Sales.”

 

Certain Covenants

The indenture that governs the Notes contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:

 

   

incur or guarantee additional indebtedness or issue preferred stock;

 

   

grant liens on assets;

 

   

pay dividends or make distributions to our stockholders;

 

   

repurchase or redeem capital stock or subordinated indebtedness;

 

   

make investments or acquisitions;

 

 

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enter into sale/leaseback transactions;

 

   

incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us;

 

   

enter into transactions with our affiliates;

 

   

merge or consolidate with other companies or transfer all or substantially all of our assets; and

 

   

transfer or sell assets.

 

  These covenants are subject to a number of important limitations and exceptions as described under “Description of the Notes—Certain Covenants.”

 

 

Use of Proceeds

The net proceeds from the sale of the securities by this prospectus will be received by the selling security holder. MSC will not receive any of the proceeds from any sale by the selling security holder of the securities covered by this prospectus. See “Use of Proceeds” and “Selling Security Holder.”

Book-Entry Form

The Notes were initially issued to an affiliate of Apollo in physical form and are represented by definitive certificates with certain restrictive legends. Following the effective date of this registration statement on Form S-1, the definitive certificates representing the Notes that are resold pursuant to this registration statement on Form S-1 will be exchanged (in whole or part as applicable) for a beneficial interest in a permanent global certificate, which will be deposited with, or on behalf of, The Depository Trust Company (“DTC”) and registered in the name of a nominee of DTC. Beneficial interests in any of the securities will be shown on, and future transfers will only be effected through, records maintained by DTC or its nominee and any such interest may not be exchanged for certificated securities, except in limited circumstances. The Notes issued upon resale of the Notes represented by definitive certificates will be in fully registered book-entry form only, without coupons in denominations of $2,000 and any integral multiple of $1,000, provided that such Notes may be issued in denominations of less than $1,000 solely to accommodate book-entry positions that have been created by the depository in denominations of less than $1,000.

Risk Factors

Investment in the Notes involves substantial risks. See “Risk Factors” immediately following this summary for a discussion of certain risks relating to an investment in the Notes.

 

 

 

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Summary Historical Consolidated Financial Data of Momentive Specialty Chemicals Inc.

The following table presents MSC’s summary historical financial information as of and for the periods presented. The summary historical financial information as of June 30, 2011 and for the six month periods ended June 30, 2011 and 2010 have been derived from, and should be read in conjunction with, MSC’s unaudited condensed consolidated financial statements included elsewhere in this prospectus. The summary historical financial information as of and for each of the years ended December 31, 2010, 2009 and 2008 have been derived from, and should be read in conjunction with, MSC’s audited financial statements included elsewhere in this prospectus.

You should read the following summary historical consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Capitalization,” “Unaudited Pro Forma Financial Information,” “Selected Historical Financial and Other Information” and our consolidated financial statements and related notes and other financial information included elsewhere in this prospectus.

 

 

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Momentive Specialty Chemicals Inc.

Summary Historical Consolidated Financial Data

 

     Six months ended
June 30,
    Year ended December 31,  

(In millions)

   2011     2010     2010     2009     2008  

Statement of Operations

          

Net sales

   $ 2,732      $ 2,203      $ 4,597      $ 3,549      $ 5,390   

Cost of sales

     2,308        1,879        3,866        3,077        4,807   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     424        324        731        472        583   

Selling, general and administrative expense

     171        158        331        305        342   

Terminated merger and settlement (income) expense, net (1)

     —          (28     (171     (62     1,027   

Integration and transaction costs

     —          —          —          —          27   

Asset impairments

     18        —          —          49        8   

Other operating (income) expense, net

     (13     (3     25        44        41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     248        197        546        136        (862

Interest expense, net

     129        135        276        223        303   

Loss (gain) on extinguishment of debt

     —          8        30        (224     —     

Other non-operating (income) expense, net

     (2     3        (4     —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax and earnings from unconsolidated entities

     121        51        244        137        (1,171

Income tax expense (benefit)

     3        17        35        (8     (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before earnings from unconsolidated entities

     118        34        209        145        (1,155

Earnings from unconsolidated entities, net of taxes

     6        4        8        2        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     124        38        217        147        (1,153

Net income (loss) from discontinued operations, net of taxes (2)

     2        7        (3     (30     (32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     126        45        214        117        (1,185

Net income attributable to noncontrolling interest

     —          —          —          (3     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Momentive Specialty Chemicals Inc.

   $ 126      $ 45      $ 214      $ 114      $ (1,190
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows provided by (used in):

          

Operating activities

   $ (43   $ (108   $ 45      $ 355      $ (632

Investing activities

     103        (35     (99     (132     (134

Financing activities

     (51     124        97        (222     706   

Balance Sheet Data (at end of period):

          

Cash and cash equivalents

   $ 196        $ 186      $ 142      $ 117   

Short-term investments

     6          6        10        7   

Working capital (3)

     630          551        204        390   

Total assets

     3,363          3,137        2,973        3,180   

Total long-term debt

     3,550          3,588        3,424        3,743   

Total net debt (4)

     3,439          3,480        3,354        3,729   

Total liabilities

     5,205          5,156        5,022        5,359   

Total deficit

     (1,842       (2,019     (2,049     (2,179

EBITDA (5)

   $ 342      $ 286      $ 719      $ 275      $ (709

Transaction and terminated merger and settlement (income) expense, net, asset impairments, non-cash charges, integration costs and net income attributable to noncontrolling interest included in EBITDA (6)

     21        (23     (166     (23     1,061   

Unusual items included in EBITDA

     4        8        54        115        98   

 

 

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     Twelve months ended
June 30, 2011
 

LTM Adjusted EBITDA (7)

   $ 770   

 

(1) Terminated merger and settlement (income) expense, net for the six months ended June 30, 2011 and 2010 and the years ended December 31, 2010 and 2009 includes the non-cash push-down of insurance recoveries by the Company’s owner related to the settlement payment made by the Company’s owner that had been treated as an expense of the Company for the year ended December 31, 2008 associated with the terminated merger with Huntsman Corporation, as well as reductions on certain of the Company’s merger related service provider liabilities. Amount for the year ended December 31, 2008 also represents termination fees, settlement payments, accounting and legal costs paid by the Company as well as the write-off of previously deferred acquisition costs.
(2) Income (loss) from discontinued operations reflects the results of our IAR and CCR businesses.
(3) Working capital is defined as current assets less current liabilities. As of December 31, 2010, the net assets and liabilities of the IAR and CCR businesses totaling $184 have been classified as current.
(4) Net debt is defined as long-term debt plus short-term debt less cash and cash equivalents and short-term investments.
(5) EBITDA is defined as Net income (loss) (excluding loss (gain) on extinguishment of debt) before interest, income taxes, and depreciation and amortization. We have presented EBITDA because we believe that EBITDA is useful to investors since it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. EBITDA is not a recognized term under U.S. Generally Accepted Accounting Principles (“GAAP”), should not be viewed in isolation and does not purport to be an alternative to Net income (loss) as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. There are material limitations associated with making the adjustments to our earnings to calculate EBITDA and using this non-GAAP financial measure as compared to the most directly comparable U.S. GAAP financial measures. For instance, EBITDA does not include:

 

   

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

 

   

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

 

   

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

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

See below for a reconciliation of Net income (loss) to EBITDA.

 

     Six months ended
June 30,
     Year ended December 31,  

(In millions)

       2011              2010          2010      2009     2008  

Reconciliation of Net Income (Loss) to EBITDA

             

Net income (loss)

   $ 126       $ 45       $ 214       $ 117      $ (1,185

Income tax expense (benefit)

     3         17         35         (8     (16

Loss (gain) on extinguishment of debt

     —           8         30         (224     —     

Interest expense, net

     129         135         276         223        303   

Depreciation and amortization

     84         81         164         167        189   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

EBITDA

   $ 342       $ 286       $ 719       $ 275      $ (709
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

 

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(6) Amounts for the six months ended June 30, 2011 and 2010 and for the years ended December 31, 2010, 2009 and 2008 consist of the following items:

 

     Six months ended
June 30,
    Year ended December 31,  

(In millions)

     2011          2010       2010     2009     2008  

Terminated merger and settlement (income) expense, net

   $ —         $ (28   $ (171   $ (62   $ 1,027   

Integration costs

     —           —          —          —          27   

Asset impairments

     18         —          —          49        8   

Non-cash items

     3         5        5        (7     4   

Net income attributable to noncontrolling interest

     —           —          —          (3     (5
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 21       $ (23   $ (166   $ (23   $ 1,061   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(7) See “Covenant Compliance” for our reasons for presenting LTM Adjusted EBITDA, a reconciliation of Net Income to LTM Adjusted EBITDA, and qualifications as to the use of LTM Adjusted EBITDA, which is not a recognized term under U.S. GAAP.

Ratio of Earnings to Fixed Charges

 

     Historical      Pro Forma
Year ended
December 31,
 
     Six months ended
June 30,
     Year ended December 31,     
     2011      2010      2010      2009      2008      2007      2006      2010  

Ratio of earnings to fixed charges and preferred stock dividends (1)

     1.90         1.36         1.84         1.57         —           —           —           1.90   

 

(1) Due to the net losses in the years 2006 to 2008, the ratio of earnings to fixed charges and preferred stock dividends was less than 1. Our earnings were insufficient to cover fixed charges and preferred stock dividend requirements by $138 million, $24 million and $1,171 million for the years ended December 31, 2006, 2007 and 2008, respectively.

 

 

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RISK FACTORS

Investing in the Notes involves a high degree of risk. Any of the following risks could materially adversely affect our business, financial condition or results of operations and prospects, which in turn could adversely affect our ability to pay the Notes. In such case, you may lose all or part of your original investment.

Risks Related to an Investment in the Notes

The Notes are effectively subordinated to all liabilities of our non-guarantor subsidiaries and structurally subordinated to claims of creditors of all of our foreign subsidiaries.

The Notes are structurally subordinated to indebtedness and other liabilities of MSC’s subsidiaries that are not the Issuers or guarantors of the Notes. As June 30, 2011, MSC’s subsidiaries that are not the Issuers or guarantors had total indebtedness of approximately $712 million (which excluded intercompany liabilities of such non-guarantor subsidiaries). In the event of a bankruptcy, liquidation or reorganization of any of our non-guarantor subsidiaries, these non-guarantor subsidiaries will pay the holders of their debts, holders of preferred equity interests and their trade creditors before they will be able to distribute any of their assets to MSC or the Issuers.

The Notes are not guaranteed by any of MSC’s non-U.S. subsidiaries. MSC’s non-U.S. subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that MSC or the subsidiary guarantors have to receive any assets of any of the foreign subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of Notes to realize proceeds from the sale of any of those subsidiaries’ assets, will be effectively subordinated to the claims of those subsidiaries’ creditors, including trade creditors and holders of preferred equity interests of those subsidiaries.

Additional indebtedness is secured by the collateral securing the Notes, and the Notes will be secured only to the extent of the value of the assets that have been granted as security for the Notes and the guarantees, which may not be sufficient to satisfy our obligations under the Notes.

Indebtedness under our senior secured credit facilities, the interest rate protection and other hedging agreements and the overdraft facility permitted thereunder, and the senior secured Notes (referred to in these risk Factors as the “First-Priority Lien Obligations”) are secured by senior-priority liens on substantially all tangible and intangible assets of MSC and each subsidiary guarantor, except for certain excluded collateral (such as our Principal Properties). Of the First-Priority Lien Obligations, indebtedness under our senior secured credit facilities, the interest rate protection and other hedging agreements and the overdraft facility permitted thereunder are secured by liens that are senior to the liens that secure our senior secured Notes. The Notes are secured by a lien on only a portion of the assets that secure the First-Priority Lien Obligations and the liens securing the Notes are subordinated to First-Priority Lien Obligations and there may not be sufficient collateral to pay all or any of the Notes. In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us or any future domestic subsidiary, the assets that are pledged as shared collateral securing the First-Priority Lien Obligations and the Notes must be used first to pay the First-Priority Lien Obligations in full before making any payments on the Notes. Accordingly, the Notes will be effectively subordinated to these obligations to the extent of the collateral securing such obligations. We may incur additional First-Priority Lien Obligations in the future.

At June 30, 2011, we had $3.6 billion aggregate principal amount of outstanding indebtedness (including the Notes and guarantees), and $1.4 billion of First-Priority Lien Obligations. At June 30, 2011, borrowings of $200 million were unused and available under our senior secured credit facilities (excluding the incremental term loan commitments), all of which would constitute First-Priority Lien Obligations if drawn. In addition to borrowings

 

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under our senior secured credit facilities, the indenture governing the Notes allows a significant amount of other indebtedness and other obligations to be secured by a lien on the collateral securing the Notes on a senior-priority basis or on an equal and ratable basis, provided that, in each case, such indebtedness or other obligation could be incurred under the debt incurrence covenants contained in the indenture governing the Notes. Any additional obligations secured by a lien on the collateral securing the Notes (whether senior to or equal with the lien of the Notes) will adversely affect the relative position of the holders of the Notes with respect to the collateral securing the Notes.

Many of our assets, such as certain assets owned by our foreign subsidiaries, are not part of the collateral securing the Notes, but do secure some First-Priority Lien Obligations. In addition, our foreign subsidiaries will be permitted to incur substantial indebtedness in compliance with the covenants under our senior secured credit facilities, the indentures governing the senior secured Notes, the indenture governing the Notes and the agreements governing our other indebtedness, most of which is permitted to be a First-Priority Lien Obligation. We are also permitted to transfer up to 5% of our total assets (as defined) from guarantors to non-guarantor subsidiaries, including non-U.S. subsidiaries. Upon such a transfer, those assets will be released automatically from the lien securing the Notes. With respect to those assets that are not part of the collateral securing the Notes but which secure other obligations, the Notes will be effectively junior to these obligations to the extent of the value of such assets. There is no requirement that the holders of the First-Priority Lien Obligations first look to these excluded assets before foreclosing, selling or otherwise acting upon the collateral shared with the Notes.

No appraisals of any collateral have been prepared in connection with the offering of the Notes. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. The value of the assets pledged as collateral for the Notes could be impaired in the future as a result of changing economic conditions, our failure to implement our business strategy, competition and other future events or trends. In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, no assurance can be given that the proceeds from any sale or liquidation of the collateral will be sufficient to pay our obligations under the Notes, in full or at all, after first satisfying our obligations in full under the First-Priority Lien Obligations and any other obligations secured by a priority lien on the collateral.

Accordingly, there may not be sufficient collateral to pay all or any of the amounts due on the Notes. Any claim for the difference between the amount, if any, realized by holders of the Notes from the sale of the collateral securing the Notes and the obligations under the Notes will rank equally in right of payment with all of our other unsecured unsubordinated indebtedness and other obligations, including trade payables.

Holders of Notes will not control decisions regarding collateral.

Pursuant to the intercreditor agreement, the collateral agent representing the holders of the First-Priority Lien Obligations controls substantially all matters related to the collateral securing the First-Priority Lien Obligations and the Notes. The holders of the First-Priority Lien Obligations may cause the collateral agent to dispose of, release or foreclose on, or take other actions with respect to the shared collateral with which holders of the Notes may disagree or that may be contrary to the interests of holders of the Notes. To the extent shared collateral is released from securing the First-Priority Lien Obligations, the liens securing the Notes will also automatically be released. In addition, the security documents generally provide that, so long as the First-Priority Lien Obligations are in effect, the holders of the First-Priority Lien Obligations may change, waive, modify or vary the security documents without the consent of the holders of the Notes, provided that any such change, waiver or modification does not materially adversely affect the rights of the holders of the Notes and not the other secured creditors in a like or similar manner. Except under limited circumstances, if at any time the First-Priority Lien Obligations cease to be in effect, the liens securing the Notes will also be released and the Notes will become unsecured senior obligations. See “Description of the Notes—Security for the Notes.”

Furthermore, the security documents generally allow us and our subsidiaries to remain in possession of, retain exclusive control over, to freely operate, and to collect, invest and dispose of any income from, the

 

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collateral securing the Notes. In addition, to the extent we sell any assets that constitute collateral, the proceeds from such sale will be subject to the lien securing the Notes only to the extent such proceeds would otherwise constitute “collateral” securing the Notes under the security documents. To the extent the proceeds from any such sale of collateral do not constitute “collateral” under the security documents, the pool of assets securing the Notes would be reduced and the Notes would not be secured by such proceeds. For instance, if we sell any of our domestic assets which constitute collateral securing the Notes and, with the proceeds from such sale, purchase assets in Europe which we transfer to one of our foreign subsidiaries, the holders of the Notes would not receive a security interest in the assets purchased in Europe and transferred to our foreign subsidiary because the pool of assets which constitutes collateral securing the Notes under the security documents excludes assets owned by our foreign subsidiaries.

The capital stock securing the Notes will automatically be released from the lien and no longer be deemed to be collateral to the extent the pledge of such capital stock would require the filing of separate financial statements for any of our subsidiaries (other than Momentive Canada Entities, including Momentive Coop) with the SEC. As a result of any such release, the Notes could be secured by less collateral than our first-priority indebtedness.

The indenture governing the Notes and the security documents provide that, to the extent that separate financial statements of any of our subsidiaries (other than Momentive Canada Entities, including Momentive Coop) would be required by the rules of the SEC (or any other governmental agency) due to the fact that such subsidiary’s capital stock or other securities secure the Notes, then such capital stock or other securities will automatically be deemed not to be part of the collateral securing the Notes to the extent necessary to not be subject to such requirement. In such event, the security documents will be amended, without the consent of any holder of Notes, to the extent necessary to release the liens on such capital stock or securities. As a result, holders of the Notes could lose all or a portion of their security interest in the capital stock or other securities if any such rule becomes applicable. In addition, certain of our foreign subsidiaries have a value in excess of 20% of the aggregate principal amount of the Notes; accordingly, our pledge of such stock as collateral for the Notes will be limited to less than 20% of the aggregate principal amount of the Notes (however, our pledge of membership interests in Hexion Coop will not be cut back on the date of this prospectus). As a result of the foregoing, the Notes could be secured by less collateral than our first-priority indebtedness.

Rights of holders of Notes in the collateral may be adversely affected by bankruptcy proceedings.

The right of the collateral agent to repossess and dispose of the collateral securing the Notes upon acceleration is likely to be significantly impaired by federal bankruptcy law if bankruptcy proceedings are commenced by or against us prior to or possibly even after the collateral agent has repossessed and disposed of the collateral. Under Title 11 of the United States Code (the “U.S. Bankruptcy Code”), a secured creditor, such as the collateral agent, is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from a debtor, without bankruptcy court approval. Moreover, bankruptcy law permits the debtor to continue to retain and to use collateral, and the proceeds, products, rents or profits of the collateral, even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the collateral and may include cash payments or the granting of additional security, if and at such time as the court in its discretion determines, for any diminution in the value of the collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the Notes could be delayed following commencement of a bankruptcy case, whether or when the collateral agent would repossess or dispose of the collateral, or whether or to what extent holders of the Notes would be compensated for any delay in payment of loss of value of the collateral through the requirements of “adequate protection.” Furthermore, in the event the bankruptcy court determines that the value of the collateral is not sufficient to repay all amounts due on the Notes, the holders of the Notes would have “undersecured claims” as to the difference. Federal bankruptcy laws do not permit the payment or accrual of interest, costs and attorneys’ fees for “undersecured claims” during the debtor’s bankruptcy case.

 

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Finally, in the intercreditor agreement, the noteholders will waive a significant number of rights ordinarily accruing to secured creditors in bankruptcy. See “Description of the Notes—Security for the Notes—Security Documents and Intercreditor Agreement.”

The collateral securing the Notes may be diluted under certain circumstances.

The collateral that will secure the Notes also secures our obligations under the First-Priority Lien Obligations. This collateral may secure on a first-priority basis or a parity basis additional senior indebtedness that MSC or certain of our subsidiaries incur in the future, subject to restrictions on our ability to incur debt and liens under the First-Priority Lien Obligations and the indenture governing the Notes, and may generally secure any other indebtedness permitted to be incurred under the indenture on a parity basis. Your rights to the collateral would be diluted by any increase in the indebtedness secured on a first-priority or parity basis by this collateral.

It may be difficult to realize the value of the collateral securing the Notes.

The collateral securing the Notes will be subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the creditors that have the benefit of first liens on the collateral securing the Notes from time to time, whether on or after the date the Notes are issued. The initial purchasers did not analyze the effect of, nor participate in, any negotiations relating to, such exceptions, defects, encumbrances, liens and other imperfections. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the collateral securing the Notes as well as the ability of the collateral agent to realize or foreclose on such collateral.

In the event that a bankruptcy case is commenced by or against us, if the value of the collateral is less than the amount of principal and accrued and unpaid interest on the Notes and all other senior or pari passu secured obligations, interest may cease to accrue on the Notes from and after the date the bankruptcy petition is filed.

In addition, our business requires numerous federal, state and local permits and licenses. Continued operation of properties that are the collateral for the Notes depends on the maintenance of such permits and licenses may be prohibited. Our business is subject to substantial regulations and permitting requirements and may be adversely affected if we are unable to comply with existing regulations or requirements or changes in applicable regulations or requirements. In the event of foreclosure, the transfer of such permits and licenses may be prohibited or may require us to incur significant cost and expense. Further, we cannot assure you that the applicable governmental authorities will consent to the transfer of all such permits. If the regulatory approvals required for such transfers are not obtained or are delayed, the foreclosure may be delayed, a temporary shutdown of operations may result and the value of the collateral may be significantly decreased.

There are circumstances other than repayment or discharge of the Notes under which the collateral securing the Notes and guarantees will be released automatically, without your consent or the consent of the trustee.

Under various circumstances, collateral securing the Notes will be released automatically, including:

 

   

a sale, transfer or other disposition of such collateral in a transaction not prohibited under the indenture;

 

   

with respect to collateral held by a guarantor, upon the release of such guarantor from its guarantee;

 

   

subject to certain exceptions, the release of all other liens securing first-priority lien obligations (if there are no outstanding receivables financings);

 

   

in respect of the property and assets of a restricted subsidiary that is a guarantor, upon the designation of such guarantor as an unrestricted subsidiary in accordance with the indenture governing the Notes; and

 

   

the case of a guarantor making a transfer permitted under the indenture governing the Notes to any restricted subsidiary of MSC.

 

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The guarantee of a subsidiary guarantor will be automatically released to the extent it is released in connection with a sale of such subsidiary guarantor in a transaction not prohibited by the indenture. The indenture also permits us to designate one or more of our restricted subsidiaries that is a guarantor of the Notes as an unrestricted subsidiary. If we designate a subsidiary guarantor as an unrestricted subsidiary for purposes of the indenture governing the Notes, all of the liens on any collateral owned by such subsidiary or any of its subsidiaries and any guarantees of the Notes by such subsidiary or any of its subsidiaries will be released under the indenture. Designation of an unrestricted subsidiary will reduce the aggregate value of the collateral securing the Notes to the extent that liens on the assets of the unrestricted subsidiary and its subsidiaries are released. In addition, the creditors of the unrestricted subsidiary and its subsidiaries will have a claim on the assets of such unrestricted subsidiary and its subsidiaries that is senior to the claim of the holders of the Notes. See “Description of the Notes.”

Federal and state statutes allow courts, under specific circumstances, to void Notes, guarantees and security interests and require note holders to return payments received.

MSC and certain of its existing domestic subsidiaries guarantee the Notes and certain of its future domestic subsidiaries may guarantee the Notes. In addition, the guarantees are secured by certain collateral owned by the related guarantor. If any Issuer or any guarantor becomes a debtor in a case under the U.S. Bankruptcy Code or encounters other financial difficulty, under federal or state fraudulent transfer law a court may void or otherwise decline to enforce the Notes, the guaranty or the related security agreements, as the case may be. A court might do so if it found that when the applicable Issuer issued the Notes or the guarantor entered into its guaranty or, in some states, when payments became due under the Notes, the guaranty or security agreements, such Issuer or the guarantor received less than reasonably equivalent value or fair consideration and either:

 

   

was or was rendered insolvent;

 

   

was left with inadequate capital to conduct its business; or

 

   

believed or reasonably should have believed that it would incur debts beyond its ability to pay.

The court might also void an issuance of Notes, a guaranty or security agreements, without regard to the above factors, if the court found that the applicable Issuer issued the Notes or the guarantor entered into its guaranty or security agreements with actual intent to hinder, delay or defraud its creditors.

A court would likely find that an Issuer or a guarantor did not receive reasonably equivalent value or fair consideration for the Notes or its guaranty and security agreements, respectively, if the Issuer or the guarantor did not substantially benefit directly or indirectly from the issuance of the Notes. If a court were to void an issuance of Notes, a guaranty or the related security agreements, you would no longer have a claim against the Issuer or the guarantor or, in the case of the security agreements, a claim with respect to the related collateral. Sufficient funds to repay the Notes may not be available from other sources, including the remaining Issuers or guarantors, if any. In addition, the court might direct you to repay any amounts that you already received from the Issuer or the guarantor or with respect to the collateral.

The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. In general, however, a court would consider an Issuer or a guarantor insolvent if:

 

   

the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets;

 

   

the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

   

it could not pay its debts as they became due.

 

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Each guaranty contains a provision intended to limit the guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guaranty to be a fraudulent transfer. This provision may not be effective to protect the guaranties from being voided under fraudulent transfer law, or may reduce or eliminate the guarantor’s obligation to an amount that effectively makes the guaranty worthless.

The Notes will mature after a substantial portion of our other indebtedness.

The Notes will mature on November 15, 2020. Substantially all of our existing indebtedness (including under our senior secured credit facilities and our existing Notes) will mature prior to November 15, 2020.

Therefore, we will be required to repay substantially all of our other creditors before we are required to repay a portion of the interest due on, and the principal of, the Notes. As a result, we may not have sufficient cash to repay all amounts owing on the Notes at maturity. There can be no assurance that we will have the ability to borrow or otherwise raise the amounts necessary to repay or refinance such amounts.

The rights of holders of Notes to the collateral securing the Notes may be adversely affected by the failure to perfect security interests in the collateral and other issues generally associated with the realization of security interests in collateral.

Applicable law requires that a security interest in certain tangible and intangible assets can only be properly perfected and its priority retained through certain actions undertaken by the secured party. The liens on the collateral securing the Notes may not be perfected with respect to the claims of Notes if the collateral agent is not able to take the actions necessary to perfect any of these liens on or prior to the date of the indenture governing the Notes. In addition, applicable law requires that certain property and rights acquired after the grant of a general security interest, such as real property, can only be perfected at the time such property and rights are acquired and identified and additional steps to perfect in such property and rights are taken. We, the Issuers and our subsidiary guarantors will have limited obligations to perfect the security interest of the holders of Notes in specified collateral. There can be no assurance that the trustee or the collateral agent for the Notes will monitor, or that we will inform such trustee or collateral agent of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired collateral. The collateral agent for the Notes has no obligation to monitor the acquisition of additional property or rights that could constitute collateral or the perfection of any security interest. This may result in the loss of the security interest in the collateral or the priority of the security interest in favor of Notes against third parties.

In addition, the security interest of the collateral agent will be subject to practical challenges generally associated with the realization of security interests in collateral. For example, the collateral agent may need to obtain the consent of third parties and make additional filings. If we are unable to obtain these consents or make these filings, the security interests may be invalid and the holders will not be entitled to the collateral or any recovery with respect thereto. We cannot assure you that the collateral agent will be able to obtain any such consent. We also cannot assure you that the consents of any third parties will be given when required to facilitate a foreclosure on such assets. Accordingly, the collateral agent may not have the ability to foreclose upon those assets and the value of the collateral may significantly decrease.

Rights of holders of Notes in the collateral may be adversely affected by the failure to perfect security interests in certain collateral acquired in the future.

The security interest in the collateral securing the Notes includes domestic assets, both tangible and intangible, whether now owned or acquired or arising in the future. Applicable law requires that certain property and rights acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. We are required by the Trust Indenture Act to inform the trustee of certain future acquisitions of property or rights that constitute collateral. However, there can be no assurance that the necessary action will be taken to properly perfect the security interest in such after-acquired collateral. This may result in the loss of the security interest therein or the priority of the security interest in favor of the Notes against third parties.

 

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The Issuers may not be able to repurchase the Notes upon a change of control.

Specific kinds of change of control events of MSC will be an event of default under the indenture governing the Notes unless the Issuers make an offer to repurchase all outstanding Notes at 101% of their principal amount, plus accrued and unpaid interest or by exercising their right to redeem such Notes, in each case within 30 days after such change of control event. Similar change of control offer requirements are applicable to Notes issued under certain of our other indentures. The Issuers will be dependent on MSC and its subsidiaries for the funds necessary to cure the events of default caused by such change of control event. MSC and its subsidiaries may not have sufficient financial resources to purchase all of the Notes that are tendered upon a change of control offer or to redeem such Notes. The occurrence of a change of control would also constitute an event of default under our senior secured credit facilities and could constitute an event of default under our other indebtedness. Our bank lenders may have the right to prohibit any such purchase or redemption, in which event we will seek to obtain waivers from the required lenders under our senior secured credit facilities and our other indebtedness, but may not be able to do so. See “Description of the Notes—Change of Control.”

Investors may not be able to determine when a change of control giving rise to their right to have the Notes repurchased by the company has occurred following a sale of “substantially all” of the company’s assets.

Specific kinds of change of control events of MSC require the Issuers to make an offer to repurchase all outstanding Notes or exercise their right to redeem such Notes. The definition of change of control includes a phrase relating to the sale, lease of transfer of “all or substantially all” the assets of MSC and its subsidiaries taken as a whole. There is no precise established definition of the phrase “substantially all” under applicable law. Accordingly, the ability of a holder of Notes to require the Issuers to repurchase such Notes as a result of a sale, lease or transfer of less than all of the assets of MSC and its subsidiaries taken as a whole to another individual, group or entity may be uncertain.

We can enter into transactions like recapitalizations, reorganizations and other highly leveraged transactions that do not constitute a change of control but that could adversely affect the holders of the Notes.

The change of control repurchase provisions that require the Issuers to make an offer to repurchase all outstanding Notes or exercise their right to redeem such Notes are a result of negotiations among MSC, the Issuers and the initial purchasers of the Notes. Therefore, MSC could, in the future, enter into certain transactions, including acquisitions, reorganizations, refinancings or other recapitalizations, that would not constitute a change of control under the indenture governing the Notes, but that could increase the amount of indebtedness outstanding at such time or otherwise affect MSC’s capital structure or credit ratings.

There may be no active trading market for the Notes, and if one develops, it may not be liquid.

There is no established trading market for the Notes. We do not intend to list the Notes on any national securities exchange or to seek the admission of the Notes for quotation through the National Association of Securities Dealers Automated Quotation System. As a result, there may be limited liquidity of any trading market that does develop for the Notes. In addition, market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act, and may be limited during the pendency of any shelf registration statement. There can be no assurance as to the development or liquidity of any market for the Notes, the ability of the holders of such Notes to sell such Notes or the price at which the holders would be able to sell such Notes. Future trading prices of the Notes will depend on many factors, including:

 

   

our operating performance and financial condition;

 

   

the interest of securities dealers in making a market; and

 

   

the market for similar securities.

Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Notes. The market for the Notes, if any, may be subject to similar disruptions. Any such disruptions may adversely affect the value of the Notes.

 

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Our ability to repay the Notes depends upon the performance of MSC and its subsidiaries and their ability to make payments or distributions.

The Issuers are finance subsidiaries of MSC and do not have any material assets other than intercompany loans to MSC and its subsidiaries. Therefore, the Issuers will be entirely dependent on MSC and its other subsidiaries for funds to satisfy their debt service requirements with respect to the Notes.

A significant portion of MSC’s assets are owned, and a significant percentage of MSC’s net sales are earned, by its direct and indirect subsidiaries. Therefore, MSC’s cash flows and its ability to service indebtedness, including its ability to transfer funds, directly or indirectly, to the Issuers or to honor its obligations under its guaranty of the Notes, will be dependent upon cash dividends and distributions or other transfers from its subsidiaries. Payments to MSC by its subsidiaries will be contingent upon the earnings of those subsidiaries.

MSC’s subsidiaries are separate and distinct legal entities and, except for the Issuers and the existing and future subsidiaries that will guarantee the Notes, they will not have any obligation, contingent or otherwise, to pay amounts due with respect to the Notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payments. In addition, certain of MSC’s subsidiaries are subject to contractual limitations on their ability to pay dividends or otherwise distribute money to MSC. If MSC’s subsidiaries cannot pay out dividends or make other distributions to MSC, MSC may not have sufficient cash to fulfill its obligations with respect to the Notes.

Because Hexion Nova Scotia Finance, ULC is not a U.S. company, it may be difficult for you to effect service of process on it or on its directors or to enforce any judgment you may receive against them from a U.S. court. In addition, any judgment against Hexion Nova Scotia Finance, ULC, obtained in Canada, would be in Canadian dollars exposing you to exchange rate risk.

Hexion Nova Scotia Finance, ULC is an unlimited liability company organized under the laws of Nova Scotia. Certain of its officers and directors may be residents of various jurisdictions outside the United States. All or a substantial portion of its assets may be located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to enforce in United States courts judgments obtained against such persons in United States courts and predicated upon the civil liability provisions of the United States federal securities laws. In addition, any judgment against Hexion Nova Scotia Finance, ULC, obtained in Canada, would be in Canadian dollars exposing you to exchange rate risk.

In addition, Hexion Nova Scotia Finance, ULC has been advised by its Nova Scotia counsel, that there is doubt as to (i) the enforceability, in original actions in Nova Scotia courts, of liabilities predicated solely upon the United States federal securities laws and (ii) the enforceability in Nova Scotia courts of judgments of United States courts obtained in actions predicated upon the civil liability provisions of the United States federal securities laws.

Our controlling shareholder may have a significant interest in the Notes.

Apollo, our controlling stockholder, owns approximately $134 million principal amount of the Notes, which collectively represents approximately 23.3% of the total outstanding Notes. Apollo is hereby registering its Notes in accordance with the right to do so that was provided to it in its registration rights agreement with the Company. See “Certain Relationships and Related Party Transactions.” Apollo had entered into a customary lock-up agreement with the initial purchasers for the offering of the Notes pursuant to which it agreed not to sell the Notes acquired by it for 180 days following the Issue Date of the Notes. While Apollo’s voting rights will be limited in certain circumstances pursuant to the terms of the Notes, Apollo may be able to exercise its full rights in connection with any bankruptcy of the Issuers or any restructuring involving the Notes. Apollo may continue to have a significant interest in the Notes until the Notes offered hereby are resold and Apollo’s interests may differ from, and be in conflict with, the interests of other holders of the Notes.

 

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Risks Related to Our Indebtedness

We may not be able to generate sufficient cash flows from operations to meet our consolidated debt service payments.

We have substantial consolidated indebtedness. As of June 30, 2011, we had $3.6 billion of consolidated outstanding indebtedness, including payments due within 12 months on short-term bonds.

In 2011, based on our consolidated indebtedness outstanding at June 30, 2011 our annualized cash interest expense is projected to be approximately $326 million based on interest rates at June 30, 2011, of which $220 million represents cash interest expense on fixed-rate obligations, including variable rate debt subject to interest rate swap agreements.

Our ability to generate sufficient cash flows from operations to make scheduled debt service payments depends on a range of economic, competitive and business factors, many of which are outside of our control. Our business may generate insufficient cash flows from operations to meet our debt service and other obligations, and currently anticipated cost savings, working capital reductions and operating improvements may not be realized on schedule, or at all. If we are unable to meet our expenses and debt service obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or issue additional equity securities. We may be unable to refinance any of our indebtedness, sell assets or issue equity securities on commercially reasonable terms, or at all, which could cause us to default on our obligations and result in the acceleration of our debt obligations. Our inability to generate sufficient cash flows to satisfy our outstanding debt obligations, or to refinance our obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition and results of operations.

Our substantial indebtedness exposes us to significant interest expense increases if interest rates increase.

$1.4 billion, or approximately 37%, of our borrowings as of June 30, 2011 were at variable interest rates and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. Assuming our consolidated variable interest rate indebtedness outstanding as of June 30, 2011 remains the same, an increase of 1% in the interest rates payable on our variable rate indebtedness would increase our 2011 annual estimated debt-service requirements by approximately $14 million. Accordingly, an increase in interest rates from current levels could cause our annual debt-service obligations to increase significantly.

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.

Our substantial level of indebtedness could have other important consequences, including but not limited to the following:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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it may adversely affect terms under which suppliers provide materials and services to us;

 

   

it may limit our ability to borrow additional funds or dispose of assets; and

 

   

it may limit our ability to fully achieve cost savings from the Momentive Combination.

There would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed.

Despite our substantial indebtedness, we may still be able to incur significant additional indebtedness. This could intensify the risks described above and below.

We may be able to incur substantial additional indebtedness in the future. Although the terms governing our indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness we may incur in compliance with these restrictions could be substantial. Increasing our indebtedness could intensify the risks described above and below.

The terms governing our outstanding debt, including restrictive covenants may adversely affect our operations.

The terms governing our outstanding debt contain, and any future indebtedness we incur would likely contain, numerous restrictive covenants that impose significant operating and financial restrictions on our ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

pay dividends and make other distributions to our shareholders;

 

   

create or incur certain liens;

 

   

make certain loans, acquisitions, capital expenditures or investments;

 

   

engage in sales of assets and subsidiary stock;

 

   

enter into sale/leaseback transactions;

 

   

enter into transactions with affiliates; and

 

   

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

In addition, at any time that loans or letters of credit are outstanding and not cash collateralized thereunder, the agreement governing our revolving credit facility, which is part of our senior secured credit facilities , require us to maintain a specified leverage ratio. At June 30, 2011, we were in compliance with our leverage ratio maintenance covenant set forth in our senior secured credit facilities. If business conditions weaken, we may not comply with our leverage ratio covenant for future periods. If we are at risk of failing to comply with our leverage ratio covenant, we would pursue additional cost saving actions, restructuring initiatives or other business or capital structure optimization measures available to us to remain in compliance with these covenants, but any such measures may be unsuccessful or may be insufficient to maintain compliance with our leverage ratio covenants.

A failure to comply with the covenants contained in our senior secured credit facilities, the indentures governing Notes issued or guaranteed by our subsidiaries or their other existing indebtedness could result in an event of default under the existing agreements that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.

In particular, a breach of a leverage ratio covenant would result in an event of default under our revolving credit facility. Pursuant to the terms of our credit agreement, our direct parent company has the right but not the

 

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obligation to cure such default through the purchase of additional equity in up to three of any four consecutive quarters. If a breach of a leverage ratio covenant is not cured or waived, or if any other event of default under a senior secured credit facility occurs, the lenders under such credit agreement:

 

   

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

 

   

could elect to declare all borrowings outstanding under such revolving credit facility, together with accrued and unpaid interest and fees, due and payable and could demand cash collateral for all letters of credit issued thereunder;

 

   

could elect to declare all borrowings outstanding under the term loan facility, together with accrued and unpaid interest and fees, due and payable;

 

   

could require us to apply all of our available cash to repay these borrowings; and/or

 

   

could prevent us from making payments on our Notes;

any or all of which could result in an event of default under our Notes.

If the indebtedness under our senior secured credit facilities or our existing Notes were to be accelerated after an event of default, our respective assets may be insufficient to repay such indebtedness in full and our lenders could foreclose on the assets pledged under the applicable facility. Under these circumstances, a refinancing or additional financing may not be obtainable on acceptable terms, or at all, and we may be forced to explore a restructuring.

In addition the terms governing our indebtedness limit our ability to sell assets and also restrict the use of proceeds from that sale, including restrictions on transfers from us to MPM and vice versa. We may be unable to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations. Furthermore, a substantial portion of our assets are, and may continue to be, intangible assets. Therefore, it may be difficult for us to pay our consolidated debt obligations in the event of an acceleration of any of our consolidated indebtedness.

We may be unable to generate sufficient cash flows from operations to pay dividends or distributions to our direct parent company in amounts sufficient for it to pay its debt.

Our direct parent company has incurred substantial indebtedness, and likely will need to rely upon distributions from us to pay such indebtedness. As of June 30, 2011, the aggregate principal amount outstanding of MSC Holdings’ term loans was $217 million. These loans accrue interest in-kind until maturity if elected by MSC Holdings.

We and our subsidiaries may not generate sufficient cash flows from operations to pay dividends or distributions in amounts sufficient to allow our direct parent company to pay principal and cash interest on its debt upon maturity. If our direct parent company is unable to meet its debt service obligations, it could attempt to restructure or refinance their indebtedness or seek additional equity capital. It may be unable to accomplish these actions on satisfactory terms, if at all. A default under our direct parent company’s debt instruments could lead to a change of control under our debt instruments and lead to an acceleration of all outstanding loans under our senior secured credit facilities and other indebtedness.

Repayment of our debt, including required principal and interest payments, depends on cash flow generated by our subsidiaries, which may be subject to limitations beyond our control.

Our subsidiaries own a significant portion of our consolidated assets and conduct a significant portion of our consolidated operations. Repayment of our indebtedness depends, to a significant extent, on the generation of cash flow and the ability of our subsidiaries to make cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to

 

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make payments on our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from subsidiaries. While there are limitations on the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make intercompany payments, these limitations are subject to certain qualifications and exceptions. In the event that we are unable to receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

A downgrade in our debt ratings could restrict our access to, and negatively impact the terms of, current or future financings or trade credit.

Standard and Poor’s Ratings Services and Moody’s Investors Service maintain credit ratings on us and certain of our debt. Each of these ratings is currently below investment grade. Any decision by these or other ratings agencies to downgrade such ratings or put us on negative watch in the future could restrict our access to, and negatively impact the terms of, current and future financing and trade credit extended by our suppliers of raw materials or other vendors.

Risks Related to Our Business

If global economic conditions weaken again, it will negatively impact our business operations, results of operations and financial condition.

Global economic and financial market conditions, including severe market disruptions in late 2008 and 2009 and the potential for a significant and prolonged global economic downturn, have impacted or could impact our business operations in a number of ways including, but not limited to, the following:

 

   

reduced demand in key customer segments, such as automotive, building, construction and electronics, compared to prior years;

 

   

payment delays by customers and reduced demand for our products caused by customer insolvencies and/or the inability of customers to obtain adequate financing to maintain operations. This situation could cause customers to terminate existing purchase orders and reduce the volume of products they purchase from us and further impact our customers ability to pay our receivables, requiring us to assume additional credit risk related to these receivables or limit our ability to collect receivables from that customer;

 

   

insolvency of suppliers or the failure of suppliers to meet their commitments resulting in product delays;

 

   

more onerous credit and commercial terms from our suppliers such as shortening the required payment period for outstanding accounts receivable or reducing or eliminating the amount of trade credit available to us; and

 

   

potential delays in accessing our senior secured credit facilities or obtaining new credit facilities on terms we deem commercially reasonable or at all, and the potential inability of one or more of the financial institutions included in our syndicated revolving credit facility to fulfill their funding obligations. Should a bank in our syndicated revolving credit facility be unable to fund a future draw request, we could find it difficult to replace that bank in the facility.

Global economic conditions may weaken again. Any further weakening of economic conditions would likely exacerbate the negative effects described above, could significantly affect our liquidity which may cause us to defer needed capital expenditures, reduce research and development or other spending, defer costs to achieve productivity and synergy programs or sell assets or incur additional borrowings which may not be available or may only be available on terms significantly less advantageous than our current credit terms and could result in a wide-ranging and prolonged impact on general business conditions, thereby negatively

 

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impacting our business, results of operations and financial condition. In addition, if the global economic environment begins to weaken again or remains slow for an extended period of time, the fair value of our reporting units could be more adversely affected than we estimated in our analysis of reporting unit fair values at October 1, 2010. This could result in additional goodwill or other asset impairments, which could negatively impact our business, results of operations and financial condition.

Fluctuations in direct or indirect raw material costs could have an adverse impact on our business.

Raw materials costs made up 70% of our cost of sales in 2010. The prices of our direct and indirect raw materials have been, and we expect them to continue to be, volatile. If the cost of direct or indirect raw materials increases significantly and we are unable to offset the increased costs with higher selling prices, our profitability will decline. Increases in prices for our products could also hurt our ability to remain both competitive and profitable in the markets in which we compete.

Although some of our materials contracts include competitive price clauses that allow us to buy outside the contract if market pricing falls below contract pricing, and certain contracts have minimum-maximum monthly volume commitments that allow us to take advantage of spot pricing, we may be unable to purchase raw materials at market prices. In addition, some of our customer contracts have fixed prices for a certain term, and as a result, we may not be able to pass on raw material price increases to our customers immediately, if at all. Due to differences in timing of the pricing trigger points between our sales and purchase contracts, there is often a “lead-lag” impact that can negatively impact our margins in the short term in periods of rising raw material prices and positively impact them in the short term in periods of falling raw material prices. Future raw material prices may be impacted by new laws or regulations, suppliers’ allocations to other purchasers, changes in our supplier manufacturing processes as some of our products are byproducts of these processes, interruptions in production by suppliers, natural disasters, volatility in the price of crude oil and related petrochemical products and changes in exchange rates.

An inadequate supply of direct or indirect raw materials and intermediate products could have an adverse effect on our business.

Our manufacturing operations require adequate supplies of raw materials and intermediate products on a timely basis. The loss of a key source or a delay in shipments could have an adverse effect on our business. Raw material availability may be subject to curtailment or change due to, among other things:

 

   

new or existing laws or regulations;

 

   

suppliers’ allocations to other purchasers;

 

   

interruptions in production by suppliers; and

 

   

natural disasters.

Many of our raw materials and intermediate products are available in the quantities we require from a limited number of suppliers. Should any of our key suppliers fail to deliver these raw materials or intermediate products to us or no longer supply us, we may be unable to purchase these materials in necessary quantities, which could adversely affect our volumes, or may not be able to purchase them at prices that would allow us to remain competitive. During the past several years, certain of our suppliers have experienced force majeure events rendering them unable to deliver all, or a portion of, the contracted-for raw materials. On these occasions, we were forced to purchase replacement raw materials in the open market at significantly higher costs or place our customers on an allocation of our products. In addition, we cannot predict whether new regulations or restrictions may be imposed in the future which may result in reduced supply or further increases in prices. We cannot assure investors that we will be able to renew our current materials contracts or enter into replacement contracts on commercially acceptable terms, or at all. Fluctuations in the price of these or other raw materials or intermediate products, the loss of a key source of supply or any delay in the supply could result in a material adverse effect on our business.

 

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Our production facilities are subject to significant operating hazards which could cause environmental contamination, personal injury and loss of life, and severe damage to, or destruction of, property and equipment.

Our production facilities are subject to hazards associated with the manufacturing, handling, storage and transportation of chemical materials and products, including human exposure to hazardous substances, pipeline and equipment leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failures, unscheduled downtime, transportation interruptions, remedial complications, chemical spills, discharges or releases of toxic or hazardous substances or gases, storage tank leaks and other environmental risks. Additionally a number of our operations, are adjacent to operations of independent entities that engage in hazardous and potentially dangerous activities. Our operations or adjacent operations could result in personal injury or loss of life, severe damage to or destruction of property or equipment, environmental damage, or a loss of the use of all or a portion of one of our key manufacturing facilities. Such events at our facilities or adjacent third-party facilities, could have a material adverse effect on us.

We may incur losses beyond the limits or coverage of our insurance policies for liabilities that are associated with these hazards. In addition, various kinds of insurance for companies in the chemical industry have not been available on commercially acceptable terms, or, in some cases, have been unavailable altogether. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.

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

Our operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials and are subject to extensive and complex U.S. federal, state, local and non-U.S. supranational, national, provincial, and local environmental, health and safety laws and regulations. These environmental laws and regulations include those that govern the discharge of pollutants into the air and water, the generation, use, storage, transportation, treatment and disposal of hazardous materials and wastes, the cleanup of contaminated sites, occupational health and safety and those requiring permits, licenses, or other government approvals for specified operations or activities. Our products are also subject to a variety of international national, regional, state, and provincial requirements and restrictions applicable to the manufacture, import, export or subsequent use of such products. In addition, we are required to maintain, and may be required to obtain in the future, environmental, health and safety permits, licenses, or government approvals to continue current operations at most of our manufacturing and research facilities throughout the world.

Compliance with environmental, health and safety laws and regulations, and maintenance of permits, can be costly and complex, and we have incurred and will continue to incur costs, including capital expenditures and costs associated with the issuance and maintenance of letters of credit, to comply with these requirements. In 2010, we incurred capital expenditures of $22 million to comply with environmental laws and regulations and to make other environmental improvements. If we are unable to comply with environmental, health and safety laws and regulations, or maintain our permits, we could incur substantial costs, including fines and civil or criminal sanctions, third party property damage or personal injury claims or costs associated with upgrades to our facilities or changes in our manufacturing processes in order to achieve and maintain compliance, and may also be required to halt permitted activities or operations until any necessary permits can be obtained or complied with. In addition, future developments or increasingly stringent regulations could require us to make additional unforeseen environmental expenditures.

Environmental, health and safety requirements change frequently and have tended to become more stringent over time. We cannot predict what environmental, health and safety laws and regulations or permit requirements will be enacted or amended in the future, how existing or future laws or regulations will be interpreted or enforced or the impact of such laws, regulations or permits on future production expenditures, supply chain or sales. Our costs of compliance with current and future environmental, health and safety requirements could be

 

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material. Such future requirements include legislation designed to reduce emissions of carbon dioxide and other substances associated with climate change (“greenhouse gases”). The European Union has enacted greenhouse gas emissions legislation, and is considering expanding the scope of such legislation. The U.S. Environmental Protection Agency (“USEPA”) has promulgated new regulations applicable to projects involving greenhouse gas emissions above a certain threshold, and the U.S. and certain states within the U.S. have enacted, or are considering, limitations on greenhouse gas emissions. These requirements to limit greenhouse gas emissions could increase our energy costs, and may also require us to incur capital costs to modify our manufacturing facilities.

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

We have been notified that we are or may be responsible for environmental remediation at a number of sites in the United States, Europe and South America. We are also performing a number of voluntary cleanups. One of the most significant sites at which we are performing or participating in environmental remediation is a site formerly owned by us in Geismar, Louisiana. As the result of former, current or future operations, there may be additional environmental remediation or restoration liabilities or claims of personal injury by employees or members of the public due to exposure or alleged exposure to hazardous materials in connection with our operations, properties or products. Sites sold by us in past years may have significant site closure or remediation costs and our share, if any, may be unknown to us at this time. These environmental liabilities or obligations, or any that may arise or become known to us in the future, could have a material adverse effect on our financial condition, cash flows and profitability.

Future chemical regulatory actions may decrease our profitability.

Several governmental entities have enacted, are considering or may consider in the future, regulations that may impact our ability to sell certain chemical products in certain geographic areas. In December 2006, the European Union enacted a regulation known as REACH, which stands for Registration, Evaluation and Authorization of Chemicals. This regulation requires manufacturers, importers and consumers of certain chemicals manufactured in, or imported into, the European Union to register such chemicals and evaluate their potential impacts on human health and the environment. The implementing agency is currently in the process of determining if any chemicals should be further tested, regulated, restricted or banned from use in the European Union. Other countries have implemented, or are considering implementation of, similar chemical regulatory programs. When fully implemented, REACH and other similar regulatory programs may result in significant adverse market impacts on the affected chemical products. If we fail to comply with REACH or other similar laws and regulations, we may be subject to penalties or other enforcement actions, including fines, injunctions, recalls or seizures, which would have an adverse effect on our financial condition, cash flows and profitability.

We participate with other companies in trade associations and regularly contribute to the research and study of the safety and environmental impact of our products and raw materials, including silica, formaldehyde and BPA. These programs are part of a program to review the environmental impacts, safety and efficacy of our products. In addition, government and academic institutions periodically conduct research on potential environmental and health concerns posed by various chemical substances, including substances we manufacture and sell. These research results are periodically reviewed by state, national and international regulatory agencies

 

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and potential customers. Such research could result in future regulations restricting the manufacture or use of our products, liability for adverse environmental or health effects linked to our products, and/or de-selection of our products for specific applications. These restrictions, liability, and product de-selection could have an adverse effect on our business, our financial condition and/or liquidity.

Because of certain government public health agencies’ concerns regarding the potential for adverse human health effects, formaldehyde is regulated and public health agencies continue to evaluate it. In 2004, the International Agency for Research on Cancer, or IARC, reclassified formaldehyde as “carcinogenic to humans,” a higher classification than set forth in previous IARC evaluations. In 2009, the IARC determined that there is sufficient evidence in human beings of a causal association between formaldehyde exposure and leukemia. In 2011, the National Toxicology Program within the U.S. Department of Health and Human Services, or NTP, issued its 12th Report on Carcinogens, or RoC, which lists formaldehyde as “known to be a human carcinogen.” This NTP listing was based, in part, upon certain studies reporting an increased risk of certain types of cancers, including myeloid leukemia, in individuals with higher measures of formaldehyde exposure (exposure level or duration). The USEPA is considering regulatory options for setting limits on formaldehyde emissions from composite wood products that use formaldehyde-based adhesives. The USEPA, under its Integrated Risk Information System, or IRIS, has also released a draft of its toxicological review of formaldehyde. This draft review states that formaldehyde meets the criteria to be described as “carcinogenic to humans” by the inhalation route of exposure based upon evidence of causal links to certain cancers, including leukemia. The National Academy of Sciences, or NAS, was requested by the USEPA to serve as the external peer review body for the draft assessment. The NAS reviewed the draft IRIS toxicological review and issued a report in April 2011 that criticized the draft IRIS toxicological review and stated that the methodologies and the underlying science used in the draft IRIS report did not clearly support a conclusion of a causal link between formaldehyde exposure and leukemia. It is possible that USEPA may revise the IRIS toxicological review to reflect the NAS findings, including the conclusions regarding a causal link between formaldehyde exposure and leukemia. According to the NTP, a listing in the RoC indicates a potential hazard and does not assess cancer risks to individuals associated with exposures in their daily lives. However, the report could have adverse effects on our business. It is possible that new regulatory requirements could be promulgated to limit human exposure to formaldehyde, that we could incur substantial additional costs to meet any such regulatory requirements, and that there could be a reduction in demand for our formaldehyde-based products. These additional costs and reduced demand could have a material adverse effect on our operations and profitability.

BPA, which is used as an intermediate at our Deer Park, Texas and Pernis, Netherlands manufacturing facilities, and is also sold directly to third parties, is currently under evaluation as an “endocrine disrupter.” Endocrine disrupters are chemicals that have been alleged to interact with the endocrine systems of human beings and wildlife and disrupt their normal processes. BPA continues to be subject to scientific, regulatory and legislative review and negative publicity. We do not believe it is possible at this time to predict the outcome of regulatory and legislative initiatives. In the event that BPA is further regulated or banned for use in certain products, substantial additional operating costs would be likely in order to meet more stringent regulation of this chemical and could reduce demand for the chemical and have a material adverse effect on our operations and profitability.

We manufacture resin-encapsulated sand. Because sand consists primarily of crystalline silica, potential exposure to silica particulate exists. Overexposure to crystalline silica is a recognized health hazard. The Occupational Safety and Health Administration (“OSHA”) continues to maintain on its regulatory calendar the possibility of promulgating a comprehensive occupational health standard for crystalline silica within the next few years. We may incur substantial additional costs to comply with any new OSHA regulations.

In addition, we sell resin-encapsulated sand to natural gas drilling operators for use in extracting natural gas from wells that were drilled by a method called hydraulic fracturing. This drilling method has been under public and legislative scrutiny due to potential environmental impacts, including contamination of groundwater and drinking water. Currently, studies of hydraulic fracturing are underway by the USEPA, and legislation is being

 

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considered in Congress and is being considered or has been adopted by some states and localities to regulate this drilling method. New laws and regulations could affect the number of wells drilled by operators, decrease demand for our resin-coated sands, and cause a decline in our operations and financial performance. Such a decline in demand could also increase competition and decrease pricing of our products, which could also have a negative impact on our profitability and financial performance.

We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business.

We cannot predict with certainty the cost of defense, of prosecution or of the ultimate outcome of litigation and other proceedings filed by or against us, including penalties or other civil or criminal sanctions, or remedies or damage awards, and adverse results in any litigation and other proceedings may materially harm our business. Litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, international trade, commercial arrangements, product liability, environmental, health and safety, joint venture agreements, labor and employment or other harms resulting from the actions of individuals or entities outside of our control. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that are subject to third-party patents or other third-party intellectual property rights. Litigation based on environmental matters or exposure to hazardous substances in the workplace or from our products could result in significant liability for us.

Because we manufacture and use materials that are known to be hazardous, we are subject to, or affected by, certain product and manufacturing regulations, for which compliance can be costly and time consuming. In addition, we may be subject to personal injury or product liability claims as a result of human exposure to such hazardous materials.

We produce hazardous chemicals that require care in handling and use that are subject to regulation by many U.S. and non-U.S. national, supra-national, state and local governmental authorities. In some circumstances, these authorities must approve our products and manufacturing processes and facilities before we may sell some of these chemicals. To obtain regulatory approval of certain new products, we must, among other things, demonstrate to the relevant authority that the product is safe for its intended uses and that we are capable of manufacturing the product in compliance with current regulations. The process of seeking approvals can be costly, time consuming and subject to unanticipated and significant delays. Approvals may not be granted to us on a timely basis, or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate revenue from those products. New laws and regulations may be introduced in the future that could result in additional compliance costs, bans on product sales or use, seizures, confiscation, recall or monetary fines, any of which could prevent or inhibit the development, distribution or sale of our products and could increase our customers’ efforts to find less hazardous substitutes for our products. We are subject to ongoing reviews of our products and manufacturing processes.

As discussed above, we manufacture and sell products containing formaldehyde, and certain governmental bodies have stated that there is a causal link between formaldehyde exposure and certain types of cancer, including myeloid leukemia. These conclusions could also become the basis of product liability litigation.

Other products we have made or used have been the focus of legal claims based upon allegations of harm to human health. While we cannot predict the outcome of pending suits and claims, we believe that we maintain adequate reserves, in accordance with our policy, to address currently pending litigation and are adequately insured to cover currently pending and foreseeable future claims. However, an unfavorable outcome in these litigation matters may cause our profitability, business, financial condition and reputation to decline.

 

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We are subject to claims from our customers and their employees, environmental action groups and neighbors living near our production facilities.

We produce hazardous chemicals that require appropriate procedures and care to be used in handling them or in using them to manufacture other products. As a result of the hazardous nature of some of the products we produce and use, we may face claims relating to incidents that involve our customers’ improper handling, storage and use of our products. We have historically faced lawsuits, including class action lawsuits, that claim liability for death, injury or property damage caused by products that we manufacture or that contain our components. These lawsuits, and any future lawsuits, could result in substantial damage awards against us, which in turn could encourage additional lawsuits and could cause us to incur significant legal fees to defend such lawsuits, either of which could have a material adverse effect on our financial condition and profitability. In addition, the activities of environmental action groups could result in litigation or damage to our reputation.

As a global business, we are subject to numerous risks associated with our international operations that could have a material adverse effect on our business.

We have significant manufacturing and other operations outside the United States. Some of these operations are in jurisdictions with unstable political or economic conditions. There are numerous inherent risks in international operations, including, but not limited to:

 

   

exchange controls and currency restrictions;

 

   

currency fluctuations and devaluations;

 

   

tariffs and trade barriers;

 

   

export duties and quotas;

 

   

changes in local economic conditions;

 

   

changes in laws and regulations;

 

   

exposure to possible expropriation or other government actions;

 

   

hostility from local populations;

 

   

diminished ability to legally enforce our contractual rights in non-U.S. countries;

 

   

restrictions on our ability to repatriate dividends from our subsidiaries;

 

   

unsettled political conditions and possible terrorist attacks against U.S. interests; and

 

   

natural disasters or other catastrophic events.

Our international operations expose us to different local political and business risks and challenges. For example, we face potential difficulties in staffing and managing local operations, and we have to design local solutions to manage credit risks of local customers and distributors. In addition, some of our operations are located in regions that may be politically unstable, having particular exposure to riots, civil commotion or civil unrests, acts of war (declared or undeclared) or armed hostilities or other national or international calamity. In some of these regions, our status as a United States company also exposes us to increased risk of sabotage, terrorist attacks, interference by civil or military authorities or to greater impact from the national and global military, diplomatic and financial response to any future attacks or other threats.

Some of our operations are located in regions with particular exposure to natural disasters such as storms, floods, fires and earthquakes. It would be difficult or impossible for us to relocate these operations and, as a result, any of the aforementioned occurrences could materially adversely affect our business.

In addition, intellectual property rights may be more difficult to enforce in non-U.S. or non-Western Europe countries.

 

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Our overall success as a global business depends, in part, upon our ability to succeed under different economic, social and political conditions. We may fail to develop and implement policies and strategies that are effective in each location where we do business, and failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to foreign currency risk.

In 2010, approximately 60% of our net sales originated outside the United States. In our consolidated financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, at a constant level of business, our reported international revenues and earnings would be reduced because the local currency would translate into fewer U.S. dollars.

In addition to currency translation risks, we incur a currency transaction risk whenever we enter into a purchase or a sales transaction or indebtedness transaction using a different currency from the currency in which we record revenues. Given the volatility of exchange rates, we may not manage our currency transaction and/or translation risks effectively, and volatility in currency exchange rates may materially adversely affect our financial condition or results of operations, including our tax obligations. Since most of our indebtedness is denominated in U.S. dollars, a strengthening of the U.S. dollar could make it more difficult for us to repay our indebtedness.

We have entered and expect to continue to enter into various hedging and other programs in an effort to protect against adverse changes in the non-U.S. exchange markets and attempt to minimize potential adverse effects. These hedging and other programs may be unsuccessful in protecting against these risks. Our results of operations could be materially adversely affected if the U.S. dollar strengthens against non-U.S. currencies and our protective strategies are not successful. Likewise, a strengthening U.S. dollar provides opportunities to source raw materials more cheaply from foreign countries.

Increased energy costs could increase our operating expenses, reduce net income and negatively affect our financial condition.

Natural gas and electricity are essential to our manufacturing processes, which are energy-intensive. Oil and natural gas prices have fluctuated greatly over the past several years and we anticipate that they will continue to do so. Our energy costs represented 5% of our total costs of sales in 2010, 2009 and 2008.

Our operating expenses will increase if our energy prices increase. Increased energy prices may also result in greater raw materials costs. If we cannot pass these costs through to our customers, our profitability may decline. In addition, increased energy costs may also negatively affect our customers and the demand for our products.

We face increased competition from other companies and from substitute products, which could force us to lower our prices, which would adversely affect our profitability and financial condition.

The markets that we operate in are highly competitive, and this competition could harm our results of operations, cash flows and financial condition. Our competitors include major international producers as well as smaller regional competitors. We believe that the most significant competitive factor that impacts demand for certain of our products is selling price. We may be forced to lower our selling price based on our competitors’ pricing decisions, which would reduce our profitability. Certain markets that we serve have become commoditized in recent years and have given rise to several industry participants, resulting in fierce price competition in these markets. This has been further magnified by the impact of the recent global economic downturn, as companies have focused more on price to retain business and market share. In addition, we face competition from a number of products that are potential substitutes for our products. Growth in substitute products could adversely affect our market share, net sales and profit margins.

 

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Additional trends include current and anticipated consolidation among our competitors and customers which may cause us to lose market share as well as put downward pressure on pricing. There is also a trend in our industries toward relocating manufacturing facilities to lower cost regions, such as Asia, which may permit some of our competitors to lower their costs and improve their competitive position. Furthermore, there has been an increase in new competitors based in these regions.

Some of our competitors are larger, have greater financial resources, have a lower cost structure, and/or have less debt than we do. As a result, those competitors may be better able to withstand a change in conditions within our industry and in the economy as a whole. If we do not compete successfully, our operating margins, financial condition, cash flows and profitability could be adversely affected. Furthermore, if we do not have adequate capital to invest in technology, including expenditures for research and development, our technology could be rendered uneconomical or obsolete, negatively affecting our ability to remain competitive.

We may be unable to achieve the cost savings or synergies that we expect to achieve from our strategic initiatives, including the Momentive Combination, which would adversely affect our profitability and financial condition.

We have not yet realized all of the cost savings and synergies we expect to achieve from our current strategic initiatives, including the Momentive Combination and those related to shared services and logistics optimization, best-of-source contractual terms, procurement savings, regional site rationalization, administrative and overhead savings, and new product development, and may not be able to realize such cost savings or synergies. A variety of risks could cause us not to realize the expected cost savings and synergies, including but not limited to, the following: the shared services agreement that we entered into with MPM on October 1, 2010, which was amended on March 17, 2011 (the “Shared Services Agreement”) may be viewed negatively by vendors, customers or financing sources, negatively impacting potential benefits; any difficulty or inability to integrate shared services with our business; higher than expected severance costs related to staff reductions; higher than expected retention costs for employees that will be retained; higher than expected stand-alone overhead expenses; delays in the anticipated timing of activities related to our cost-saving plan; increased complexity and cost in collaborating between us and MPM and establishing and maintaining shared services; and other unexpected costs associated with operating our business.

Our ability to realize the benefits of the Momentive Combination also may be limited by applicable limitations under the terms of our debt instruments. These debt instruments generally require that transactions between us and MPM with a value in excess of a de minimis threshold be entered into on an arm’s-length basis. These constraints could result in significantly fewer cost savings and synergies than would occur if these limitations did not exist. Our ability to realize intended savings also may be limited by existing contracts to which we are a party, the need for consents with respect to agreements with third parties, and other logistical difficulties associated with integration.

The Shared Services Agreement expires in October 2015 (subject to one-year renewals every year thereafter, absent contrary notice from either party). Moreover, the Shared Services Agreement is also subject to termination by either MSC or MPM, without cause, on not less than thirty days prior written notice subject to a one year transition assistance period. If the Shared Services Agreement is terminated, it could have a negative effect on our business operations, results of operations, and financial condition, as we would need to replace the services that were being provided by MPM, and would lose the benefits we were generating under the agreement at the time.

If we are unable to achieve the cost savings or synergies that we expect to achieve from our strategic initiatives, including the Shared Services Agreement, it would adversely affect our profitability and financial condition. In addition, while we have been successful in reducing costs and generating savings, factors may arise that may not allow us to sustain our current cost structure. As market and economic conditions change, we may also make changes to our operating cost structure. To the extent we are permitted to include the pro forma impact of such cost savings initiatives in the calculation of financial covenant ratios under our senior credit agreements, our failure to realize such savings could impact our compliance with such covenants.

 

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Our success depends in part on our ability to protect our intellectual property rights, and our inability to enforce these rights could have an adverse effect on our competitive position.

We rely on the patent, trademark, copyright and trade-secret laws of the United States and the countries where we do business to protect our intellectual property rights. We may be unable to prevent third parties from using our intellectual property without our authorization. The unauthorized use of our intellectual property could reduce any competitive advantage we have developed, reduce our market share or otherwise harm our business. In the event of unauthorized use of our intellectual property, litigation to protect or enforce our rights could be costly, and we may not prevail.

Many of our technologies are not covered by any patent or patent application, and our issued and pending U.S. and non-U.S. patents may not provide us with any competitive advantage and could be challenged by third parties. Our inability to secure issuance of our pending patent applications may limit our ability to protect the intellectual property rights these pending patent applications were intended to cover. Our competitors may attempt to design around our patents to avoid liability for infringement and, if successful, our competitors could adversely affect our market share. Furthermore, the expiration of our patents may lead to increased competition.

Our pending trademark applications may not be approved by the responsible governmental authorities and, even if these trademark applications are granted, third parties may seek to oppose or otherwise challenge these trademark applications. A failure to obtain trademark registrations in the United States and in other countries could limit our ability to protect our products and their associated trademarks and impede our marketing efforts in those jurisdictions.

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

Where a product formulation or process is kept as a trade secret, third parties may independently develop or invent and patent products or processes identical to our trade-secret products or processes. This could have an adverse impact on our ability to make and sell products or use such processes and could potentially result in costly litigation in which we might not prevail.

We could face intellectual property infringement claims that could result in significant legal costs and damages and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition and results of operations.

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

 

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We depend on certain of our key executives and our ability to attract and retain qualified employees.

Our ability to operate our business and implement our strategies depends, in part, on the skills, experience and efforts of Craig O. Morrison, our chief executive officer, and William H. Carter, our chief financial officer, and other key members of our leadership team. We do not maintain any key-man insurance on any of these individuals. In addition, our success will depend on, among other factors, our ability to attract and retain other managerial, scientific and technical qualified personnel, particularly research scientists, technical sales professionals, and engineers that have specialized skills required by our business and focused on the industry in which we compete. Competition for qualified employees in the chemicals and materials industry is intense and the loss of the services of any of our key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on our business or business prospects. Further, if any of these executives or employees joins a competitor, we could lose customers and suppliers and incur additional expenses to recruit and train personnel, who require time to become productive and to learn our business.

Our and MPM’s majority shareholder’s interest may conflict with or differ from our interests.

Apollo controls our ultimate parent company, Momentive Performance Materials Holdings LLC, or Momentive Holdings, which indirectly owns 100% of our common equity. In addition, representatives of Apollo comprise a majority of our directors. As a result, Apollo can control our ability to enter into significant corporate transactions such as mergers, tender offers and the sale of all or substantially all of our assets. The interests of Apollo and its affiliates could conflict with or differ from our interests. For example, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination which may otherwise be favorable for us.

Our ultimate parent company, Momentive Holdings, is also the ultimate parent company of our affiliate, MPM. Therefore, in addition to controlling our activities through its control of Momentive Holdings, Apollo can also control the activities of MPM through this same ownership and control structure. There can be no assurance that Apollo (and our senior management team, many of whom hold the same position with, or also provide services to, MPM) will not decide to focus its attention and resources on matters relating to MPM or Momentive Holdings that otherwise could be directed to our business and operations. If Apollo determines to focus attention and resources on MPM or any new business lines of MPM instead of us, it could adversely affect our ability to expand our existing business or develop new business.

Additionally, Apollo is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete, directly or indirectly with us. Apollo may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Additionally, even if Apollo invests in competing businesses through Momentive Holdings, such investments may be made through MPM or a newly-formed subsidiary of Momentive Holdings. Any such investment may increase the potential for the conflicts of interest discussed in this risk factor.

So long as Apollo continues to indirectly own a significant amount of the equity of Momentive Holdings, even if such amount is less than 50%, they will continue to be able to substantially influence or effectively control our ability to enter into any corporate transactions.

Because our equity securities are not and will not be registered under the securities laws of the United States or in any other jurisdiction and are not listed on any U.S. securities exchange, we are not subject to certain of the corporate governance requirements of U.S. securities authorities or to any corporate governance requirements of any U.S. securities exchanges.

 

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The diversion of our key personnel’s attention to other businesses could adversely affect our business and results of operations.

Certain members of our senior management team, including Mr. Morrison, our CEO, and Mr. Carter, our CFO, and certain of our other employees, who provide substantial services to our businesses, also act in such capacities and provide services with respect to our affiliate MPM. Certain individuals employed by MPM also provide services to our business. The services of such individuals are provided by us to MPM, or by MPM to us, pursuant to the Shared Services Agreement. Any or all of these individuals may be required to focus their time and energies on matters relating to MPM that otherwise could be directed to our business and operations. If the attention of our senior management team, and/or such other individuals providing substantial services to our business, is significantly diverted from their responsibilities to us, it could affect our ability to service our existing business and develop new business, which could have a material adverse effect on our business and results of operations. Mr. Morrison and Mr. Carter and certain other key personnel became members of the management team of MPM in early October 2010. We cannot assure you that the transition by members of our management team to their additional roles on the management team of MPM, the transition of other employees to their additional roles with MPM, or the implementation of the Shared Services Agreement, will not be disruptive to our business.

If we fail to extend or renegotiate our collective bargaining agreements with our works councils and labor unions as they expire from time to time, if disputes with our works councils or unions arise, or if our unionized or represented employees were to engage in a strike or other work stoppage, our business and operating results could be materially adversely affected.

As of June 30, 2011, 40% of our employees were unionized or represented by works councils that were covered by collective bargaining agreements. In addition, some of our employees reside in countries in which employment laws provide greater bargaining or other employee rights than the laws of the United States. These rights may require us to expend more time and money altering or amending employees’ terms of employment or making staff reductions. For example, most of our employees in Europe are represented by works councils, which generally must approve changes in conditions of employment, including restructuring initiatives and changes in salaries and benefits. A significant dispute could divert our management’s attention and otherwise hinder our ability to conduct our business or to achieve planned cost savings.

We may be unable to timely extend or renegotiate our collective bargaining agreements as they expire. We have collective bargaining agreements which will expire during the next two years. We also may be subject to strikes or work stoppages by, or disputes with, our labor unions. If we fail to extend or renegotiate our collective bargaining agreements, if disputes with our works councils or unions arise or if our unionized or represented workers engage in a strike or other work stoppage, we could incur higher labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business, financial position and results of operations.

Our pension plans are unfunded or under-funded, and our required cash contributions could be higher than we expect, having an adverse effect on our financial condition and liquidity.

We sponsor various pension and similar benefit plans worldwide.

Our non-U.S. defined benefit pension plans were under-funded in the aggregate by $107 million as of December 31, 2010. Our U.S. defined benefit pension plans were under-funded in the aggregate by $71 million as of December 31, 2010.

We are legally required to make contributions to our pension plans in the future, and those contributions could be material. The need to make these cash contributions will reduce the amount of cash that would be available to meet other obligations or the needs of our business, which could have an adverse effect on our financial condition and liquidity.

 

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In 2011, we expect to contribute approximately $15 million and $11 million to our U.S. and non-U.S. defined benefit pension plans, respectively, which we believe is sufficient to meet the minimum funding requirements as set forth in employee benefit and tax laws.

Our future funding obligations for our employee benefit plans depend upon the levels of benefits provided for by the plans, the future performance of assets set aside for these plans, the rates of interest used to determine funding levels, the impact of potential business dispositions, actuarial data and experience, and any changes in government laws and regulations. In addition, our employee benefit plans hold a significant amount of equity securities. If the market values of these securities decline, our pension expense and funding requirements would increase and, as a result, could have a material adverse affect on our business.

Any decrease in interest rates and asset returns, if and to the extent not offset by contributions, could increase our obligations under these plans. If the performance of assets in the funded plans does not meet our expectations, our cash contributions for these plans could be higher than we expect, which could have an adverse effect on our financial condition and liquidity.

Natural or other disasters have, and could in the future, disrupt our business and result in loss of revenue or higher expenses.

Any serious disruption at any of our facilities or our suppliers’ facilities due to hurricane, fire, earthquake, flood, terrorist attack or any other natural or man-made disaster could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. If there is a natural disaster or other serious disruption at any of our facilities or our suppliers’ facilities, it could impair our ability to adequately supply our customers and negatively impact our operating results. For example, our manufacturing facilities in the U.S. Gulf Coast region were also impacted by Hurricanes Katrina and Rita in 2005 and Hurricanes Gustav and Ike in 2008. In addition, many of our current and potential customers are concentrated in specific geographic areas. A disaster in one of these regions could have a material adverse impact on our operations, operating results and financial condition. Our business interruption insurance may not be sufficient to cover all of our losses from a disaster, in which case our unreimbursed losses could be substantial.

Acquisitions and joint ventures that we pursue may present unforeseen integration obstacles and costs, increase our leverage and negatively impact our performance. Divestitures that we pursue also may present unforeseen obstacles and costs and alter the synergies we expect to achieve from the Momentive Combination.

We have made acquisitions of related businesses, and entered into joint ventures in the past and intend to selectively pursue acquisitions of, and joint ventures with, related businesses as one element of our growth strategy. Acquisitions may require us to assume or incur additional debt financing, resulting in additional leverage and complex debt structures. If such acquisitions are consummated, the risk factors we describe below, and for our business generally, may be intensified.

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

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

 

   

potential disruptions of our ongoing business and distraction of management;

 

   

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

 

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coordinating new product and process development;

 

   

hiring additional management and other critical personnel; and

 

   

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

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

In addition, we have selectively made, and may in the future, pursue divestitures of certain of our businesses as one element of our portfolio optimization strategy. Divestitures may require us to separate integrated assets and personnel from our retained businesses and devote our resources to transitioning assets and services to purchasers, resulting in disruptions to our ongoing business and distraction of management. Divestitures may alter synergies we expect to achieve from the Momentive Combination.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws, which involve substantial risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “projects,” “might,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions that concern our strategy, plans or intentions. All statements we make in this prospectus relating to our estimated and projected revenue, margins, costs, expenditures, cash flows, growth rates, financial results, and prospects are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expect. We derive many of our forward-looking statements from our operating budgets and forecasts, which we base upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

We disclose important factors that could cause actual results to differ materially from our expectations under “Risk Factors” and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus. Some of the factors that we believe could affect our revenue, margins, costs, expenditures, cash flows, growth rates, financial results, business, condition and prospects include:

 

   

general economic and business conditions including the current global economic and financial market conditions;

 

   

industry trends;

 

   

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

 

   

raw material costs and availability;

 

   

restrictions contained in our debt agreements;

 

   

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

 

   

our failure to comply with financial covenants under our credit facilities or other debt;

 

   

the possibility of environmental liabilities and other damage that is not covered by insurance or that exceeds our insurance coverage;

 

   

increased competition in the markets in which we operate and competition from substitute products;

 

   

changes in demand for our products;

 

   

the loss of any of our major customers;

 

   

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

 

   

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

 

   

changes in business strategy;

 

   

our ability to achieve all expected cost savings from our productivity initiatives or from the Momentive Combination;

 

   

difficulties with the integration process or realization of the benefits from the Momentive Combination;

 

   

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

 

   

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

 

   

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

 

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the loss of our intellectual property rights;

 

   

availability, terms and deployment of capital;

 

   

the outcome of litigation described in Note 12 to the audited consolidated financial statements of MSC and Note 7 to the unaudited condensed consolidated financial statements of MSC, each included elsewhere in this prospectus; and

 

   

other factors set forth under “Risk Factors.”

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. There may be other factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements. In addition, in light of these risks and uncertainties, the matters referred to in the forward looking statements contained in this prospectus may not in fact occur. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events, except as required by law.

 

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MARKET AND INDUSTRY DATA AND FORECASTS

This prospectus includes industry data that we obtained from periodic industry publications and internal company surveys. This prospectus includes market share and industry data that we prepared primarily based on management’s knowledge of the industry and industry data. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Unless otherwise noted, statements as to our market share and market position relative to our competitors are approximated and based on management estimates using the above-mentioned latest-available third-party data and our internal analysis and estimates. We determined our market share and market positions utilizing periodic industry publications. If we were unable to obtain relevant periodic industry publications, we based our estimates on our knowledge of the size of our markets, our sales in each of these markets and publicly available information regarding our competitors, as well as internal estimates of competitors’ sales based on discussion with our sales force and other industry participants.

Although we believe that the third-party sources are reliable, we have not independently verified market industry data provided by third parties or by industry or general publications. Similarly, while we believe our internal estimates with respect to our industry are reliable, our estimates have not been verified by any independent sources. While we are not aware of any misstatements regarding any industry data presented in this prospectus, our estimates, in particular as they relate to market share and our general expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the sections entitled “Risk Factors,” “Cautionary Statement Concerning Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

 

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USE OF PROCEEDS

We will not receive any proceeds from the resale of the Notes offered by this prospectus. The selling security holder will receive all of the proceeds from the sale of its Notes.

See “Security Ownership of Certain Beneficial Owners and Management,” “Certain Relationships and Related Party Transactions,” “Management” and “Selling Security Holder” for certain information related to the selling security holder.

 

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CAPITALIZATION

The following table sets forth as of June 30, 2011, MSC’s cash and cash equivalents and capitalization on an actual basis.

You should read this table in conjunction with “Risk Factors” and “Selected Historical Financial and Other Information,” as well as the historical condensed consolidated financial statements and related notes included elsewhere in this prospectus.

 

(In millions)

   As of June 30, 2011  

Cash and cash equivalents

   $ 196   
  

 

 

 

Debt:

  

Senior secured credit facilities

   $ 1,401   

8.875% senior secured notes (net of original issue discount of $6)

     994   

Floating rate second-priority senior secured notes

     120   

9.00% Second-priority senior secured notes

     574   

Senior unsecured debentures

     325   

Other debt and capital leases

     125   

Affiliated term debt

     102   
  

 

 

 

Total debt

   $ 3,641   
  

 

 

 

Deficit:

  

Common stock, par value $0.01 per share: 300,000,000 shares authorized, 82,556,847 shares issued and outstanding

     1   

Paid-in capital

     326   

Note receivable due from parent

     (296

Treasury stock

     (24

Accumulated other comprehensive income

     139   

Accumulated deficit

     (1,989

Noncontrolling interest

     1   
  

 

 

 

Total deficit

     (1,842
  

 

 

 

Total capitalization

   $ 1,799   
  

 

 

 

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

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

The unaudited pro forma statement of operations for the year ended December 31, 2010, gives pro forma effect to the January and November Refinancing Transactions and the resale of the Notes (which would have had no impact on our statement of operations) as if they occurred on January 1, 2010. An unaudited pro forma statement of operations for the six months ended June 30, 2011 has not been presented, as the impact of the January and November Refinancing Transactions is included in the historical results of operations for this period, and the resale of the Notes will have no impact on our statement of operations.

The unaudited pro forma financial information is presented for informational purposes only, and does not purport to represent what our results of operations would actually have been if the transactions had occurred on the dates indicated, nor does it purport to project our results of operations or financial condition that we may achieve in the future.

You should read the following unaudited pro forma financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Capitalization,” “Selected Historical Financial and Other Information” and our consolidated financial statements and related notes and other financial information included elsewhere in this prospectus.

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

Unaudited Pro Forma Statement of Operations For the Year Ended December 31, 2010

(dollars in millions)

 

     Actual      Adjustments     Pro Forma  

Net sales

   $ 4,597       $ —        $ 4,597   

Cost of sales

     3,866         —          3,866   
  

 

 

    

 

 

   

 

 

 

Gross profit

     731         —          731   

Selling, general and administrative expense

     331         —          331   

Terminated merger and settlement income, net

     (171)         —          (171)   

Other operating expense, net

     25         —          25   
  

 

 

    

 

 

   

 

 

 

Operating income

     546         —          546   

Interest expense, net

     276         7 (a)      283   

Loss on extinguishment of debt

     30         (30) (b)      —     

Other non-operating income, net

     (4)         —          (4)   
  

 

 

    

 

 

   

 

 

 

Income from continuing operations before income tax and earnings from unconsolidated entities

     244         23        267   

Income tax expense

     35         —          35   
  

 

 

    

 

 

   

 

 

 

Income from continuing operations before earnings from unconsolidated entities

     209         23        232   

Earnings from unconsolidated entities, net of taxes

     8         —          8   
  

 

 

    

 

 

   

 

 

 

Income from continuing operations

     217         23        240   

Net loss from discontinued operations, net of taxes

     (3)         —          (3)   
  

 

 

    

 

 

   

 

 

 

Net income

   $ 214       $ 23      $ 237   
  

 

 

    

 

 

   

 

 

 

See Notes to Unaudited Pro Forma Statement of Operations

 

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Notes to Unaudited Pro Forma Statement of Operations (dollars in millions)

 

(a) Represents the increase in net interest expense related to the incurrence of new debt, the extension of maturities of term loans under our senior secured credit facilities and the settlement of existing debt as part of the January and November Refinancing Transactions and the resale of the Notes (which had no impact on our statement of operations):

 

Newly issued debt:

  

8.875% senior secured notes due 2018

   $ 89   

9.00% second-priority senior secured notes due 2020

     52   

Existing debt:

  

Senior secured credit facilities

     56   

Floating rate second-priority senior secured notes

     6   

Senior unsecured debentures

     27   

Other debt and capital leases

     10   

Affiliated term debt

     3   

Revolver commitment fee

     4   

Interest rate swaps

     26   

Amortization of deferred debt issuance costs

     10   
  

 

 

 

Total

     283   

Historic interest expense

     (276
  

 

 

 

Net adjustment

   $ 7   
  

 

 

 

The pro forma adjustments were calculated using a U.S. LIBOR rate of 0.25% and a Euribor rate of 1.61% per annum as of July 18, 2011. Each one-eighth point change in the assumed interest rates would result in a $1 change in annual interest expense.

 

(b) Reflects the adjustment to eliminate the loss on extinguishment associated with the January and November Refinancing Transactions.

 

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COVENANT COMPLIANCE

The instruments that govern our indebtedness contain, among other provisions, restrictive covenants and incurrence tests regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the senior secured credit facilities may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of representation or warranty, most covenant defaults, events of bankruptcy and a change of control.

Certain covenants contained in the credit agreement that governs our senior secured credit facilities require us to have a senior secured debt to Adjusted EBITDA ratio less than 4.25:1. The indentures that govern certain of our notes (in our 8.875% senior secured notes and the Notes offered hereby) contain an Adjusted EBITDA to Fixed Charges ratio incurrence test which restricts our ability to take certain actions such as incurring additional debt or making acquisitions if we are unable to meet this ratio (measured on a last twelve months, or LTM, basis) of at least 2.0:1.

Fixed Charges are defined as net interest expense excluding the amortization or write-off of deferred financing costs. Adjusted EBITDA is defined as EBITDA adjusted to exclude certain non-cash and certain non-recurring items. Adjusted EBITDA is calculated on a pro-forma basis, and also includes expected future cost savings from business optimization programs, including those related to acquisitions, including the Hexion Formation, and other synergy and productivity programs. As we are highly leveraged, we believe that including the supplemental adjustments that are made to calculate Adjusted EBITDA provides additional information to investors about our ability to comply with our financial covenants and to obtain additional debt in the future. Adjusted EBITDA and Fixed Charges are not defined terms under GAAP. Adjusted EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or operating cash flows determined in accordance with GAAP. Additionally, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not take into account certain items such as interest and principal payments on our indebtedness, depreciation and amortization expense (because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue), working capital needs, tax payments (because the payment of taxes is part of our operations, it is a necessary element of our costs and ability to operate), non-recurring expenses and capital expenditures. Fixed Charges should not be considered an alternative to interest expense.

As of June 30, 2011, we were in compliance with all financial covenants that govern our senior secured credit facilities, including our senior secured debt to Adjusted EBITDA ratio.

Based on our projections of 2011 operating results, we expect to be in compliance with all of the financial covenants and tests that are contained in the indentures that govern certain of our notes and our senior secured credit facilities throughout 2011.

 

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(In millions)

   June 30, 2011
LTM period
 
Reconciliation of Net Income to Adjusted EBITDA   

Net income

   $ 295   

Income tax expense

     21   

Loss on extinguishment of debt

     22   

Interest expense, net

     270   

Depreciation and amortization expense

     167   
  

 

 

 

EBITDA

     775   

Adjustments to EBITDA:

  

Push-down of income from owner (1)

     (135

Asset impairments and other non-cash items (2)

     21   

Unusual items:

  

Loss on divestitures of assets

     3   

Net loss from discontinued operations (3)

     8   

Business realignments (4)

     19   

Other (5)

     27   
  

 

 

 

Total unusual items

     57   
  

 

 

 

Productivity program savings (6)

     9   

Savings from the Shared Services Agreement (7)

     43   
  

 

 

 

Adjusted EBITDA

   $ 770   
  

 

 

 

Fixed Charges (8)

   $ 242   
  

 

 

 

Ratio of Adjusted EBITDA to Fixed Charges (9)

     3.18   
  

 

 

 

 

(1) Represents the non-cash push-down of insurance recoveries by our owner related to the $200 termination settlement payment that was pushed down and treated as an expense of the Company in 2008.
(2) Represents asset impairments, stock-based compensation and unrealized foreign exchange and derivative activity.
(3) Represents the results of the IAR and CCR businesses.
(4) Represents plant rationalization and headcount reduction expenses related to productivity programs and other costs associated with business realignments.
(5) Primarily includes pension expense related to formerly owned businesses, business optimization expenses, management fees, retention program costs and certain intercompany or nonoperational realized foreign currency activity.
(6) Represents pro forma impact of in-process productivity program savings.
(7) Primarily represents pro forma impact of expected savings from the Shared Services Agreement in conjunction with the Momentive Combination.
(8) Reflects pro forma interest expense based on interest rates at July 18, 2011 as if the November Refinancing Transaction had taken place at the beginning of the period.
(9) We are required to have an Adjusted EBITDA to Fixed Charges ratio of greater than 2.0 to 1.0 to be able to incur additional indebtedness under our indenture for the Second Priority Senior Secured Notes. As of June 30, 2011, the Company was able to satisfy this test and incur additional indebtedness under this indenture.

 

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SELECTED HISTORICAL FINANCIAL AND OTHER INFORMATION

The following table presents selected historical financial and other data for MSC. The selected historical financial and other data as of June 30, 2011 and for the six months ended June 30, 2011 and June 30, 2010 have been derived from the unaudited condensed consolidated financial statements of MSC included elsewhere in this prospectus. The selected historical financial and other data for MSC as of and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 have been derived from the audited consolidated financial statements of MSC included elsewhere in this prospectus.

Our financial data for the year ended December 31, 2006 includes:

 

   

The results of operations of the decorative coatings and adhesives business unit of The Rhodia Group since its date of acquisition.

Our financial data for the year ended December 31, 2007 includes:

 

   

The results of operations for the acquisitions of Orica Limited and the forest products resins and the formaldehyde business of Arkema Gmbh since February 1, 2007 and November 1, 2007, their respective acquisition dates.

In addition, Taro Plast, our Italian-based engineering thermoplastics business is reported as a discontinued operation for the year ended December 31, 2006 and the IAR and CCR businesses have been reported as discontinued operations for the six months ended June 30, 2011 and 2010 and the years ended December 31, 2010, 2009, 2008, 2007 and 2006.

 

     Six months ended
June 30,
    Year ended December 31,  
(In millions)        2011             2010         2010     2009     2008     2007(1)     2006(2)  

Statement of Operations

              

Net sales

   $ 2,732      $ 2,203      $ 4,597      $ 3,549      $ 5,390      $ 5,166      $ 4,460   

Cost of sales

     2,308        1,879        3,866        3,077        4,807        4,435        3,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     424        324        731        472        583        731        645   

Selling, general and administrative expense

     171        158        331        305        342        352        340   

Terminated merger and settlement (income) expense, net (3)

     —          (28     (171     (62     1,027        —          —     

Integration and transaction costs

     —          —          —          —          27        34        56   

Asset impairments

     18        —          —          49        8        21        12   

Other operating (income) expense, net (4)

     (13     (3     25        44        41        25        (20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     248        197        546        136        (862     299        257   

Interest expense, net

     129        135        276        223        303        309        242   

Loss (gain) on extinguishment of debt

     —          8        30        (224     —          —          —     

Other non-operating (income), expense net

     (2     3        (4     —          6        15        120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax and earnings from unconsolidated entities

     121        51        244        137        (1,171     (25     (105

Income tax expense (benefit)

     3        17        35        (8     (16     46        13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before earnings from unconsolidated entities

     118        34        209        145        (1,155     (71     (118

Earnings from unconsolidated entities, net of taxes

     6        4        8        2        2        4        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     124        38        217        147        (1,153     (67     (115

Net income (loss) from discontinued operations, net of taxes (5)

     2        7        (3     (30     (32     4        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     126        45        214        117        (1,185     (63     (105

Net income attributable to noncontrolling interest

     —          —          —          (3     (5     (2     (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Momentive Specialty Chemicals Inc.

     126        45        214        114        (1,190     (65     (109

Accretion of redeemable preferred stock

     —          —          —          —          —          —          33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 126      $ 45      $ 214      $ 114      $ (1,190   $ (65   $ (142
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Six months ended
June 30,
    Year ended December 31,  
       2011         2010       2010     2009     2008     2007 (1)     2006 (2)  

Dividends declared per common share

   $ —        $ —        $ —        $ —        $ —        $ 0.01      $ 6.12   

Cash Flows provided by (used in):

              

Operating activities

   $ (43   $ (108   $ 45      $ 355      $ (632   $ 174      $ 21   

Investing activities

     103        (35     (99     (132     (134     (335     (277

Financing activities

     (51     124        97        (222     706        288        128   

Balance Sheet Data (at end of period):

              

Cash and cash equivalents

   $ 196        $ 186      $ 142      $ 117      $ 192      $ 57   

Short-term investments

     6          6        10        7        —          —     

Working capital (6)

     630          551        204        390        509        367   

Total assets

     3,363          3,137        2,973        3,180        4,006        3,508   

Total long-term debt

     3,550          3,588        3,424        3,743        3,632        3,324   

Total net debt (7)

     3,439          3,480        3,354        3,729        3,521        3,332   

Total liabilities

     5,205          5,156        5,022        5,359        5,380        4,909   

Total deficit

     (1,842       (2,019     (2,049     (2,179     (1,374     (1,401

 

(1) Includes data for the adhesive and resins business of Orica Limited and the forest products resins and the formaldehyde business of Arkema Gmbh since February 1, 2007 and November 1, 2007, their respective dates of acquisition.
(2) Includes data for the decorative coatings and adhesives business unit of The Rhodia Group from January 31, 2006 its date of acquisition.
(3) Terminated merger and settlement (income) expense, net for the years ended December 31, 2010 and 2009 includes the non-cash push-down of insurance recoveries by the Company’s owner related to the settlement payment made by the Company’s owner that had been treated as an expense of the Company for the year ended December 31, 2008 associated with the terminated merger with Huntsman Corporation, as well as reductions on certain of the Company’s merger related service provider liabilities. Amount for the year ended December 31, 2008 also represents termination fees, settlement payments, accounting and legal costs paid by the Company as well as the write-off of previously deferred acquisition costs.
(4) Other operating income for the year ended December 31, 2006 includes net gains of $39 recognized on the divestiture of our branded consumer adhesives company based in Boituva, Brazil.
(5) Loss from discontinued operations reflects the results on our IAR and CCR businesses. Loss from discontinued operations for the year ended December 31, 2006 also reflects the losses on our Italian-based engineering thermoplastics business, Taro Plast, S.p.a.
(6) Working capital is defined as current assets less current liabilities. As of December 31, 2010, the net assets and liabilities of the IAR and CCR business totaling $184 have been classified as current.
(7) Net debt is defined as long-term debt plus short-term debt less cash and cash equivalents and short-term investments.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our results of operations and financial condition for the years ended December 31, 2010, 2009 and 2008 with the audited consolidated financial statements of MSC, and for the six-month periods ended June 30, 2011 and June 30, 2010 with the unaudited condensed consolidated financial statements of MSC, each included elsewhere herein. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs, and which involve numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. See “Cautionary Statement Concerning Forward-Looking Statements.”

The purpose of the following discussion is to provide relevant information to investors who use our financial statements so they can assess our financial condition and results of operations by evaluating the amounts and certainty of cash flows from our operations and from outside sources. The three principal objectives of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are: to provide a narrative explanation of financial statements that enables investors to see our Company through the eyes of management; to enhance overall financial disclosure and provide the context within which financial information should be analyzed; and to provide information about the quality and potential variability of earnings and cash flows so that investors can judge the likelihood that past performance is indicative of future performance.

MD&A is presented in eight sections: Overview and Outlook, Results of Operations, Results of Operations by Segment, Liquidity and Capital Resources, Reconciliation of Net Income to Adjusted EBITDA, Critical Accounting Estimates, Recently Issued Accounting Standards and Qualitative and Quantitative Disclosures About Market Risk. MD&A should be read in conjunction with our financial statements and the accompanying notes included elsewhere in this prospectus. Unless otherwise indicated by the context, U.S. dollar amounts in the tables and charts located in MD&A are in millions.

Within the following discussion, unless otherwise stated, “2010” refers to the year ended December 31, 2010, “2009” refers to the year ended December 31, 2009, “2008” refers to the year ended December 31, 2008, “the quarter ended June 30, 2011” and “the second quarter of 2011” refer to the three months ended June 30, 2011, and “the quarter ended June 30, 2010” and “the second quarter of 2010” refer to the three months ended June 30, 2010.

Overview and Outlook

Business Overview

We are a large participant in the specialty chemicals industry, and a leading producer of adhesive and structural resins and coatings. Thermosets are a critical ingredient for virtually all paints, coatings, glues and other adhesives produced for consumer or industrial uses. We provide a broad array of thermosets and associated technologies and have significant market positions in all of the key markets that we serve.

Our products are used in thousands of applications and are sold into diverse markets, such as forest products, architectural and industrial paints, packaging, consumer products and automotive coatings, as well as higher growth markets, such as composites, UV cured coatings and electrical composites. Major industry sectors that we serve include industrial/marine, construction, consumer/durable goods, automotive, wind energy, aviation, electronics, architectural, civil engineering, repair/remodeling, graphic arts and oil and gas field support. Key drivers for our business include general economic and industrial conditions, including housing starts, auto build rates and active gas drilling rigs. In addition, due to the nature of our products and the markets we serve, competitor capacity constraints and the availability of similar products in the market may impact our

 

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results. As is true for many industries, our financial results are impacted by the effect on our customers of economic upturns or downturns, as well as by the impact on our own costs to produce, sell and deliver our products. Our customers use most of our products in their production processes. As a result, factors that impact their industries have significantly affected our results.

Through our worldwide network of strategically located production facilities we serve more than 7,800 customers in over 100 countries. Our global customers include large companies in their respective industries, such as 3M, Ashland Chemical, BASF, Bayer, DuPont, GE, Halliburton, Honeywell, Louisiana Pacific, Owens Corning, PPG Industries, Sumitomo, Valspar and Weyerhaeuser.

Momentive Combination and Shared Services Agreement

In October 2010, our parent, MSC Holdings and Momentive Performance Materials Holdings Inc., the parent company of Momentive Performance Materials Inc. (“MPM”), became subsidiaries of a newly formed holding company, Momentive Holdings. We refer to this transaction as the “Momentive Combination.” In connection with the closing of the Momentive Combination, we entered into the Shared Services Agreement with MPM, as amended on March 17, 2011, pursuant to which we will provide to MPM, and MPM will provide to us, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, technology development, legal and procurement services. The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between us and MPM.

We expect that the Momentive Combination, including the Shared Services Agreement, will result in significant synergies for us, including shared services and logistics optimization, best-of-source contractual terms, procurement savings, regional site rationalization, and administrative and overhead savings. We expect to achieve a total of approximately $58 million of cost savings in connection with the Shared Services Agreement and recent divestitures. Through June 30, 2011, we realized $27 million of these savings on a run-rate basis, and anticipate fully realizing the remaining anticipated savings over the next 18 to 24 months.

Business Strategy

We believe that we have opportunities for growth through the following strategies:

 

   

Develop and Market New Products. We will continue to expand our product offerings through research and development initiatives and research partnership formations with third parties. Through these innovation initiatives we will continue to create new generations of products and services which will drive revenue and earnings growth.

 

   

Expand Our Global Reach in Faster Growing Regions. We intend to continue to grow internationally by expanding our product sales to our customers around the world. Specifically, we are focused on growing our business in markets in the high growth regions of Asia-Pacific, Eastern Europe, Latin America, India and the Middle East, where the usage of our products is increasing. Furthermore, by consolidating sales and distribution infrastructures via the Momentive Combination, we expect to accelerate the penetration of our high-end, value-added products into markets, thus further leveraging our research and applications efforts and existing global footprint.

 

   

Increase Shift to High-Margin Specialty Products. We continue to proactively manage our product portfolio with a focus on specialty, high-margin applications and the reduction of our exposure to lower-margin products. As a result of this capital allocation strategy and strong end market growth underlying these specialty segments including energy and oilfield applications, they will continue to be a larger part of our broader portfolio. Consequently, we have witnessed a strong organic improvement in our profitability profile as a whole over the last several years which we believe will continue.

 

   

Continue Portfolio Optimization and Pursue Targeted Add-On Acquisitions and Joint Ventures. The specialty chemicals and materials market is comprised of numerous small and mid-sized specialty

 

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companies focused on niche markets, as well as smaller divisions of large chemical conglomerates. As a large manufacturer of specialty chemicals and materials with leadership in the production of thermosets, we have a significant advantage in pursuing add-on acquisitions and joint ventures in areas that allow us to build upon our core strengths, expand our product, technology and geographic portfolio, and better serve our customers. We believe we can consummate a number of these acquisitions at relatively attractive valuations due to the scalability of our existing global operations and deal-related synergies. In addition, we have and will continue to monitor the strategic landscape for opportunistic divestments consistent with our broader specialty strategy. For example, we recently completed the sale of our IAR business and CCR business.

 

   

Capitalize on the Momentive Combination to Grow Revenues and Realize Operational Efficiencies. We believe the Momentive Combination will present opportunities to increase our revenues by leveraging each of ours and MPM’s respective global footprints and technology platforms. For example, in Asia, we anticipate being able to accelerate the penetration of our products. Further, we anticipate the Momentive Combination will provide opportunities to streamline our business and reduce our cost structure. We anticipate that these savings to come from logistics optimization, reduction in corporate expenses and reductions in the costs for raw materials and other inputs. Through June 30, 2011, we implemented $27 million of these savings on a run-rate basis, and anticipate fully realizing the remaining anticipated savings over the next 18 to 24 months.

 

   

Generate Free Cash Flow and Deleverage. We expect to generate strong free cash flow due to our size, advantaged cost structure, and reasonable ongoing capital expenditure requirements Furthermore, we have demonstrated expertise in managing our working capital, which has been further augmented as a result of our increased sales from the Momentive Combination. Our strategy of generating significant free cash flow and deleveraging is complimented by our long-dated capital structure with no near-term maturities and strong liquidity position. This financial flexibility allows us to prudently balance deleveraging with our focus on growth and innovation.

Change in Reportable Segments

In the first quarter of 2011, the Company completed the IAR Divestiture and moved the oversight and management of the coatings reporting unit into the Epoxy and Phenolic Resins Division, which was renamed the Epoxy, Phenolic and Coating Resins Division. These organizational and internal reporting changes caused the Company to re-evaluate its reportable segments. As a result of these changes, effective in the first quarter of 2011, the results of the Company’s coatings reporting unit, which were previously reported in the Coatings segment, are included within the Epoxy, Phenolic and Coating Resins segment. The prior periods have been recast for comparability purposes. In addition, the Company has renamed its Formaldehyde and Forest Products Resins segment to Forest Products Resins. No changes were made to the product lines that comprise this segment.

The Company’s business segments are based on the products that we offer and the markets that we serve. At June 30, 2011, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins. A summary of the major products of the Company’s reportable segments follows:

 

   

Epoxy, Phenolic and Coating Resins: epoxy specialty resins, oil field products, versatic acids and derivatives, basic epoxy resins and intermediates, phenolic specialty resins and molding compounds, polyester resins, acrylic resins and vinylic resins.

 

   

Forest Products Resins: forest products resins and formaldehyde applications.

In the second quarter of 2011, the Company sold its North American CCR business to PCCR USA, Inc., a subsidiary of Investindustrial, a European investment group. The CCR business was previously included in the Coatings segment in 2010 and the Epoxy, Phenolic and Coating Resins segment beginning in 2011 as a result of the change in the Company’s reportable segments discussed above. The CCR business is reported as a discontinued operation for all periods presented.

 

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First Half 2011 Overview

 

   

Net sales increased 24% in the first half of 2011 as compared to the first half of 2010 due primarily to slightly increasing demand in the industrial, automotive and durable goods markets. Net sales also increased due to raw material-driven price increases to our customers.

 

   

We experienced significantly higher profitability during the first half of 2011, as operating income increased $51 million, or 26% in the first half of 2011 as compared to the first half of 2010. This increase was primarily due to the increase in volumes across several of our businesses and the pass through of raw material-driven price increases.

 

   

In January 2011, we completed the sale of our global IAR business and in May 2011, we completed the sale of our North American-based CCR business. Both divestitures will increase our profitability margins as a whole and will allow us to focus our financial resources towards growing specialty applications within our portfolio.

 

   

In the first half of 2011, we realized approximately $14 million in cost savings as a result of the Shared Services Agreement. As of June 30, 2011, we have approximately $43 million of in-process cost savings and synergies that we expect to achieve over the next eighteen to twenty-four months in connection with the Shared Services Agreement and recently completed divestitures.

 

   

We are expanding in markets in which we expect opportunities for growth.

Recently completed expansion efforts include:

 

   

Construction of a new manufacturing production line at our Cleburne, Texas facility within our oil field business which began operations in the fourth quarter of 2010. The new production line provides resin coated proppants to fracturing service companies and operators in the oil and gas industry.

 

   

Construction of a versatics manufacturing facility in Korea, which began operations in the second quarter of 2011. The new facility produces Cardura® monomers, a versatic acid derivative, used as a key raw material in environmentally advanced paints and coatings.

Future growth initiatives include:

 

   

Construction of a new manufacturing production line at our Brady, Texas facility within our oil field business which is expected to be operational in the third quarter of 2011. The new production line will provide resin coated proppants to fracturing service companies and operators in the oil & gas industry.

 

   

A joint venture to construct a versatics manufacturing facility in China, which is expected to be complete by the second half of 2011. The new facility will produce VeoVa® monomers, a versatic acid derivative, used as a key raw material in environmentally advanced paints and coatings. The facility is expected to be fully operational in the first half of 2012.

 

   

A joint venture to construct a phenolic specialty resins manufacturing facility in China, which is expected to be operational by the second half of 2012. The new facility will produce a full range of specialty novolac and resole phenolic resins used in a diverse range of applications, including refractories, friction and abrasives to support the growing auto and consumer markets in China.

2010 Overview

 

   

Net sales increased 30% in 2010, as compared to 2009 due primarily to higher demand as the global economy experienced modest recovery. The increase was driven by stabilizing and slightly increasing demand in the automotive, housing and durable goods markets, and also due to short-term capacity constraints in certain of our markets. Net sales also increased due to raw material-driven price increases to our customers compared to 2009.

 

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As a percent of sales, gross profit increased by 3% in 2010 as compared to 2009. Gross profit percentage increased due to the positive impact of pricing initiatives, favorable product mix, the positive impact of productivity project initiatives and the impact of increased product volumes that outpaced the increase in fixed processing costs.

 

   

We experienced significantly higher profitability during 2010, as segment EBITDA increased $240 million, or 65% in 2010 as compared to 2009. This increase was primarily due to the modest recovery in volumes across most of our businesses, the favorable impact of pricing and cost savings initiatives, the favorable impact of product mix, and short-term capacity constraints in certain of our markets.

 

   

In January 2010, we amended our senior secured credit facilities. Under the amendment and restatement, we extended the maturity of approximately $959 million of our Senior Secured Credit Facility term loans from May 5, 2013 to May 5, 2015 and increased the interest rate with respect to such term loans from LIBOR plus 2.25% to LIBOR plus 3.75%. In addition to, and in connection with, this amendment agreement, we issued $1,000 million aggregate principal amount of 8.875% senior secured notes due 2018. We used the net proceeds of $993 million ($1,000 million less original issue discount of $7 million) from the issuance to repay $800 million of our U.S. term loans under the Senior Secured Credit Facility, pay certain related transaction costs and expenses and provide incremental liquidity (“January Refinancing Transactions”).

 

   

In November 2010 we refinanced $533 million in outstanding principal amount of our 9.75% Second-Priority Senior Secured Notes due 2014 through the issuance of the original $574 million aggregate principal amount of 9.00% second-priority senior secured notes due 2020. As a result, we effectively extended our total weighted average debt maturities by one year (“November Refinancing Transaction”).

 

   

We are expanding in markets in which we expect opportunities for growth.

Recently completed expansion efforts in 2010 include:

 

   

Completion of a formaldehyde and forest products resins manufacturing complex to serve the engineered wood products market in southern Brazil.

 

   

A joint venture to construct a forest products resins manufacturing facility in Russia, which began operations in 2010.

 

   

The relocation of a specialty epoxy facility to a larger facility in Esslingen, Germany to support the growing wind energy market.

 

   

The completion of a new oil field manufacturing plant and the opening of additional transload facilities to provide resin-encapsulated proppants to fracturing service companies and operators in the oil & gas industry.

 

   

Construction of a versatics manufacturing facility in Korea, which began limited operations at the end of 2010. The new facility will produce Cardura® monomers, a versatic acid derivative, used as a key raw material in environmentally advanced paints and coatings. The facility is expected to be fully operational in the second quarter of 2011.

Short-term Outlook

Our business is impacted by general economic and industrial conditions, including housing starts, automotive builds, oil and natural gas drilling activity and general industrial production. Our business has both geographic and end market diversity which often reduces the impact of any one of these factors on our overall performance.

Although we previously anticipated continued modest economic recovery in 2011 versus 2010 to result in slightly higher volumes in many of our businesses, due to recent worldwide economic developments, the short-term outlook for the remainder of 2011 for our business is extremely difficult to predict. At this time, we believe

 

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the continued turmoil in the global financial markets, downgrade in the U.S. debt credit rating, ongoing debt crisis in Europe, tightness in the Chinese credit markets and lack of consumer confidence could lead to softness in demand for products within both of our reportable segments in the second half of 2011, particularly those within industrial, housing and automotive markets. It remains unclear to what extent these factors will ultimately impact the overall demand for our products. An additional economic downturn or postponement of modest economic recovery would have an adverse impact on our business and results of operations.

If the global economic environment begins to weaken again or remains slow for an extended period of time, the fair value of our reporting units could be more adversely affected than we estimated in our analysis of reporting unit fair values at October 1, 2010. This could result in additional goodwill or other asset impairments.

We remain optimistic about our position in the global markets when they do recover to more stable conditions.

We expect long-term raw material cost volatility to continue because of price movements of key feedstocks. To help mitigate raw material volatility, we have purchase and sale contracts and commercial arrangements with many of our vendors and customers that contain periodic price adjustment mechanisms. Due to differences in the timing of pricing mechanism trigger points between our sales and purchase contracts, there is often a lead-lag impact during which margins are negatively impacted in the short term when raw material prices increase and are positively impacted in the short term when raw material prices fall. We anticipate that raw material volatility will stabilize for the remainder of 2011, and that the pricing actions we took in late 2010 and in 2011 will continue to compensate for the increase in raw materials and energy costs experienced in the first half of 2011, which should benefit our operating cash flows in the second half of 2011.

Matters Impacting Comparability of Results

Our consolidated financial statements and our unaudited condensed consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights and variable interest entities in which we have a controlling financial interest. Intercompany accounts and transactions are eliminated in consolidation. However, with respect to our results for the year ended December 31, 2010, the deconsolidation of HAI did not have a material impact on our Segment EBITDA as compared to the year ended December 31, 2009 and 2008, as equity earnings from HAI are included in our Segment EBITDA.

Raw materials comprise approximately 70% of our cost of sales. The three largest raw materials used in our production processes are phenol, methanol and urea. These materials represent about half of our total raw material costs. Fluctuations in energy costs, such as volatility in the price of crude oil and related petrochemical products, as well as the cost of natural gas have historically caused volatility in our raw material and utility costs. The average prices of phenol, methanol and urea increased by approximately 15%, 23% and 37%, respectively, in the first half of 2011 compared to the first half of 2010. Passing through raw material price changes to customers can result in significant variances in sales comparisons from year to year.

 

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Results of Operations

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in millions)

 

      Six Months Ended June 30,     Year ended December 31,  
          2011             2010         2010     2009     2008  

Net sales

   $ 2,732      $ 2,203      $ 4,597      $ 3,549      $ 5,390   

Cost of sales

     2,308        1,879        3,866        3,077        4,807   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     424        324        731        472        583   

Gross profit as a percentage of net sales

     16     15     16     13     11

Selling, general and administrative expense

     171        158        331        305        342   

Terminated merger and settlement (income) expense, net

     —          (28     (171     (62     1,027   

Integration costs

     —          —          —          —          27   

Asset impairments

     18        —          —          49        8   

Business realignment costs

     —          —          20        37        32   

Other operating (income) expense, net

     (13     (3     5        7        9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     248        197        546        136        (862

Operating income (loss) as a percentage of net sales

     9     9     12     4     (16 %) 

Interest expense, net

     129        135        276        223        303   

Loss (gain) on extinguishment of debt

     —          8        30        (224     —     

Other non-operating (income) expense, net

     (2     3        (4     —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expense (income)

     127        146        302        (1     309   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax and earnings from unconsolidated entities

     121        51        244        137        (1,171

Income tax expense (benefit)

     3        17        35        (8     (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before earnings from unconsolidated entities

     118        34        209        145        (1,155

Earnings from unconsolidated entities, net of taxes

     6        4        8        2        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     124        38        217        147        (1,153

Net income(loss) from discontinued operations, net of taxes

     2        7        (3     (30     (32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     126        45        214        117        (1,185

Net income attributable to noncontrolling interest

     —          —          —          (3     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Momentive Specialty Chemicals Inc.

   $ 126      $ 45      $ 214      $ 114      $ (1,190
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2011 vs. Six months ended June 30, 2010 Consolidated Results (Unaudited)

Net Sales

In the first half of 2011, net sales increased by $529 million, or 24%, compared with the first half of 2010. Volume increases across several of our product lines, including our oil field, phenolic specialty resins, base epoxy and formaldehyde businesses positively impacted sales by $125 million. These increases were primarily a result of improved demand in the industrial and durable goods markets and in oil and natural gas drilling activity. These increases were offset by decreases in volumes in our European forest products business due to the loss of a large customer in this business and the effects of natural disasters that adversely impacted demand for products within our Australia and New Zealand forest products business. The pass through of raw material-driven price increases in virtually all businesses positively impacted sales by $295 million. In addition, foreign currency translation positively impacted sales by $109 million, primarily as a result of the weakening of the U.S. dollar against the euro, Brazilian real, Australian dollar and Canadian dollar in the first half of 2011.

 

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Gross Profit

In the first half of 2011, gross profit increased by $100 million compared with the first half of 2010 as a result of the increase in net sales as discussed above.

Operating Income

In the first half of 2011, operating income increased by $51 million compared with the first half of 2010. The primary driver of the increase was the increase in gross profit, as discussed above. This increase was partially offset by an increase in Selling, general and administrative costs of $13 million due to higher compensation costs and integration costs related to the Momentive Combination. In addition, $28 million of push-down income recorded by the Company in the second quarter of 2010, related to insurance recoveries associated with previous legal settlements did not recur in the second quarter of 2011. In the second quarter of 2011, we recorded asset impairments of $18 million against certain long-lived assets within our Forest Products Resins segment. Other operating income, net increased by $10 million primarily due to a $21 million gain recognized in the second quarter of 2011 related to a compensation payment paid by a customer as consideration to terminate an operator agreement. This gain was partially offset by additional foreign exchange transaction losses, due to the weakening of the U.S. dollar against certain foreign currencies.

Non-Operating Expense

In the first half of 2011, total non-operating expense decreased by $19 million compared with the first half of 2010. Approximately $9 million of the decrease was due to deferred financing fees written-off and fees incurred related to refinancing transactions in the first half of 2010 that did not recur in the first half of 2011. Interest expense, net decreased by $6 million due to lower effective interest rates on certain of our outstanding long-term debt due to the maturity of our January 2007 interest rate swap. Other non-operating expense, net decreased by $5 million, from expense of $3 million to income of $2 million, primarily due to decreased foreign exchange transaction losses.

Income Tax Expense

In the first half of 2011, income tax expense decreased by $14 million compared to the first half of 2010 primarily due to a decrease in pre-tax income in certain foreign jurisdictions despite a significant increase in pre-tax income in the U.S. Income tax expense relates primarily to income from foreign operations, with tax on the profits in the U.S. being offset by reducing the valuation allowance on deferred tax assets expected to be utilized.

2010 vs. 2009 and 2009 vs. 2008 Consolidated Results

Net Sales

In 2010, net sales increased by $1,048 million, or 30%, compared with 2009. Volume increases across substantially all of our product lines positively impacted sales by $594 million. These increases were primarily a result of the modest increases in U.S. housing starts and automotive builds, increased demand in the wind energy and alternative energy markets and increases in oil and natural gas drilling activity. The pass through of raw material driven price increases primarily in our North American and European formaldehyde and forest products resins, phenolic specialty resins, and dispersions product lines, as well as short-term capacity shortages in the market for base epoxies and monomers, positively impacted sales by $462 million. In addition, foreign currency translation negatively impacted sales by $8 million primarily as a result of the strengthening of the U.S. dollar against the euro compared to 2009.

In 2009, net sales decreased by $1,841 million, or 34%, compared with 2008. Volume declines across all of our product lines negatively impacted sales by $898 million. These declines were primarily a result of the continued weakness in the housing, construction and automotive markets as a result of the global economic downturn. The pass through of raw material driven price decreases primarily in our forest products resins and formaldehyde, phenolic specialty resins and base epoxies and intermediates product lines during 2009, negatively impacted sales by $791 million. In addition, foreign currency translation negatively impacted sales by $152 million primarily as a result of the strengthening of the U.S. dollar against the euro compared to 2008.

 

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Gross Profit

In 2010, gross profit increased by $259 million, compared with 2009 primarily as a result of the increase in sales. As a percentage of sales, gross profit increased 3% as a result of the positive impact of pricing initiatives, favorable product mix, the positive impact of productivity project initiatives and the impact of increased product volumes that outpaced the increase in fixed processing costs.

In 2009, gross profit decreased by $111 million, compared with 2008 primarily as a result of the decrease in sales, offset by lower raw material and processing costs, as discussed above. The impact of lower sales was partially offset by favorable impacts of productivity savings programs on manufacturing and processing costs of approximately $95 million. This resulted in an increase of 2% in gross profit as a percentage of sales as the positive impact of lower processing costs and productivity projects more than offset the impact of lower volumes on fixed manufacturing costs during 2009.

Operating Income (Loss)

In 2010, operating income increased by $410 million, compared with 2009. The primary drivers of the increase were the increase in gross profit, as discussed above, and an increase in Terminated merger and settlement income, net.

We recognized Terminated merger and settlement income, net of $171 million in 2010, which was primarily related to the non-cash pushdown of $163 million of insurance recoveries by our owner related to the $200 million settlement payment made by our owner that was previously treated as a pushdown of owner expense in the fourth quarter of 2008. Furthermore, Business realignment costs decreased $17 million due to the reduction in productivity program costs in 2010, but was offset by an increase in Selling, general and administrative expense of $26 million due primarily to higher compensation costs. As a percentage of sales, Selling, general and administrative expense decreased due to the positive impacts of productivity initiatives. In addition, 2009 was impacted by Asset impairments of $49 million, which did not occur in 2010.

In 2009, operating income increased by $998 million, compared with 2008. The primary drivers of the increase was the reduction in Terminated merger and settlement expense, net and the positive impacts of productivity program and cost reduction initiatives. In 2008, Terminated merger and settlement expense, net of $1,027 million consisted of the write-off of previously deferred acquisition costs, legal fees and $750 million in litigation settlement costs related to the terminated Huntsman merger, of which $200 million represents the non-cash push-down of settlement costs paid by Apollo. In 2009, we recognized Terminated merger and settlement income, net of $62 million, which was comprised of reductions on certain of our merger related service provider liabilities and the $37 million pushdown of insurance recoveries by Apollo, offset by $18 million in legal contingency accruals. Selling, general and administrative expenses decreased due primarily to the positive impacts of productivity savings programs and other cost savings initiatives. Further, Integration costs decreased by $27 million. In 2008, we incurred costs related to the Hexion Formation and the implementation of a company-wide management information and accounting system.

These favorable impacts were partially offset by increases in Asset impairments and Business realignment costs incurred to implement productivity and cost savings initiatives. In 2009, we recorded impairments of $46 million in our Epoxy, Phenolic and Coating Resins segment as a result of our decision to indefinitely idle certain production lines. In addition, we recorded miscellaneous impairments of $3 million related to the closure of R&D facilities in our Forest Products Resins and our Epoxy, Phenolic and Coating Resins segments. Business realignment costs increased by $5 million due to increased costs related to headcount reduction and plant rationalization programs associated with our productivity initiatives in 2009. Furthermore, Operating income was also impacted by the decline in Gross profit discussed above.

Non-Operating Expense (Income)

In 2010, total non-operating income decreased by $303 million due primarily to the gain of $224 million recognized on the extinguishment of debt securities in 2009 that did not recur in 2010. In addition, a loss on

 

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extinguishment of debt of $30 million was recognized in 2010 as a result of the November Refinancing. Other non-operating income, net increased by $4 million, due to higher foreign exchange transaction gains in 2010, compared to 2009. Interest expense, net increased by $53 million as a result of the January Refinancing Transactions and higher interest rates in 2010.

In 2009, total non-operating expense decreased by $310 million to income of $1 million, compared with 2008. We recognized a gain of $224 million on the extinguishment of $298 million in face value of the Company’s outstanding debt securities in 2009. Other non-operating expense, net decreased by $6 million, due to higher foreign exchange transaction losses in 2008, compared to 2009. Interest expense, net decreased by $80 million as a result of lower interest rates and due to lower debt levels as a result of debt repurchases in 2009.

Income Tax Expense (Benefit)

In 2010, income tax benefit decreased by $43 million to an expense of $35 million, compared with 2009. This change was primarily due to an increase in pre-tax income in certain foreign jurisdictions. The tax expense on the profits in the U.S. was offset by a release of valuation allowance on our deferred tax assets expected to be utilized.

In 2009, income tax benefit decreased by $8 million, compared with 2008. This change was primarily due to income being earned in the US from extinguishment of debt and continued earnings from foreign operations. This expense was offset by a release of valuation allowance on our deferred tax assets in the US and foreign losses for which we are receiving a benefit.

Results of Operations by Segment

Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by reportable segment. Segment EBITDA is defined as EBITDA adjusted to exclude certain non-cash and certain non-recurring expenses, and, prior to the IAR Divestiture, in January 2011, discontinued operations. Segment EBITDA is the primary performance measure used by our senior management, the chief operating decision-maker and our board of directors (the “Board of Directors”) to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. Corporate and Other is primarily corporate general and administrative expenses that are not allocated to the segments.

 

     Six months ended June 30,     Year ended December 31,  
         2011             2010         2010     2009     2008  

Net Sales to Unaffiliated Customers (1)(2):

          

Epoxy, Phenolic and Coating Resins

   $ 1,818      $ 1,395      $ 2,990      $ 2,351      $ 3,341   

Forest Products Resins

     914        808        1,607        1,198        2,049   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,732      $ 2,203      $ 4,597      $ 3,549      $ 5,390   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA (2):

          

Epoxy, Phenolic and Coating Resins

   $ 307      $ 205      $ 491      $ 307      $ 302   

Forest Products Resins

     95        92        177        110        198   

Corporate and Other

     (35     (26     (61     (50     (50

 

(1) Intersegment sales are not significant and, as such, are eliminated within the selling segment.
(2) The Company changed its reportable segments in the first quarter of 2011. The prior period balances have been recast to conform to the Company’s current reportable segments.

 

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Six months ended June 30, 2011 vs. Six months ended June 30, 2010 Segment Results (Unaudited)

Following is an analysis of the percentage change in sales by segment from the six months ended June 30, 2010 to the six months ended June 30, 2011:

 

     Volume         Price/Mix         Currency
Translation
    Total  

Epoxy, Phenolic and Coating Resins

     9     16     5     30

Forest Products Resins

     —       8     5     13

Epoxy, Phenolic and Coating Resins

Net sales in the first half of 2011 increased by $423 million, or 30%, when compared to the first half of 2010. Volume increases positively impacted sales by $125 million as the global economy continued to stabilize. Volumes increased primarily in our oil field, phenolic specialty resins, and base epoxy businesses, and in certain portions of our epoxy specialty business. The volume increases in our phenolic specialty resins, base epoxy and epoxy specialty businesses were attributable to general improvement within industrial markets. Volume increases in our oil field business was due primarily to increased demand as a result of increased oil and natural gas horizontal drilling activity. The pass through of higher raw material costs in virtually all businesses, coupled with continued capacity shortages in the market for our monomers business and positive mix in our base epoxy business resulted in positive pricing impacts of $227 million. The impact of foreign exchange translation on net sales resulted in positive impacts of $71 million due to the weakening of the U.S. dollar against the euro in the first half of 2011 compared to the first half of 2010.

Segment EBITDA in the first half of 2011 increased by $102 million to $307 million compared to the first half of 2010. The increase was primarily due to the volume, pricing and foreign exchange translation impacts discussed above. Segment EBITDA in the first half of 2011 was negatively impacted approximately $9 million due to unplanned production line outages at certain facilities within our base epoxy business, net of insurance proceeds received related to the production outages.

Forest Products Resins

Net sales in the first half of 2011 increased by $106 million, or 13%, when compared to the first half of 2010. The impact of changes in volumes on net sales was virtually flat. Volumes in our North American formaldehyde business increased due to improving industrial and consumer markets after the global economic downturn which began in late 2008 and continued into 2010. This increase was offset by decreases in volumes in our European forest products business due to the loss of a large customer in this business and the effects of natural disasters that adversely impacted demand for products within our Australia and New Zealand forest products business. Higher raw material prices passed through to customers, partially offset by the impacts of product mix in our formaldehyde business, led to pricing increases of $68 million. In addition, we experienced favorable currency translation of $38 million due the weakening of the U.S. dollar against the euro, Brazilian real, Australian dollar and Canadian dollar in the first half of 2011 compared to the first half of 2010.

Segment EBITDA in the first half of 2011 increased by $3 million to $95 million compared to the first half of 2010. The increase is primarily due to the volume, pricing and foreign exchange translation impacts discussed above, but was partially offset by increased raw material costs that were not fully passed on to customers.

Corporate and Other

Corporate and Other is primarily corporate, general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions, unallocated foreign exchange gains and losses and legacy company costs not allocated to continuing segments. Corporate and Other charges increased by $9 million to $35 million compared to the first half of 2010, primarily due to increased compensation costs and higher unallocated foreign exchange transaction losses.

 

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2010 vs. 2009 Segment Results

The table below provides additional detail of the percentage change in sales by segment from 2009 to 2010.

 

     Volume     Price/
Mix
    Currency
Translation
    Total  

Epoxy, Phenolic and Coating Resins

     15     14     (2 )%      27

Forest Product Resins

     18     12     4     34

Epoxy, Phenolic and Coating Resins

Net sales in 2010 increased by $639 million, or 27%, when compared to 2009. Volume increases positively impacted sales by $376 million as the global economy stabilized. Volumes increased in virtually all businesses, but most significantly in our oil field, versatics, epoxy specialty and base epoxy businesses. The volume increases in our base epoxy business were attributable to the stabilization of the automotive and durable goods markets relative to the low point of the economic downturn, which began in late 2008 and continued into 2009, and were also impacted by short-term capacity constraints. The pass through of higher raw material costs in most businesses, the favorable product mix in our phenolics business and short-term capacity shortages in the market for base epoxies resulted in positive pricing impacts of $321 million. However, sales were negatively impacted by competitive pricing pressures in our oil field and epoxy specialty businesses. Foreign currency translation had a negative impact of $58 million, primarily due to the strengthening of the U.S. dollar against the euro in 2010 compared to 2009.

Segment EBITDA in 2010 increased by $184 million to $491 million compared to 2009. Segment EBITDA increased primarily due to the increased growth in demand discussed above due to a modest economic recovery and due to short term capacity constraints in certain markets. The remaining overall increase was primarily attributable to the accelerated recognition of unabsorbed processing costs that occurred in 2009 compared to 2010 and the favorable impact of productivity driven cost savings. This increase was partially offset by additional maintenance and turnaround costs in 2010 compared to 2009.

Forest Products Resins

Net sales in 2010 increased by $409 million, or 34% when compared to 2009. Higher volumes positively impacted sales by $218 million, with increases across all businesses and regions. The strongest increase in volumes were in our Latin American markets, where we served the growing southern Brazil markets through the opening of our Montenegro plant in 2010, and our North American formaldehyde business, due to modest market recoveries in the demand for durable goods. In addition, we experienced strong volume increases in our North American forest products resins business, primarily driven by the restocking of inventory by our customers, compared to the de-stocking of inventory that occurred in 2009, coupled with the modest increase in U.S. housing starts and household remodeling compared to the same period of 2009. Higher raw material prices passed through to customers in most regions, combined with positive product mix within our North American formaldehyde business, led to a sales increase of $141 million due to pricing. Although raw material prices generally increased during 2010 and we passed through to customers as allowed under our contracts, the significant strengthening of the Brazilian real, Australian dollar and New Zealand dollar against the US dollar resulted in lower raw material prices in these local currencies, which were passed through to customers in these regions. In addition, we experienced favorable currency translation of $50 million due to the weakening of the U.S. dollar against the Brazilian real, Australian dollar and Canadian dollar in 2010 compared to 2009.

Segment EBITDA in 2010 increased by $67 million to $177 million compared to 2009. The increase was primarily attributable to the impact of the volume increases discussed above and recent product development initiatives, as well as the favorable impact of productivity driven cost savings.

 

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Corporate and Other

Corporate and Other is primarily corporate, general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions, unallocated foreign exchange gains and losses and legacy company costs not allocated to continuing segments. Corporate and Other charges increased by $11 million to $61 million compared to 2009, primarily due to increased compensation costs. These increases were partially offset by higher unallocated foreign currency transaction gains and the impact of productivity-driven cost savings.

2009 vs. 2008 Segment Results

The table below provides additional detail of the percentage change in sales by segment from 2008 to 2009.

 

     Volume     Price/
Mix
    Currency
Translation
    Total  

Epoxy, Phenolic and Coating Resins

     (17 )%      (10 )%      (3 )%      (30 )% 

Forest Product Resins

     (16 )%      (23 )%      (3 )%      (42 )% 

Epoxy, Phenolic and Coating Resins

Net sales in 2009 decreased by $990 million, or 30%, compared to 2008. Volume declines negatively impacted sales by $565 million as the global economic downturn had an adverse impact on our volumes. Volumes declined across all businesses, with our precursors business showing the largest decline over the prior year and our specialty epoxy and versatics businesses experiencing relatively lesser amounts of volume decline during 2009 compared to 2008. These declines were primarily attributable to the decrease in the automotive, construction, housing, foundry, oilfield and durable goods markets, as well as increased worldwide capacity in base epoxies. The lower volume decline in versatics was due to the absence of the shortage of certain raw materials that occurred in 2008. The pass through of lower raw material costs and competitive pricing pressures, primarily in our major resins and specialty phenolics businesses, resulted in pricing decreases of $327 million. Foreign currency translation had a negative impact of $98 million as the U.S. dollar strengthened against the euro and the Canadian dollar in 2009 compared to 2008.

Segment EBITDA in 2009 increased by $5 million to $307 million compared to 2008. The increase was due to the impact of productivity driven cost savings impacting processing costs and decreases in raw material prices and freight costs. The increase was largely offset by the price and volume declines discussed above. The base epoxies and specialty phenolics businesses experienced the largest declines during the year with these declines being offset by increases in the specialty epoxy and versatics businesses.

Forest Products Resins

Net sales in 2009 decreased by $851 million, or 42%, compared to 2008. Lower volumes negatively impacted sales by $333 million. The volume decrease occurred in most of our businesses, including our European and North American forest products resins business, due to the continued decline in the worldwide housing and construction markets, as well as in our North American formaldehyde business due to decreased demand in the durable goods market resulting from the adverse impacts of the global economic downturn. We realized modest increases in volumes in the Latin American market due to lesser impacts of the worldwide economic downturn in this region. Lower prices resulted in a sales decrease of $464 million as we passed through raw material price decreases to our customers primarily in North America and Europe. Unfavorable currency translation of $54 million contributed to lower sales as the U.S. dollar strengthened against the euro in 2009 compared to 2008.

Segment EBITDA in 2009 decreased by $88 million to $110 million compared to 2008. The decrease was primarily attributable to the loss of volume and pricing impacts, as discussed above, partially offset by the impact of productivity driven cost savings. In addition, the prior year was impacted by favorable raw material purchase contracts in certain of our international forest products and resins businesses of $32 million.

 

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Corporate and Other

Corporate and Other is primarily corporate, general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions, unallocated foreign exchange gains and losses and legacy company costs not allocated to continuing segments. Corporate and Other charges remained relatively flat as compared to 2008. The impact of foreign currency transaction losses and additional compensation costs were offset by the positive impact of productivity driven cost savings.

Reconciliation of Segment EBITDA to Net Income (Loss)

 

     Six months ended June 30,     Year ended December 31,  
         2011             2010         2010     2009     2008  

Segment EBITDA:

          

Epoxy, Phenolic and Coating Resins

   $ 307      $ 205      $ 491      $ 307      $ 302   

Forest Products Resins

     95        92        177        110        198   

Corporate and Other

     (35     (26     (61     (50     (50

Reconciliation:

          

Items not included in Segment EBITDA

          

Terminated merger and settlement income (expense), net

     —          28        171        62        (1,027

Integration costs

     —          —          —          —          (27

Non-cash charges

     (3     (5     (5     7        (4

Unusual items:

          

Gain (loss) on divestiture of assets

     1        1        (2     (6     5   

Net income (loss) from discontinued operations

     2        7        (3     (30     (32

Business realignments

     —          —          (20     (37     (32

Asset impairments

     (18     —          —          (49     (8

Other

     (7     (16     (29     (42     (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unusual items

     (22     (8     (54     (164     (106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     (25     15        112        (95     (1,164

Interest expense, net

     (129     (135     (276     (223     (303

(Loss) gain on extinguishment of debt

     —          (8     (30     224        —     

Income tax (expense) benefit

     (3     (17     (35     8        16   

Depreciation and amortization

     (84     (81     (164     (167     (189
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Momentive Specialty Chemicals Inc.

     126        45        214        114        (1,190

Net income attributable to noncontrolling interest

     —          —          —          3        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 126      $ 45      $ 214      $ 117      $ (1,185
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Items not included in Segment EBITDA for the first half of 2011 and the first half of 2010

Non-cash charges primarily represent stock-based compensation expense and unrealized derivative and foreign exchange gains and losses.

Not included in Segment EBITDA are certain non-cash and other income or expenses that are deemed by management to be unusual in nature. For the six months ended June 30, 2011, these items included asset impairments, business optimization expenses, retention program costs and realized foreign exchange gains and losses, offset by a gain recognized on the termination of an operator agreement with a customer. For the six months ended June 30, 2010, these items consisted of business realignment costs primarily related to expenses from the Company’s productivity program, realized foreign exchange gains and losses and retention program costs. For the six months ended June 30, 2010, these items also consisted of financing fees incurred as part of refinancing transaction in the first half of 2010, partially offset by insurance settlements related to previous litigation matters.

 

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Items not included in Segment EBITDA for 2010, 2009 and 2008

In 2010, Terminated merger and settlement income, net primarily included the pushdown of Apollo’s 2010 recoveries of $163 million in insurance proceeds in 2010 related to the $200 million settlement payment made by Apollo that was treated as a pushdown of shareholder expense in 2008 and the $8 million in insurance settlements related to the New York Shareholder Action. In 2009, Terminated merger and settlement expense, net included the pushdown of Apollo’s recovery of $37 million in insurance proceeds in 2009 related to the $200 million settlement payment made by Apollo, as well as discounts on certain of the Company’s merger related service provider liabilities. This income was partially offset by legal and consulting costs and legal contingency accruals related to the New York Shareholder Action. In 2008, Terminated merger and settlement expense, net primarily represented accounting, consulting, tax and legal costs related to the terminated Huntsman merger and related litigation, including the $550 million payment to Huntsman to terminate the merger and settle litigation and the non-cash push-down of settlement costs paid by Apollo of $200 million. Terminated merger and settlement costs also include the write-off of previously deferred acquisition costs.

Integration costs primarily represent redundancy and incremental administrative costs for integration programs as a result of the Hexion Formation, as well as costs to implement a single, company-wide, management information and accounting system and a new consolidations and financial reporting system.

Non-cash charges primarily represent stock-based compensation expense, accelerated depreciation on closing facilities and unrealized derivative and foreign exchange gains and losses. Loss from discontinued operations represents the results of the IAR and CCR businesses.

Not included in Segment EBITDA are certain non-cash and certain non-recurring income or expenses that are deemed by management to be unusual in nature. For 2010, these items consisted of business realignment costs primarily related to expenses from the Company’s productivity program, realized foreign exchange gains and losses and retention program costs. For 2009, these items consisted of business realignment costs primarily related to expense from the Company’s productivity program, asset impairments, retention program costs and realized foreign exchange gains and losses. For 2008, these items consisted of asset impairments, a gain on the sale of a portion of the Company’s ownership in HAI and a gain on the sale of certain assets of a non-core product line.

Liquidity and Capital Resources

Sources and Uses of Cash

We are a highly leveraged company. Our primary sources of liquidity are cash flows generated from operations, availability under our senior secured credit facilities and our financing commitment from Apollo. Our primary liquidity requirements are interest, working capital and capital expenditures.

At June 30, 2011, we had $3,539 million of unaffiliated debt, including $89 million of short-term debt and capital lease maturities. In addition, at June 30, 2011, we had $569 million in liquidity including $192 million of unrestricted cash and cash equivalents (of which $128 million is maintained in foreign jurisdictions), $200 million of borrowings available under our senior secured revolving credit facilities and $177 million of borrowings available under credit facilities at certain international subsidiaries with various expiration dates in 2011 and 2012, and the financing commitment from Apollo.

Our net working capital (defined as accounts receivable and inventories less accounts and drafts payable) at June 30, 2011 was $717 million, an increase of $229 million from December 31, 2010. The increase was a result of higher volumes and production and increasing raw material costs. We were able to fund the increase in working capital through our existing liquidity as well as through the proceeds from the sale of the IAR business. To minimize the impact of net working capital on cash flows, we continue to negotiate and contractually extend payment terms whenever possible. We have also focused on receivable collections to offset a portion of the

 

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payment term pressure by offering incentives to customers to encourage early payment. We anticipate that raw material volatility will generally stabilize for the remainder of 2011 and that the pricing actions we took in late 2010 and in 2011 will compensate for the increase in raw materials and energy costs experienced in the first half of 2011, which should benefit our operating cash flow in the second half of 2011.

We regularly borrow from our revolving credit facility under our senior secured credit facilities to support our short-term liquidity requirements, particularly when net working capital requirements increase in response to seasonality of our volumes in the summer months. At June 30, 2011 the borrowings outstanding were $0.

Apollo Financing Commitment

Certain affiliates of Apollo have agreed to make a $200 million investment in the Company. Certain affiliates of Apollo entered into a commitment letter with the Company pursuant to which they committed to purchase $200 million in preferred units and warrants of Momentive Holdings by December 31, 2011. Prior to the purchase of all the preferred shares and warrants, certain affiliates of Apollo had committed to provide liquidity facilities to MSC Holdings or the Company on an interim basis. In connection therewith, in 2009, certain affiliates of Apollo extended a $100 million term loan to the Company and an affiliate of the Company (the “Apollo Term Loan”). The Apollo Term Loan will mature on December 31, 2011. Momentive Holdco has agreed to contribute any proceeds from the issuance of preferred or common units under this agreement as a capital contribution to MSC Holdings, and MSC Holdings has agreed to contribute such amounts as a capital contribution to the Company. Therefore, by the end of 2011, we expect the outstanding amounts under the Apollo Term Loan to be contributed to the Company prior to the end of 2011. This will provide the Company permanent access to the $200 million in liquidity and will benefit the Company’s cash position in to 2012.

We feel we are favorably positioned to maintain adequate liquidity through the remainder of 2011 and the foreseeable future to fund our ongoing operations, cash debt service obligations and any additional investment in net working capital. Further, we expect that the extension of a portion of our senior credit facility, second priority senior secured notes and extension of the revolver will allow greater flexibility and liquidity for the Company in the longer term.

Recent Refinancing Transactions

In late December 2009 and early January 2010, we obtained commitments from lenders to extend our existing revolving line of credit facility commitments, which will take effect upon the May 31, 2011 maturity of the existing revolving facility commitments. The new commitments will extend the availability of the revolver to February 2013. The new revolving loans, which cannot be drawn until the existing revolving credit facility matures, will bear interest at a rate of LIBOR plus 4.50%. The extension also requires a 2.00% annual ticking fee to be paid quarterly on committed amounts until the extended revolver facility is effective.

In 2010, as part of the January Refinancing Transactions, we amended our senior secured credit facilities. Under the amendment and restatement, we extended the maturity of approximately $959 million of our Senior Secured Credit Facility term loans from May 5, 2013 to May 5, 2015 and increased the interest rate with respect to such term loans from LIBOR plus 2.25% to LIBOR plus 3.75%. In addition to, and in connection with, this amendment agreement, we issued $1,000 million aggregate principal amount of 8.875% senior secured notes due 2018. We used the net proceeds of $993 million ($1,000 million less original issue discount of $7 million) from the issuance to repay $800 million of our U.S. term loans under the Senior Secured Credit Facility, pay certain related transaction costs and expenses and provide incremental liquidity of $162 million.

In 2010, as part of the November Refinancing Transaction, we refinanced $533 million in outstanding principal amount of our 9.75% Second-Priority Senior Secured Notes due 2014 through the original issuance of $574 million aggregate principal amount of 9.00% second-priority senior secured notes due 2020. The net cash proceeds of the issuance were used to pay redemption premiums to redeem the existing Second-Priority Notes and pay transaction fees and expenses. As a result, we effectively extended our total weighted average debt maturities by one year.

 

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IAR Divestiture

We used the majority of the $120 million proceeds from the IAR Divestiture received to further strengthen our liquidity in 2011. We used the proceeds to fund increases in net working capital and capital spending plan for 2011. Certain of our covenants that govern our senior secured credit facilities and indentures allow us to use the proceeds for capital projects rather than paying down debt. However, subject to an excess cash flow covenant in our senior secured credit facilities, we may be required to pay down debt in 2012.

We feel that we are favorably positioned to maintain adequate liquidity throughout 2011 and the foreseeable future to fund our ongoing operations, cash debt service obligations and any additional investment in net working capital. Further, we expect that the extension of a portion of our senior credit facility, second priority senior secured notes and extension of the revolver will allow greater flexibility and liquidity for the Company in the longer term.

Following are highlights from our Consolidated Statements of Cash Flows:

 

     Six months ended
June 30,
    Year ended December 31,  
         2011             2010         2010     2009     2008  

Sources (uses) of cash:

          

Operating activities

   $ (43   $ (108   $ 45      $ 355      $ (632

Investing activities

     103        (35     (99     (132     (134

Financing activities

     (51     124        97        (222     706   

Effect of exchange rates on cash flow

     3        (4     2        13        (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

   $ 12      $ (23   $ 45      $ 14      $ (78
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

In the first half of 2011, operations used $43 million of cash. Net income of $126 million included $87 million of net non-cash items, of which $86 million was for depreciation and amortization. Working capital (defined as accounts receivable and inventories less accounts and drafts payable) used $163 million which was driven by higher sales volumes and increased sales pricing driven by raw material price increases. Changes in other assets and liabilities and income taxes payable used $93 million due to the payout of prior year incentive compensation programs and the timing of when items were expensed versus paid.

In the first half of 2010, operations used $108 million of cash. Net income of $45 million included $75 million of net non-cash and non-operating expense items, of which $28 million was for the non-cash pushdown of the recovery of 2008 owner expense, offset by $86 million for depreciation and amortization. Working capital (defined as accounts receivable and inventories less accounts and drafts payable) and changes in other assets and liabilities and income taxes payable used $228 million due primarily to increased accounts receivable, which resulted from the higher sales volumes and increased pricing. The impact of increases in inventory and accounts payable from higher production volumes and increasing raw material costs substantially offset each other.

In 2010, operations provided $45 million of cash. Net income of $214 million included $39 of net non-cash and non-operating income items, of which $163 million was for the non-cash pushdown of the recovery of 2008 owner expense, offset by $172 million for depreciation and amortization and $30 million for the loss on extinguishment of debt. Working capital (defined as accounts receivable and inventories less accounts and drafts payable) and changes in other assets and liabilities and income taxes payable used $208 million due primarily to increased accounts receivable and inventory, which resulted from the higher sales volumes and increased pricing.

In 2009, operations provided $355 million of cash. Net income of $117 million included $38 million of net non-cash and non-operating income items, of which $224 million was for the gain on extinguishment of debt and $37 million was for the non-cash pushdown of the recovery of 2008 shareholder expense, offset by $178 million

 

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for depreciation and amortization and $57 million for impairments and accelerated depreciation of property and equipment. Net working capital and changes in other assets and liabilities and income taxes payable generated $276 million due to decreased accounts receivable and inventories, which resulted from lower volumes and production, efforts to decrease inventory quantities, decreasing raw material costs and the sale of trade accounts receivable.

In 2008, operations used $632 million of cash. The net loss of $1,185 million included $557 million of non-cash and non-operating items, of which $203 million was for depreciation and amortization, $200 million was for the non-cash push-down of shareholder expense related to the Huntsman litigation settlement, $101 million was for the write-off of deferred acquisition costs paid in the prior year, $37 million was for the settlement of derivatives, $33 million was for the impairment of goodwill, intangible assets and property, plant and equipment and accelerated depreciation, offset by $13 million for the deferred tax benefit. Net working capital and changes in other assets and liabilities and income taxes payable used $4 million due to one-time Terminated merger and settlement costs, increased pressure on vendor payment terms and the timing of cash payments versus cash collections and expense recognition. These uses of cash were partially offset by decreased accounts receivable and inventories, which resulted from lower volumes and production, as well as decreasing raw material costs at the end of the year. Accounts receivable also decreased due to the sale of a portion of our trade accounts receivable.

Investing Activities

In the first half of 2011, investing activities provided $103 million of cash. We generated cash of $173 million from the IAR and CCR Divestitures, and spent $71 million for capital expenditures, which primarily relates to plant expansions and improvements.

In the first half of 2010, investing activities used $35 million of cash. We spent $48 million for capital expenditures (including capitalized interest). Of the $48 million in capital expenditures, approximately $9 million relates to our productivity savings initiatives while the remaining amount relates primarily to plant expansions and improvements. We used cash of $2 million to purchase marketable securities and generated $12 million from the sale of assets. In addition, we had a decrease in cash of $4 million related to the deconsolidation of HAI as a result of the adoption of a new accounting standard for consolidation of variable interest entities.

In 2010, investing activities used $99 million of cash. We spent $120 million for capital expenditures (including capitalized interest). Of the $120 million in capital expenditures, approximately $19 million relates to our productivity savings initiatives while the remaining amount relates primarily to plant expansions and improvements. We generated cash of $4 million from the sale of marketable securities and generated $14 million from the sale of assets. In addition, we had a decrease in cash of $4 million related to the deconsolidation of HAI as a result of the adoption of ASU 2009-17.

In 2009, investing activities used $132 million of cash. We spent $136 million for capital expenditures (including capitalized interest). Of the $136 million in capital expenditures, approximately $26 million relates to our productivity savings initiatives while the remaining amount relates to maintenance and environmental related capital expenditures and plant expansions and improvements, including our new formaldehyde and forest products plant in Brazil.

In 2008, investing activities used $134 million of cash. We spent $134 million for capital expenditures, primarily for maintenance and environmental related capital expenditures, plant expansions and improvements. We generated cash of $13 million from the divestiture of a non-core product line and the sale of a portion of the Company’s ownership in HAI. We used $7 million for the purchase of short-term investments and $6 million to fund a restricted cash requirement primarily for collateral for a subsidiary’s debt.

Financing Activities

In the first half of 2011, financing activities used $51 million of cash. This consisted of net long-term debt repayments and credit facility fees of $43 million and net-short term debt repayments of $8 million.

 

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In the first half of 2010, financing activities provided $124 million of cash. Net long-term debt borrowings of $157 million primarily consisted of the $993 million in proceeds offset by the pay-down of $800 million of our U.S. term loans under the Senior Secured Credit Facility and pay-down of our revolving line of credit as part of refinancing transactions in the first half of 2010. $33 million was used to pay for financing fees related to these refinancing transactions and the extension of the revolving line of credit facility.

In 2010, financing activities provided $97 million of cash. Net long-term debt borrowings of $179 million primarily consisted of the $993 million in proceeds offset by the pay-down of $800 million of our U.S. term loans under the Senior Secured Credit Facility as part of the January Refinancing Transactions and pay-down of our revolving line of credit. $72 million was used to pay for financing fees related to the January and November Refinancing Transactions and the extension of the revolving line of credit facility.

In 2009, financing activities used $222 million of cash. Net long-term debt repayments primarily consisted of the $144 million pay-down on our senior revolving credit facility and $72 million to purchase back debt on the open market. Net short-term debt repayments were $10 million and affiliated debt borrowings were $104 million. We used $24 million to purchase $180 million in face value of outstanding debt of our parent. We paid $10 million to fund dividends that were declared on common stock in prior years. The deconsolidation of a variable interest entity that purchased a portion of our trade accounts receivable in 2008 resulted in a financing outflow of $24 million.

In 2008, financing activities generated $706 million of cash. Net short-term debt borrowings were $8 million and net long-term debt borrowings were $163 million, primarily to fund working capital requirements and terminated merger and settlement costs. Our parent contributed $325 million in equity so that we could pay the $325 million merger termination fee and Apollo advanced $225 million, while reserving all rights with respect to reallocation of the payments to other affiliates of Apollo, so that we could make the $225 million merger settlement payment. We paid $37 million to settle portions of our cross currency and interest rate swaps and $2 million to fund dividends that were declared on common stock in prior years. The consolidation of a variable interest entity that purchased a portion of our trade accounts receivable resulted in an inflow of $24 million.

 

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Outstanding Debt

Following is a summary of our cash and cash equivalents and outstanding debt at:

 

     June 30,
2011
     December 31,
2010
 

Cash and cash equivalents

   $ 196       $ 186   
  

 

 

    

 

 

 

Short-term investments

   $ 6       $ 6   
  

 

 

    

 

 

 

Non-affiliated debt:

     

Senior Secured Credit Facilities:

     

Floating rate term loans due 2013

     462         463   

Floating rate term loans due 2015

     938         942   

Senior Secured Notes:

     

8.875% senior secured notes due 2018 (net of original issue discount of $6)

     994         994   

Floating rate second-priority senior secured notes due 2014

     120         120   

9.00% Second-priority senior secured notes due 2020

     574         574   

Debentures:

     

9.2% debentures due 2021

     74         74   

7.875% debentures due 2023

     189         189   

8.375% sinking fund debentures due 2016

     62         62   

Other Borrowings:

     

Australian Multi-Currency Term/Working Capital Facility due 2011

     23         48   

Brazilian bank loans

     72         70   

Capital Leases

     12         10   

Other

     19         24   
  

 

 

    

 

 

 

Total non-affiliated debt

     3,539         3,570   

Affiliated debt:

     

Affiliated borrowings due on demand

     2         2   

Affiliated term loan due 2011

     100         100   
  

 

 

    

 

 

 

Total affiliated debt

     102         102   
  

 

 

    

 

 

 

Total debt

   $ 3,641       $ 3,672   
  

 

 

    

 

 

 

Financial Instruments

Our various interest rate swap agreements are designed to offset cash flow variability from interest rate fluctuations on our variable rate debt. The notional amounts of the swaps change based on the expected payments on our term loans. As a result of the interest rate swaps, we pay a weighted average fixed rate equal to approximately 7.1% per year and receive a variable rate based on the terms of the underlying debt. As of June 30, 2011, our weighted average interest rate of affiliated borrowings was 2.57%. See “—Quantitative and Qualitative Disclosures About Market Risk,” Note 9 to the audited consolidated financial statements of MSC and Note 5 and Note 6 to the unaudited condensed consolidated financial statements of MSC, each included elsewhere in this prospectus for information on our financial instruments. Our most significant financial instruments measured at fair value on a recurring basis are our cross currency and interest rate swaps, which are measured at fair value using significant observable inputs and deemed to be Level 2 inputs.

The fair values of these instruments were determined based on an over-the-counter retail market based pricing model adjusted for nonperformance risk. These financial instruments are in liability positions at December 31, 2010, requiring us to incorporate our credit risk as a component of fair value. We calculated our credit risk adjustment by applying an imputed credit spread, based on the over-the-counter retail market price of our Senior Secured Credit Facility floating rate term loans at December 31, 2010, to the future cash flows of the

 

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financial instruments. This did not result in a material reduction in our financial instrument liabilities. A change in the interest rates used in the interest rate yield curve to determine fair value of our financial instruments of 1% would result in an approximate $7 million change in fair value.

Financial Measures that Supplement GAAP

Certain covenants contained in the credit agreement that governs our senior secured credit facilities require us to have a senior secured debt to Adjusted EBITDA ratio less than 4.25:1. The indentures that govern certain of our notes (including our 8.875% senior secured notes and the Notes offered hereby) contain an Adjusted EBITDA to Fixed Charges ratio incurrence test which restricts our ability to take certain actions such as incurring additional debt or making acquisitions if we are unable to meet this ratio (measured on a last twelve months, or LTM, basis) of at least 2.0:1. See “Covenant Compliance.”

Fixed Charges are defined as net interest expense excluding the amortization or write-off of deferred financing costs. Adjusted EBITDA is defined as EBITDA adjusted to exclude certain non-cash and certain non-recurring items. Adjusted EBITDA is calculated on a pro-forma basis, and also includes expected future cost savings from business optimization programs, including those related to acquisitions, including the Hexion Formation, and other synergy and productivity programs. As we are highly leveraged, we believe that including the supplemental adjustments that are made to calculate Adjusted EBITDA provides additional information to investors about our ability to comply with our financial covenants and to obtain additional debt in the future. Adjusted EBITDA and Fixed Charges are not defined terms under GAAP. Adjusted EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or operating cash flows determined in accordance with GAAP. Additionally, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not take into account certain items such as interest and principal payments on our indebtedness, depreciation and amortization expense (because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue), working capital needs, tax payments (because the payment of taxes is part of our operations, it is a necessary element of our costs and ability to operate), non-recurring expenses and capital expenditures. Fixed Charges should not be considered an alternative to interest expense.

 

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Reconciliation of Net Income to Adjusted EBITDA

The following table reconciles net income to EBITDA and Adjusted EBITDA, as calculated under certain of the Company’s indentures, for the period presented:

 

     June 30, 2011
LTM period
 

Net income

   $ 295   

Income tax expense

     21   

Loss on extinguishment of debt

     22   

Interest expense, net

     270   

Depreciation and amortization expense

     167   
  

 

 

 

EBITDA

     775   

Adjustments to EBITDA:

  

Push-down of income from owner (1)

     (135

Asset impairments and other non-cash items (2)

     21   

Unusual items:

  

Loss on divestitures of assets

     3   

Net loss from discontinued operations (3)

     8   

Business realignments (4)

     19   

Other (5)

     27   
  

 

 

 

Total unusual items

     57   
  

 

 

 

Productivity program savings (6)

     9   

Savings from the Shared Services Agreement (7)

     43   
  

 

 

 

Adjusted EBITDA

   $ 770   
  

 

 

 

Fixed Charges (8)

   $ 242   
  

 

 

 

Ratio of Adjusted EBITDA to Fixed Charges (9)

     3.18   
  

 

 

 

 

(1) Represents the non-cash push-down of insurance recoveries by our owner related to the $200 termination settlement payment that was pushed down and treated as an expense of the Company in 2008.
(2) Represents asset impairments, stock-based compensation and unrealized foreign exchange and derivative activity.
(3) Represents the results of the IAR and CCR businesses.
(4) Represents plant rationalization and headcount reduction expenses related to productivity programs and other costs associated with business realignments.
(5) Primarily includes pension expense related to formerly owned businesses, business optimization expenses, management fees, retention program costs and certain intercompany or nonoperational realized foreign currency activity.
(6) Represents pro forma impact of in-process productivity program savings.
(7) Primarily represents pro forma impact of expected savings from the Shared Services Agreement in conjunction with the Momentive Combination.
(8) Reflects pro forma interest expense based on interest rates at July 18, 2011 as if the Company’s refinancings in November 2010 had taken place at the beginning of the period.
(9) We are required to have an Adjusted EBITDA to Fixed Charges ratio of greater than 2.0 to 1.0 to be able to incur additional indebtedness under our indenture for the Second Priority Senior Secured Notes. As of June 30, 2011, the Company was able to satisfy this test and incur additional indebtedness under this indenture.

 

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Contractual Obligations

The following table presents our contractual cash obligations at December 31, 2010. Our contractual cash obligations consisted of legal commitments at December 31, 2010 that require us to make fixed or determinable cash payments, regardless of the contractual requirements of the specific vendor to provide us with future goods or services. This table does not include information about most of our recurring purchases of materials used in our production; our raw material purchase contracts do not meet this definition since they generally do not require fixed or minimum quantities. Contracts with cancellation clauses are not included, unless a cancellation would result in a major disruption to our business. For example, we have contracts for information technology support that are cancelable, but this support is essential to the operation of our business and administrative functions; therefore, amounts payable under these contracts are included. These contractual obligations are grouped in the same manner as they are classified in the Consolidated Statement of Cash Flows in order to provide a better understanding of the nature of the obligations.

We do not believe our obligations in this table have changed materially since December 31, 2010.

 

     Payments Due By Year  

Contractual Obligations

   2011      2012      2013      2014      2015      2016 and
beyond
     Total  

Operating activities:

                    

Purchase obligations (a)

   $ 280       $ 203       $ 176       $ 39       $ 24       $ 121       $ 843   

Interest on fixed rate debt obligations (b)

     186         169         168         167         165         581         1,436   

Interest on variable rate debt obligations (c)

     52         59         51         45         18         6         231   

Operating lease obligations

     29         21         16         12         10         28         116   

Funding of pension and other postretirement obligations (d)

     31         38         36         32         29         —           166   

Financing activities:

                    

Long-term debt, including current maturities

     81         71         474         161         913         1,866         3,566   

Capital lease obligations

     1         1         1         —           1         6         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 660       $ 562       $ 922       $ 456       $ 1,160       $ 2,608       $ 6,368   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Purchase obligations are comprised of the fixed or minimum amounts of goods and/or services under long-term contracts and assumes that certain contracts are terminated in accordance with their terms after giving the requisite notice which is generally two to three years for most of these contracts; however, under certain circumstances, some of these minimum commitment term periods could be further reduced which would significantly decrease these contractual obligations.

 

(b) Includes variable rate debt subject to interest rate swap agreements.

 

(c) Based on applicable interest rates in effect at December 31, 2010.

 

(d) Pension and other postretirement contributions have been included in the above table for the next five years. These amounts include estimated benefit payments to be made for unfunded foreign defined benefit pension plans as well as estimated contributions to our funded defined benefit plans. The assumptions used by our actuaries in calculating these projections includes a weighted average annual return on pension assets of approximately 7% for the years 2011 – 2015 and the continuation of current law and plan provisions. These estimated payments may vary based on the actual return on our plan assets or changes in current law or plan provisions. See Note 13 to the audited consolidated financial statements of MSC included elsewhere in the prospectus for more information on our pension and postretirement obligations.

The table above excludes payments for income taxes and environmental obligations since, at this time, we cannot determine either the timing or the amounts of all payments beyond 2011. At December 31, 2010, we recorded unrecognized tax benefits and related interest and penalties of $112 million. We estimate that we will

 

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pay approximately $43 million in 2011 for local, state and international income taxes. We expect non-capital environmental expenditures for 2011 through 2015 totaling $21 million. See Notes 12 and 16 to the audited consolidated financial statements of MSC included elsewhere in the prospectus for more information on these obligations.

Capital Expenditures

We plan to spend between $120 million and $130 million on capital expenditures in 2011, which will primarily be used for growth, maintenance and environmental projects. We determined this amount through our budgeting and planning process, and it is subject to change at the discretion of the Board of Directors. We considered future product demand, existing plant capacity and external customer trends. We plan to fund capital expenditures through cash from operations and proceeds from the sale of the IAR business, and if necessary, through available lines of credit.

Off Balance Sheet Arrangements

We had no off-balance sheet arrangements as of June 30, 2011.

Critical Accounting Estimates

In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America, we have to make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Some of these accounting policies require the application of significant judgment by management to select the appropriate assumptions to determine these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty; therefore, actual results may differ significantly from estimated results. We base these judgments on our historical experience, advice from experienced consultants, forecasts and other available information, as appropriate. Our significant accounting policies are more fully described in Note 2 to the audited consolidated financial statements of MSC included elsewhere in the prospectus.

Our most critical accounting policies, which reflect significant management estimates and judgment to determine amounts in our audited Consolidated Financial Statements, are as follows:

Environmental Remediation and Restoration Liabilities

Accruals for environmental matters are recorded when we believe that it is probable that a liability has been incurred and we can reasonably estimate the amount of the liability. We have accrued approximately $33 million and $37 million at December 31, 2010 and 2009, respectively, for all probable environmental remediation and restoration liabilities, which is our best estimate of these liabilities. Based on currently available information and analysis, we believe that it is reasonably possible that the costs associated with these liabilities may fall within a range of $22 million to $63 million. This estimate of the range of reasonably possible costs is less certain than the estimates that we make to determine our reserves. To establish the upper limit of this range, we used assumptions that are less favorable to MSC among the range of reasonably possible outcomes, but we did not assume that we would bear full responsibility for all sites to the exclusion of other potentially responsible parties.

Some of our facilities are subject to environmental indemnification agreements, where we are generally indemnified against damages from environmental conditions that occurred or existed before the closing date of our acquisition of the facility, subject to certain limitations.

Income Tax Assets and Liabilities and Related Valuation Allowances

While the Company continues to remain in full valuation allowance against our deferred income tax assets in various taxing jurisdictions as of June 30, 2011, due to the current and continued growth of earnings in these jurisdictions, it is reasonably possible that The Company could release a portion of these valuation allowances to income over the next 12 months as a result of positive evidence to support the realization of such assets.

 

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At December 31, 2010 and 2009, we had valuation allowances of $479 million and $579 million, respectively, against all of our net federal, state and some of our net foreign deferred income tax assets. The valuation allowances require an assessment of both negative and positive evidence, such as operating results during the most recent three-year period is given more weight than our expectations of future profitability, which are inherently uncertain. Our losses in the U.S. and certain foreign operations in recent periods represented sufficient negative evidence to require a full valuation allowance against our net federal, state and certain foreign deferred income tax assets. We intend to maintain a valuation allowance against the net deferred income tax assets until sufficient positive evidence exists to support the realization of such assets.

The calculation of our income tax liabilities involves dealing with uncertainties in the application of complex domestic and foreign income tax regulations. Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in the consolidated financial statements. Tax benefits are recognized in the consolidated financial statements when it is more likely than not that a tax position will be sustained upon examination. Tax benefits are measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective income tax rate in a given period could be materially impacted. An unfavorable income tax settlement would require the use of cash and result in an increase in our effective income tax rate in the year it is resolved. A favorable income tax settlement would be recognized as a reduction in the effective income tax rate in the year of resolution. At December 31, 2010 and 2009, we recorded unrecognized tax benefits and related interest and penalties of $112 million and $82 million, respectively.

Pensions

The amounts that we recognize in our financial statements for pension benefit obligations are determined by actuarial valuations. Inherent in these valuations are certain assumptions, the more significant of which are:

 

   

The weighted average rate used for discounting the liability;

 

   

The weighted average expected long-term rate of return on pension plan assets;

 

   

The method used to determine market-related value of pension plan assets;

 

   

The weighted average rate of future salary increases; and

 

   

The anticipated mortality rate tables.

The discount rate reflects the rate at which pensions could be effectively settled. When selecting a discount rate, our actuaries provide us with a cash flow model that uses the yields of high-grade corporate bonds with maturities consistent with our anticipated cash flow projections.

The expected long-term rate of return on plan assets is determined based on the various plans’ current and projected asset mix. To determine the expected overall long-term rate of return on assets, we take into account the rates on long-term debt investments that are held in the portfolio, as well as expected trends in the equity markets, for plans including equity securities.

The Company has elected to use the five-year smoothing in the calculation of the market-related value of plan assets, which is used in the calculation of pension expense, as well as to establish the corridor used to determine amortization of unrecognized actuarial gains and losses. This method, which reduces the impact of market volatility on pension expense can result in significant differences in pension expense versus calculating expense based on the fair value of plan assets at the beginning of the period. At December 31, 2010, the market-related value of the Company’s plan assets was $415 million versus fair value of $408 million. Using market-related value of assets to calculate 2011 pension expense reduces expense by approximately $1 million.

The rate of increase in future compensation levels is determined based on salary and wage trends in the chemical and other similar industries, as well as our specific compensation targets.

 

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The mortality tables that are used represent the most commonly used mortality projections for each particular country and reflect projected mortality improvements.

We believe the current assumptions used to estimate plan obligations and pension expense are appropriate in the current economic environment. However, as economic conditions change, we may change some of our assumptions, which could have a material impact on our financial condition and results of operations.

The following table presents the sensitivity of our projected pension benefit obligation (“PBO”), accumulated benefit obligation (“ABO”), deficit (“Deficit”) and 2011 pension expense to the following changes in key assumptions:

 

     Increase /(Decrease) at
December 31, 2010
    Increase /
(Decrease)
 
     PBO     ABO     Deficit     2011 Expense  

Assumption:

        

Increase in discount rate of 0.5%

   $ (35   $ (33   $ 28      $ —     

Decrease in discount rate of 0.5%

     38        36        (31     —     

Increase in estimated return on assets of 1.0%

     N/A        N/A        N/A        (4

Decrease in estimated return on assets of 1.0%

     N/A        N/A        N/A        4   

Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets

As events warrant, we evaluate the recoverability of long-lived assets, other than goodwill and other indefinite-lived intangibles, by assessing whether the carrying value can be recovered over their remaining useful lives through the expected future undiscounted operating cash flows of the underlying business. Long-lived assets are grouped together at the lowest level for which identified cash flows are largely independent of cash flows of other groups of long-lived assets. Any impairment loss that may be required is determined by comparing the carrying value of the assets to their estimated fair value. Impairment indicators include a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner in which the asset is being used or in its physical condition, a significant adverse change in legal factors or the business climate that could affect the value of a long-lived asset, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset, current period operating or cash flow losses combined with a history of operating or cash flow losses associated with the use of the asset, or a current expectation that more likely than not a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. As a result, future decisions to change our manufacturing process, exit certain businesses, reduce excess capacity, temporarily idle facilities and close facilities could result in material impairment charges. We do not have any indefinite-lived intangibles, other than goodwill. Other than impairments recorded in the period, long-lived assets other than goodwill that experienced an impairment indicator had undiscounted cash flows that substantially exceeded their carrying values.

We perform an annual goodwill impairment test to assess whether the estimated fair value of each reporting unit is less than the carrying amount of the unit’s net assets. Our reporting units include epoxy, phenolic specialty resins, oil field, coatings, versatics and forest products Our reporting units are generally one level below our operating segments for which discrete financial information is available and reviewed by segment management. However, components of an operating segment can be aggregated as one reporting unit if the components have similar economic characteristics. We use a probability weighted market and income approach to estimate the values of our reporting units. Our market approach is a comparable analysis technique commonly used in the investment banking and private equity industries based on the EBITDA multiple technique. Under this technique, estimated values are the result of a market based EBITDA multiple that is applied to an appropriate historical EBITDA amount, adjusted for the additional fair value that would be assigned by a market participant obtaining control over the reporting unit. Our income approach is a discounted cash flow model.

 

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Prior to 2010, we performed our annual impairment test at December 31. However, as a result of the Momentive Combination, we have changed the annual goodwill impairment testing date to October 1. This change was made to conform with the accounting policy and annual impairment testing date of our accounting acquirer, MPM Holdings and our ultimate parent, Momentive Holdco. Accordingly, we consider this accounting change preferable. This change does not accelerate, delay, avoid or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. The annual goodwill impairment testing was performed as of October 1, 2010. Consideration was given to the period between the testing date and December 31, 2010, concluding that no facts or circumstances arose that would lead to a different conclusion as of December 31, 2010.

As of October 1, 2010, the fair value of each of our remaining reporting units exceeded the carrying amount of assets and liabilities assigned to each unit. A 20% decrease in the EBITDA multiple or a 20% increase in the interest rate used to calculate the discounted cash flows would not result in any reporting units failing the first step of our goodwill impairment analysis.

Recently Issued Accounting Standards

Newly Adopted Accounting Standards

There were no newly issued accounting standards adopted by the Company in the first half of 2011.

Newly Issued Accounting Standards

In June 2011, the FASB issued Accounting Standards Update No. 2011-05: Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends current presentation guidance by eliminating the option for an entity to present the components of comprehensive income as part of the statement of changes in stockholder’s equity and requires presentation of comprehensive income in a single continuous financial statement or in two separate but consecutive financial statements. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 will be effective for the Company on January 1, 2012. The Company is currently assessing the impact of ASU 2011-05 to the presentation of its Statement of Comprehensive Income within its unaudited Condensed Consolidated Financial Statements.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk, including changes in currency exchange rates, interest rates and certain commodity prices. To manage the volatility related to these exposures we use various financial instruments, including some derivatives, to help us hedge our foreign currency exchange risk and interest rate risk. We also use raw material purchasing contracts and pricing contracts with our customers to help mitigate commodity price risks. These contracts generally do not contain minimum purchase requirements.

We do not use derivative instruments for trading or speculative purposes. We manage counterparty credit risk by entering into derivative instruments only with financial institutions with investment-grade ratings.

 

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The following table summarizes our derivative financial instruments as of December 31, 2010 and 2009, which are recorded as Other current liabilities in the Consolidated Balance Sheets. Fair values are determined from quoted market prices at these dates.

 

    December 31, 2010     December 31, 2009  

Liability Derivatives

  Average
Days To
Maturity
    Average
Contract
Rate
    Notional
Amount
    Fair
Value
Liability
    Average
Days to
Maturity
    Average
Contract
Rate
    Notional
Amount
    Fair
Value
Liability
 

Derivatives designated as hedging instruments

               

Interest Rate Swaps

               

Interest swap – 2007

    4        —        $ 375      $ (5     366        —        $ 650      $ (28

Interest swap – 2010

    732        —          350        (2     —          —          —          —     
       

 

 

         

 

 

 

Total derivatives designated as hedging instruments

        $ (7         $ (28
       

 

 

         

 

 

 

Derivatives not designated as hedging instruments

               

Foreign Exchange and Interest Rate Swaps

               

Cross-Currency and Interest Rate Swap

    273        1.2038      $ 25      $ (3     638        1.2038      $ 25      $ (5

Interest Rate Swap

               

Interest swap—Australia Multi-Currency Term

    364        —          22        —          729        —          23        (1

Commodity Contracts

               

Electricity contracts

    —          —          4        —          —          —          3        (1

Natural gas futures

    —          —          2        —          —          —          3        —     
       

 

 

         

Total derivatives not designated as hedging instruments

        $ (3         $ (7
       

 

 

         

 

 

 

Foreign Exchange Risk. Our international operations accounted for approximately 57% and 58% of our sales in 2010 and 2009, respectively, and continue to account for a significant portion of our revenue and operating income. As a result, we have significant exposure to foreign exchange risk on transactions that can potentially be denominated in many foreign currencies. These transactions include foreign currency denominated imports and exports of raw materials and finished goods (both intercompany and third party) and loan repayments. The functional currency of our operating subsidiaries is the related local currency.

Our policy is to reduce foreign currency cash flow exposure from exchange rate fluctuations by hedging anticipated and firmly committed transactions when it is economically feasible. We periodically enter into forward contracts to buy and sell foreign currencies to reduce foreign exchange exposure and protect the U.S. dollar value of certain transactions to the extent of the amount under contract. The counter-parties to our forward contracts are financial institutions with investment grade ratings. We do not apply hedge accounting to these derivative instruments.

In 2005, we entered into a three-year $289 million cross-currency and interest rate swap agreement structured for a non-U.S. subsidiary’s $290 million U.S. dollar denominated floating rate term loan. The swap was designed to offset balance sheet and interest rate exposures and cash flow variability associated with the exchange rate fluctuations on the term loan. In 2008, we paid $29 million to settle a portion of the cross-currency and interest rate swaps, which matured in 2008.

The remaining portion of the cross-currency and interest rate swap was renegotiated and amended with the respective counterparties, effective September 30, 2008, in order to offset the ongoing balance sheet and interest

 

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rate exposures and cash flow variability associated with the exchange rate fluctuations of a non-U.S. subsidiary’s U.S. dollar denominated floating rate term loan. The amended swap agreement requires us to sell euros in exchange for U.S. dollars at a rate of 1.2038. We also will pay a variable rate equal to Euribor plus 390 basis points and will receive a variable rate equal to the U.S. dollar LIBOR plus 250 basis points. The amount we receive under this agreement is approximately equal to the non-U.S. subsidiary’s interest rate on its $290 million term loan. This amended swap agreement has an initial notional amount of $25 million that amortizes quarterly on a straight line basis to $24 million, prior to maturing on September 30, 2011. We paid a weighted average interest rate of 4.6% and 5.5% and received a weighted average interest rate of 2.8% and 3.4% on these amended swap agreements in 2010 and 2009, respectively.

Our foreign exchange risk is also mitigated because we operate in many foreign countries, which reduces the concentration of risk in any one currency. In addition, our foreign operations have limited imports and exports, which reduces the potential impact of foreign currency exchange rate fluctuations.

Interest Rate Risk. We are a party to various interest rate swap agreements that are designed to offset the cash flow variability that is associated with interest rate fluctuations on our variable rate debt. The fair values of these swaps are determined by using estimated market values. Under interest rate swaps, we agree with other parties to exchange at specified intervals the difference between the fixed rate and floating rate interest amounts that are calculated from the agreed notional principal amount.

In July 2010, the Company entered into a two-year interest rate swap agreement (the “July 2010 Swap”). This swap is designed to offset the cash flow variability that results from interest rate fluctuations on the Company’s variable rate debt. This swap became effective on January 4, 2011 upon the expiration of our prior January 2007 interest rate swap. The initial notional amount of the swap is $350 million, and will subsequently be amortized down to $325 million. The Company pays a fixed rate of 1.032% and will receive a variable one month LIBOR rate. The Company accounts for the swap as a qualifying cash flow hedge.

In February 2007, to effectively fix the interest rate on approximately $30 million of our Australian Multi-Currency Term / Working Capital Facility, we entered into interest rate swap agreements with two counterparties for an initial notional amount of AUD $35 million, which amortizes quarterly based on the expected loan payments. The swap agreements terminate December 30, 2011. We pay a fixed interest rate of 6.6% and receive a floating rate based on the terms of the underlying debt. We have not applied hedge accounting to this derivative instrument.

Some of our debt, including debt under our floating rate notes and borrowings under our Senior Secured Credit Facilities, is at variable interest rates that expose us to interest rate risk. If interest rates increase, our debt service obligations on variable rate debt would increase even though the amount borrowed would not increase. Including variable rate debt that is subject to interest rate swap agreements, assuming the amount of our variable debt remains the same, an increase of 1% in the interest rates on our variable rate debt would increase our 2010 estimated debt service requirements by approximately $14 million. See “Risk Factors—Risks Related to Our Indebtedness—We may not be able to generate sufficient cash flows from operations to meet our consolidated debt service payments” and “Risk Factors—Risks Related to Our Indebtedness—Our substantial indebtedness exposes us to significant interest expense increases if interest rates increase.”

 

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Following is a summary of our outstanding non-affiliated debt as of December 31, 2010 and 2009 (see Note 10 to the audited consolidated financial statements of MSC included elsewhere in the prospectus for additional information on our debt). The fair value of our publicly held debt is based on the price at which the bonds are traded or quoted at December 31, 2010 and 2009. All other debt fair values are determined from quoted market interest rates at December 31, 2010 and 2009. At June 30, 2011, we had $3,539 of unaffiliated debt, including $89 million of short-term debt and capital lease maturities. We do not believe the fair value and related maturities of our unaffiliated debt have materially changed since December 31, 2010.

 

     2010      2009  

Year

   Non-affiliated
Debt
Maturities
     Weighted
Average
Interest Rate
    Fair Value      Non-affiliated
Debt
Maturities
     Weighted
Average
Interest Rate
    Fair Value  

2010

           $ 78         4.5   $ 75   

2011

   $ 82         6.4   $ 82         112         4.5     104   

2012

     72         6.4     71         30         4.5     27   

2013

     475         6.7     461         2,183         5.5     1,867   

2014

     161         7.0     154         678         8.7     644   

2015

     914         7.6     901         25         8.7     20   

2016 and beyond

     1,872         7.8     1,944         296         8.4     214   
  

 

 

      

 

 

    

 

 

      

 

 

 
   $ 3,576         $ 3,613       $ 3,402         $ 2,951   
  

 

 

      

 

 

    

 

 

      

 

 

 

We do not use derivative financial instruments in our investment portfolios. Our cash equivalent investments and short-term investments are made in instruments that meet the credit quality standards that are established in our investment policies, which also limits the exposure to any one issue. At December 31, 2010 and 2009, we had $80 million and $64 million, respectively, invested at average rates of 2% and 2%, respectively, primarily in interest-bearing time deposits. Due to the short maturity of our cash equivalents, the carrying value of these investments approximates fair value. Our short-term investments are recorded at cost which approximates fair value. Our interest rate risk is not significant. A 1% increase or decrease in interest rates on invested cash would not have had a material effect on our net income and cash flows for the years ended December 31, 2010 and 2009. We do not believe that our interest rate risk has changed as our outstanding debt obligations have not changed materially since December 31, 2010.

Commodity Risk. We are exposed to price risks on raw material purchases, most significantly with phenol, methanol, urea, acetone, propylene and chlorine. We respond to this volatility in a number of ways, including strategic raw materials purchases and through commercial and contractual pricing agreements and customer price adjustments. For our commodity raw materials, we have purchase contracts that have periodic price adjustment provisions. Commitments with certain suppliers, including our phenol and urea suppliers, provide up to 100% of our estimated requirements but also provide us with the flexibility to purchase a certain portion of our needs in the spot market, when it is favorable to us. We rely on long-term agreements with key suppliers for most of our raw materials. The loss of a key source of supply or a delay in shipments could have an adverse effect on our business. Should any of our suppliers fail to deliver or should any key long-term supply contracts be cancelled, we would be forced to purchase raw materials in the open market, and no assurances can be given that we would be able to make these purchases or make them at prices that would allow us to remain competitive. Our largest supplier provides 9% of our raw material purchases, and we could incur significant time and expense if we had to replace this supplier. In addition, several feedstocks at various facilities are transported through a pipeline from one supplier. If we were unable to receive these feedstocks through these pipeline arrangements, we may not be able to obtain them from other suppliers at competitive prices or in a timely manner. See “Risk Factors—Risks Related to Our Business—Fluctuations in direct or indirect raw material costs could have an adverse impact on our business” and “Risk Factors—Risks Related to Our Business—An inadequate supply of direct or indirect raw materials and intermediate products could have an adverse effect on our business.”

 

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We hedge a portion of our electricity purchases for certain North American plants. We enter into forward contracts with fixed prices to hedge electricity pricing at these plants. Any unused electricity is net settled for cash each month based on the market electricity price versus the contract price. We also hedge a portion of our natural gas purchases for certain North American plants. We use futures contracts to hedge natural gas pricing at these plants. The natural gas contracts are settled for cash each month based on the closing market price on the last day the contract trades on the New York Mercantile Exchange. We do not apply hedge accounting to these electricity or natural gas future contracts.

Our commodity risk is moderated through our selected use of customer contracts with selling price provisions that are indexed to publicly available indices for the relevant commodity raw materials.

 

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BUSINESS

Overview

Momentive Specialty Chemicals Inc., or MSC, a New Jersey corporation with predecessors dating from 1899, is the world’s largest producer of thermosetting resins, or thermosets, and a leading producer of adhesive and structural resins and coatings. Thermosets are a critical ingredient in virtually all paints, coatings, glues and other adhesives produced for consumer or industrial uses. The type of thermoset used, and how it is formulated, applied and cured, determines its key attributes, such as durability, gloss, heat resistance, adhesion or strength of the final product. Thermosetting resins include materials such as phenolic resins, epoxy resins, polyester resins, acrylic resins and urethane resins.

Hexion Formation

The Company was formed on May 31, 2005 by combining three Apollo Management, L.P. controlled companies: Resolution Performance Products, LLC (“Resolution Performance”), Resolution Specialty Materials, Inc. (“Resolution Specialty”) and Borden Chemical, Inc. (“Borden Chemical”), including Bakelite Aktiengesellschaft (“Bakelite”). We refer to this combination as the “Hexion Formation.” Since the Hexion Formation, we have expanded our specialty chemicals businesses through several strategic acquisitions.

Momentive Combination

On October 1, 2010, our parent, MSC Holdings (formerly known as Hexion LLC) and MPM Holdings, the parent company of MPM, became subsidiaries of a newly formed holding company, Momentive Holdco. At the time of the Momentive Combination, Hexion LLC changed its name to Momentive Specialty Chemicals Holdings LLC and Hexion Specialty Chemicals, Inc. changed its name to Momentive Specialty Chemicals Inc. As a result of the Momentive Combination, Momentive Holdco became the ultimate parent entity of MPM and MSC. Momentive Holdco is controlled by investment funds (the “Apollo Funds”) managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”). Apollo may also be referred to as the Company’s owner.

Our business is organized based on the products that we offer and the markets that we serve. At June 30, 2011, we had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins.

Products and Markets

We have a broad range of thermoset resin technologies, with high quality research, applications development and technical service capabilities. We provide a broad array of thermosets and associated technologies, and have significant market positions in each of the key markets that we serve.

Our products are used in thousands of applications and are sold into diverse markets, such as forest products, architectural and industrial paints, packaging, consumer products and automotive coatings, as well as higher growth markets, such as composites and electrical components. Major industry sectors that we serve include industrial/marine, construction, consumer/durable goods, automotive, wind energy, aviation, electronics, architectural, civil engineering, repair/remodeling, graphic arts and oil and gas field support. The diversity of our products limits our dependence on any one market or end-use. We have a history of product innovation and success in introducing new products to new markets, as evidenced by more than 1,600 patents, the majority of which relate to the development of new products and processes for manufacturing.

As of June 30, 2011, we had 76 active production sites around the world. Through our worldwide network of strategically located production facilities, we serve more than 7,800 customers in over 100 countries. Our position in certain additives, complementary materials and services further enables us to leverage our core

 

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thermoset technologies and provide our customers a broad range of product solutions. As a result of our focus on innovation and a high level of technical service, we have cultivated long-standing customer relationships. Our global customers include leading companies in their respective industries, such as 3M, Ashland Chemical, BASF, Bayer, DuPont, GE, Halliburton, Honeywell, Huntsman, Louisiana Pacific, Owens Corning, PPG Industries, Sumitomo, Valspar and Weyerhaeuser.

Competitive Strengths

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

Leading Positions in Diverse End Markets. We benefit from holding a longstanding number one or two position in a diverse group of consumer and industrial segments. Markets we serve on a global basis include, among other markets, energy, automotive, construction and consumer products, each further stratified by our strategic regional manufacturing capabilities. We believe the diversification they provide will continue to support our ability to create significant value throughout the economic cycle and mitigate the financial impact of a downturn in a single market. Furthermore, we believe our strategic choice to backward integrate into selected base formulations gives us a competitive advantage over many of our smaller competitors.

Strong Presence in High Growth Regions and End Markets. Across our strategic manufacturing footprint serving over 100 countries, we have made tactical investments in high growth specialty formulations globally as well as in select geographies generally that are expected to generate outsized demand for our products over the next several years. For example, we have achieved 60% revenue growth in our oil field resins business since 2007, as a result of strategic capital allocation and our ongoing leadership in global shale development.

In addition to investing in various high growth technologies we have a strong presence in key emerging markets including Brazil, China, Russia and other key developing economies. For example in 2008 and 2009, we invested approximately $55 million in a new forest products resins manufacturing complex to serve the growing engineered wood market in southern Brazil.

Going forward, we believe our leading share in these key markets and technologies will allow us to outperform our peers and continue our strong financial performance.

Well-Invested Global Asset Base with Low-Cost Position. We support our global market position with our strategically-located, low-cost manufacturing presence. Our low-cost position is the result of our production and manufacturing facilities strategically located throughout the world and our integrated supply position in several critical intermediate materials. We believe our ability to internally produce raw and intermediate materials provides us with a cost advantage over our competitors. Furthermore, our large market position and scale in each of our key product markets provides us with purchasing and manufacturing efficiencies. We also benefit from having the contractual ability to pass-through material input price increases for many of our contracts.

Solutions-based Selling Proposition Drives Customer Loyalty and Sales Growth. The majority of our customers require solutions that are tailored to their individual production needs and require a high degree of technical service and customized product formulations. We believe that the value-added nature of these services allows us to earn higher and more stable margins than general material producers who do not offer the same level of service. Our diverse portfolio of differentiated chemicals and materials allows us to leverage related technologies across geographies, customers and end-markets in order to provide a broad range of product and technical service solutions. As a result, we have cultivated stable, long-standing customer relationships.

Experienced and Highly Motivated Management Team with Proven Track Record. We believe that we have a world-class management team led by Craig O. Morrison, our chairman and chief executive officer, and William H. Carter, our chief financial officer. Our management team has demonstrated expertise in growing our business organically, integrating acquisitions and executing on significant cost cutting programs.

 

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Growth and Strategy

We believe that we have opportunities for growth through the following strategies:

Develop and Market New Products. We will continue to expand our product offerings through research and development initiatives and research partnership formations with third parties. Through these innovation initiatives we will continue to create new generations of products and services which will drive revenue and earnings growth.

Expand Our Global Reach in Faster Growing Regions. We intend to continue to grow internationally by expanding our product sales to our customers around the world. Specifically, we are focused on growing our business in markets in the high growth regions of Asia-Pacific, Eastern Europe, Latin America, India and the Middle East, where the usage of our products is increasing. Furthermore, by consolidating sales and distribution infrastructures via the Momentive Combination, we expect to accelerate the penetration of our high-end, value-added products into new markets, thus further leveraging our research and application efforts and existing global footprint.

Increase Shift to High-Margin Specialty Products. We continue to proactively manage our product portfolio with a focus on specialty, high-margin applications and the reduction of our exposure to lower-margin products. As a result of this capital allocation strategy and strong end market growth underlying these specialty segments including wind energy and oilfield applications, they will continue to be a larger part of our broader portfolio. Consequently, we have witnessed a strong organic improvement in our profitability profile as a whole over the last several years which we believe will continue.

Continue Portfolio Optimization and Pursue Targeted Add-On Acquisitions and Joint Ventures. The specialty chemicals and materials market is comprised of numerous small and mid-sized specialty companies focused on niche markets, as well as smaller divisions of large chemical conglomerates. As a large manufacturer of specialty chemicals and materials with leadership in the production of thermosets, we have a significant advantage in pursuing add-on acquisitions and joint ventures in areas that allow us to build upon our core strengths, expand our product, technology and geographic portfolio, and better serve our customers. We believe we can consummate a number of these acquisitions at relatively attractive valuations due to the scalability of our existing global operations and deal-related synergies. In addition, we have and will continue to monitor the strategic landscape for opportunistic divestments consistent with our broader specialty strategy. For example, we recently completed the sale of our global inks and adhesive resins business, or IAR business, and North American coatings and composite resins business, or CCR business.

Capitalize on the Momentive Combination to Grow Revenues and Realize Operational Efficiencies. We believe the Momentive Combination will present opportunities to increase our revenues by leveraging each of ours and MPM’s respective global footprints and technology platforms. For example, in Asia, we anticipate being able to accelerate the penetration of our products. Further, we anticipate that the Momentive Combination will provide opportunities to streamline our business and reduce our cost structure. We are currently targeting $58 million in annual cost savings related to the Momentive Combination. We anticipate these savings to come from logistics optimization, reduction in corporate expenses and reductions in the costs for raw materials and other inputs. Through June 30, 2011, we implemented $27 million of these savings on a run-rate basis, and anticipate fully realizing the remaining anticipated savings over the next 18 to 24 months.

Generate Free Cash Flow and Deleverage. We expect to generate strong free cash flow due to our size, advantaged cost structure, and reasonable ongoing capital expenditure requirements. Furthermore, we have demonstrated expertise in managing our working capital, which has been further augmented as a result of our increased sales from the Momentive Combination. Our strategy of generating significant free cash flow and deleveraging is complimented by our long-dated capital structure with no near-term maturities and strong liquidity position. This financial flexibility allows us to prudently balance deleveraging with our focus on growth and innovation.

 

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Industry & Competitors

We are a large participant in the specialty chemicals industry. Thermosetting resins are generally considered specialty chemical products because, historically, they have been sold primarily on the basis of performance, technical support, product innovation and customer service. However, as a result of the impact of the recent global economic downturn and overcapacity in certain markets, chemical companies have focused more on price to retain business and market share.

We compete with many companies in most of our product lines, including large global chemical companies and small specialty chemical companies. The principal competitive factors in our industry include technical service, breadth of product offering, product innovation, product quality and price. Some of our competitors are larger and have greater financial resources and less debt and better access to the capital markets than we do, and, as a result, may be better able to withstand changes in industry conditions, including pricing, and the economy as a whole. As a result, our competitors may have more resources and better access to capital markets for continued expansion than we do. Further, some of our competitors also have a greater product range and may be more vertically integrated than we are within specific product lines or geographies.

We are able to compete with smaller niche specialty chemical companies due to our investment in research and development and our customer service model, which provides on-site, value-added technical services for our customers. In addition, our size and scale provide efficiencies in our cost structure. To maintain our position in the markets we serve, we believe that the principal factors that contribute to success in the specialty chemicals market are (1) consistent delivery of high-quality products, (2) favorable process economics, (3) the ability to provide value to customers through both product attributes and strong technical service and (4) a presence in growing and developing markets.

No single company competes with us across all of our segments and existing product lines.

Our Businesses

In the first quarter of 2011, the Company completed the IAR Divestiture and moved the oversight and management of the coatings reporting unit into the Epoxy and Phenolic Resins Division, which was renamed the Epoxy, Phenolic and Coating Resins Division. These organizational and internal reporting changes caused the Company to re-evaluate its reportable segments. As a result of these changes, effective in the first quarter of 2011, the results of the Company’s coatings reporting unit, which were previously reported in the Coatings segment, are included within the Epoxy, Phenolic and Coating Resins segment. In addition, the Company has renamed its Formaldehyde and Forest Products Resins segment to Forest Products Resins. No changes were made to the product lines that comprise this segment. The following paragraphs discuss our reportable segments and corresponding key product lines and primary end-use applications of our key products as of December 31, 2010, the end of our last full fiscal year.

The following discussion has been recasted under the Company’s new reporting structure.

Epoxy, Phenolic and Coating Resins Segment

2010 Net Sales: $2,990 million

Epoxy Specialty Resins

We are a leading producer of epoxy specialty resins, modifiers and curing agents in Europe and the United States. Epoxy resins are the fundamental component of many types of materials and are often used in the automotive, construction, aerospace and electronics industries due to their superior adhesion, strength and durability. We internally consume approximately 30% of our liquid epoxy resin (“LER”) production in specialty composite, coating and adhesive applications, giving us a competitive advantage versus our non-integrated

 

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competitors. Our position in basic epoxy resins, along with our technology and service expertise, has enabled us to offer formulated specialty products in certain markets. In composites our specialty epoxy products are used either as replacements for traditional materials such as metal, wood, and ceramics, or in applications where traditional materials do not meet demanding engineering specifications.

We are a leading producer of resins that are used in fiber reinforced composites. Composites are a fast-growing class of materials that are used in a wide variety of applications ranging from aircraft components and wind turbine blades to sports equipment. We supply epoxy resin systems to composite fabricators in the wind energy, aerospace, sporting goods and pipe markets.

Epoxy specialty resins are also used for a variety of high-end coating applications that require the superior adhesion, corrosion resistance and durability of epoxy, such as protective coatings for industrial flooring, pipe, marine and construction applications and automotive coatings. Epoxy-based surface coatings are among the most widely used industrial coatings due to their long service life and broad application functionality combined with overall economic efficiency. We also leverage our resin and additives position to supply custom resins to specialty coatings formulators.

 

Products

  

Key Applications

Adhesive applications

  
Civil Engineering    Building and bridge construction, concrete enhancement and corrosion protection
Adhesives    Automotive: hem flange adhesives and panel reinforcements
   Construction: ceramic tiles, chemical dowels and marble
   Aerospace: metal and composite laminates
   Electronics: chip adhesives, solder masks
Electrical applications   
Electronic Resins    Unclad sheets, paper impregnation and electrical laminates for printed circuit boards
Electrical Castings    Generators and bushings, transformers, medium and high-voltage switch gear components, post insulators, capacitors and automotive ignition coils
Principal Competitors: Dow Chemical, Nan Ya, Huntsman, Spolchemie, Leuna and Aditya Birla (Thai Epoxy)

Composites

  
Composite Epoxy Resins    Pipes and tanks, automotive, sports (ski, snowboard, golf), boats, construction, aerospace, wind energy and industrial applications

 

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Products

  

Key Applications

Principal Competitors: Dow Chemical, BASF, Aditya Birla (Thai Epoxy), Gurit, Leuna and Huntsman
Coating applications   
Floor Coatings (LER, Solutions, Performance Products)    Chemically resistant, antistatic and heavy duty flooring used in hospitals, the chemical industry, electronics workshops, retail areas and warehouses
Ambient Cured Coatings (LER, Solid Epoxy Resin (“SER”), Solutions, Performance Products)    Marine (manufacturing and maintenance), shipping containers and large steel structures (such as bridges, pipes, plants and offshore equipment)
Waterborne Coatings (EPI-REZ™ Epoxy Waterborne Resins)    Substitutes of solvent-borne products in both heat cured and ambient cured applications
Principal Competitors: Dow Chemical, Huntsman, Nan Ya, Air Products, Cytec Industries

Basic Epoxy Resins and Intermediates

We are one of the world’s largest suppliers of basic epoxy resins, such as solid epoxy resin SER and LER. These base epoxies are used in a wide variety of industrial coatings applications. In addition, we are a major producer of bisphenol-A (“BPA”) and epichlorohydrin (“ECH”), key precursors in the downstream manufacture of basic epoxy resins and epoxy specialty resins. We internally consume the majority of our BPA, and virtually all of our ECH, giving us a competitive advantage versus non-integrated competitors.

 

Products

  

Key Applications

Electrocoat (LER, SER, BPA)    Automotive, general industry and white goods (such as appliances)
Powder Coatings (SER, Performance Products)    White goods, pipes for oil and gas transportation, general industry (such as heating radiators) and automotive (interior parts and small components)
Heat Cured Coatings (LER, SER)    Metal packaging and coil-coated steel or construction and general industry
Principal Competitors: Dow Chemical, Huntsman, Nan Ya and the Formosa Plastics Group, Leuna and Kukdo

Versatic Acids and Derivatives

We are the world’s largest producer of versatic acids and derivatives. Versatic acids and derivatives are specialty monomers that provide significant performance advantages for finished coatings, including superior adhesion, hydrolytic stability, water resistance and appearance and ease of application. Our products include basic versatic acids and derivatives sold under the Versatic™, VEOVA® and CARDURA® names. Applications for these specialty monomers include decorative, automotive and protective coatings as well as other uses, such as pharmaceuticals and personal care products. We manufacture versatic acids and derivatives using our integrated manufacturing sites and our internally produced ECH.

 

Products

  

Key Applications

CARDURA®    Automotive repair/refinishing, automotive original equipment manufacturing (“OEM”) and industrial coatings

 

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Products

  

Key Applications

Versatic Acids and Derivatives    Chemical building blocks, peroxides, pharmaceuticals and agrochemicals
VEOVA®    Architectural coatings and construction
Principal Competitors: ExxonMobil, Tianjin Shield and Hebei Huaxu

Phenolic Specialty Resins and Molding Compounds

We are one of the leading producers of phenolic specialty resins, which are used in applications that require extreme heat resistance and strength, such as after-market automotive and OEM truck brake pads, filtration, aircraft components, foundry resins and electrical laminates. These products are sold under globally recognized brand names such as BORDEN, BAKELITE, DURITE and CELLOBOND. Our phenolic specialty resins are known for their binding qualities and used widely in the production of mineral wool and glass wool used for commercial and domestic insulation applications.

 

Products

  

Key Applications

Phenolic Specialty Resins

  
Composites and Electronic Resins    Aircraft components, ballistic applications, industrial grating, pipe, jet engine components, electrical laminates, computer chip encasement and photolithography
Automotive Phenol Formaldehyde Resins    Acoustical insulation, engine filters, brakes, friction materials, interior components, molded electrical parts and assemblies and foundry binders
Construction Phenol Formaldehyde Resins, Urea Formaldehyde Resins and Ketone Formaldehyde    Fiberglass insulation, floral foam, insulating foam, lamp cement for light bulbs, molded appliance and electrical parts, molding compounds, sandpaper, fiberglass mat, electrical laminates and coatings
Molding Compounds   
Phenolic, Epoxy, unsaturated polyesters    High performance automotive transmissions and under-hood components, heat resistant knobs and bases, switches and breaker components, pot handles and ashtrays
Glass    High load, dimensionally stable automotive underhood parts and commutators
Principal Competitors: Dynea International, Arclin, Georgia-Pacific (a subsidiary of Koch Industries), Sumitomo (Durez), SI Group, Ashland, Huttenes-Albertus and Plenco

Phenolic Encapsulated Substrates

We are a leading producer of phenolic encapsulated sand and ceramic substrates that are used in oil field services and foundry applications. Our highly specialized compounds are designed to perform well under extreme conditions, such as intense heat, high-stress and corrosive environments, that characterize oil and gas

 

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drilling and foundry industries. In the oil field services industry, our resin encapsulated proppants are used to enhance oil and gas recovery rates and extend well life.

Through our unconsolidated HA-International, Inc. joint venture, we are also the leading producer by volume of foundry resins in North America. Our foundry resin systems are used by major automotive and industrial companies for precision engine block casting, transmissions and brake and drive train components. In addition to encapsulates substrates, in the foundry industry, we also provide phenolic resin systems and ancillary products used to produce finished metal castings.

 

Products

  

Key Applications

Oil & Gas Stimulation Services Applications

  
Resin Encapsulated Proppants    Oil and gas fracturing
Foundry Applications   
Refractory Coatings    Thermal resistant coatings for ferrous and nonferrous applications
Resin Coated Sands and Binders    Sand cores and molds
Principal Competitors: Ashland, Carbo Cermaics, Santrol and Atlas Resins

Polyester Resins

We are one of the major producers of powder polyesters in Europe. We provide liquid and powder custom polyester resins to customers for use in industrial coatings that require specific properties, such as gloss and color retention, resistance to corrosion and flexibility. Polyester coatings are typically used in building construction, transportation, automotive, machinery, appliances and metal office furniture.

 

Products

  

Key Applications

Powder Polyesters    Outdoor durable systems for architectural window frames, facades and transport and agricultural machinery; indoor systems for domestic appliances and general industrial applications
Liquid Polyesters and Polyester Dispersions    Automotive, coil and exterior can coating applications
Principal Competitors: DSM, Cytec, Cray Valley/CCP, Reichhold, Nuplex and EPS (owned by Valspar)

Acrylic Resins

We are a significant supplier of water-based and solvent-based acrylic resins in Europe and North America. Acrylic resins are supplied as either acrylic homopolymers or as resins incorporating various comonomers that modify performance or cost. Water based acrylic homopolymers are used in interior trim paints and exterior applications where color, gloss retention and weathering protection are critical. Styrene is widely used as a modifying comonomer in our water-based acrylic resins. Styrene-acrylic copolymers are mainly used where high hydrophobicity and alkali resistance are required. In addition, we produce a wide range of specialty solution acrylic resins for marine and maintenance paints and automotive topcoats.

 

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We are also a producer of acrylic monomer in Europe, the key raw material in our acrylic resins. This ability to internally produce a key raw material gives us a cost advantage and ensures us adequate supply.

 

Products

  

Key Applications

Acrylic Dispersions    Architectural: Interior semi-gloss and high gloss, interior and exterior paints, stains and sealers, drywall primer, masonry coatings and general purpose
   Industrial: Automotive OEM, packaging, general metal, wood, plastic coatings, traffic marking paint, industrial maintenance and transportation, adhesives and textiles
Styrene-Acrylic Dispersions    Architectural: Interior matte to high gloss paints, interior and exterior paints, primer, masonry coatings and general purpose
   Industrial: Building and construction, automotive OEM, general metal, wood, plastic coatings, traffic marking paint, industrial maintenance and transportation, adhesives and textiles
Solution Acrylics    Architectural markets: Aerosols, masonry and tile sealers
   Industrial Markets: Transportation, packaging, aerosols, automotive OEM, appliance, industrial maintenance, marine and road marking
Principal Competitors: BASF, DSM, Dow Chemical, UES and Polymer Latex

Vinylic Resins

We are a supplier of water-based vinylic resins in Europe, North and South America. Vinylic resins might be either simple homopolymers of vinyl acetate or copolymers with acrylic, olefin, or other vinylic monomers to improve performance. A significant part of the vinylic resins we produce are spray dried to produce redispersible powders. We produce a wide range of specialty homopolymer and copolymer based powdered resins that are subsequently redispersed in water for primary applications in the building and construction market.

 

Products

  

Key Applications

Vinyl Acetate Homopolymer Dispersions    Packaging, paper and wood adhesives and textiles
Vinyl Acetate Copolymers    Packaging, wood and paper adhesives and textiles
Vinyl Acrylic Dispersion    Architectural applications
Redispersible Powders    Tile adhesives, external thermal insulation and finishing systems, self leveling underlayments, repair mortars, gypsum compounds, membranes and grouts
Principal Competitors: Celanese, Wacker, Vinavil, Elotex, Dairen, Dow Chemical and UES

For additional information about our segments, see Note 17 to the audited consolidated financial statements of MSC included elsewhere in the prospectus.

 

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Forest Product Resins Segment

2010 Net Sales: $1,607 million

Formaldehyde Based Resins and Intermediates

We are the leading producer of formaldehyde-based resins for the North American forest products industry, and also hold significant positions in Europe, Latin America and Australia. Formaldehyde-based resins, also known as forest product resins, are a key adhesive and binding ingredient used in the production of a wide variety of engineered lumber products, including medium-density fiberboard (“MDF”), oriented strand board (“OSB”), oriented strand lumber (“OSL”) and various types of plywood and laminated veneer lumber (“LVL”). These products are used in a wide range of applications in the construction, remodeling and furniture industries. Forest product resins have relatively short shelf lives and as such, our manufacturing facilities are strategically located in close proximity to our customers.

In addition, we are the world’s largest producer of formaldehyde, a key raw material used to manufacture thousands of other chemicals and products, including the manufacture of methylene diphenyl diisocyanate (“MDI”). We internally consume the majority of our formaldehyde production in the production of forest product resins, giving us a competitive advantage versus our non-integrated competitors.

We have expanded our formaldehyde and forest products resins businesses in select regions where we believe there are prospects for growth. We completed the construction of a new manufacturing facility in Montenegro, Brazil, which began operations in 2010, and will serve the southern Brazil formaldehyde and forest products markets. In addition, our forest products joint venture in Russia, which began operations in 2010, is ramping up production to capitalize on growth opportunities in both Russia and Eastern Europe.

 

Products

  

Key Applications

Forest Products Resins

  
Engineered Wood Resins    Softwood and hardwood plywood, OSB, LVL, strand lumber and wood fiber resins, (such as particleboard), MDF and finished veneer lumber, decorative laminates
Specialty Wood Adhesives    Laminated beams, structural and nonstructural fingerjoints, wood composite I-beams, cabinets, doors, windows, furniture, molding and millwork, and paper laminations
Wax Emulsions    Moisture resistance for panel boards and other specialty applications
Principal Competitors: Dynea International, Arclin, Georgia-Pacific (a subsidiary of Koch Industries) and Tembec
Formaldehyde Applications   
Formaldehyde    Herbicides and fungicides, scavengers for oil and gas production, fabric softeners, Urea Formaldehyde, Melamine Formaldehyde, Phenol Formaldehyde, MDI, hexamine and other catalysts
Principal Competitors: Dynea International, Arclin and Georgia-Pacific (a subsidiary of Koch Industries)

 

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Discontinued Operations

On January 31, 2011, we sold our global IAR business to Harima Chemicals Inc. for a purchase price of approximately $120 million. The IAR business is engaged in the production of naturally derived resins and related products primarily used for the manufacture of printing inks, adhesives, synthetic rubber, specialty coatings and aroma chemicals.

The IAR business generated 2010 net sales of approximately $356 million and included 11 manufacturing facilities in Europe, the United States and the Asia-Pacific region. The IAR business was previously reported within our Coatings and Inks segment and is reported as a discontinued operation for all periods presented.

On May 31, 2011, we sold our North American CCR business to PCCR USA, Inc., a subsidiary of Investindustrial, a European investment group. The CCR business generated 2010 net sales of $221 and was engaged in the production of coating resins for architectural and original equipment manufacturers, alkyd resins, as well as composite resins for construction, transportation, consumer goods, marine and other applications and includes four manufacturing facilities in the United States. The CCR business was previously reported within our Coatings segment in 2010 and Epoxy, Phenolic and Coating Resins segment in 2011 and is reported as a discontinued operation for all periods presented.

Marketing, Customers and Seasonality

Our products are sold to industrial users worldwide through a combination of a direct sales force that services our larger customers, and third-party distributors that more cost-effectively serve our smaller customers. Our customer service and support network is made up of key regional customer service centers. We have global account teams that serve the major needs of our global customers for technical service and supply and commercial term requirements. Where operating and regulatory factors vary from country to country, these functions are managed locally.

In 2010, our largest customer accounted for less than 3% of our sales and our top ten customers accounted for approximately 17% of our sales. However, neither our overall business nor any of our reporting segments depends on any single customer, or a particular group of customers, the loss of which would have a material adverse effect on either the reporting segment or the Company as a whole. Our primary customers are manufacturers, and the demand for our products is seasonal in certain of our businesses, with the highest demand in the summer months and lowest in winter months. Therefore, the dollar amount of our backlog orders was not significant as of December 31, 2010. Demand for our products can also be cyclical as general economic health, industrial and commercial production levels are key drivers for our business.

International Operations

Our international operations accounted for 60%, 61% and 60% of our sales in 2010, 2009 and 2008, respectively. While our international operations may be subject to a number of additional risks such as exposure to foreign currency exchange risk, we do not believe that our foreign operations, on the whole, carry significantly greater risk than our operations in the United States. We plan to grow our business in the Asian-Pacific, Eastern European and Latin American markets, where the use of our products is increasing. In 2010, we began operations of our formaldehyde and forest products resins plant in Brazil and a forest products resins manufacturing plant in Russia that is 50% owned through a joint venture. In addition, we began operations of a new plant in Korea in 2011 to manufacture versatic acids. Information about sales by geographic region for the past three years and long-lived assets by geographic region for the past two years can be found in Note 17 to the audited consolidated financial statements of MSC included elsewhere in the prospectus.

 

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Raw Materials

Raw material costs account for approximately 70% of our cost of sales. In 2010, we purchased approximately $2.9 billion of raw materials. The three largest raw materials that we use are phenol, methanol and urea, which represented 44% of our total raw material expenditures. The majority of raw materials that we use to manufacture our products are available from more than one source and are readily available in the open market. We have long-term purchase agreements for certain raw materials that ensure the availability of adequate supply. These agreements generally have periodic price adjustment mechanisms and do not have minimum annual purchase requirements. Smaller quantity materials that are single sourced generally have long-term supply contracts to maximize supply reliability. Prices for our main feedstocks are generally driven by underlying petrochemical benchmark prices and energy costs, which are subject to price fluctuations. Although we seek to offset increases in raw material prices with increases in our product prices, we may not always be able to do so, and there are periods when price increases lag behind raw material price increases.

Research and Development

Our research and development activities are geared to developing and enhancing products, processes and application technologies so that we can maintain our position as the world’s largest producer of thermosetting resins. We focus on:

 

   

developing new or improved applications based on our existing product lines and identified customer needs;

 

   

developing new resin products and applications for customers to improve their competitive advantage and profitability;

 

   

providing premier technical service for customers of specialty products;

 

   

providing technical support for manufacturing locations and assisting in optimizing our manufacturing processes;

 

   

ensuring that our products are manufactured consistent with our global environmental, health and safety policies and objectives;

 

   

developing lower cost manufacturing processes globally; and

 

   

expanding our production capacity.

We have over 460 scientists and technicians worldwide. Our research and development facilities include a broad range of synthesis, testing and formulating equipment, and small-scale versions of customer manufacturing processes for applications development and demonstration.

More recently, we have focused additional research and development resources on “green product” initiatives to remain competitive and to address our customers’ demands for more environmentally sensitive product solutions. Our efforts have focused on developing resin technologies that eliminate emissions, maximize the efficiency and renewability of bio-based natural resources and promote safe, environmentally-friendly manufacturing processes. A few examples of meaningful results of our investment in development of “green products” include:

 

   

EcoBind™ Resin Technology, an ultra low-emitting binder resin used to produce engineered wood products;

 

   

Albecor-Bio™ Powder Coating Resins which use a bio-based material for low-heat cure resulting in less energy and CO2 emissions;

 

   

Hexitherm™ which enables small lengths of lumber to be assembled into finger-jointed studs with the same durability and strength as dimensional lumber, with resistance to heat;

 

   

Epi-Rez™ Epoxy Waterborne Resins which provide for low or zero volatile organic compounds, reducing air emissions; and

 

   

PropTrac™ Fracture Diagnostics Service which enables oil & gas producers to eliminate use of radioactive tracers in well diagnostics.

 

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In each of 2010, 2009 and 2008, our research and development and technical services expense was $54 million, $53 million and $62 million, respectively. We take a customer-driven approach to discover new applications and processes and provide customer service through our technical staff. Through regular direct contact with our key customers, our research and development associates can become aware of evolving customer needs in advance and can anticipate their requirements to more effectively plan customer programs. We also focus on continuous improvement of plant yields and production capacity and reduction of fixed costs.

Intellectual Property

We own, license or have rights to over 1,600 patents, over 1,800 trademarks, and various patent and trademark applications and technology licenses around the world, which we hold for use or currently use in our operations. A majority of our patents relate to developing new products and processes for manufacturing and will expire between 2011 and 2027. We renew our trademarks on a regular basis. While we view our patents and trademarks to be valuable, because of the broad scope of our products and services, we do not believe that the loss or expiration of any single patent or trademark would have a material adverse effect on our results of operations, financial position or the continuation of our business.

Industry Regulatory Matters

Domestic and international laws regulate the production and marketing of chemical substances. Almost every country has its own legal procedure for registration and import. Of these, the laws and regulations in the European Union, the United States (Toxic Substances Control Act) and China are the most significant to our business. Chemicals that are missing from one or more of these or any other country chemical inventory lists can usually be registered and imported but may first require additional testing or submission of additional administrative information.

The European Commission enacted a regulatory system in 2006, known as Registration, Evaluation, Authorization and Restriction of Chemical substances, or REACH, which requires manufacturers, importers and consumers of certain chemicals to register these chemicals and evaluate their potential impact on human health and the environment. As REACH matures, significant market restrictions could be imposed on the current and future uses of chemical products that we use as raw materials or that we sell as finished products in the European Union. Other countries may enact similar regulations.

Environmental Regulations

Our policy is to strive to operate our plants in a manner that protects the environment and health and safety of our employees, customers and communities. We have implemented company-wide environmental, health and safety policies managed by our Environmental, Health and Safety (“EH&S”) department and overseen by the EH&S Committee of the Momentive Holdco Board of Directors. Our EH&S department has the responsibility to ensure that our operations worldwide comply with environmental, health and safety laws and regulations. This responsibility is executed via training, communication of EH&S policies, formulation of relevant policies and standards, EH&S audits and incidence response planning and implementation. Our EH&S policies include systems and procedures that govern environmental emissions, waste generation, process safety management, handling, storage and disposal of hazardous substances, worker health and safety requirements, emergency planning and response and product stewardship.

Our operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials and are subject to extensive environmental regulation at the federal, state and international level and are exposed to the risk of claims for environmental remediation or restoration. Our production facilities require operating permits that are subject to renewal or modification. Violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs. In addition, statutes such as the federal Comprehensive Environmental Response, Compensation and Liability Act

 

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and comparable state and foreign laws impose strict, joint and several liability for investigating and remediating the consequences of spills and other releases of hazardous materials, substances and wastes at current and former facilities and at third-party disposal sites. Other laws permit individuals to seek recovery of damages for alleged personal injury or property damage due to exposure to hazardous substances and conditions at our facilities or to hazardous substances otherwise owned, sold or controlled by us. Therefore, notwithstanding our commitment to environmental management, environmental health and safety, we may incur liabilities in the future, and these liabilities may result in a material adverse effect on our business, financial condition, results of operations or cash flows.

Although our environmental policies and practices are designed to ensure compliance with international, federal and state laws and environmental regulations, future developments and increasingly stringent regulation could require us to make additional unforeseen environmental expenditures. In addition, our former operations, including our ink, wallcoverings, film, phosphate mining and processing, thermoplastics and food and dairy operations, may give rise to claims relating to our period of ownership.

We expect to incur future costs for capital improvements and general compliance under environmental laws, including costs to acquire, maintain and repair pollution control equipment. In 2010, we incurred related capital expenditures of $22 million. We estimate that capital expenditures in 2011 for environmental controls at our facilities will be between $20 and $25 million. This estimate is based on current regulations and other requirements, but it is possible that a material amount of capital expenditures, in addition to those we currently anticipate, could be necessary if these regulations or other requirements or other facts change.

Employees

At June 30, 2011, we had approximately 6,000 employees. Approximately 40% of our employees are members of a labor union or are represented by workers’ councils that have collective bargaining agreements, including most of our European employees. We believe that relations with our union and non-union employees are good.

Our Board of Directors and Shareholders expect honest and ethical conduct from every employee. We strive to adhere to the highest ethical standards in the conduct of our business and to comply with all laws and regulations that are applicable to the business. Each employee has a responsibility to maintain and advance the ethical values of the Company. In support of this, our employees receive training to emphasize the importance of compliance with our Code of Business Ethics.

Properties

Our headquarters are in Columbus, Ohio and we have European executive offices in Seattleweg, Netherlands. Our major manufacturing facilities are primarily located in North America and Europe. As of June 30, 2011, we operated 30 domestic production and manufacturing facilities in 19 states and 46 foreign production and manufacturing facilities primarily in Australia, Brazil, Canada, China, Colombia, the Czech Republic, Finland, France, Germany, Italy, Korea, Malaysia, Netherlands, New Zealand, Spain, Thailand, the United Kingdom and Uruguay.

The majority of our facilities are used for the production of thermosetting resins, and most of them manufacture more than one type of thermosetting resin, the nature of which varies by site. These facilities typically use batch technology, and range in size from small sites, with a limited number of reactors, to larger sites, with dozens of reactors. One exception to this is our plant in Deer Park, Texas, the only continuous-process epoxy resins plant in the world, which provides us with a cost advantage over conventional technology.

In addition, we have the ability to internally produce key intermediate materials such as formaldehyde, BPA, ECH, versatic acid and acrylic acid. This backward integration provides us with cost advantages and

 

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facilitates our adequacy of supply. These facilities are usually co-located with downstream resin manufacturing facilities they serve. As these intermediate materials facilities are often much larger than a typical resins plant, we can capture the benefits of manufacturing efficiency and scale by selling material that we do not use internally to third parties.

We believe our production and manufacturing facilities are well maintained and effectively utilized and are adequate to operate our business. Following are our more significant production and manufacturing facilities and executive offices:

 

Location

  

Nature of
Ownership

  

Reporting Segment

Argo, IL*

   Owned    Epoxy, Phenolic and Coating Resins

Barry, UK*

   Owned    Epoxy, Phenolic and Coating Resins

Brady, TX

   Owned    Epoxy, Phenolic and Coating Resins

Deer Park, TX*

   Owned    Epoxy, Phenolic and Coating Resins

Duisburg-Meiderich, Germany

   Owned    Epoxy, Phenolic and Coating Resins

Iserlohn-Letmathe, Germany

   Owned    Epoxy, Phenolic and Coating Resins

Lakeland, FL

   Owned    Epoxy, Phenolic and Coating Resins

Louisville, KY

   Owned    Epoxy, Phenolic and Coating Resins

Moerdijk, Netherlands*

   Owned    Epoxy, Phenolic and Coating Resins

Norco, LA*

   Owned    Epoxy, Phenolic and Coating Resins

Pernis, Netherlands*

   Owned    Epoxy, Phenolic and Coating Resins

Ribecourt, France

   Owned    Epoxy, Phenolic and Coating Resins

Sokolov, Czech Republic

   Owned    Epoxy, Phenolic and Coating Resins

Wesseling, Germany

   Leased    Epoxy, Phenolic and Coating Resins

Onsan, South Korea

   Owned    Epoxy, Phenolic and Coating Resins

Brimbank, Australia

   Owned    Forest Products Resins

Curitiba, Brazil

   Owned    Forest Products Resins

Edmonton, AB, Canada

   Owned    Forest Products Resins

Fayetteville, NC

   Owned    Forest Products Resins

Geismar, LA

   Owned    Forest Products Resins

Gonzales, LA

   Owned    Forest Products Resins

Hope, AR

   Owned    Forest Products Resins

Kitee, Finland

   Owned    Forest Products Resins

Leuna, Germany

   Owned    Forest Products Resins

Montenegro, Brazil

   Owned    Forest Products Resins

Springfield, OR

   Owned    Forest Products Resins

St. Romuald, QC, Canada

   Owned    Forest Products Resins

Columbus, OH†

   Leased    Corporate and Other

Seattleweg, Netherlands†

   Leased    Corporate and Other

Shanghai, China†

   Leased    Corporate and Other

 

* We own all of the assets at this location. The land is leased.
Executive offices.

Legal Proceedings

We are involved in various product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings in the ordinary course of business, including actions that allege harm caused by products the Company has allegedly made or used, containing silica and asbestos. The following claims represent material proceedings outstanding that are not in the ordinary course of business.

 

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Sokolov, Czech Republic Groundwater Contamination

The Sokolov, Czech Republic facility has soil and groundwater contamination which pre-dates privatization and acquisition of the facility by Eastman in 2000. The investigation phase of the site remediation project has been completed, and building demolition and removal of waste is underway. The National Property Fund has provided us with a written commitment to reimburse all site investigation and remediation costs up to approximately $73 million. The current estimate for site remediation is significantly less than the maximum amount the National Property Fund has committed to the project.

Environmental Damages to the Port of Paranagua, Brazil

On August 10, 2005, Governo Do Paraná and the Environmental Institution of Paraná IAP (the “IAP”), an environmental agency of the Brazilian government, provided Hexion Quimica Industria, our Brazilian subsidiary, with notice of a potential fine of up to $12 million in connection with alleged environmental damages to the Port of Paranagua caused in November 2004 by an oil spill from a shipping vessel carrying methanol purchased by the Company. The investigations have been concluded with no findings against the Company that the methanol damaged the environment. In October 2009, the Court granted our request for an injunction precluding the imposition of any fines or penalties by the IAP. The Court lifted its injunction on November 2010; however, we subsequently appealed in order to preclude the IAP from levying any fines or penalties. At June 30, 2011, the amount of the assessment, including tax, penalties, monetary correction and interest, is 27 Brazilian reais, or approximately $17 million.

Other Litigation

For a discussion of certain other legal contingencies, refer to Note 12 to the audited consolidated financial statements of MSC and Note 7 to the unaudited condensed consolidated financial statements of MSC, each included elsewhere in the prospectus.

There have been no other material developments during the first six months of 2011 in any of the other ongoing legal proceedings that we have previously disclosed.

 

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MANAGEMENT

Executive Officers and Directors

Set forth below are the names, ages and current positions of our executive officers and directors as of September 1, 2011.

 

Name

  

Age

  

Position

Craig O. Morrison

   56    Director, Chairman, President and Chief Executive Officer

William H. Carter

   58    Director, Executive Vice President and Chief Financial Officer

Robert V. Seminara

   39    Director

Jordan C Zaken

   36    Director

David B. Sambur

   30    Director

Joseph P. Bevilaqua

   56    Executive Vice President, President—Epoxy, Phenolic and Coatings Resins Division

Dale N. Plante

   54    Executive Vice President, President—Forest Products Division

Judith A. Sonnett

   55    Executive Vice President, Human Resources

Kevin W. McGuire

   51    Executive Vice President—Business Processes and IT

Nathan E. Fisher

   45    Executive Vice President—Procurement

Anthony B. Greene

   52    Executive Vice President—Business Development and Strategy

Douglas A. Johns

   54    Executive Vice President and General Counsel

Karen E. Koster

   48    Executive Vice President—Environmental, Health & Safety

George F. Knight

   54    Senior Vice President—Finance and Treasurer

Craig O. Morrison was elected President and Chief Executive Officer and a director effective March 25, 2002 and was named Chairman of the Board of Directors on June 1, 2005. He also serves as President and CEO and a director of Momentive Performance Materials Inc. and Momentive Performance Materials Holdings LLC, having been elected to those positions on October 1, 2010. Prior to joining our Company, he served as President and General Manager of Alcan Packaging’s Pharmaceutical and Cosmetic Packaging business from 1999 to 2002. From 1993 to 1998 he was President and General Manager for Van Leer Containers, Inc. Prior to joining Van Leer Containers, Mr. Morrison served in a number of management positions with General Electric’s Plastics division from March 1990 to November 1993, and as a consultant with Bain and Company from 1987 to 1990. He is a member of the Environmental, Health and Safety and Executive Committees of the Board of Managers of Momentive Holdco. Mr. Morrison’s position as President and Chief Executive Officer, his extensive management experience, and his skills in business leadership and strategy qualify him to serve on our Board of Directors.

William H. Carter was elected Executive Vice President and Chief Financial Officer effective April 3, 1995 and a director November 20, 2001. He also serves as Executive Vice President and CFO and a director of Momentive Performance Materials Inc. and Momentive Performance Materials Holdings LLC, having been elected to those positions October 1, 2010. Throughout his tenure with us, Mr. Carter has been instrumental in the restructuring of our holdings, including serving as a director and interim President and Chief Executive Officer of a former subsidiary, BCP Management Inc., from January to June 2000, and a director and executive officer of WKI Holding Company, Inc. from 2001 to 2003. Additionally, he has served as a director of Elmer’s Products, Inc., Borden Foods Corporation and AEP Industries, Inc. Prior to joining our Company in 1995, Mr. Carter was a partner, and the engagement partner for Borden Chemical, with Price Waterhouse LLP, which he joined in 1975. Mr. Carter’s position as Executive Vice President and Chief Financial Officer, his extensive management experience, and his skills in financial leadership qualify him to serve on our Board of Directors.

Robert V. Seminara was elected a director of the Company on August 12, 2004. Mr. Seminara is a Partner at Apollo, where he has worked since January 2003. From June 1996 to January 2003, Mr. Seminara served as an officer in the private equity investment group at Evercore Partners LLC, where he held the title Managing Director. He is Chairman of the Audit Committee of the Board of Directors of the Company and of Momentive

 

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Performance Materials Holdings LLC’s Board of Managers. Within the past five years he also served as a director of Momentive Performance Materials Holdings LLC, Covalence Specialty Materials, World Kitchen, Inc., Berry Plastics Corporation and Skylink Aviation, Inc., all Apollo portfolio companies. In light of our ownership structure and Mr. Seminara’s position with Apollo and his extensive financial and business experience, we believe it is appropriate for Mr. Seminara to serve as a director of the Company.

Jordan C. Zaken was elected a director of the Company on June 29, 2005. Mr. Zaken is a Partner at Apollo, where he has worked since 1999. Prior to that time, Mr. Zaken was employed by Goldman, Sachs & Co. in its Mergers and Acquisitions Department. He also is a director of Apollo portfolio companies: Momentive Performance Materials Inc., Momentive Performance Materials Holdings LLC, Verso Paper Corp, Verso Paper Holdings, LLC. Within the past five years, Mr. Zaken was a director of Parallel Petroleum Corporation. He is the Chairman of the Compensation Committee of the Board of Directors. He is also a member of the Environmental, Health and Safety Committee, the Executive Committee, Audit Committee, and Chair of the Compensation Committee of the Board of Managers of Momentive Performance Materials Holdings LLC. In light of our ownership structure and Mr. Zaken’s extensive finance and business experience, we believe it is appropriate for Mr. Zaken to serve as a director of the Company.

David B. Sambur was elected a director of the Company on October 1, 2010. He is a principal of Apollo Management, L.P., where he has worked since 2004. He was a member of the Leveraged Finance Group of Salomon Smith Barney Inc. from 2002 to 2004. Mr. Sambur also is a director of Verso Paper Corp., Verso Paper Holdings, Caesars Entertainment Corporation, Momentive Holdco, and MPM, all Apollo portfolio companies. He serves on the Audit and Compensation Committees of the Company’s Board of Directors. He also is a member of the Audit and Compensation Committees of the Board of Managers of Momentive Holdco.

Joseph P. Bevilaqua is an Executive Vice President and President of the Epoxy, Phenolic and Coating Resins Division. Since August 10, 2008, he has been responsible for the epoxy and phenolic resins businesses and in October 2010, the coatings business was added to his division responsibilities. Prior to that, he was Executive Vice President and President of the Phenolic and Forest Products Division, a position he held from January 2004 to August 2008. Mr. Bevilaqua joined the Company in April 2002 as Vice President-Corporate Strategy and Development. From February 2000 to March 2002, he was the Vice President and General Manager of Alcan’s global plastics packaging business. Prior to Alcan, Mr. Bevilaqua served in leadership positions with companies such as General Electric, Woodbridge Foam Corporation and Russell-Stanley Corporation.

Dale N. Plante was elected an Executive Vice President and appointed President of the Forest Products Division on September 1, 2008. In this role, Mr. Plante is responsible for the Company’s global forest products resins and formaldehyde businesses, as well as our Australian-based Applied Technology Group additives business. Mr. Plante has held a number of assignments with increasing responsibility in his thirty years in the forest products sector with the Company and its predecessors. Prior to becoming President of the Forest Products division, in 2005 Mr. Plante relocated from Canada to Rotterdam to become the Managing Director of Forest Products and Formaldehyde—Europe. In 2007, Mr. Plante was promoted to Vice President and Managing Director of Forest Products and Formaldehyde—Europe. Prior to 2005, Mr. Plante was located in Canada working for the Company’s Canadian subsidiary and, from 2004-2005 was North American Sales Manager—Wood Fiber.

Judith A. Sonnett was elected Executive Vice President—Human Resources in September 2007. She also serves as Executive Vice President—Human Resources of MPM, having been elected to that position on October 1, 2010. She has served in various HR leadership roles for the Company and its predecessors since November 1998. Prior to her election to her current position, Ms. Sonnett was Vice President—People and Organizational Development from November 2004 thru September 2007, and prior to that, she held the title Vice President, Human Resources for Borden Chemical Inc. from November 1998 thru November 2004. From 1995 to 1998 Ms. Sonnett worked in Human Resources for W.L. Gore and Associates.

 

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Kevin W. McGuire was elected Executive Vice President—Business Processes and IT on June 1, 2005. He also serves as Executive Vice President—Business Processes and IT of MPM, having been elected to that position October 1, 2010. Mr. McGuire joined the Company in 2002 as the Chief Information Officer.

Nathan E. Fisher was elected Executive Vice President—Procurement on June 1, 2005. He also serves as Executive Vice President—Procurement of MPM, having been elected to that position on October 1, 2010. Mr. Fisher joined the Company in March 2003 as Director of Strategic Sourcing and was promoted to Vice President—Global Sourcing in September 2004.

Anthony B. Greene was elected Executive Vice President—Business Development and Strategy on October 1, 2010. Mr. Greene also serves in that capacity for MPM. Mr. Greene joined MPM upon its formation on December 4, 2006 as Global Financial Planning and Analysis Manager. He was appointed Global Business Development Leader in January 2010. Prior to December 2006, he served as Global Financial Planning and Analysis Manager for GE Advanced Materials since 2005. Mr. Greene joined GE in 1981 and has held numerous financial management roles in a wide variety of GE businesses in the U.S. , Asia and Europe.

Douglas A. Johns was elected Executive Vice President and General Counsel on October 1, 2010. He also serves as Executive Vice President, General Counsel and Secretary of MPM and Momentive Holdco. Mr. Johns joined MPM as General Counsel and Secretary upon its formation on December 4, 2006. He was promoted to Executive Vice President on October 1, 2010. Prior to that time, Mr. Johns served as General Counsel for GE Advanced Materials, a division of the General Electric Company (“GE”) from 2004 to December 2006. Mr. Johns began his career as a trial lawyer at the U.S. Department of Justice and was in private practice before joining GE in 1991, where he served as Senior Counsel for global regulatory and environmental matters and Senior Business Counsel at GE Plastics’ European headquarters in Bergen Op Zoom, The Netherlands from 2001 to 2004.

Karen E. Koster was elected Executive Vice President—Environmental, Health & Safety effective August 8, 2011. Ms. Koster also serves in that capacity for MPM. Prior to joining the Company, Ms. Koster held various environmental services and legal management roles at Cytec Industries where, from August 2002, she served as Vice President, Safety, Health and Environment.

George F. Knight was elected Senior Vice President—Finance and Treasurer on June 1, 2005. Mr. Knight joined the Company in 1997. From 1999-2001 he served as Vice President of Finance for Borden Foods Corporation, an affiliate of the Company. In 2001, he re-joined the Company and was appointed Vice President—Finance and Treasurer of the Company in July 2002. He was promoted to Senior Vice President in June 2005. He also serves as Senior Vice President Finance and Treasurer of MPM and Momentive Holdco, having been elected to those positions on October 1, 2010 and November 1, 2010, respectively.

Nominating Committee

As a controlled company, we have no Nominating Committee nor do we have written procedures by which security holders may recommend nominees to our Board of Directors.

Audit Committee Financial Expert

Since we are not a listed issuer, there are no requirements that we have an independent Audit Committee. Our Audit Committee consists of Messrs. Seminara and Sambur, both of whom qualify as audit committee financial experts, as such term is defined in Item 407(d)(5) of Regulation S-K, and neither of whom is independent.

 

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Code of Ethics

We have a Code of Business Ethics that applies to all associates, including our Chief Executive Officer and senior financial officers. These standards are designed to deter wrongdoing and to promote the honest and ethical conduct of all employees. Our Code of Business Ethics is posted on our website: www.momentive.com under “Investor Relations—Corporate Governance.” Any substantive amendment to, or waiver from, any provision of the Code of Business Ethics with respect to any senior executive or financial officer shall be posted on this website.

Compensation Discussion and Analysis

Oversight of the Executive Compensation Program

The Compensation Committee of our Board of Directors (the “Committee”) is responsible for establishing and monitoring compliance with our executive compensation philosophy. The Committee’s overarching goal is that the compensation and benefits provided to executives are reasonable, internally fair and externally competitive. The Committee has the authority to approve all executive compensation, equity and benefit programs.

The Committee sets the principles and strategies that guide the design of our executive compensation program. They annually evaluate the performance and compensation levels of the Chief Executive Officer (the “CEO”) and each of the executive officers who report directly to the CEO. Based on this evaluation, the Committee establishes and approves each executive’s compensation level, including base salary, annual incentive opportunities and long-term incentive opportunities, including any equity-based awards. Throughout this discussion, we refer to the executives named in the Summary Compensation Table included herein as the Named Executive Officers. We also refer to our CEO and the executives who report directly to him as the “Senior Leadership Team.” Our Senior Leadership Team is currently comprised of 12 individuals, including all of the named executive officers.

Executive Compensation Philosophy and Objectives of Executive Compensation Program

Our executive compensation program is designed to focus our CEO and the Senior Leadership Team on our key strategic, financial and operational goals that will translate into long-term value creation for our owners. As a result, we believe that the compensation packages we provide to executives should include a mix of short-term cash-based awards that encourage the achievement of annual goals, and long-term cash and equity-based elements that reward sustained business performance and encourage management stability. The Committee also believes that equity-based awards play an important role in creating incentives for our executives to maximize Company performance and further align the interests of our executives with those of our stockholders.

Our annual compensation review process includes an evaluation of key objectives and measurable contributions to ensure that the incentives are not only aligned with the Company’s strategic goals, but also enable us to attract and retain a highly qualified and effective management team. The Committee bases its executive compensation decisions on the following philosophy:

 

   

The compensation program should be designed to support the business with a balance between critical short-term objectives and long-term strategy;

 

   

Each executive’s total compensation should have a correlation to the scope of his or her responsibilities and relative contributions to the Company’s performance; and,

 

   

A significant portion of each executive’s total compensation should be variable and contingent upon the achievement of specific financial and operational performance goals.

Our general philosophy is to set base salaries at levels comparable to the general market for the given position, and provide the opportunity for short-term and long-term incentive compensation that will exceed the general market when we perform at or above target levels.

 

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Roles and Responsibilities

The Committee makes all final decisions regarding the compensation of our Senior Leadership Team, and is also responsible for approving new compensation programs, changes to existing compensation programs and equity award grants for all other employees. These decisions, other than decisions regarding their own compensation, are based on recommendations made by the CEO and the Executive Vice President of Human Resources. The compensation of the CEO and the Executive Vice President of Human Resources is determined by the Committee. The Committee uses its discretion and judgment in accepting or modifying management’s recommendations in making its final compensation decisions.

Use of Compensation Data

In order to obtain a general understanding of current compensation practices when setting executive compensation levels, the Committee considers broad-based competitive market data on total compensation packages provided to executives with similar responsibilities at comparable companies within the chemical industry, as well as companies of similar revenues and operational complexity outside the chemical industry. We also use a variety of third party salary surveys, including Hay Group PayNet and Towers Watson Executive Compensation Database. When making its executive compensation decisions, the Committee evaluates each executive’s scope of responsibility, his or her specific role in value creation and overall contributions to Company performance.

The Committee also reviews historical total compensation data on each executive, which includes base salary, target and actual annual incentive compensation and long-term incentive compensation, including equity ownership.

Executive Compensation and Related Actions in 2010

In early 2009, in light of the dramatic volume decreases in most of our businesses in the fourth quarter of 2008, the Committee approved a number of urgent cost-saving actions, including the suspension of the Company match to the defined contribution plan and the reduction by 10% of the base salaries of each member of the Senior Leadership Team.

In January 2010, in anticipation of modest economic recovery and out of concern for retaining members of the Senior Leadership Team, the Committee voted to restore the Senior Leadership Team’s base salaries to their 2008 levels, effective April 1, 2010. In addition, executives were eligible to receive merit increases based on individual performance effective April 1, 2010. In May 2010, the Company match to the defined contribution plan was restored for all employees.

No new equity awards were made to executives in 2010.

On October 1, 2010 in connection with the closing of the Momentive Combination, we entered into the Shared Services Agreement, pursuant to which, MPM provides to us, and we provide to MPM, a range of services, including the services of certain executives and employees on a shared basis. Under this arrangement, we provide MPM with the executive services of Mr. Morrison, Mr. Carter and Ms. Sonnett and certain other members of our Senior Leadership Team (while they continue to be employed by, and provide services to, MSC) and MPM provides the executive services of certain members of their Senior Leadership Team (while they continue to be employed by, and provide services to, MPM). In addition, under this agreement, MPM provides to us, and we provide to MPM, the services of various other executives and employees on a shared basis. Pursuant to the Shared Services Agreement, the fully burdened costs (including associated overhead costs) of the executives and other employees that MPM provides to us and we provide to MPM are allocated 51% to us and 49% to MPM, respectively, according to an agreed upon methodology, except to the extent that 100% of any cost is demonstrably attributable to or for the benefit of either MPM or us, in which case the entire cost is allocated to such party. Fully burdened costs for shared employees include salary, bonus, cash grants under annual incentive

 

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compensation plans, costs under health care, life insurance, pension, retirement, deferred compensation and severance plans and associated overhead, calculated in accordance with accounting policies and procedures approved, from time to time, by the parties. Monthly net payments are made under the Shared Services Agreement based on estimated total allocated costs for all services. Following the end of each quarter, an additional payment is made, if necessary, based on a reconciliation of estimated costs to actual costs for such quarter. We expect that the Momentive Combination, including the Shared Services Agreement, will result in significant synergies for us. For additional details regarding the Shared Services Agreement, see “Certain Relationships and Related Party Transactions—Director Independence.”

In connection with the Momentive Combination, the responsibilities of certain executives were increased (as described above) and accordingly, effective October 1, 2010, these individuals, including certain of our Named Executive Officers, received salary adjustments and/or increases in their annual incentive compensation targets. These adjustments are further described below.

2011 Compensation Actions

In February 2011, the Compensation Committee of the Board of Managers of Momentive Holdco approved a new long-term equity incentive plan for employees and directors of the Company and MPM (the “2011 Equity Plan”). The 2011 Equity Plan was adopted to address the concern that many of the Company’s key managers do not currently hold a meaningful or any equity stake in Momentive Holdco, and the fact that management’s overall ownership interest in Momentive Holdco is relatively small. Grants under the 2011 Equity Plan are denominated in Momentive Holdco common units. Under the 2011 Equity Plan, participants may receive grants of common units, restricted units, restricted deferred units, unit options, and other unit-based awards. Grants of restricted deferred units and options to purchase units were made to a select group of Company leaders, including our Named Executive Officers. The amount of each award is based on the executive’s scope of responsibility, long-term potential, retention risk and/or impact on value creation. The awards also varied depending upon the grantees’ existing equity holdings, as the Compensation Committee of Momentive Holdco sought to harmonize equity ownership positions among key executives of MSC and MPM based on the factors above. The awards made pursuant to the 2011 Equity Plan will vest based on continued service and the achievement of certain unit prices following certain transactions involving Momentive Holdco, which we believe provides a retention incentive and encourages long-term value creation.

Executive Compensation Components

The following paragraphs describe and analyze the essential components of our executive compensation program which are as follows: base salaries, annual incentive awards, long-term incentive awards, retirement benefits and international assignment compensation and severance benefits. Unless otherwise noted, the same compensation principles apply to all other non-bargained salaried employees of the Company.

1. Base Salaries

We provide our executives with an annual, fixed base salary commensurate with their professional status, accomplishments, scope of responsibility, and overall impact on the organization. The Committee reviews our executives’ base salary levels annually in conjunction with the annual performance review conducted globally for all non-bargained salaried employees. In addition, the Committee reviews base salaries in conjunction with promotions or significant changes in job responsibilities of the Senior Leadership Team. When approving increases to base salaries, the Committee considers many factors including job performance, total target compensation, impact on value creation and the competitive marketplace. We believe that it is appropriate that the base salaries of our CEO and Chief Financial Officer are set higher than those of our other executive officers due to the broad scope of responsibilities they have for the overall operations of the Company. The base salaries of our Executive Vice Presidents, in relation to each other, generally reflect the size and complexity of the business or functional operations they manage.

 

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2. Annual Incentive Awards

The purpose of our annual incentive program is to provide a short-term performance incentive and to reward participants for delivering increased value to the organization against specific EBITDA, cash flow and Environmental Health and Safety (“EH&S”) objectives. In order to accomplish this, we have an annual cash incentive plan which uses measurable performance targets. In addition, from time to time the CEO may request a discretionary cash bonus pool to reward exemplary performance, or for retention purposes or in connection with a new hiring or promotion. The CEO makes discretionary bonus recommendations to the Committee for consideration and approval.

Our annual incentive plan awards are targeted at a level that, when combined with base salaries, is intended to yield total annual compensation that is competitive in the marketplace, while performance above the target is intended to yield total annual compensation above the market median. The financial targets for the annual incentive plan for executives and other eligible, salaried employees are identical. We strive to set annual incentive compensation targets that are achievable only through strong performance, believing that this motivates our executives and other participants to deliver ongoing value creation, while allowing the Company to attract and retain a highly talented Senior Leadership Team.

Annual incentive award targets are determined by the Committee as part of the Company’s annual planning process in January. The annual planning process involves the development of an overall budget, which includes incentive compensation targets that consider a number of factors, such as: our prior-year performance; current market trends; integration efforts around acquired businesses; potential pricing actions; raw material projections; the realization of planned productivity initiatives; expansion plans; new product development; and other strategic factors that could potentially impact our operations.

The three metrics used in our 2010 Annual Incentive Compensation Plan (“2010 ICP”) design are Segment EBITDA, EH&S statistics and Cash Flow. The Committee uses Segment EBITDA as the primary profitability measure for determining the level of the Company’s financial performance for management and executive annual incentive compensation purposes. Segment EBITDA is defined as earnings before interest, income taxes, depreciation and amortization (EBITDA) that is adjusted to exclude certain non-cash or non-recurring expenses (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a reconciliation of Segment EBITDA to Net Income (loss)). The Segment EBITDA target for the annual incentive plan is set by the Committee based upon factors including, but not limited to, competitive business dynamics in the markets in which we operate, raw material trends, anticipated business unit growth, anticipated cost synergies and business unit budget projections. For the 2010 ICP, the targeted MSC Segment EBITDA was $515 million. The minimum threshold for an incentive payout under the Segment EBITDA measure was established at 89.3% of the target and the maximum payout was established at 110.7% of the target.

Cash flow encompasses EBITDA, net trading capital improvement and/or usage, capital spending and interest paid along with other smaller operating cash flow items such as income taxes paid and pension contributions. The purpose of this component is to increase focus on cost control and cost reduction actions to preserve an adequate amount of liquidity to fund operations and capital expenditures, service debt and ultimately sustain the business through difficult economic cycles. The cash flow targets were established as a result of budget projections and reflected a cash usage of $140 million. This target represents a decrease from 2009’s actual cash flow generated amount of approximately $274 million and incorporates a usage of cash through an increased investment in working capital of $303 million, due to the anticipated recovery in volumes and raw material price increases within our businesses. Minimum and maximum threshold targets were established for each division and for global MSC. The Segment EBITDA and cash flow measurements act independently such that a payout of one element is possible even if the minimum target threshold for the other is not achieved We believe this design encourages continued focus on critical cash constraints.

Consistent with past plan designs, 10% of the 2010 ICP was based on achievement of Environmental Health and Safety (“EH&S”) goals. As a chemical manufacturer, our operations involve the use of hazardous materials,

 

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and we are subject to extensive environmental regulation. As a result, EH&S is a critical focus for all of our associates. EH&S targets are measured based upon achievement of goals around reducing occupational illness and injury rates (“OIIR”) and environmental incidents such as permit exceedances and hazardous spills. The Company’s EH&S target for 2010 was an OIIR of .83. This goal represents a 10% improvement over prior year actual. Any payout on achievement of an EH&S target is contingent upon the achievement of the Segment EBITDA target.

Each participant’s incentive target award is based on a percentage of his or her base salary. All executives have 50% of their annual incentive compensation tied to global MSC or Division Segment EBITDA budget targets, 10% tied to EH&S goals and 40% tied to cash flow budget targets. The following table summarizes the targets and performance components, including individual goals and weightings, for each of our Named Executive Officers.

 

Name

   Incentive Target
(% of Base  Salary)
  Award Payout
Range
(% of Incentive Target)
  

Performance Components
Individual Goals

   Weight

C. Morrison

   100%   50% -200%   

MSC Segment EBITDA

Global EH&S Goals

MSC Cash Flow Targets

   50%

10%

40%

W. Carter

   80%   50% -200%   

MSC Segment EBITDA

Global EH&S Goals’

MSC Cash Flow Targets

   50%

10%

40%

J. Bevilaqua

   80%   50% -200%   

MSC Segment EBITDA

Division Segment EBITDA

Division EH&S Goals

Division Cash Flow Target

   10%

40%

10%

40%

J. Sonnett

   60%   50% -200%   

MSC Segment EBITDA

Global EH&S Goals

MSC Cash Flow Targets

   50%

10%

40%

D. Plante

   70%   50% -200%   

MSC Segment EBITDA

Division Segment EBITDA

Division EH&S Goals

Division Cash Flow Target

   10%

40%

10%

40%

We believe that our Division Presidents’ incentive compensation must have a strong tie to their division’s performance where they have the greatest impact and closest line of sight and therefore, 90% of their targets are tied to their division’s results. Please see “Determining Executive Compensation for our Named Executive Officers” below for a description of each Named Executive Officer’s performance against the 2010 ICP goals.

3. Long-term Incentive Awards

Equity Awards

From time to time, grants of equity-based awards may be made to our Named Executive Officers, other members of the Senior Leadership Team and other eligible associates. The purpose of equity awards is to provide a long-term performance incentive and to reward the participants for planning and delivering long-term value. The equity incentive awards granted prior to the Momentive Combination covered equity securities of our parent, MSC Holdings and are generally subject to time-based or performance-based vesting requirements. Time-based awards function as a retention incentive, while performance-based awards are linked to the Company’s attainment of specific long-term objectives. At the time of the Momentive Combination, all outstanding equity-based awards that covered common units of MSC Holdings were converted on a one-for-one basis to cover units of Momentive Holdco. The Company has equity-based awards outstanding under the 2004 Stock Incentive Plan (the “2004 Stock Plan”), the 2004 Deferred Compensation Plan (the “2004 DC Plan”), the RPP Restricted Unit

 

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Plan, the 2000 Non-Employee Directors Stock Option Plan, the RPP 2000 Stock Option Plan, the RSM 2004 Stock Option Plan, and the 2007 Long-Term Incentive Plan (the “2007 Long-Term Plan”). The material terms of awards made to our Named Executive Officers under any of these plans are further described in the Narrative to the Outstanding Equity Awards Table.

Long-Term Cash Awards

The Committee may, from time to time, adopt long-term cash award plans for our Named Executive Officers, other members of the Senior Leadership Team and other eligible associates. The purpose of cash based long-term incentive plans is to provide a definite value to the executive after a multi-year period upon the achievement of financial targets and to retain such key employees.

Retaining key talent during difficult business cycles has been a critical focus for us. In early 2009, the Committee approved the 2009 LTIP to provide management stability during a difficult economic environment and focus key leaders, including our Named Executive Officers, on business sustainability and recovery. The terms of the 2009 LTIP are set forth in the Narrative to the Grants of Plan Based Awards Table.

Our 2009 LTIP contained two financial performance measures in order to trigger vesting of the award. The first measure was a cost reduction target of $60 million with a measurement period of July 2009 through December 2010. The second measure was an annual MSC Segment EBITDA achievement target of $550 million with a measurement period that began after December 2009 and ran until the calendar year in which the target was achieved. The cost reduction target was achieved in 2009 and the MSC Segment EBITDA achievement target was achieved in 2010. Accordingly, one-half of the awards vested on January 1, 2011 and will be paid in the first quarter of 2011, with the remainder to vest January 1, 2012 and be paid in first quarter of 2012, subject to the participant’s continued employment with the Company.

4. Retirement Benefits

Each of our Named Executive Officers participates in qualified defined-benefit and defined-contribution retirement plans on substantially the same terms as our other U.S. and Canadian participating employees.

In 2009, we froze the non-qualified Executive Supplemental Pension Plan (the “MSC Supplemental Plan”), which exists to provide retirement benefits above the maximum limitations under an IRS qualified benefit plan. In July 2009, Momentive Specialty’s U.S. pension plans (the “MSC U.S. Pension Plans”) were frozen for all executive and non-executive non-bargained salaried employees. The Company chose to freeze the MSC U.S. Pension Plans to control the growth of future pension liabilities, reduce administrative costs and equalize retirement benefits among our U.S. associates. One of our Named Executive Officers participates in the Momentive Specialty Chemicals Canada Employees Retirement Income Plan, a non-contributory defined benefit which remains an active plan under which employees continue to earn service benefits.

In April 2009, in conjunction with other urgent cost-saving actions, we suspended the Company match to the U.S. defined contribution plan (the “MSC Savings Plan”) as a temporary measure due to the significant declines experienced in our businesses in the fourth quarter of 2008 and first quarter of 2009. In May 2010, having experienced slight increases in sequential quarter volumes for most of our businesses, and to address employee morale and retention, the Company match to the MSC Savings Plan was restored.

While we believe that retirement benefits are important compensation and retention tools, we believe that the shift away from defined benefit plans to defined contribution plans is a growing trend. Accordingly, in 2009, we instituted an annual retirement contribution benefit for U.S. associates to replace future pension benefits, which is based on a percent of salary determined by years of service. This annual retirement contribution is made to the MSC Savings Plan and is in addition to the Company’s matching contributions and the Company “achievement” match, which is made to participants’ accounts upon the achievement of Momentive Specialty Segment EBITDA targets. There is a description of these plans in the narrative following the Pension Benefits table below.

 

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5. International Assignment Compensation

Benefits provided to employees and executives as part of an international assignment are viewed by the Company as a means to compensate the executive for financial expenses and personal hardships which would not exist if the executive remained in his or her home country. We believe that, as a growing global company, it is necessary to offer this compensation to encourage key employees and executives to temporarily relocate for strategic business reasons. Mr. Bevilaqua’s international assignment package is described in the Narrative to the Summary Compensation table.

6. Severance Benefits

In most cases our Named Executive Officers are entitled to receive severance benefits if their employment is terminated by the Company without cause. Severance benefits for Named Executive Officers are provided pursuant to the terms of the executive’s employment agreement, and generally include base salary and benefits continuation for the same period of time following the executive’s termination of employment that the executive is subject to a non-competition restriction.

Determining Compensation for our Named Executive Officers

President and Chief Executive Officer—Craig O. Morrison

At the beginning of 2010, Mr. Morrison recommended annual goals and objectives for the organization. The goals included a global Momentive Specialty Segment EBITDA target, a cash flow from operations target, Environmental Health and Safety (EH&S) and compliance goals, the implementation of productivity and six sigma goals, specific actions relating to people and organization matters, and the development and execution of specific development plans for high growth businesses, and the prioritization of strategic alternatives. These goals supported both critical short-term objectives and long-term value creation and were discussed by the full Board of Directors and subsequently approved by the Committee. Under the 2010 ICP, Mr. Morrison’s incentive is tied to the achievement of the global Momentive Specialty Segment EBITDA target, the EH&S target and the cash flow target.

The Company posted record results in 2010 since the Company’s formation, despite only modest economic recovery, as the Company exceeded the 2010 ICP EBITDA target by approximately 23%. The cash flow target was also exceeded but the global EH&S target was not met. While a 4% improvement was made in the safety metrics, the 10% corporate improvement objective for 2010 was not achieved. The Committee believes that Mr. Morrison’s leadership was critical to the development of a comprehensive long term strategic business plan to ensure the continued growth and success of the business. Mr. Morrison led the business and functional leaders in the development of several strategic alternatives, with specific implementation plans. In addition, Mr. Morrison continued to drive Six Sigma and a strong focus on achieving productivity savings. Six Sigma projects focused on working capital, EBITDA growth and margin over material improvement. The Committee also feels Mr. Morrison’s leadership was instrumental in the Company’s successful completion of the Momentive Combination which will provide a platform for continued growth while allowing the Company to reduce administrative costs.

In recognition of his accomplishments, the Committee awarded Mr. Morrison a discretionary bonus of $3,250,000. This discretionary award was determined by the MSC Committee in consultation with the Executive Vice President of Human Resources. In determining the amount of this award, the MSC Committee took into consideration Mr. Morrison’s achievements during the past year which are described in the paragraph above, specifically his role in the successful completion of the Momentive Combination, as well as the fact that, dating back to 2008, Mr. Morrison had forfeited several cash awards to which he was entitled.

Under the 2010 ICP, given the Company’s record performance and the achievement of Company goals, Mr. Morrison will receive a $1,409,800 payment, as a result of the Company exceeding MSC Segment EBITDA and cash flow targets. No amounts will be paid under the MSC EH&S target, as the target was not met.

 

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Under the 2009 LTIP, in which Mr. Morrison participates, the relevant performance targets were achieved at December 31, 2010 giving Mr. Morrison an incentive payment of 300% of his January 1, 2009 base salary. One-half of the target award vested on January 1, 2011 and will be paid during the first quarter of 2011. The remaining one-half will vest on January 1, 2012, provided Mr. Morrison is still employed by the Company.

In February 2011, Mr. Morrison was granted an award of 193,667 restricted deferred units and an option to purchase 581,001 units under the 2011 Equity Plan.

Executive Vice President and Chief Financial Officer—William H. Carter

Mr. Carter’s 2010 goals included improvement of liquidity and enhancements to the Company’s capital structure as well as supporting the Company’s strategic planning process and implementation of key strategic objectives. In addition, Mr. Carter’s goals included a continued focus on optimizing the Company’s finance function and reporting processes as well as continued enhancements to the Company’s internal controls with system implementations and projects.

The Company exceeded its 2010 ICP EBITDA target by approximately 23% resulting in the highest EBITDA achievement since the Hexion Formation and the Committee believes that Mr. Carter’s leadership was a factor in the Company exceeding its cash flow target by 15%. Under Mr. Carter’s direction the Company successfully extended the maturity of $959 million of its Senior Secured Credit Facility term loans and issued $1 billion of aggregate principle senior secured notes which were used to repay certain term loans, which provided incremental liquidity and extended maturities. Further, Mr. Carter led the refinancing of $533 million of its senior secured fixed rate notes, which effectively extended maturities on the notes by six years. Also, with his support and direction as part of its strategic plan the Company successfully divested certain of its non-core assets with the sale of its Inks and Adhesives Resins business in January 2011. The Committee also believes Mr. Carter was instrumental in the Company’s successful completion of the Momentive Combination which will provide a platform for continued growth while allowing the Company to reduce administrative costs.

In recognition of his accomplishments, the Committee awarded Mr. Carter a discretionary bonus of $1,750,000. This discretionary award was determined by the MSC Committee in consultation with the CEO and the Executive Vice President of Human Resources. In determining the amount of this award, the MSC Committee took into consideration Mr. Carter’s achievements during the past year which are described in the paragraph above, specifically his role in the successful completion of the Momentive Combination, as well as the fact that, dating back to 2008, Mr. Carter had forfeited cash awards to which he was entitled. In October, the Committee increased Mr. Carter’s incentive compensation target from 70% to 80% of base salary to reflect his increased responsibilities as Chief Financial Officer of Momentive Holdco and the increased size and scope of the financial operations he has been asked to head. Mr. Carter will also be considered for a salary merit increase in April 2011.

Under the 2010 ICP, given the Company’s record performance and the achievement of goals, Mr. Carter will be entitled to receive a $737,648 payment, as a result of exceeding MSC Segment EBITDA and cash flow targets. No amounts will be paid under the MSC EH&S portion, as the targets were not met. The amount is prorated to represent a 70% target for the first three quarters of 2010 and an 80% target or the fourth quarter of 2010.

Under the 2009 LTIP, in which Mr. Carter participates, the relevant performance targets were achieved at December 31, 2010. Mr. Carter’s target award under this plan is 300% of his January 1, 2009 base salary. One-half of the target award vested on January 1, 2011 and will be paid during the first quarter of 2011. The remaining one-half will vest on January 1, 2012, provided Mr. Carter is still employed by the Company.

In February 2011, Mr. Carter was granted an award of 154,934 restricted deferred units and an option to purchase 464,801 units under the 2011 Equity Plan.

 

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Executive Vice President and President- Epoxy, Phenolic & Coatings Resins Division—Joseph P. Bevilaqua

Mr. Bevilaqua’s 2010 goals were focused upon the achievement of MSC and division EBITDA targets, division cash flow and EH&S targets, productivity goals including six sigma projects and strategic business review goals. The Committee believes that Mr. Bevilaqua’s leadership of the Epoxy & Phenolic Resins Division resulted in significant financial improvement. The division exceeded its 2010 ICP Segment EBITDA and cash flow targets by over 30%. Mr. Bevilaqua’s focus on plant and operational safety led to the achievement of the division EH&S goal. Mr. Bevilaqua was successful in implementing productivity objectives, driving the implementation of six sigma deeper into the division, and creating a phased divisional growth strategy.

In recognition of his accomplishments, Mr. Bevilaqua’s base salary was increased in October to $550,000 per year and his incentive target percent was increased from 70% to 80% to reflect the increased size and scope of the Epoxy & Phenolic Resins Division to include operations formerly in our Coatings reporting unit. He is not eligible for another merit increase until April 2012.

Under the 2010 ICP, as a result of the Company’s and his division’s performance, and the achievement of MSC and division Segment EBITDA, cash flow, EH&S goals, Mr. Bevilaqua will receive a $771,250 payment, which is prorated to represent 70% of his pre-October salary for the first three quarters of 2010 and 80% of his new base salary for the fourth quarter of 2010.

Under the 2009 LTIP, in which Mr. Bevilaqua participates, the relevant performance targets were achieved at December 31, 2010. Mr. Bevilaqua’s target award under this plan is 300% of his January 1, 2009 base salary. One-half of the target award vested on January 1, 2011 and will be paid during the first quarter of 2011. The remaining one-half will vest on January 1, 2012, provided Mr. Bevilaqua is still employed by the Company.

In February 2011, Mr. Bevilaqua was granted an award of 122,344 restricted deferred units and an option to purchase 367,033 units under the 2011 Equity Plan.

The Company has an agreement with Mr. Bevilaqua relating to his international assignment, which is described in the Narrative to the Summary Compensation Table. The additional allowances that he receives as part of his international assignment in The Netherlands were not impacted by the 10% base salary reduction that went into effect for the Senior Leadership Team in April 2009.

Executive Vice President Human Resources—Judith A. Sonnett

Ms. Sonnett’s goals for 2010 were similar to those of Mr. Morrison’s and Mr. Carter’s, described above, but in addition she had goals focused on the achievement of recruiting over 800 positions globally during the year to secure the intellectual capital necessary to drive growth. In addition, she was instrumental in driving the implementation of development planning for over 80% of the top 3 levels of the organization, creating a People and Organizational Development plan for the Asia Management Team, and over 300 developmental moves and promotions internally with company associates. Finally, Ms. Sonnett was responsible for HR-related cost savings initiatives to help the Company meet its cash flow targets under the annual incentive plan. The Committee also believes that Ms. Sonnett’s leadership was a significant contributor to goals focused on global organizational design changes with minimal business disruption, reducing pension liabilities while harmonizing benefits within countries, as well as a global in depth review of talent and succession planning, all of which were successfully completed. Ms. Sonnett will continue to play a key leadership role during the integration of the Momentive Combination, which will provide a platform for continued growth of the company.

In recognition of her accomplishments, Ms. Sonnett’s base salary was increased in October to $400,000 to reflect her increased responsibilities as the leader of Human Resources for the Momentive Holdco and MPM organizations, and the increased size and scope of the functional area she has been asked to lead. She will not be eligible for another merit increase until April 2012.

 

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Under the 2010 ICP, given the Company’s performance and the achievement of goals, Ms. Sonnett will receive a $336,981 payment, as a result of the Company exceeding MSC Segment EBITDA and cash flow targets. No amounts will be paid under the MSC EH&S portion, as the targets were not met. The amount is prorated to represent 60% of her pre-October base salary for the first three quarters of 2010 and 60% of her new base salary for the fourth quarter of 2010.

Under the 2009 LTIP, in which Ms. Sonnett participates, the relevant performance targets were achieved at December 31, 2010. Ms. Sonnett’s target award under this plan is 300% of her January 1, 2009 base salary. One-half of the target award vested on January 1, 2011 and will be paid during the first quarter of 2011. The remaining one-half will vest on January 1, 2012, provided Ms. Sonnett is still employed by the Company.

In April 2010, one-half of the restricted stock units awarded to Ms. Sonnett in 2007 time-vested. These units will not be distributed to her until her termination from the Company.

In February 2011, Ms. Sonnett was granted an award of 153,295 restricted deferred units and an option to purchase 459,886 units under the 2011 Equity Plan.

Executive Vice President and President—Forest Products Division—Dale N. Plante

Mr. Plante’s 2010 goals were focused upon the achievement of division EBITDA, cash flow and working capital targets, EH&S targets, productivity and six sigma goals. In addition, Mr. Plante’s goals included product compliance and development initiatives and strategy. Mr. Plante’s division exceeded its EBITDA target by 3% in a continued depressed housing and construction market, a key driver of the division’s results. Although approximately 90% of the division’s cash flow target was achieved, the Committee recognized Mr. Plante’s focused efforts to manage cash given raw material price increases and the resulting increased investment in working capital. Mr. Plante aggressively pursued Six Sigma projects which delivered significant savings as well as the completion of the Company’s new Montenegro, Brazil facility, which expanded the Company’s capacity in a key Latin America growth region. In addition, Mr. Plante has conducted a thorough review of the business globally; optimized the plant network, and identified potential acquisition targets for growth. Finally, Mr. Plante has also done a complete organizational review and made the necessary decisions to position the business for future success. In recognition of his accomplishments, Mr. Plante will be considered for a merit increase in base salary in April 2011.

Under the 2010 ICP, given the Company’s and his division’s performance, Mr. Plante will be entitled to receive a $252,867 payment, as a result of the Forest Products Division exceeding Segment EBITDA targets and the Company exceeding MSC Segment EBITDA targets. No amounts will be paid under the MSC EH&S portion, as the target was not met.

Under the 2009 LTIP, in which Mr. Plante participates, the relevant performance targets were achieved at December 31, 2010. Mr. Plante’s target award under this plan is $640,380. One-half of the target award vested on January 1, 2011 and will be paid during the first quarter of 2011. The remaining one-half will vest on January 1, 2012, provided Mr. Plante is still employed by the Company.

In February 2011, Mr. Plante was granted an award of 76,748 restricted deferred units and an option to purchase 230,243 units under the 2011 Equity Plan.

 

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Compensation Committee Report on Executive Compensation(1)

The Compensation Committee has certain duties and powers as described in its charter. The Compensation Committee is currently composed of the two non-employee directors named at the end of this report. The Compensation Committee has reviewed and discussed with management the disclosures contained in the above Compensation Discussion and Analysis. Based upon this review and discussion, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis section be included in this prospectus.

Compensation Committee of the Board of Directors

Jordan C. Zaken (Chairman)

Scott M. Kleinman (through September 2010)

David B. Sambur (from October 1, 2010)

 

(1) SEC filings sometimes “incorporate information by reference.” This means the Company is referring you to information that has previously been filed with the SEC, and that this information should be considered as part of the filing you are reading. Unless the Company specifically states otherwise, this report shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act or the Securities Exchange Act.

 

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Summary Compensation Table—Fiscal 2010, 2009 and 2008

The following table presents information about the compensation of our CEO, Chief Financial Officer, and our three next most highly compensated executive officers at December 31, 2010, whom we collectively refer to as our Named Executive Officers, for the years ended December 31, 2010, 2009 and 2008.

Summary Compensation Table

 

Names and

Principal Position (a)

  Year
(b)
    Salary ($)
(c)
    Bonus ($)
(d)
    Stock
Awards
($)

(e)
    Options
Awards

($)
(f)
    Non-Equity
Incentive Plan
Compensation
($)

(1)
(g)
    Change in
Pension

Value and
Nonqualified
Deferred
Compensation
Earnings ($)
(2)

(h)
    All
Other
Compen-
sation ($)
(3)

(i)
    Total ($)
(j)
 

Craig O. Morrison

President and Chief Operating Officer

   

 

 

2010

2009

2008

  

  

  

   

 

 

906,250

810,048

847,956

  

  

  

   

 

 

3,250,000

—  

—  

  

  

  

   

 

 

—  

—  

—  

  

  

  

   

 

 

—  

—  

—  

  

  

  

   

 

 

4,034,800

—  

—  

  

  

  

   

 

 

33,839

19,002

107,804

  

  

  

   

 

 

7,350

19,561

75,916

  

  

  

   

 

 

8,232,239

848,611

1,031,676

  

  

  

William H. Carter

Executive Vice President and Chief Financial
Officer

   

 

 

2010

2009

2008

  

  

  

   

 

 

659,241

604,492

646,683

  

  

  

   

 

 

1,750,000

—  

—  

  

  

  

   

 

 

—  

—  

—  

  

  

  

   

 

 

—  

—  

—  

  

  

  

   

 

 

2,696,534

365,659

—  

  

  

  

   

 

 

46,601

21,150

86,824

  

  

  

   

 

 

12,250

31,075

66,431

  

  

  

   

 

 

5,164,626

1,022,376

799,938

  

  

  

Joseph P. Bevilaqua

Executive Vice President, President, Epoxy, Phenolic and Coating Resins
Division

   

 

 

2010

2009

2008

  

  

  

   

 

 

510,577

462,885

459,203

  

  

  

   

 

 

—  

—  

98,000

  

  

  

   

 

 

—  

—  

—  

  

  

  

   

 

 

—  

—  

—  

  

  

  

   

 

 

2,271,250

156,660

—  

  

  

  

   

 

 

14,432

15,665

51,317

  

  

  

   

 

 

520,051

542,819

19,473

  

  

  

   

 

 

3,316,310

1,178,029

627,993

  

  

  

Judith A. Sonnett

Executive Vice President, Human Resources

   

 

 

2010

2009

2008

  

  

  

   

 

 

363,738

327,352

350,200

  

  

  

   

 

 

—  

—  

106,111

  

  

  

   

 

 

—  

—  

—  

  

  

  

   

 

 

—  

—  

—  

  

  

  

   

 

 

1,397,781

169,728

—  

  

  

  

   

 

 

13,706

15,178

33,950

  

  

  

   

 

 

9,800

11,719

12,295

  

  

  

   

 

 

1,785,025

523,977

502,556

  

  

  

Dale N. Plante

Executive Vice President, President, Forest Products Division

    2010        316,038        —          —          —          893,247        59,975        39,543        1,308,803   

 

(1) The amounts shown in column (g) reflect the amounts awarded under our 2010 ICP and 2009 LTIP. The material terms of the 2010 ICP and 2009 LTIP are described in detail within the Compensation Discussion & Analysis above. Amounts are reflected in column (g) for the 2009 LTIP since the relevant performance measures were achieved by the end of 2010; however, half of the earned award under the 2009 LTIP is payable to the Named Executive Officer in 2011 with the remainder payable in 2012, provided the employee is still employed by the Company at that time. The aggregate amounts earned for each Named Executive Officer under the 2009 LTIP are: Morrison—$2,625,000; Carter—$1,958,886; Bevilaqua—$1,500,000; Sonnett—$1,060,800; and Plante—$640,380.
(2) The amounts shown in column (h) reflect the actuarial increase in the present value of each Named Executive Officer’s benefits under the MSC U.S. Pension Plans and MSC Supplemental Plan. For Mr. Plante, the amount also reflects the actuarial increase in the present value for benefits under the MSC Canada Employees’ Retirement Income Plan.
(3) The amounts shown in column (i) include company matching contributions and annual retirement contributions to the MSC Savings Plan. For Mr. Plante, these matching contributions totaled $21,983. For Mr. Bevilaqua, the amount shown includes allowances for international assignment of $512,701, which includes goods and services allowances of $57,700 and payment of Dutch income taxes on Mr. Bevilaqua’s U.S. salary of $282,575. Also included in Mr. Bevilaqua’s international assignment compensation are tax gross-ups of $107,693.

 

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Narrative to the Summary Compensation Table

Messrs. Morrison and Carter, and Ms. Sonnett are employed by us and began to provide executive services to MPM on October 1, 2010 pursuant to the terms of the Shared Services Agreement, which is fully described in the Compensation Discussion and Analysis section of this report. The compensation set forth in this table for our executives who also provide services to MPM on a shared basis, is shown regardless of the cost allocations of any compensation amounts under the Shared Services Agreement.

The Company has an employment agreement with Mr. Morrison which includes an agreement not to compete with the Company for 18 months following termination, a one-year non-solicitation agreement and a confidentiality agreement. In the event that Mr. Morrison’s employment is terminated by the Board of Directors without cause or Mr. Morrison resigns for good reason, he is entitled, under this agreement, to base salary continuation during the term of his non-compete agreement.

The Company has an employment agreement with Mr. Carter which includes an agreement not to compete with the Company for two years following termination, a one-year non-solicitation agreement and a confidentiality agreement. In the event that Mr. Carter’s employment is terminated without cause or he resigns for good reason, he is entitled, under this agreement, to base salary continuation during the term of his non-compete agreement.

The Company has an agreement with Mr. Bevilaqua relating to his international assignment, which began in November 2008. The additional compensation that he receives as part of his international assignment in The Netherlands was not impacted by the 10% base salary reduction that went into effect for the Senior Leadership Team in April 2009 as they are related to his additional living expenses in the Netherlands. This additional compensation is directly related to additional expenses Mr. Bevilaqua incurs as a result of his international assignment including tax preparation assistance, up to $25,000 per year for family travel while he remains on assignment, relocation and repatriation expenses, a housing allowance of up to $5,000 per month, a monthly goods and services allowance of $4,800 to compensate for the difference in the cost of living internationally and payment of Dutch taxes on his U.S. paid salary. He is also provided with a vehicle under the Company’s European Automobile Policy. Upon the completion of his international assignment, the Company will seek to offer a suitable alternative position to Mr. Bevilaqua in the U.S. , and will pay to relocate him back to the U.S. even if no such position is available. Upon repatriation, the Company will provide 60 days of temporary housing and $2,500 for expenses. This agreement can be terminated upon three months notice by either party. In the event that the agreement is terminated by the Company prior to the end of its term, the Company will pay repatriation expenses and other unavoidable expenses incurred as a result of the termination, for up to three months following repatriation. The Company’s employment agreement with Mr. Bevilaqua includes an agreement not to compete with the Company for 18 months following termination, a one-year non-solicitation agreement and a confidentiality agreement. In the event that Mr. Bevilaqua’s employment is terminated without cause by the Company or he resigns for good reason, he is entitled, under this agreement, to base salary continuation during the term of his non-compete agreement.

Mr. Plante’s terms of employment provide him with eighteen months of severance in the event his employment is terminated though no fault of his own. If such an event occurs prior to August 2013, the Company has agreed to pay the cost of relocating Mr. Plante and his family back to Canada under the Company’s U.S relocation policy. Mr. Plante is provided a lump sum of $7,000 per year through December 2013 for his immediate family members to travel between Canada and the U.S. In addition, the Company will reimburse the cost of travel for Mr. and Mrs. Plante for bereavement leave related to immediate family members.

The Company has also agreed to pay to Mr. Plante’s account an additional 2% annual Company matching contribution in a yet-to-be established supplemental plan, for the period January 1, 2009 through April 1, 2009 and May 1, 2010 through the date of inception of the plan. This additional match is intended to compensate Mr. Plante for the reduced Company matching contribution percentage in the MSC Savings Plan compared to the Canadian plan in which he previously participated.

 

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Under his terms of employment, tax preparation services will be provided to Mr. Plante for 2009-2010. Mr. Plante has an agreement not to compete with the Company and not to solicit Company employees for one year following termination for any reason, and a confidentiality agreement.

2009 Cash-Based Long Term Incentive Plan

Our 2009 LTIP contains two financial performance measures in order to trigger vesting of an award. The first measure is a cost reduction target of $60 million with a measurement period of July 2009 through December 2010. The second measure was an annual MSC Segment EBITDA achievement target of $550 million with a measurement period that began after December 2009 and ran until the calendar year in which the target was achieved. The cost reduction target was achieved in 2009 and the MSC Segment EBITDA achievement target was achieved in 2010. One-half of the participants’ awards vested January 1, 2011 and will be paid in the first quarter of 2011 with the remaining one-half vesting in January 2012, subject to the participants continued employment with the Company.

Additional information on amounts reported in the Summary Compensation Table, including payouts under the 2010 ICP, is covered in detail for each Named Executive Officer within the Compensation Discussion & Analysis above.

Grants of Plan Based Awards—Fiscal 2010

The following table presents information about grants of awards during the year ended December 31, 2010 under our 2010 Annual Incentive Compensation Plan (“2010 ICP”).

 

            Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
 

Name

(a)

   Grant Date
(b)
     Threshold
($)

(c)
     Target
($)

(d)
     Maximum
($)

(e)
 

Craig O. Morrison

           

2010 ICP

     —           190,000         950,000         1,900,000   

William H. Carter

           

2010 ICP

     —           99,413         497,067         994,135   

Joseph P. Bevilaqua

           

2010 ICP

     —           19,281         385,625         771,250   

Judith A. Sonnett

           

2010 ICP

     —           45,415         227,076         454,152   

Dale N. Plante

           

2010 ICP

     —           11,655         233,100         466,200   

Narrative to Grants of Plan Based Awards Table

2010 Annual Incentive Compensation Plan

Our 2010 ICP uses three performance metrics: Segment EBITDA, an Environmental Health and Safety (EH&S) OIIR statistic and Cash Flow targets. Segment EBITDA is defined as earnings before interest, income taxes, depreciation and amortization (EBITDA) that is adjusted to exclude certain non-cash or non-recurring expenses (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations” for a reconciliation of Segment EBITDA to Net Income (loss)). Cash flow encompasses EBITDA, net trading capital improvement and/or usage, capital spending and interest paid along with other smaller operating cash flow items such as income taxes paid and pension contributions. Minimum, target and maximum goals were established for each division and for global Momentive for both EBITDA and cash flow targets. The minimum threshold for an incentive payout under the segment EBITDA measure was established at 89.3% of the target and the maximum payout was established at 110.7% of the target. The EBITDA and cash flow measurements act independently such that a payout of one element is possible even if the minimum target threshold for the other is not achieved.

 

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Consistent with past plan designs, 10% of the 2010 ICP was based on achievement of an Environmental Health and Safety (“EH&S”) goal. Our EH&S target is measured based upon achievement of a target occupational illness and injury rate (“OIIR”). The MSC EH&S target for 2010 was an OIIR of .83. This goal represents a 10% improvement over prior year actual. Any payout on achievement of an EH&S target is contingent upon the achievement of the Segment EBITDA target.

Each Named Executive Officer’s incentive target award is based on a percentage of his or her base salary. All executives have 50% of their annual incentive compensation tied to annual MSC or Division Segment EBITDA, 10% tied to EH&S goals and 40% tied to MSC or division cash flow targets. Additional information on the 2010 ICP targets, performance components and weightings for each of our Named Executive Officers can be found in “Management—Compensation Discussion and Analysis.”

Outstanding Equity Awards at Fiscal 2010 Year-End

The following table presents information about outstanding and unexercised options and outstanding and unvested stock awards held by our Named Executive Officers at December 31, 2010. The securities underlying the awards are common units of Momentive Holdco and were granted under the 2004 Stock Plan and the 2007 Long-Term Plan. See the Narrative below for a discussion of these plans and the vesting conditions applicable to the awards.

 

    Options Awards     Stock Awards  

Name

(a)

  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(c) (1)
    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(d)
    Option
Exercise
Price
($) (e)
    Option
Expiration
Date

(f)
    Number of
Shares or
Units of
Stock That

Have Not
Vested (#)
(g)
    Market
Value of
Shares
or Units
of Stock
That
Have Not
Vested
($) (h)
(1)
 

Craig O. Morrison

             

2004 Stock Plan Tranche A

    301,514        —          —          6.22        8/12/2014        —          —     

2004 Stock Plan Tranche B

    —          301,514        —          6.22        8/12/2014        —          —     

William H. Carter

             

2004 Stock Plan Tranche A

    241,211        —          —          6.22        8/12/2014        —          —     

2004 Stock Plan Tranche B

    —          241,211        —          6.22        8/12/2014        —          —     

Joseph P. Bevilaqua

             

2004 Stock Plan Tranche A

    100,504        —          —          6.22        8/12/2014        —          —     

2004 Stock Plan Tranche B

    —          100,504        —          6.22        8/12/2014        —          —     

Judith A. Sonnett

             

2007 Long-Term Plan Options (with performance conditions)

    —          —          18,000        10.81        4/30/2015        —          —     

2007 Long-Term Plan 4 Year Vest RSUs

    —          —          —          —          —          3,000        14,550   

Dale N. Plante

             

2007 Long-Term Plan Options (with performance conditions)

    —          —          15,000        10.81        4/30/2015        —          —     

 

(1) Since equity interests in our ultimate parent, Momentive Holdco, are not publicly traded, there is no closing market price at the completion of the fiscal year. The market values shown in column (h) are based on the most recent value of a unit of Momentive Holdco as determined by Momentive Holdco board of managers for management equity transaction purposes. In light of differences between the companies, including differences in capitalization, a value of a unit in Momentive Holdco does not necessarily equal the value of a share of the Company’s common stock.

 

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Narrative to Outstanding Equity Awards Table

At the time of the Momentive Combination, all outstanding equity-based awards that covered common units of MSC Holdings were converted on a one-for-one basis to cover units of Momentive Holdco. The outstanding options held by Messrs. Morrison, Carter and Bevilaqua were granted under the 2004 Stock Incentive Plan (the “2004 Stock Plan”) and cover equity securities of Momentive Holdco. The “Tranche A” options reported in the table above vested over five years and are fully vested at December 31, 2010. The “Tranche B” options reported in the table are designed to vest on the eighth anniversary of the grant date (August 2004) but are subject to accelerated vesting in connection with a change in control of the Company, if specified internal rates of return for the Company’s investors and target EBITDA levels are met. Since the specified rates of return have already been achieved, if a sale occurs, the options would vest six months after the date of a sale of the Company (or upon a termination of the optionee’s employment by the Company without cause or by the optionee for good reason during this six-month period). Definitions of specific terms used above in relation to vesting of options are found in the 2004 Stock Plan or the agreement that evidences the individual award.

In addition to the options shown above, Messrs. Morrison, Carter, Bevilaqua have deferred compensation which is held in the form of deferred stock units in Momentive Holdco (Morrison- 241,211 units; Carter- 192,969 units; Bevilaqua- 80,403 units). These deferred stock units will be distributed upon termination of employment or retirement and are not shown in the table above.

The outstanding options and restricted stock unit awards held by Ms. Sonnett and outstanding options held by Mr. Plante at year-end were granted under the 2007 Long-Term Plan and cover equity securities of Momentive Holdco. The option awards vest only if our principal shareholder realizes certain internal rates of return on its investment in a sale or other transfer to independent third parties of a majority interest in Momentive Holdco. The restricted stock unit awards vest 100% on the third or fourth anniversary of the grant date, which was April 2007, or, upon a change in control event (as defined in the 2007 Long-Term Plan). Vested units will be distributed to the participants upon termination of employment with the Company.

The Compensation Committee administers all long-term equity plans. As is customary in incentive plans of this nature, the terms of outstanding awards under the plans are subject to adjustment upon the occurrence of certain corporate events affecting the securities underlying the award.

Option Exercises and Stock Vested—Fiscal 2010

The following table presents information on vesting of certain of our stock awards during the year ended December 31, 2010.

 

     Options Awards      Stock Awards  

Name (a)

   Number of
Shares
Acquired  on
Exercise (b)
     Value Realized
on Exercise
(c) (1)
     Number of
Shares
Acquired  on

Vesting (#)
(d)
     Value Realized
on Vesting ($)
(e)
 

Craig O. Morrison

     —           —           —           —     

William H. Carter

     —           —           —           —     

Joseph P. Bevilaqua

     —           —           —           —     

Judith A. Sonnett

     —           —           —           —     

2007 Long-Term Plan 3 Year Vest RSUs

     —           —           3,000         4,680   

Dale N. Plante

     —           —           —           —     

 

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Pension Benefits—2010

The following table presents information regarding the present value of accumulated benefits that may become payable to each of the Named Executive Officers under our qualified and nonqualified defined-benefit pension plans as of December 31, 2010. The amounts shown in the table for each participant represent the present value of the annuitized benefit under the plan and does not represent the actual cash balance of a participant’s account. For a discussion of the assumptions applied in calculating the benefits reported in the table above, please see Note 13 to the audited consolidated financial statements of MSC included elsewhere in this prospectus.

 

Name (a)

  

Plan Name (b)

   Number
of Years
Credited
Service
(#) (c)
     Present
Value of
Accumulated
Benefit ($)
(d)
     Payments
During
Last
Fiscal
Year ($)
(e)
 

Craig O. Morrison

   MSC U.S. Pension Plan      8.75         99,586         —     
   MSC Supplemental Plan      8.75         400,898         —     

William H. Carter

   MSC U.S. Pension Plan      15.75         193,848         —     
   MSC Supplemental Plan      15.75         527,957         —     

Joseph P. Bevilaqua

   MSC U.S. Pension Plan      8.75         95,383         —     
   MSC Supplemental Plan      8.75         121,322         —     

Judith A. Sonnett

   MSC U.S. Pension Plan      12.17         133,807         —     
   MSC Supplemental Plan      12.17         78,956         —     

Dale N. Plante

   MSC Canada Pension Plan      29.70         233,889         —     
   MSC U.S. Pension Plan      29.70         5,531         —     
   MSC Supplemental Plan      29.70         6,781         —     

Narrative to Pension Benefits Table

MSC U.S. Pension Plans and MSC Supplemental Plan

The benefits associated with the MSC U.S. Pension Plans and MSC Supplemental Plan were frozen June 30, 2009 and January 1, 2009, respectively. Although participants will continue to receive interest credits under the plan, no additional compensation will be credited. The MSC U.S. Pension Plans covered U.S. employees who work in locations and/or business units to provide benefit credits equal to 3% of earnings to the extent that this credit does not exceed the Social Security wage base for the year plus 6% of eligible earnings in excess of the social security wage base.

The MSC Supplemental Plan provides non-qualified pension benefits in excess of the qualified pension plans. The benefit calculation is the same as the qualified MSC U.S. Pension Plans but the formula is only applied to compensation above the federal limits for qualified plans. The benefits are unfunded and paid from our general assets upon the associates’ termination from the Company.

Under both the MSC U.S. Pension Plans and MSC Supplemental Plan, eligible earnings include annual incentive awards that are paid currently, but exclude any long-term incentive awards. Benefits for service through December 31, 1986 are based on the plan formula then in effect and have been converted to opening balances in the plan. Both opening balances and benefit credits receive interest credits at one-year Treasury bill rates until the participant begins to receive benefit payments. The interest rate that was determined under the plan for fiscal 2010 was 0.31%. Participants vest after the completion of three years of service.

Effective July 1, 2009 as a replacement for the benefits under the frozen MSC U.S. Pension Plans, participants in the MSC Savings Plan (described below) are eligible for an annual retirement contribution based on years of service. Participants in the MSC Savings Plan begin vesting in the Company matching contributions after two years of service and are fully vested after five years of service, and the annual retirement contributions (between 2% and 7%) are vested after three years of service. The annual retirement contributions to the MSC Savings Plan are reflected in Column (i) in the Summary Compensation table.

 

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MSC Canada Pension Plan

The Momentive Specialty Chemicals Canada Employees Retirement Income Plan (“MSC Canada Pension Plan”) is a non-contributory defined benefit plan covering eligible Canadian employees. An employee is eligible to participate and vest in the Plan after two years of service with benefits retroactive back to date of hire. A participant’s years of service and salaries determine the benefits earned each year.

MSC U.S. Retirement Savings Plan (the “MSC Savings Plan”)

The MSC Savings Plan, which is a defined contribution plan, covers U.S. employees. This plan allows eligible employees, including our five Named Executive Officers, to make pre-tax contributions from 1% to 15% of eligible earnings for highly compensated employees and 25% for all other employees up to the federal limits for qualified plans. Those employees are also eligible to receive matching contributions from the Company at 100% on contributions of up to 5% of eligible earnings. Additional company contributions may be made if we achieve specified annual financial measures established at the beginning of the plan year. The Company matching contributions were suspended for all participants effective April 1, 2009 through the end of 2009. The Committee voted in January 2010 to resume the Company matching contributions to the MSC Savings Plan beginning May 1, 2010. Company matching contributions are reflected in Column (i) in the Summary Compensation table.

Nonqualified Deferred Compensation—2010

The following table presents information on contributions to, earnings accrued under and distributions from our non tax-qualified defined contribution and other nonqualified deferred compensation plans. We have two non tax-qualified deferred compensation plans: the MSC Supplemental Plan (discussed in the Narrative to the Pension Benefits table) and the 2004 Deferred Compensation Plan, described below. Effective January 1, 2009, the benefits provided by the registrant and all participant contributions under the MSC Supplemental Plan were frozen.

 

Name (a)

   Executive
Contributions
in Last FY ($)
(1)

(b)
     Registrant
Contributions
in Last FY ($)
(1)

(c)
     Aggregate
Earnings in Last
FY ($)

(d)
     Aggregate
Withdrawals/
Distributions
($)

(e)
     Aggregate
Balance at
Last FYE ($)

(f)
 

Craig O. Morrison

              

MSC Supplemental Plan

     —           —           20,455         —           853,496   

2004 DC Plan

     —           —           —           —           1,169,875   

William H. Carter

              

MSC Supplemental Plan

     —           —           39,183         —           1,634,940   

2004 DC Plan

     —           —           —           —           935,900   

Joseph P. Bevilaqua

              

MSC Supplemental Plan

     —           —           8,023            334,771   

2004 DC Plan

     —           —           —           —           389,958   

Judith A. Sonnett

              

MSC Supplemental Plan

     —           —           1,832         —           76,459   

Dale N. Plante

     —           —           —           —           —     

MSC U.S. Executives’ Supplemental Pension Plan (the “MSC Supplemental Plan”)

Effective January 1, 2009, the benefits associated with the MSC Supplemental Plan were frozen. This plan provided supplemental retirement benefits and voluntary employee deferral opportunities at the point that the terms of the MSC Savings Plan are restricted by federal qualified plan compensation limits. The MSC Supplemental Plan benefits are unfunded and paid from our general assets upon the associate’s termination from the Company. Earnings are credited to the participant’s accounts at a floating rate equivalent to a fixed income fund of the MSC Savings Plan, as selected by the Company. Earnings are credited to the participant’s account until the participant begins to receive benefit payments.

 

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2004 Deferred Compensation Plan (the “2004 DC Plan”)

In 2004, in connection with the acquisition of the Company by Apollo, Messrs. Morrison, Carter and Bevilaqua deferred the receipt of compensation and were credited with a number of deferred stock units in Hexion LLC (Morrison- 241,211 units; Carter- 192,969 units; Bevilaqua- 80,403 units). At the time of the Momentive Combination, the deferred stock units were converted to units of Momentive Holdco. These deferred stock units are held pursuant to the 2004 DC Plan and will be distributed upon their termination of employment or retirement.

Potential Payments Upon Termination of Employment

The following table and narrative describe payments our Named Executive Officers would have received had the individual been terminated at December 31, 2010.

 

Name

   Cash Severance
($)
     Continued  Health
Benefits

($)
     Outplacement
Services
Allowance

($)
 

Craig O. Morrison

     1,425,000         26,794         25,000   

William H. Carter

     1,371,200         19,674         25,000   

Joseph P. Bevilaqua

     825,000         14,472         25,000   

Judith A. Sonnett

     400,000         —           25,000   

Dale N. Plante

     499,500         18,399         25,000   

Upon a termination of employment for any reason, we would distribute to Messrs. Morrison, Carter and Bevilaqua the Momentive Holdco common units credited to them under the 2004 DC Plan (Morrison- 241,211; Carter- 192,969; Bevilaqua- 80,403) as well as payment of benefits under the MSC Supplemental Plan, as described in the Nonqualified Deferred Compensation table above. We have given these executives a right to require the Company to purchase their common units, and any units acquired upon the exercise of vested options, at fair value following their separation from the Company if the Company has not consummated an initial public offering. Following their termination of employment for any reason, Messrs. Morrison, Carter, Bevilaqua, Sonnett and Plante would also receive payment of their pension benefits under the MSC U.S. Pension Plan and MSC Supplemental Pension Plan.

As noted above in the Narrative to the Outstanding Equity Awards Table, our Named Executive Officers may also be entitled to accelerated vesting of their outstanding equity awards under the 2004 Stock Plan and 2007 Long-Term Plan in connection with a sale of the Company or Momentive Holdco. Please see the Narrative to the Outstanding Equity Awards Tables above for additional information on the outstanding awards held by our Named Executive Officers at December 31, 2010 and the terms of these awards. There was no value in any of the stock options held by our Named Executive Officers at December 31, 2010 as the option exercise prices all exceeded the year-end unit value.

Ms. Sonnett holds 3,000 restricted stock units under the 2007 Long-Term Plan which are vested as of December 31, 2010, and which would be distributed to her upon termination of her employment. The aggregate value of the vested restricted stock units is $14,550 as of December 31, 2010. Ms. Sonnett also holds 3,000 restricted stock units under the 2007 Long-Term Plan which are not yet vested. The aggregate value of the unvested units is $14,550 at December 31, 2010.

The cash severance shown in the table above is based upon the executive’s employment agreement, where applicable and as described in the Narrative to the Summary Compensation Table, or reflects the terms of MSC’s severance guidelines in place on December 31, 2010. The severance amount shown for Ms. Sonnett is the low end of the range of severance for which she would be eligible under corporate severance guidelines, in light of her position and her length of service to the Company.

Please see the Compensation Discussion and Analysis section above for a discussion of how the foregoing payments and benefits were determined.

 

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Director Compensation—Fiscal 2010

The table below summarizes the compensation we paid to non-employee Directors for the year ended December 31, 2010.

 

Name (a)

   Fees Earned
or Paid in
Cash

(b)
     Stock
Awards
(c) (1)
     Option
Awards  (#)

(d)
     Non-Equity
Incentive Plan
Compensation
($)

(e)
     Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings

(f)
     All Other
Compensation
(#)

(g)
     Total
($)

(h) (1)
 

Joshua J. Harris*

     34,500         —           —           —           —           —           34,500   

Scott M. Kleinman*

     41,500         —           —           —           —           —           41,500   

Marvin O. Schlanger*

     37,500         —           —           —           —           —           37,500   

Jan Secher*

     36,500         —           —           —           —           —           36,500   

David Sambur*

     —           —           —           —           —           —           —     

Robert V. Seminara

     38,500         —           —           —           —           —           38,500   

Jordan C. Zaken

     39,500         —           —           —           —           —           39,500   

 

* Messrs. Harris, Kleinman, Schlanger and Secher served on our Board through September 30, 2010. Mr. Sambur joined our Board on October 1, 2010.
(1) At December 31, 2010, Messrs. Harris, Kleinman, Schlanger, Seminara, and Zaken held options covering 163,850; 163,850; 355,470; 28,141, and 28,141 common units, respectively, in Momentive Holdco. All of the options held by Mr. Schlanger and Mr. Zaken are fully vested. Of the options held by Messrs. Harris and Kleinman, 135,709 are fully vested. The remainder of Messrs. Harris and Kleinman’s options and all of Mr. Seminara’s options vest upon an initial public offering of the company. On February 23, 2011, Messrs. Kleinman, Zaken and Sambur, along with the other directors of Momentive Holdco, were each granted a vested option to purchase 50,000 units of Momentive Holdco pursuant to the 2011 Equity Plan.

Narrative to Directors’ Compensation Table

For the first three quarters of 2010, we paid our non-employee directors an annual cash retainer of $40,000, paid quarterly after each fiscal quarter of service, and a fee of $1,000 for each board and committee meeting attended in person. Fifty percent of the meeting fee was paid for board and committee meetings attended by teleconference. Directors who were also employees of the Company received no additional compensation for their services as Directors. Directors were eligible to receive equity-based awards from time to time on a discretionary basis.

On October 1, 2010, in connection with the Momentive Combination, we changed the composition of our Board of Directors and terminated our Director Compensation program. At that time, Messrs. Harris, Kleinman, Schlanger, Seminara, Sambur and Zaken became members of the Board of Managers of Momentive Holdco and received director fees for their services to Momentive Holdco and its subsidiaries, which are partially funded by the Company. For fourth quarter 2010, the following director fees were earned for services provided to Momentive Holdco and its subsidiaries in addition to the amounts shown in the above table: Mr. Harris—$20,750; Mr. Kleinman-$22,750; Mr. Schlanger—$22,750; Mr. Seminara—$22,750; Mr. Sambur—$22,750; and Mr. Zaken—$24,750. We declared a dividend to fund Momentive Holdco for approximately 51% of this fourth quarter expense.

Compensation Committee Interlocks and Insider Participation

Messrs. Zaken and Kleinman, whose names appear on the Compensation Committee Report above, are partners of Apollo Management, L.P., our controlling shareholder. Mr. Kleinman was appointed to the Compensation Committee in March 2009. Neither of these directors is or has been an executive officer of the Company. None of our executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, the executive officers of which served as a director or member of our Compensation Committee during the fiscal year ended December 31, 2010.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Momentive Holdco is our ultimate parent company and indirectly owns 100% of our capital stock. The following table sets forth information regarding the beneficial ownership of Momentive Holdco common units, as of September 1, 2011, and shows the number of units and percentage owned by:

 

   

each person known to beneficially own more than 5% of the common units of Momentive Holdco;

 

   

each of our named executive officers;

 

   

each member of our Board of Directors; and

 

   

all of the executive officers and members of our Board of Directors as a group.

As of September 1, 2011, Momentive Holdco had 279,014,078 common units outstanding. The amounts and percentages of common units beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest. Except as otherwise indicated in the footnotes below, each of the beneficial owners has, to our knowledge, sole voting and investment power with respect to the indicated common units, and has not pledged any such units as security.

 

     Beneficial Ownership of Equity
Securities
 

Name of Beneficial Owner

   Amount of Beneficial
Ownership
     Percent  

Apollo Management and affiliates (1)

     249,755,890         89.51

GE Capital Equity Investments, Inc. (2)

     25,491,297         9.1

Robert V. Seminara (3)(4)

     50,000         *   

Jordan C. Zaken (3)(4)

     78,141         *   

David B. Sambur (3)(4)

     50,000         *   

Craig O. Morrison (5)(8)

     301,514         *   

William H. Carter (6)(8)

     241,211         *   

Joseph P. Bevilaqua (7)

     100,504         *   

Dale N. Plante (8)

     —           *   

Judy Sonnett (8)(9)

     6,000         *   

All Directors and Executive Officers as a group (14 persons) (10)

     1,248,943         *   

 

* less than 1%
(1)

Includes (i) 90,845,490 common units owned by Apollo Investment Fund VI, L.P. (“AIF VI”); (ii) 83,755,612 common units owned by AP Momentive Holdings LLC (“AP Momentive Holdings”); and (iii) 75,154,788 common units owned by AIF Hexion Holdings, L.P. (“AIF Hexion Holdings” and together with AIF VI and AP Momentive Holdings, the “Apollo Holders”). Apollo Advisors VI, L.P. (“Advisors VI”) is the general partner of AIF VI, and Apollo Capital Management VI, LLC (“ACM VI”) is the general partner of Advisors VI. Apollo Management VI, L.P. (“Management VI”) is the manager of AP Momentive Holdings, and AIF VI Management, LLC (“AIF VI Management”) is the general partner of Management VI. Apollo Management, L.P. (“Apollo Management”) is the sole member and manager of AIF VI Management, and Apollo Management GP, LLC (“Management GP”) is the general partner of Apollo Management. Apollo Management Holdings, L.P. (“Management Holdings”) is the sole member and manager of Management GP, and Apollo Management Holdings GP, LLC (“Management Holdings

 

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  GP”) is the general partner of Management Holdings. AIF IV Hexion GP, LLC (“AIF IV Hexion GP”) and AIF V Hexion GP, LLC (“AIF V Hexion GP”) are the general partners of AIF Hexion Holdings. Apollo Investment Fund IV, L.P. and its parallel investment vehicle (collectively, “AIF IV”) are the members of AIF IV Hexion GP, Apollo Advisors IV, L.P. (“Advisors IV”) is the general partner of AIF IV, and Apollo Capital Management IV, Inc. (“ACM IV”) is the general partner of Advisors IV. Apollo Investment Fund V, L.P. and its parallel investment vehicles (collectively, “AIF V”) are the members of AIF V Hexion GP, Apollo Advisors V, L.P. (“Advisors V”) is the general partner of AIF V, and Apollo Capital Management V, Inc. (“ACM V”) is the general partner of Advisors V. Apollo Principal Holdings I, L.P. (“Principal Holdings I”) is the sole member or sole stockholder, as applicable, of each of ACM IV, ACM V and ACM VI, and Apollo Principal Holdings I GP, LLC (“Principal Holdings I GP”) is the general partner of Principal Holdings I. Leon Black, Joshua Harris and Marc Rowan are the principal executive officers and managers of each of Management Holdings GP and Principal Holdings I GP. Each of Advisors VI, ACM VI, Management VI, AIF VI Management, Apollo Management, Management GP, Management Holdings, Management Holdings GP, AIF IV Hexion GP, AIF V Hexion GP, AIF IV, Advisors IV, ACM IV, AIF V, Advisors V, ACM V, Principal Holdings I, Principal Holdings I GP, and Messrs. Black, Harris and Rowan disclaims beneficial ownership of any common units of Momentive Holdco owned of record by the Apollo Holders, except to the extent of any pecuniary interest therein. Apollo also has voting power pursuant to proxies granted by certain unitholders. The address of each of the Apollo Holders, AIF IV Hexion GP, AIF V Hexion GP, AIF IV, Advisors IV, ACM IV, AIF V, Advisors V, ACM V, Advisors VI, ACM VI, Principal Holdings I, and Principal Holdings I GP is 1 Manhattanville Road, Suite 201, Purchase, New York 10577. The address of each of Management VI, AIF VI Management, Apollo Management, Management GP, Management Holdings, Management Holdings GP, and Messrs. Black, Harris and Rowan is 9 West 57th Street, 43rd Floor, New York, New York 10019.
(2) Includes 6,003,363 shares issuable upon exercise of a warrant issued on December 4, 2006. Also includes 77,103 common units issuable upon the exercise of an option that is currently exercisable. The address of GE Capital Equity Investments, Inc. is 299 Park Ave., New York, NY 10171.
(3) The address for Messrs Seminara, Zaken and Sambur is c/o Apollo Management L.P., 9 West 57th Street, New York, New York 10019.
(4) Represents common units issuable upon the exercise of an option that is currently exercisable.
(5) Represents 301,514 units subject to option currently exercisable. Does not include 241,211 deferred units credited to Mr. Morrison’s account.
(6) Represents 241,211 units subject to option currently exercisable. Does not include 192,969 deferred units credited to Mr. Carter’s account.
(7) Represents 100,504 units subject to option currently exercisable. Does not include 80,403 deferred units credited to Mr. Bevilaqua’s account. Mr. Bevilaqua’s address is c/o Momentive Specialty Chemicals BV, Seattleweg 17, Pernis-Rotterdam, The Netherlands 319SND.
(8) The address for Messrs. Morrison, Carter and Plante and Ms. Sonnett is c/o Momentive Specialty Chemicals Inc., 180 E. Broad St., Columbus, Ohio 43215.
(9) Represents 6,000 vested restricted units credited to Ms. Sonnett’s account.
(10) Includes 1,069,459 units of common stock issuable upon the exercise of options granted to our directors and executive officers that were vested as of the date hereof. Does not include 611,122 deferred common stock units.

We have no compensation plans that authorize issuing our common stock to employees or non-employees. In addition, there have been no sales or repurchases of our equity securities during the past fiscal year. However, we and our direct and indirect parent companies have in the past issued and may issue from time to time equity awards to our employees and directors that are denominated in or based upon the common units of our direct or ultimate parent. As the awards were granted in exchange for service to us these awards are included in our consolidated financial statements. For a discussion of these equity plans see Note 15 to the audited consolidated financial statements of MSC included elsewhere in the prospectus and “Management—Compensation Discussion and Analysis.”

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Review, Approval or Ratification of Transactions with Related Persons

We have a written Statement of Policy and Procedures Regarding Related Person Transactions that has been adopted by our Board of Directors.

The policy requires the Company to establish and maintain procedures for identifying potential or existing transactions between the Company and related persons. The policy generally adopts the definitions of “related person” and “transaction” set forth in Regulation S-K Item 404 under the Securities Act of 1933 and the Securities Exchange Act of 1934.

The types of transactions that are covered by our policy include financial and other transactions, arrangements or relationships in which the Company or any of its subsidiaries is a participant and in which a related person has a direct or indirect material interest, where the amount involved exceeds $75,000.

Related persons include directors and director nominees, executive officers, shareholders beneficially owning more than 5% of the Company’s voting stock, and immediate family members of any of the previously described persons. A related person could also be an entity in which a director, executive officer or 5% shareholder is an employee, general partner or 5% shareholder.

Transactions identified by management that are between the Company and a related person that involve amounts exceeding $75,000 will be reviewed by the Board of Directors, the Audit Committee, or another appropriate committee of the Board of Directors. In certain situations, the Board or a committee may delegate authority to an individual Board member to review related person transactions.

Under the policy, the Board of Directors or a committee of the Board of Directors is directed to approve only those related person transactions that are determined by them in good faith to be in, or not inconsistent with, the best interest of the Company and its shareholders. In making this determination, all available, relevant facts and circumstances will be considered, including the benefits to the Company; the impact of the transaction on the related person’s independence; the availability of other sources of comparable products or services; the terms of the transaction; and the terms available to unrelated third parties or to employees in general.

Our policy recognizes that there are situations where related person transactions may be, or may not be inconsistent with, the best interests of the Company and its shareholders, especially while we are a “controlled company.”

There were no material related person transactions where our policies and procedures did not require review, approval or ratification or where such policies and procedures were not followed.

Related Party Transactions

Apollo Notes Registration Rights Agreement

On November 5, 2010, in connection with the issuance of approximately $134 million of the Notes to Apollo, we entered into a registration rights agreement with an affiliate of Apollo. The registration rights agreement requires us, if requested by Apollo, to file a registration statement with respect to the Notes held by Apollo, which is the purpose of filing this registration statement on Form S-1. There are no cash or additional penalties under the registration rights agreement resulting from delays in registering the Notes.

Management Consulting Agreement

The Company is subject to a seven-year Amended and Restated Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) that terminates on May 31, 2012 under which the Company receives certain structuring and advisory services from Apollo and its affiliates. The Management Consulting Agreement provides indemnification to Apollo, its affiliates and their directors, officers and representatives for

 

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potential losses arising from these services. Under the Management Consulting Agreement, as compensation for Apollo’s agreement to provide such structuring and advisory services, Apollo is entitled to an annual fee equal to the greater of $3 million or 2% of the Company’s Adjusted EBITDA. With respect to the years ended December 31, 2010, 2008 and 2007, Apollo elected to defer payment of any portion of the annual fee due in excess of $3 million and the Company paid to Apollo annual fees of $3 million for each of 2010, 2008 and 2007. During the six months ended June 30, 2011, the Company recognized expense under the Management Consulting Agreement of $2 million. This amount is included in Other operating expense, net in the Company’s unaudited Condensed Consolidated Statements of Operations. Due to the economic downturn, Apollo elected to waive payment of the 2009 annual fee in its entirety. With respect to 2011, Apollo has elected to waive its right to receive any portion of the annual fee in excess of $3 million. The Management Consulting Agreement also provides for a lump-sum settlement equal to the net present value of the remaining annual management fees payable under the remaining term of the agreement in connection with a sale or initial public offering by the Company.

Related Party Transactions resulting from Momentive Combination

On October 1, 2010, in connection with the closing of the Momentive Combination, the Company entered into the Shared Services Agreement. Pursuant to the Shared Services Agreement, the Company will provide to MPM, and MPM provides to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, legal and procurement services. The Shared Services Agreement establishes certain criteria upon which the costs of such services will be allocated between the Company and MPM. Allocation of service costs not demonstrably attributable to either the Company or MPM will initially be 51% to the Company and 49% to MPM, except to the extent that 100% of any cost was demonstrably attributable to or for the benefit of either MPM or the Company, in which case the total cost was allocated 100% to such party. The Shared Services Agreement remains in effect until terminated according to its terms. MPM or the Company may terminate the agreement for convenience, without cause, by giving written notice not less than thirty (30) days prior to the effective date of termination. It is also anticipated that the Company and MPM will cooperate to achieve favorable pricing with respect to purchases of raw materials and logistics services. We expect that the Shared Services Agreement will result in significant synergies over its term.

Pursuant to this agreement, in the fourth quarter of 2010, the Company incurred approximately $42 million of costs for shared services and MPM incurred approximately $43 million of costs for shared services (excluding, in each case, costs allocated 100% to one party). MPM billed the Company approximately $1 million which represents a true-up payment to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to 51% for the Company and 49% for MPM. The true-up amount is included in Other operating expense, net, in the Consolidated Statement of Operations.

Pursuant to this agreement, during the six months ended June 30, 2011, the Company incurred approximately $94 million of costs for shared services and MPM incurred approximately $83 million of costs for shared services (excluding, in each case, costs allocated 100% to one party). During the six months ended June 30, 2011, the Company realized approximately $14 million in cost savings as a result of the Shared Services Agreement. MSC billed MPM approximately $4 million which represents a true-up payment to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to 51% for the Company and 49% for MPM. The true-up amount is included in Other operating expense, net, in the unaudited Condensed Consolidated Statement of Operations. The Company has accounts receivable from MPM of approximately $4 million at June 30, 2011.

On March 17, 2011, we entered into an amendment and restatement to the Shared Services Agreement with MPM to reflect the terms of the Master Confidentiality and Joint Development Agreement (the “JDA”) by and between MPM and us entered into on the same date.

The Shared Services Agreement incorporates by reference the terms of the JDA and provides that in the event of a conflict between such agreements, the terms of the JDA shall control. The JDA, which is effective as of October 1, 2010, sets forth the terms and conditions for (i) the disclosure, receipt and use of each party’s

 

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confidential information, (ii) any research and development (“R&D”) collaborations agreed to be pursued by MPM and us; (iii) the ownership of products, technology and intellectual property (“IP”) resulting from such collaborations; (iv) licenses under each party’s respective IP; and (v) strategies for commercialization of products and/or technology developed under the agreement.

Pursuant to the JDA, each party has sole ownership rights for any R&D work product and related IP developed under the agreement (“Technology”) for their respective product categories and/or technology fields (as defined in the JDA). For Technology that relates to product categories and/or technology fields of both MPM and us (“Hybrid Technology”), a steering committee made up of three representatives of each party shall determine which party shall be granted ownership rights, subject to certain exceptions. In the event that the steering committee is unable to reach a decision, the Hybrid Technology shall be jointly owned by the parties. In addition, under the terms of the JDA, each party grants to the other party a non-exclusive royalty-bearing (subject to certain exceptions) license for the Technology or the Hybrid Technology. The royalty shall be determined by the respective representatives of the parties through the steering committee in arm’s-length good faith negotiations. The parties also grant royalty-free licenses to each other with respect to their IP for R&D, including for initiatives outside the scope of the JDA. The JDA has a term of 20 years, subject to early termination pursuant to its terms for cause or for a change of control.

Transactions related to the Terminated Merger Agreement and Settlement with Huntsman

In connection with the terminated Huntsman merger and related litigation settlement agreement and release among the Company, Huntsman and other parties entered into on December 14, 2008 (the “Huntsman Settlement”), the Company paid Huntsman $225 million. The settlement payment was funded to the Company by an advance from Apollo, while reserving all rights with respect to reallocation of the payments to other affiliates of Apollo. Under the provisions of the settlement agreement and release, the Company is contractually obligated to reimburse Apollo for any insurance recoveries on the $225 million settlement payment, net of expense incurred in obtaining such recoveries. Apollo has agreed that the payment of any such insurance recoveries will satisfy the Company’s obligation to repay amounts received under the $225 million advance. The Company has recorded the $225 million settlement payment advance as a long-term liability at December 31, 2010 and March 31, 2011. As of June 30, 2011, the Company has not recovered any insurance proceeds related to the $225 million settlement payment.

Other Financing Arrangements

Pursuant to the Huntsman settlement, certain affiliates of Apollo entered into a commitment letter with the Company and MSC Holdings pursuant to which they committed to purchase $200 million in preferred units and warrants to purchase 28,785,935 common units of MSC Holdings by December 31, 2011. Prior to the purchase of all the preferred shares and warrants, certain affiliates of Apollo have committed to provide liquidity facilities to MSC Holdings or us on an interim basis. On October 1, 2010, at the time of the closing of the Momentive Combination, the commitment by Apollo to purchase $200 million in preferred units of MSC Holdings and warrants to purchase 28,785,935 common units of MSC Holdings was amended to become a commitment to purchase preferred units and warrants to purchase common units of Momentive Holdco. Momentive Holdco has agreed to contribute any proceeds from the issuance of preferred or common units under this agreement as a capital contribution to MSC Holdings, and MSC Holdings has agreed to contribute such amounts as a capital contribution to the Company.

The aggregate liquidity facilities outstanding, together with the purchase price for any purchased preferred shares and warrants, will at no time exceed $200 million. In connection therewith, the Company has $100 million in term loans outstanding with affiliates of Apollo which will mature on December 31, 2011, with interested at adjusted LIBOR plus 2.25%. The Company also has $2 million outstanding with an affiliate of Apollo, which is due upon demand. The weighted average interest rate of affiliated borrowings at June 30, 2011 was 2.57%.

In December, September, June and March 2010, the Company entered into accounts receivable purchase and sale agreements to sell $67 million, $107 million, $100 million and $100 million, respectively, of its trade

 

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accounts receivable to affiliates of Apollo on terms which management believes were more favorable to the Company than could have been obtained from an independent third party. Under the terms of the agreements, the receivables are sold at a discount relative to their carrying value in exchange for all interests in such receivables. The Company retains the obligation to service the collection of the receivables on the purchasers’ behalf for which the Company is paid a fee and the purchasers defer payment of a portion of the receivable purchase price and establish a reserve account with the proceeds. The reserve account is used to reimburse the purchasers for credit and collection risk. The remaining amounts are paid to the Company after receipt of all collections on the purchased receivables. Other than amounts held in the reserve account, the purchasers bear all credit risk on the purchased receivables.

Purchases and Sales of Products and Services with Apollo Affiliates

The Company sells products to certain Apollo affiliates and members of Momentive Holdco. These sales were $3 million, $2 million and $7 million for the years ended December 31, 2010, 2009 and 2008, respectively. These sales were $1 million for the six months ended June 30, 2011 and 2010. Accounts receivable from these affiliates were $1 million and less than $1 million at June 30, 2011 and December 31, 2010, respectively. The Company also purchases raw materials and services from certain Apollo affiliates. These purchases were $20 million and $7 million for the six months ended June 30, 2011 and 2010, respectively. The Company had accounts payable to Apollo affiliates of $2 and $1 million at June 30, 2011 and December 31, 2010, respectively.

Other Transactions and Arrangements

The Company sells finished goods to and purchases raw materials from its foundry joint venture between the Company and Delta-HA, Inc. (“HAI”). The Company also provides toll-manufacturing and other services to HAI. The Company’s investment in HAI is recorded under the equity method of accounting and the related sales and purchases are not eliminated from the Company’s unaudited condensed consolidated financial statements. However, any profit on these transactions is eliminated in the Company’s unaudited condensed consolidated financial statements to the extent of the Company’s 50% interest in HAI. Sales and services provided to HAI were $77 million and $45 million for the six months ended June 30, 2011 and 2010, respectively. Accounts receivable from HAI were $21 million and $13 million at June 30, 2011 and December 31, 2010, respectively. Purchases from HAI were $46 for the six months ended June 30, 2011 and 2010. The Company had accounts payable to HAI of $7 million and $2 million at June 30, 2011 and December 31, 2010, respectively. Additionally, HAI declared a dividend of $5 million and $4 million in the three months ended June 30, 2011 and 2010, respectively. No amounts remain outstanding related to these previously declared dividends as of June 30, 2011.

The Company’s purchase contracts with HAI represent a significant portion of HAI’s total revenue. In addition, the Company has pledged its member interest in HAI as collateral on HAI’s revolving line of credit. These factors result in the Company absorbing the majority of the risk to potential losses or gains from a majority of the expected returns. However, the Company does not have the power to direct the activities that most significantly impact HAI, and therefore, does not have a controlling financial interest. The carrying value of HAI’s assets were $51 million and $44 million at June 30, 2011 and December 31, 2010, respectively. The carrying value of HAI’s liabilities were $27 million and $22 million at June 30, 2011 and December 31, 2010, respectively.

The Company has a loan receivable from its unconsolidated forest products joint venture in Russia of $4 million as of June 30, 2011 and December 31, 2010.

Director Independence

We have no securities listed for trading on a national securities exchange or in an automated inter-dealer quotation system of a national securities association which has requirements that a majority of our Board of Directors be independent. However, for purposes of complying with the disclosure requirements of the Securities and Exchange Commission, we have adopted the definition of independence used by the New York Stock Exchange. Under the New York Stock Exchange’s definition of independence, none of our directors is independent.

 

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DESCRIPTION OF OTHER INDEBTEDNESS

Other than the Notes, MSC has the following secured indebtedness outstanding:

 

   

the senior secured credit facilities;

 

   

the Senior Secured Notes; and

 

   

the Second-Priority Senior Secured Notes.

Each of the foregoing are secured by separate collateral agreements with substantially identical terms and covering substantially identical collateral subject to exceptions for foreign collateral pledged in favor of lenders under the senior secured credit facilities. In addition, HA-International, LLC and non-U.S. subsidiaries in countries including Australia, Brazil, Finland and Korea have various secured credit facilities and other arrangements with lenders.

First-Priority Lien Obligations

Senior Secured Credit Facilities

On January 29, 2010, we amended our senior secured credit facilities pursuant to an amendment and restatement of the credit agreement governing the credit facility. Our senior secured credit facilities provide for a $225 million revolving credit facility, which includes:

 

   

revolving credit subfacilities for MSC, MSC Canada, as the Canadian subsidiary borrower, Momentive Specialty Chemicals UK Limited and Borden Chemical UK Limited, as the U.K. subsidiary borrowers and Momentive Specialty Chemicals B.V., as the Dutch subsidiary borrower;

 

   

a letter of credit subfacility of $100 million to be made available for our account and the accounts of our Canadian, U.K., and Dutch subsidiary borrowers; and

 

   

a $30 million swingline loan subfacility made available for our account and the accounts of MSC and the U.K. and Dutch subsidiary borrowers.

We and our Canadian, U.K. and Dutch subsidiary borrowers use our revolving credit facility for, among other things, our and our respective subsidiaries’ working capital and other general corporate purposes, including, without limitation, effecting permitted acquisitions and investments.

In late December 2009 and early January 2010, we obtained commitments from lenders to extend our existing revolving line of credit facility commitments, which took effect upon the May 31, 2011 maturity of the existing revolving facility commitments. The new commitments will extend the availability of the revolver to February 2013. The new revolving loans will bear interest at a rate of LIBOR plus 4.50%. The extension also requires a 2.00% annual ticking fee to be paid quarterly on committed amounts until the extended revolver facility is effective.

Our senior secured credit facilities also provide for a $1.4 billion term loan facility, of which approximately $455 million matures in May 2013 and approximately $927 million matures in May 2015, and a seven-year $50 million synthetic letter of credit facility, with such term beginning in May 2006, under which $50 million was deposited by lenders to be used to fund any drawn letters of credit under the facility. This facility is available for letters of credit for our account.

Our senior secured credit facilities also permit us to obtain up to an additional $200 million of credit facilities (the “additional credit facilities”), without the consent of the existing lenders under our senior secured credit facilities.

Scheduled Amortization Payments and Mandatory Prepayments

Our term loan facility and our synthetic letter of credit facility under the senior secured credit facilities provide for quarterly and annual amortization payments, respectively, in each case totaling 1% per annum, with the balance payable or returnable, respectively, upon the final maturity date.

 

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In addition, our senior secured credit facilities require us to prepay outstanding term loans subject to certain exceptions, with:

 

   

100% of the net cash proceeds of asset sales and dispositions;

 

   

50% of our excess cash flow if our senior secured bank leverage ratio is greater than 3.25:1.0 (reducing to 25% if our senior secured bank leverage ratio is less than or equal to 3.25:1.0 and to 0% if our senior secured bank leverage ratio is less than or equal to 3.0:1.0);

 

   

if our senior secured bank leverage ratio is greater than 3.0:1.0, 100% of the net cash proceeds received from issuances of debt, subject to exceptions with respect to debt that we and our subsidiaries may incur under the negative covenants.

Voluntary Prepayments and Reduction and Termination of Commitments

We are able to voluntarily prepay loans and permanently reduce the loan commitments or return synthetic letter of credit deposits under our senior secured credit facilities at any time without premium or penalty, subject to the payment of customary LIBOR or EURO LIBOR breakage costs, if any. The revolving loan commitment and the synthetic letter of credit facility commitment may not be reduced to less than the outstanding balance of loans (in the case of the revolving loan commitment) and letter of credit obligations under such commitment on the date of such reduction. In addition, we are able to terminate our senior secured credit facilities without paying a premium or penalty upon prior written notice, and, in some cases, we may revoke such notice. Upon termination, we will be required to repay all obligations outstanding under our senior secured credit facilities and to satisfy or cash collateralize all outstanding letter of credit obligations.

Interest and Applicable Margins

The interest rates with respect to term loans to MSC and to the Dutch subsidiary borrower under our senior secured credit facilities are based on, at our option, adjusted LIBOR (or EURO LIBOR for the Dutch subsidiary borrower) plus 2.25%, with respect to term loans maturing in May 2013, and 3.75%, with respect to term loans maturing in May 2015, or a Dollar base rate plus 0.75%, with respect to term loans maturing in May 2013, and 2.25%, with respect to term loans maturing in May 2015.

The interest rates with respect to revolving loans to MSC under our senior secured credit facilities are based on, at our option, adjusted LIBOR plus 2.50% or a Dollar base rate plus 1.00%.

The interest rates with respect to revolving loans to the Canadian subsidiary borrower under our senior secured credit facilities are based on (a) for loans made in dollars, at our option, adjusted LIBOR plus 2.50% or a base rate (based on a reference rate for Dollar denominated loans made in Canada) plus 1.00%, or (b) for loans made in Canadian Dollars, at our option, a Canadian Bankers’ Acceptances rate plus 2.50% or a Canadian Dollar base rate plus 1.00%.

The interest rates with respect to revolving loans to the U.K. subsidiary borrowers under our senior secured credit facilities are based on (a) for loans made in dollars, at our option, adjusted LIBOR plus 2.50% or a Dollar base rate plus 1.00%, (b) for loans made in Sterling, at our option, adjusted LIBOR plus 2.50% or a Sterling base rate plus 1.00% or (c) for loans made in euros, at our option, EURO LIBOR plus 2.50% or a Euro base rate plus 1.00%.

The interest rates with respect to revolving loans to the Dutch subsidiary borrower under our senior secured credit facilities are based on, at our option, EURO LIBOR plus 2.50% or a Euro base rate plus 1.00%.

These applicable margins are, with respect to loans under our revolving credit facility, subject to prospective adjustment on a quarterly basis depending on our consolidated leverage ratio. Following and during the continuance of an event of default, overdue amounts owing under our senior secured credit facilities will bear interest at a rate per annum equal to the rate otherwise applicable thereto plus an additional 2.0%.

 

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Guarantees and Collateral

Our obligations under our senior secured credit facilities and under any interest rate protection or other hedging arrangements entered into with a lender or any affiliate thereof and under cash management lines of credit with a lender, any affiliate thereof or certain other financial institutions are guaranteed (i) prior to the initial public offering of our common stock, by our immediate parent, MSC Holdings, and (ii) at all times, by each of our existing and subsequently acquired or organized material domestic subsidiaries, excluding HA-International, LLC and other unrestricted subsidiaries. All obligations of the foreign subsidiary borrowers under our revolving credit facility are guaranteed (i) prior to the initial public offering of our common stock, by MSC Holdings and (ii) at all times, by us, the U.S. subsidiary guarantors, the other foreign subsidiary borrowers and our and their respective material subsidiaries in the United States, the United Kingdom, Germany, the Netherlands and Canada (excluding subsidiaries in the United Kingdom, Germany, the Netherlands, Canada and the United States that are unrestricted subsidiaries) and Momentive Specialty Chemicals Barbastro S.A. and Momentive Specialty Chemicals Iberica, S.A.

Our senior secured credit facilities are secured by substantially all the assets of (i) prior to the initial public offering of our common stock, MSC Holdings, which consists of a perfected first-priority pledge of all our capital stock and (ii) at all times, us and the subsidiary guarantors, including but not limited to: (a) a first-priority pledge of substantially all capital stock held by us or any subsidiary guarantor (which pledge, with respect to obligations in respect of the U.S. borrowings secured by a pledge of the stock of any first-tier foreign subsidiary, shall be limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary) and (b) perfected first-priority security interests in, and mortgages on, substantially all tangible and intangible assets of us and each subsidiary guarantor (except for Momentive Specialty Chemicals Barbastro S.A. and Momentive Specialty Chemicals Iberica, S.A., whose guarantees are unsecured).

Notwithstanding the foregoing, (i) assets of foreign subsidiary guarantors secure obligations in respect of the foreign borrowings, (ii) subject to certain exceptions, the collateral does not include (A) any real estate, fixtures or equipment of us or any of our subsidiaries located within the United States (except for assets that our Board of Directors determines do not constitute principal property under the indentures for our debentures due 2016, 2021 and 2023) and (B) any capital stock or evidence of indebtedness for borrowed money of certain subsidiaries held by us or our subsidiaries and (iii) assets of MSC Holdings, us or our domestic subsidiaries do not secure term loan obligations of our Dutch subsidiary borrower.

Covenants

Our senior secured credit facilities contain financial, affirmative and negative covenants that we believe are usual and customary for a senior secured credit agreement. The negative covenants in the senior secured credit facilities include, among other things, limitations (none of which are absolute) on our ability to:

 

   

declare dividends and make other distributions;

 

   

redeem or repurchase our capital stock;

 

   

prepay, redeem or repurchase certain of our subordinated indebtedness;

 

   

make loans or investments (including acquisitions);

 

   

incur additional indebtedness, except that we may incur indebtedness so long as our consolidated leverage ratio is not greater than 6.0:1.0, and we may incur other indebtedness pursuant to one or more issuances of additional senior secured notes or loans so long as, among other things, an agreed amount of the net cash proceeds from any such issuance are used to prepay term loans and/or revolving loans under our senior secured credit facilities at par;

 

   

grant liens, except that we may grant liens in connection with permitted incurred indebtedness, or so long as our senior secured bank leverage ratio is not greater than 4.0:1.0 and we comply with certain other limitations;

 

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enter into sale-leaseback transactions;

 

   

modify the terms of subordinated debt or other material agreements;

 

   

change our fiscal year;

 

   

restrict dividends from our subsidiaries or restrict liens;

 

   

enter into new lines of business;

 

   

recapitalize, merge, consolidate or enter into acquisitions;

 

   

sell our assets; and

 

   

enter into transactions with our affiliates.

In addition, our senior secured credit facilities require us to maintain a maximum senior secured bank leverage ratio and require us to comply with a maximum capital expenditure limitation.

Events of Default

The events of default under our senior secured credit facilities include, without limitation, nonpayment, misrepresentations, breach of covenants, insolvency, bankruptcy, certain judgments, change of control (as defined in the credit agreement that governs our senior secured credit facilities) and cross-defaults.

Senior Secured Notes

General

The Senior Secured Notes consist of $1 billion original aggregate principal amount of face value of 8.875% senior secured notes due 2018.

Ranking

The Senior Secured Notes rank pari passu in right of payment with all of MSC’s existing and future senior indebtedness, including debt under MSC’s senior secured credit facilities and the guarantees thereof. The Senior Secured Notes rank effectively junior in priority as to collateral with respect to our senior secured credit facilities and any other future obligations secured by a first-priority lien on the collateral subject to certain exceptions, senior in priority as to collateral with respect to our and our guarantors’ obligations under MSC’s Second-Priority Senior Secured Notes and any other future obligations secured by a second-priority lien on the collateral and senior in right of payment to all of MSC’s existing and future subordinated indebtedness.

Optional Redemption

The Senior Secured Notes may be redeemed prior to February 1, 2014, at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest to the redemption date and a “make-whole premium.” Thereafter, the Senior Secured Notes may be redeemed at the applicable redemption price, plus accrued and unpaid interest.

Mandatory Redemption

Except as described above in “—General,” MSC is not required to make mandatory redemption or sinking fund payments with respect to the Senior Secured Notes.

Change of Control

In the event of a Change in Control (as defined below), a holder has the right to require us to buy such holder’s Second-Priority Senior Secured Notes at 101% of their principal amount, plus accrued and unpaid interest.

 

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A “Change of Control” shall be deemed to have occurred: at such time as any person is or becomes the beneficial owner of shares of MSC’s stock entitling such person to exercise 50% or more of the total voting power of all classes of MSC’s stock entitled to vote in elections of directors; upon the disposition of substantially all of MSC’s assets; or upon the failure of continuing directors to constitute a majority of MSC’s Board of Directors.

Covenants

Under the terms of the indenture governing the Senior Secured Notes, MSC is subject to covenants that, among other things, restrict its ability to: (i) incur additional debt or issue certain preferred shares; (ii) pay dividends on or make other distributions in respect of its capital stock or make other restricted payments; (iii) make certain investments; (iv) sell certain assets; (v) create or permit to exist dividend and/or payment restrictions affecting its restricted subsidiaries; (vi) create liens on certain assets to secure debt; (vii) consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; (viii) enter into certain transactions with its affiliates; and (ix) designate its subsidiaries as unrestricted subsidiaries.

Events of Default

The Senior Secured Notes specify events of default including failure to pay principal and interest on the Senior Secured Notes, a failure to comply with covenants, subject to a 30-day grace period in certain instances, and certain bankruptcy, insolvency or reorganization events with respect to us.

Second-Priority Lien Obligations

Second-Priority Senior Secured Notes

General

The Second-Priority Senior Secured Notes originally consisted of (i) $625 million original aggregate principal amount of face value of 9.75% Second-Priority Senior Secured Notes due 2014 and (ii) $200 million original aggregate principal amount of face value of Second-Priority Senior Secured Floating Rate Notes due 2014. In November 2010 we refinanced $533 million in outstanding principal amount of our 9.75% Second-Priority Senior Secured Notes due 2014 through the issuance of the Notes (the “November Refinancing Transaction”). As a result, as of June 30, 2011, we had $120 million outstanding aggregate principal amount of face value of Second-Priority Senior Secured Floating Rate Notes due 2014.

Ranking

The Second-Priority Senior Secured Notes rank equally in right of payment to all of MSC’s existing and future senior indebtedness and rank senior in right of payment to all of MSC’s existing and future subordinated indebtedness. The Second-Priority Senior Secured Notes rank junior in priority as to collateral with respect to our senior secured credit facilities and our Senior Secured Notes and pari passu in priority as to collateral with respect to all of MSC’s existing and future obligations secured by a second priority lien on the collateral.

Optional Redemption

The Second-Priority Senior Secured Floating Rate Notes due 2014 may be redeemed at par, plus accrued and unpaid interest.

Mandatory Redemption

Except as described above in “—General,” MSC is not required to make mandatory redemption or sinking fund payments with respect to the Second-Priority Senior Secured Notes.

 

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Change of Control

In the event of a Change in Control (as defined below), a holder has the right to require us to buy such holder’s Second-Priority Senior Secured Notes at 101% of their principal amount, plus accrued and unpaid interest.

A “Change of Control” shall be deemed to have occurred: at such time as any person is or becomes the beneficial owner of shares of MSC’s stock entitling such person to exercise 50% or more of the total voting power of all classes of MSC’s stock entitled to vote in elections of directors; upon the disposition of substantially all of MSC’s assets; or upon the failure of continuing directors to constitute a majority of MSC’s Board of Directors.

Covenants

Under the terms of the indenture governing the Second-Priority Senior Secured Notes, MSC is subject to covenants that, among other things, restrict its ability to create liens on its assets, incur debt at its subsidiaries or enter into sale leaseback transactions.

Events of Default

The Second-Priority Senior Secured Notes specify events of default including failure to pay principal and interest on the Second-Priority Senior Secured Notes, a failure to comply with covenants, subject to a 30-day grace period in certain instances, and certain bankruptcy, insolvency or reorganization events with respect to us.

International Credit Facilities

We also have additional international credit facilities that constitute second-priority lien obligations and that provide liquidity to our local businesses in local currencies, in countries including Australia, Brazil, Finland and Korea with various expiration dates in 2011 and 2012. As of June 30, 2011, our international facilities provided availability totaling approximately $77 million, based on exchange rates as of such date.

Unsecured Indebtedness

Senior Unsecured Debentures

General

Borden Chemical has sold, on four occasions, senior unsecured debentures, which are referred to collectively as the Debentures, each with separate maturity dates and interest rates. Borden Chemical redeemed its 9  1/4% Debentures concurrently with the closing of the acquisition of Borden Chemical. The following table sets forth certain information about the Debentures that remain outstanding:

 

Rate

   Maturity Date    Original Face Value      Outstanding as of
June  30, 2011
     Sinking Fund Requirements  

7  7/8%

   February 15, 2023    $ 250,000,000       $ 188,786,000         None   

8  3/8%

   April 15, 2016      200,000,000         61,764,000       2010 to 2015 $ 20 million per year(1)   

9  1/5%

   March 15, 2021      200,000,000         73,581,000         None   

 

(1)

Previous buybacks of Borden Chemical’s Debentures will allow us to fulfill our sinking fund requirements through 2012 for the 8 3/8% Debentures.

Rankings

The Debentures rank equally in right of payment with all of MSC’s existing and future senior indebtedness and rank senior in right of payment to all of Hexion’s existing and future subordinated indebtedness. These Debentures are not secured and, as such, have no underlying assets to secure the payment of principal or interest.

 

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Optional Redemption

The 8  3/8% Debentures may be redeemed at par, plus accrued and unpaid interest. The 9  1/5% Debentures and the 7  7/8% Debentures are not redeemable prior to their respective maturity dates.

Mandatory Redemption

Except as described above in “—General,” MSC is not required to make mandatory redemption or sinking fund payments with respect to the Debentures.

Change of Control

In the event of a Change in Control (as defined below), a holder has the right to require us to buy such holder’s 8  3/8% Debentures at 100% of their principal amount, plus accrued and unpaid interest.

“Change in Control” shall be deemed to have occurred at such time as any person is or becomes the beneficial owner of shares of MSC’s stock entitling such person to exercise 20% or more of the total voting power of all classes of MSC’s stock entitled to vote in elections of directors; provided, however, that a Change in Control shall not be deemed to have occurred if such event is approved by a majority of the continuing directors (as defined in the prospectus related to the 8  3/8% Debentures).

The 9 1/5% Debentures and the 7  7/8% Debentures do not contain provisions relating to a Change in Control.

Covenants

Under the terms of the indentures governing the Debentures, MSC is subject to covenants that, among other things, restrict its ability to create liens on its assets, incur debt at its subsidiaries or enter into sale leaseback transactions.

Events of Default

The Debentures specify events of default including failure to pay principal and interest on the Debentures, a failure to comply with covenants, subject to a 90-day grace period in certain instances, and certain bankruptcy, insolvency or reorganization events with respect to us.

 

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DESCRIPTION OF THE NOTES

On November 5, 2010, $574,016,000 aggregate principal amount of 9.00% Second-Priority Senior Secured Notes Due 2020 (including $134,016,000 aggregate principal amount issued to Apollo) (the “Notes”) were issued under an Indenture (the “Indenture”) by and among Hexion U.S. Finance Corp. (the “U.S. Issuer”) and Hexion Nova Scotia Finance, ULC (the “Canadian Issuer” and together with the U.S. Issuer, the “Issuers”), Momentive Specialty Chemicals Inc. (“MSC”), certain of MSC’s subsidiaries and Wilmington Trust Company, as trustee (in such capacity, the “Trustee”).

The Issuers previously issued the Exchange Notes under the Indenture. The terms of the Exchange Notes are identical in all material respects to the Notes except that upon completion of the exchange offer, the Exchange Notes were registered under the Securities Act and free of any covenants regarding exchange registration rights. Apollo did not participate in the exchange offer.

The following summary of certain provisions of the Indenture, the Notes, the Security Documents and the Intercreditor Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of those agreements, including the definitions of certain terms therein and those terms made a part of the Indenture by the TIA. We urge you to read those agreements because they, not this description, define your rights as holders of the Notes. Capitalized terms used in this “Description of the Notes” section and not otherwise defined have the meanings set forth under “—Certain Definitions.” As used in this “Description of the Notes” section, “we,” “us” and “our” refers to MSC and its subsidiaries (or in the case of “—Additional Amounts” or “Redemption for Changes in Withholding Tax,” the Issuers) and “MSC” refers only to Momentive Specialty Chemicals Inc. and not to any of its subsidiaries. Unless otherwise indicated by the context, references in the “Description of Notes” section to the “Notes” include the Notes and the Exchange Notes. The U.S. Issuer is a Delaware corporation. The Canadian Issuer is a Nova Scotia unlimited liability company. Neither Issuer has any material assets other than advances or intercompany loans to MSC and its affiliates that it has made, if applicable with a portion of the proceeds from the sale of the Notes and other debt securities issued by them.

Brief Description of the Notes

The Notes are the joint and several senior obligations of the Issuers. The Notes are secured by a second-priority lien in the Collateral and guaranteed on a senior secured basis by MSC and each Subsidiary of MSC that is a Guarantor.

Principal, Maturity and Interest

Apollo did not participate in the exchange offer for the Exchange Notes, but has registration rights with respect to the Notes it acquired in the November Refinancing Transaction. Except as set forth below, the Notes have been, and will be issued only in fully registered form, without coupons, in denominations of $2,000 and any integral multiple of $1,000, provided that Notes may be issued in denominations of less than $1,000 solely to accommodate book entry positions that have been created by DTC in denominations of less than $1,000. See “—Book Entry, Delivery and Form.” No service charge will be made for any registration of transfer or exchange of the Notes, but in certain circumstances the Issuers may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. The Notes will mature on November 15, 2020.

The Issuers may issue additional Notes under the Indenture from time to time. Any offering of additional Notes is subject to the covenants described below under the captions “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” and “—Certain Covenants—Limitation on Liens.” The Notes, the Exchange Notes and the additional Notes, if any, may, at our election, be treated as a single series and/or class of Notes for purposes of the Indenture.

 

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Holders of additional Notes actually issued will share equally and ratably in the Collateral. Unless the context otherwise requires, for all purposes of the Indenture and this “Description of the Notes,” references to the Notes include any additional Notes actually issued.

Interest on the Notes will accrue at the rate of 9.00% per annum and will be payable semiannually in arrears on May 15 and November 15, commencing on May 15, 2011. The Issuers will make each interest payment to the Holders of record of the Notes on the immediately preceding May 1 and November 1. The Issuers will pay interest on overdue principal at 1% per annum in excess of the above rate and will pay interest on overdue installments of interest at such higher rate to the extent lawful.

Interest on the Notes will accrue from the most recent interest payment date for which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the Issue Date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.

Optional Redemption

On and after November 15, 2015, the Issuers may redeem the Notes at their option, in whole at any time or in part from time to time, upon not less than 30 nor more than 60 days’ prior notice mailed by first-class mail to each holder’s registered address, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest and additional interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on November 15 of the years set forth below:

 

Period

   Redemption Price  

2015

     104.500

2016

     103.000

2017

     101.500

2018 and thereafter

     100.000

In addition, prior to November 15, 2015, the Issuers may redeem the Notes at their option, in whole at any time or in part from time to time, upon not less than 30 nor more than 60 days’ prior notice mailed by first-class mail to each holder’s registered address, at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest and additional interest, if any, to the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

Notwithstanding the foregoing, at any time and from time to time on or prior to November 15, 2013, the Issuers may redeem, upon not less than 30 nor more than 60 days’ prior notice mailed by first-class mail to each holder’s registered address, in the aggregate up to 35% of the original principal amount of the Notes (which includes additional Notes, if any) with the net cash proceeds of one or more Equity Offerings (1) by MSC or (2) by any direct or indirect parent of MSC, in each case, to the extent the net cash proceeds thereof are contributed to the common equity capital of MSC or used to purchase Capital Stock (other than Disqualified Stock) of MSC from it, at a redemption price (expressed as a percentage of principal amount thereof) of 109% plus accrued and unpaid interest and additional interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 65% of the aggregate principal amount of the Notes (which includes additional Notes, if any), remains outstanding after each such redemption; provided further, however, that such redemption shall occur within 90 days after the date on which any such Equity Offering is consummated and otherwise in accordance with the procedures set forth in the Indenture.

Notice of any redemption upon any Equity Offering may be given prior to the completion thereof, and any such redemption or notice may, at MSC’s discretion, be subject to one or more conditions precedent, including, but not limited to, completion of the related Equity Offering.

 

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Selection

In the case of any partial redemption of the Notes, selection of the Notes for redemption will be made by the Trustee on a pro rata basis to the extent practicable or by lot or such other method as deemed appropriate by the Trustee; provided, however, that no Notes of $2,000 or less shall be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption so long as the Issuers have deposited with the Paying Agent funds sufficient to pay the principal of, plus accrued and unpaid interest and additional interest (if any) on, the Notes to be redeemed.

Mandatory Redemption; Offers to Purchase; Open Market Purchases

The Issuers are not required to make any mandatory redemption or sinking fund payments with respect to the Notes. However, under certain circumstances, the Issuers may be required to offer to purchase Notes as described under the captions “—Change of Control” and “—Certain Covenants—Asset Sales.” From time to time, MSC, the Issuers, their respective Affiliates or the Sponsor may acquire Notes through open market purchases, privately negotiated transactions, tender offers, exchange offers, redemptions or otherwise, upon such terms and at such prices as MSC, the Issuers, their respective Affiliates or the Sponsors (as applicable) may determine (or as may be provided for in the Indenture), which may be more or less than the consideration to be received by participating holders in the Offering Transactions and could be for cash or other consideration. There can be no assurance as to which, if any, of these alternatives or combinations thereof MSC, the Issuers, their respective Affiliates or the Sponsors may choose to pursue in the future.

Additional Amounts

We are required to make all our payments under or with respect to the Notes free and clear of and without withholding or deduction for or on account of any present or future tax, duty, levy, impost, assessment or other governmental charge (including penalties, interest and other liabilities related thereto) (hereinafter “Taxes”) imposed or levied by or on behalf of the government of Canada or any political subdivision or any authority or agency therein or thereof having power to tax, or within any other jurisdiction in which we are organized or are otherwise resident for tax purposes or any jurisdiction from or through which payment is made (each a “Relevant Taxing Jurisdiction”), unless we are required to withhold or deduct Taxes by law or by the interpretation or administration thereof.

If we are so required to withhold or deduct any amount for or on account of Taxes imposed by a Relevant Taxing Jurisdiction from any payment made under or with respect to the Notes, we will be required to pay such additional amounts (“Additional Amounts”) as may be necessary so that the net amount received by you (including Additional Amounts) after such withholding or deduction will not be less than the amount you would have received if such Taxes had not been withheld or deducted; provided, however, that the foregoing obligation to pay Additional Amounts does not apply to (1) any Taxes that would not have been so imposed but for the existence of any present or former connection between the relevant holder and the Relevant Taxing Jurisdiction (other than the mere receipt of such payment or the ownership or holding outside of Canada of such Note); (2) any estate, inheritance, gift, sales, excise, transfer, personal property tax or similar tax, assessment or governmental charge; (3) any Taxes imposed or withheld by reason of the failure to comply by the holder of a Note, or, if different, the beneficial owner of the interest payable on a Note with a timely request of the Issuer addressed to such holder or beneficial owner to provide information, documents or other evidence concerning the nationality, residence, identity or connection with a Relevant Taxing Jurisdiction that is required or imposed by a statute, treaty, regulation or administrative practice of such Relevant Taxing Jurisdiction as a precondition to exemption from all or part of such Tax nor will we pay Additional Amounts (a) if the payment could have been made without such deduction or withholding if the beneficiary of the payment had presented the Note for payment within 30 days after the date on which such payment or such Note became due and payable or the date

 

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on which payment thereof is duly provided for, whichever is later (except to the extent that the holder would have been entitled to Additional Amounts had the Note been presented on the last day of such 30-day period), or (b) with respect to any payment of principal of (or premium, if any, on) or interest on such Note to any holder who is a fiduciary or partnership or any person other than the sole beneficial owner of such payment, to the extent that a beneficiary or settler with respect to such fiduciary, a member of such a partnership or the beneficial owner of such payment would not have been entitled to the Additional Amounts had such beneficiary, settlor, member or beneficial owner been the actual holder of such Note.

We will provide the Trustee with official receipts or other documentation evidencing the payment of the Taxes with respect to which Additional Amounts are paid.

Whenever in the Indenture there is mentioned, in any context:

(1) the payment of principal;

(2) purchase prices in connection with a purchase of Notes;

(3) interest; or

(4) any other amount payable on or with respect to any of the Notes,

such reference shall be deemed to include payment of Additional Amounts as described under this heading to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof.

We will pay any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies that arise in any jurisdiction from the execution, delivery, enforcement or registration of the Notes, the Indenture, the Security Documents, the Intercreditor Agreement or any other document or instrument in relation thereof, or the receipt of any payments with respect to the Notes, excluding such taxes, charges or similar levies imposed by any jurisdiction outside of Canada, the jurisdiction of incorporation of any successor of the Canadian Issuer or any jurisdiction in which a paying agent is located, and we will agree to indemnify the Holders for any such taxes paid by such Holders.

The obligations described under this heading will survive any termination, defeasance or discharge of the Indenture and will apply mutatis mutandis to any jurisdiction in which any successor Person to the Canadian Issuer is organized or any political subdivision or taxing authority or agency thereof or therein.

For a discussion of Canadian withholding taxes applicable to payments under or with respect to the Notes, see “Material Tax Consequences—Certain Canadian Tax Consequences to Non-Canadian Holders.”

Redemption for Changes in Withholding Taxes

We are entitled to redeem the Notes, at our option, at any time in whole but not in part, upon not less than 30 nor more than 60 days’ notice, at 100% of the principal amount thereof, plus accrued and unpaid interest (if any) to the date of redemption (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), in the event we have become or would become obligated to pay, on the next date on which any amount would be payable with respect to the Notes, any Additional Amounts as a result of:

(1) a change in or an amendment to the laws (including any regulations promulgated thereunder) of Canada (or any political subdivision or taxing authority thereof or therein); or

(2) any change in or amendment to any official position regarding the application or interpretation of such laws or regulations,

which change or amendment is announced or becomes effective on or after the date of the Offering Circular and we cannot avoid such obligation by taking reasonable measures available to us.

 

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Before we publish or mail notice of redemption of the Notes as described above, we will deliver to the Trustee an Officers’ Certificate to the effect that we cannot avoid our obligation to pay Additional Amounts by taking reasonable measures available to us. We will also deliver an opinion of independent legal counsel of recognized standing stating that we would be obligated to pay Additional Amounts as a result of a change in tax laws or regulations or the application or interpretation of such laws or regulations.

Ranking

The indebtedness evidenced by the Notes and the Guarantees will be senior Indebtedness of the Issuers or the applicable Guarantor, as the case may be, will rank pari passu in right of payment with all existing and future senior Indebtedness of the Issuers and the Guarantors, as the case may be, and will have the benefit of the second-priority security interest in the Collateral as described under “—Security for the Notes” and will rank senior in right of payment to all existing and future Subordinated Indebtedness of the Issuers and the Guarantors, as the case may be. Pursuant to the Security Documents and the Intercreditor Agreement, the security interests securing the Notes and the Guarantees are second in priority (subject to Permitted Liens, including exceptions described under the caption “—Security for the Notes”) to all security interests at any time granted to secure First-Priority Lien Obligations.

At June 30, 2011,

(1) MSC and its Subsidiaries had $3.6 billion aggregate principal amount of Indebtedness outstanding (including the Notes and the Guarantees);

(2) MSC and its Subsidiaries had $1.4 billion aggregate principal amount of Indebtedness outstanding consisting of term loans and revolving loans outstanding under the existing senior secured credit facilities, which constitute First-Priority Lien Obligations. In addition, as of such date, MSC and its Subsidiaries would have had $200 million of availability under the existing revolving credit facility (excluding the incremental term loan commitments), all of which is secured by a first-priority lien on the Collateral securing the Notes;

(3) MSC and its Subsidiaries had $1 billion aggregate principal amount of Indebtedness outstanding constituting lien obligations junior to the existing senior secured credit facilities and senior to second-priority indebtedness, consisting of the Existing Senior Secured Notes and guarantees thereof, which constitute First-Priority Lien Obligations with respect to the Notes;

(4) MSC and its Subsidiaries had $694 million aggregate principal amount of Indebtedness outstanding constituting second-priority indebtedness, consisting of Secured Indebtedness under the Existing Second Lien Notes and the Notes and the guarantees thereof; and

(5) Of the $3.6 billion aggregate principal amount of Indebtedness, MSC’s Subsidiaries that are not Guarantors had total Indebtedness of approximately $712 million (excluding intercompany liabilities of Subsidiaries that are not Guarantors).

Although the Indenture contains limitations on the amount of additional Indebtedness that MSC and its Subsidiaries may Incur, under certain circumstances the amount of such Indebtedness could be substantial and, subject to certain limitations, such Indebtedness may be Secured Indebtedness, including First-Priority Lien Obligations. See “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” and “—Certain Covenants—Liens.”

A significant portion of the operations of MSC are conducted through its Subsidiaries. Unless the Subsidiary is a Guarantor or one of the Issuers, claims of creditors of such Subsidiaries, including trade creditors, and claims of preferred stockholders (if any) of such Subsidiaries generally will have priority with respect to the assets and earnings of such Subsidiaries over the claims of creditors of MSC, including holders of the Notes. The Notes, therefore, will be effectively subordinated to holders of indebtedness and other creditors (including trade

 

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creditors) and preferred stockholders (if any) of Subsidiaries of MSC that are not Guarantors or one of the Issuers. Although the Indenture limits the Incurrence of Indebtedness by and the issuance of Disqualified Stock and Preferred Stock of certain of MSC’s Subsidiaries, such limitation is subject to a number of significant qualifications. See “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock.”

Pursuant to the terms of our senior secured credit facilities, intercompany indebtedness of any borrower thereunder to any of our subsidiaries is subordinated to the prior payment of the senior indebtedness obligations under the senior secured credit facility. These subordination provisions prevent the payment of any amounts on intercompany notes until all obligations under the senior secured credit facility are paid in full in cash if any default or event of default under the senior secured credit facility has occurred.

Security for the Notes

The Notes and the Guarantees are secured by second-priority security interests (subject to Permitted Liens) in the Collateral and the Notes will share in the benefit of such security interest based on the respective amounts of the Obligations thereunder. However, the Guarantees will not be effective and the security interests will not be created prior to the Issue Date. The Collateral consists of (i) 100% of the Capital Stock of certain existing and certain future Domestic Subsidiaries of MSC that are owned directly by MSC, the U.S. Issuer or any Subsidiary Guarantor (subject to the limitations described in the next paragraph and “—Limitations on Stock Collateral”), (ii) 65% of the Capital Stock of all existing and certain future Foreign Subsidiaries of MSC that are owned directly by MSC, the U.S. Issuer or any Subsidiary Guarantor (subject to the limitations described in the next paragraph and “—Limitations on Stock Collateral”) and (iii) substantially all of the other property and assets, in each case, that are held by MSC, the U.S. Issuer or any of the Subsidiary Guarantors, to the extent that such assets secure the First-Priority Lien Obligations and to the extent that a second-priority security interest is able to be granted or perfected therein.

In addition to the limitations described below under “—Limitations on Stock Collateral”, the initial Collateral does not include (i) any property or assets owned by any Foreign Subsidiaries, (ii) any real estate held by MSC or any of its Subsidiaries, (iii) Principal Property, (iv) any vehicle covered by a certificate of title or ownership, (v) any assets not required to be pledged as security for holders of First-Priority Lien Obligations, (vi) any letter of credit rights to the extent any of the Issuers or the Subsidiary Guarantors is required by applicable law to apply the proceeds of a drawing of such letter of credit for a specified purpose, (vii) any assets which, if included in the Collateral, would require the Existing Debentures to be ratably secured with the Notes pursuant to the terms of the indentures for the Existing Debentures, (viii) any right, title or interest of the Issuers or the Subsidiary Guarantors in any license, contract or agreement to which such Issuers or Subsidiary Guarantor is a party or any of its right, title or interest thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement, result in a breach of the terms of, or constitute a default under, any license, contract or agreement to which such Issuer or Subsidiary Guarantor is a party or (ix) any equipment or other asset owned by any Issuer or Subsidiary Guarantor that is subject to a purchase money lien or a Capitalized Lease Obligation, if the contract or other agreement in which such Lien is granted (or the documentation providing for such Capitalized Lease Obligation) prohibits or requires the consent of any person other than the Issuers or Subsidiary Guarantors as a condition to the creation of any other security interest on such equipment. Except for property and assets of Foreign Subsidiaries, the foregoing excluded property and assets do not secure the First-Priority Lien Obligations.

The security interests securing the Notes are second in priority to any and all security interests (other than property and assets of Foreign Subsidiaries) at any time granted to secure the First-Priority Lien Obligations and will also be subject to all other Permitted Liens. The First-Priority Lien Obligations include Secured Bank Indebtedness and related obligations, as well as certain hedging obligations and certain other obligations in respect of cash management services. The Person holding such First-Priority Lien Obligations may have rights and remedies with respect to the property subject to such Liens that, if exercised, could adversely affect the value of the Collateral or the ability of the Intercreditor Agent to realize or foreclose on the Collateral on behalf of holders of the Notes.

 

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The Issuers, MSC and the Subsidiary Guarantors will be able to incur additional indebtedness in the future which could share in the Collateral, including additional First-Priority Lien Obligations, indebtedness secured by a Permitted Lien that may be prior or pari passu with Liens securing the Notes and additional indebtedness which would be secured on a second-priority basis with the Notes. The amount of such First-Priority Lien Obligations will be limited by the covenant disclosed under “—Certain Covenants—Liens,” and the amount of all such additional indebtedness will be limited by the covenant described under “—Certain Covenants—Limitation on incurrence of indebtedness and issuances of disqualified stock and preferred stock.” Under certain circumstances the amount of such First-Priority Lien Obligations and additional indebtedness could be significant.

Limitations on Stock Collateral

The Capital Stock and securities of a Subsidiary of MSC (other than the Momentive Canada Entities) that are owned by MSC or any Guarantor will constitute Collateral only to the extent that such Capital Stock and securities can secure the Notes without Rule 3-10 or Rule 3-16 of Regulation S-X under the Securities Act (or any other law, rule or regulation) requiring separate financial statements of such Subsidiary to be filed with the SEC (or any other governmental agency). In the event that Rule 3-10 or Rule 3-16 of Regulation S-X under the Securities Act requires or is amended, modified or interpreted by the SEC to require (or is replaced with another rule or regulation, or any other law, rule or regulation is adopted, which would require) the filing with the SEC (or any other governmental agency) of separate financial statements of any Subsidiary (other than the Momentive Canada Entities) due to the fact that such Subsidiary’s Capital Stock and securities secure the Notes or any Guarantee, then the Capital Stock and securities of such Subsidiary shall automatically be deemed not to be part of the Collateral (but only to the extent necessary to not be subject to such requirement). In such event, the Security Documents may be amended or modified, without the consent of any Holder of Notes, to the extent necessary to release the second-priority security interests on the shares of Capital Stock and securities that are so deemed to no longer constitute part of the Collateral. As of the date of this prospectus, Momentive Canada is an indirect wholly owned subsidiary of Momentive Coop.

In the event that Rule 3-10 or Rule 3-16 of Regulation S-X under the Securities Act is amended, modified or interpreted by the SEC to permit (or is replaced with another rule or regulation, or any other law, rule or regulations adopted, which would permit) such Subsidiary’s Capital Stock and securities to secure the Notes in excess of the amount then pledged without the filing with the SEC (or any other governmental agency) of separate financial statements of such Subsidiary, then the Capital Stock and securities of such Subsidiary shall automatically be deemed to be a part of the Collateral (but only to the extent necessary to not be subject to any such financial statement requirement). In such event, the Security Documents may be amended or modified, without the consent of any holder of Notes, to the extent necessary to subject to the Liens under the Security Documents such additional Capital Stock and securities.

In accordance with the limitations set forth in the two immediately preceding paragraphs, as of the date of this prospectus, other than with respect to Momentive Coop whose shares of Capital Stock are part of the Collateral without regard to such limits described above, the Collateral includes shares of Capital Stock of the Subsidiaries only to the extent that the applicable value of such Capital Stock (on a Subsidiary-by-Subsidiary basis) is less than 20% of the aggregate principal amount of the outstanding Notes. Certain of MSC’s foreign subsidiaries may have a value in excess of 20% of the principal amount of the Notes initially issued; accordingly MSC’s pledge of such stock as Collateral is limited to less than 20% of the Notes pursuant to these collateral cut back provisions.

After-Acquired Collateral

From and after the Issue Date and subject to certain limitations and exceptions, if MSC or any Guarantor creates any additional security interest upon any property or asset to secure any First-Priority Lien Obligations (which include Obligations in respect of the Credit Agreement), it must concurrently grant a second-priority security interest (subject to Permitted Liens, including the first-priority lien that secures obligations in respect of

 

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the First-Priority Lien Obligations) upon such property as security for the Notes. Also, if granting a security interest in such property requires the consent of a third party, MSC will use commercially reasonable efforts to obtain such consent with respect to the second-priority security interest for the benefit of the Trustee on behalf of the holders of the Notes. If such third party does not consent to the granting of the second-priority security interest after the use of such commercially reasonable efforts, the applicable entity will not be required to provide such security interest.

Security Documents and Intercreditor Agreement

The Notes are designated as “Additional Second Lien Obligations” under the Existing Second Lien Notes Collateral Agreement pursuant to a joinder and supplement thereto. The Security Documents and the security interests created thereunder inure to the benefit of the Trustee and the Holders of the Notes and define their rights and remedies thereunder. These security interests secure the payment and performance when due of all of the Obligations of the Issuers and the Guarantors under the Notes, the Indenture, the Guarantees and the Security Documents, as provided in the Security Documents.

The Issuers, the Trustee and the Intercreditor Agent have entered into a joinder to the Intercreditor Agreement. The Intercreditor Agreement may be amended from time to time without the consent of Holders of the Notes to add other parties holding other second-priority lien obligations and other First-Priority Lien Obligations permitted to be incurred under the Indenture. The Intercreditor Agent is initially the administrative agent under the Credit Agreement. Pursuant to the terms of the Intercreditor Agreement, at any time at which First-Priority Lien Obligations are outstanding (whether incurred prior to, on or after the Issue Date), the Intercreditor Agent will determine the time and method by which the security interests in the Collateral will be enforced. The Trustee will not be permitted to enforce the security interests even if any Event of Default under the Indenture has occurred and the Notes have been accelerated except (a) in any insolvency or liquidation proceeding, as necessary to file a claim or statement of interest with respect to such Notes or (b) as necessary to take any action in order to create, prove, preserve, perfect or protect (but not enforce) its rights in the second-priority Liens. See “Risk Factors—Risks Related to an Investment in the Notes—Holders of Notes will not control decisions regarding collateral.” At any time at which all First-Priority Lien Obligations have been discharged in full, the Trustee in accordance with the provisions of the Indenture and the Security Documents will distribute all cash proceeds (after payment of the costs of enforcement and collateral administration) of the Collateral received by it under the Security Documents for the ratable benefit of the holders of the Notes and the holders of other second-priority lien obligations. The proceeds from the sale of the Collateral remaining after the satisfaction of all First-Priority Lien Obligations may not be sufficient to satisfy the obligations owed to the holders of the Notes. By its nature some or all of the Collateral will be illiquid and may have no readily ascertainable market value. Accordingly, the Collateral may not be able to be sold in a short period of time, if saleable. See “Risk Factors—Risks Related to an Investment in the Notes—Additional indebtedness is secured by the collateral securing the Notes, and the Notes will be secured only to the extent of the value of the assets that have been granted as security for the Notes and the guarantees, which may not be sufficient to satisfy our obligations under the Notes.”

In addition, the Security Documents and the Intercreditor Agreement provide that, so long as there are First-Priority Lien Obligations outstanding (whether incurred prior to, on or after the Issue Date), (1) the holders of First-Priority Lien Obligations may direct the Intercreditor Agent to take actions with respect to the Collateral (including the release of Collateral and the manner of realization) without the consent of the holders of the Notes, (2) MSC and the Subsidiary Guarantors may require the Trustee to agree to modify the Security Documents or the Intercreditor Agreement, without the consent of the Trustee and the holders of the Notes, to secure additional extensions of credit and add additional secured creditors so long as such modifications do not expressly violate the provisions of the Credit Agreement or the Indenture and (3) the holders of the First-Priority Lien Obligations may change, waive, modify or vary the security documents without the consent of the holders of the Notes, provided that any such change, waiver or modification does not materially adversely affect the rights of the holders of the Notes and not the other secured creditors in a like or similar manner. Any provider of additional

 

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extensions of credit shall be entitled to rely on the determination of an Officer that such modifications do not expressly violate the provisions of the Credit Agreement or the Indenture if such determination is set forth in an Officers’ Certificate delivered to such provider; provided, however, that such determination will not affect whether or not MSC has complied with its undertakings in the Indenture, the Security Documents or the Intercreditor Agreement. See “Risk Factors—Risks Related to an Investment in the Notes—Holders of Notes will not control decisions regarding collateral.”

Further, the Intercreditor Agreement provides that, if any Issuer or Guarantor is subject to any bankruptcy, insolvency, liquidation or other debtor-relief proceeding (an “Insolvency Proceeding”), the Trustee and the holders of the Notes:

(1) will not contest such Issuer’s or Guarantors’, as applicable (x) use of cash collateral or (y) obtaining of any debtor-in-possession financing, in each case if the holders of First-Priority Lien Obligations desire to permit such use of cash collateral or debtor-in-possession financing, as applicable,

(2) will not request adequate protection or other relief in connection with any such use of cash collateral or any such debtor-in-possession financing, except as set forth in the following paragraph,

(3) if the Liens on any Collateral securing the First-Priority Lien Obligations (the “First-Priority Liens”) are subordinated to or are pari passu with the Liens on such Collateral securing any such debtor-in-possession financing, will subordinate the Liens on such Collateral securing the Notes on the same basis as such Liens are subordinated to the First-Priority Liens under the Intercreditor Agreement,

(4) will not contest (or support any other Person in contesting) (x) any request by the Intercreditor Agent or the holders of First-Priority Lien Obligations for adequate protection or (y) any objection made by the Intercreditor Agent or the holders of First-Priority Lien Obligations to any motion, relief, action or proceeding claiming a lack of adequate protection,

(5) will raise no objection to (or otherwise contest) any motion for relief from the automatic stay or from any injunction against foreclosure or enforcement in respect of First-Priority Lien Obligations made by the Intercreditor Agent or any holder of First-Priority Lien Obligations, and, so long as First-Priority Lien Obligations are outstanding, will not seek any such relief in respect of the Collateral without the consent of the Intercreditor Agent and the requisite holders of First-Priority Lien Obligations,

(6) will raise no objection to (or otherwise contest) any lawful exercise by any holder of First-Priority Lien Obligations of the right to credit bid First-Priority Lien Obligations at any sale in foreclosure of Collateral,

(7) will raise no objection to (and will not otherwise contest) any other request for judicial relief made in any court by any holder of First-Priority Lien Obligations relating to the lawful enforcement of any Lien on Collateral,

(8) will raise no objection to (and will not otherwise contest) any order relating to a sale of assets of any Issuer or Guarantor for which the Intercreditor Agent has consented that provides, to the extent the sale is to be free and clear of Liens, that the First-Priority Liens and the Liens securing the Notes will attach to the proceeds of the sale on the same basis of priority as the First-Priority Liens rank to the Liens securing the Notes in accordance with the Intercreditor Agreement and

(9) so long as First-Priority Lien Obligations are outstanding, will not assert or enforce any claim under Section 506(c) of the U.S. Bankruptcy Code senior to or on a parity with the First-Priority Liens for costs or expenses of preserving or disposing of any Collateral.

Notwithstanding the foregoing, in any Insolvency Proceeding, (i) if any holders of First-Priority Lien Obligations are granted adequate protection in the form of additional collateral in connection with any debtor-in-possession financing or use of cash collateral, then the trustee or the holders of the Notes may seek or request adequate protection in the form of a replacement Lien on such additional collateral, which Lien is subordinated to the First-Priority Liens and the Liens securing such debtor-in-possession financing on the same

 

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basis as the Liens securing the Notes are subordinated to the First-Priority Liens under the Intercreditor Agreement and (ii) in the event any holder of Notes (or the trustee on behalf of itself or any holder of Notes) receives adequate protection in the form of additional collateral, then the applicable holders of First-Priority Lien Obligations shall be granted a senior Lien on such additional collateral as security for the applicable First-Priority Lien Obligations, and any Lien on such additional collateral securing the Notes shall be subordinated to the Liens on such collateral securing the First-Priority Lien Obligations and any other Liens granted to the Senior Lenders (as defined in the Intercreditor Agreement) as adequate protection on the same basis as the Liens securing the Notes are so subordinated to the First-Priority Liens under the Intercreditor Agreement.

See “Risk Factors—Risks Related to an Investment in the Notes—Rights of holders of Notes in the collateral may be adversely affected by bankruptcy proceedings.

Subject to the terms of the Security Documents, the Issuers and the Guarantors have the right to remain in possession and retain exclusive control of the Collateral securing the Notes (other than any cash, securities, obligations and Cash Equivalents constituting part of the Collateral and deposited with the Intercreditor Agent in accordance with the provisions of the Security Documents and other than as set forth in the Security Documents), to freely operate the Collateral and to collect, invest and dispose of any income therefrom.

See “Risk Factors—Risks Related to an Investment in the Notes—Rights of holders of Notes in the collateral may be adversely affected by bankruptcy proceedings.”

Release of Collateral

The Issuers and the Guarantors are entitled to the releases of property and other assets included in the Collateral from the Liens securing the Notes under any one or more of the following circumstances:

(1) if all other Liens on such property or assets securing First-Priority Lien Obligations (including all commitments and letters of credit thereunder) are released and there are no outstanding Receivables Financings (or commitments therefor); provided, however, that (x) if the Issuers incur or any Guarantor subsequently incurs First-Priority Lien Obligations that are secured by liens on property or assets of the Issuers or any Guarantor of the type constituting the Collateral and the related Liens are incurred in reliance on clause (8) of the definition of Permitted Liens or (y) MSC or any of its Restricted Subsidiaries subsequently enter into any Receivables Financings, then MSC and its Restricted Subsidiaries will be required to reinstitute the security arrangements with respect to the Collateral in favor of the Notes, which, in the case of any such subsequent First-Priority Lien Obligations, will be second priority Liens on the Collateral securing such First-Priority Lien Obligations to the same extent provided by the Security Documents and on the terms and conditions of the security documents relating to such First-Priority Lien Obligations, with the second-priority Lien held either by the administrative agent, collateral agent or other representative for such First-Priority Lien Obligations or by a collateral agent or other representative designated by MSC to hold the second-priority Liens for the benefit of the Holders of the Notes and subject to an intercreditor agreement that provides the administrative agent or collateral agent substantially the same rights and powers as afforded under the Intercreditor Agreement;

(2) to enable us to consummate the disposition of such property or assets to the extent not prohibited under the covenant described under “—Certain Covenants—Asset Sales;”

(3) in the case of a Guarantor that is released from its Guarantee with respect to the Notes, the release of the property and assets of such Guarantor;

(4) in the case of a Guarantor making a Permitted Transfer to any Restricted Subsidiary of MSC; provided that such Permitted Transfer is permitted by clause (y) of the last paragraph under “—Merger, Consolidation or Sale of All or Substantially All Assets;”

(5) in respect of the property and assets of a Restricted Subsidiary that is a Guarantor, upon the designation of such Guarantor to be an Unrestricted Subsidiary in accordance with the covenant described under “—Certain Covenants—Limitation on Restricted Payments” and the definition of “Unrestricted Subsidiary;”

 

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(6) in respect of the property and assets of a Guarantor that at any time is not subject to a Lien securing First-Priority Lien Obligations at such time; provided that if such property and assets is subsequently subject to a Lien securing First-Priority Lien Obligations (other than assets excluded from the Collateral), such property and assets shall subsequently constitute Collateral hereunder; or

(7) as described under “—Amendments and Waivers” below.

If an Event of Default under the Indenture exists on the date on which the First-Priority Lien Obligations are repaid in full and terminated (including all commitments and letters of credit thereunder), the second-priority Liens on the Collateral securing the Notes will not be released, except to the extent the Collateral or any portion thereof was disposed of in order to repay the First-Priority Lien Obligations secured by the Collateral, and thereafter the Trustee (acting at the direction of the holders of a majority of outstanding principal amount of the Notes) will have the right to direct the Intercreditor Agent to foreclose upon the Collateral (but in such event, the Liens on the Collateral securing the Notes will be released when such Event of Default and all other Events of Default under the Indenture cease to exist).

The second-priority security interests in all Collateral securing the Notes also will be released upon (i) payment in full of the principal of, together with accrued and unpaid interest (including additional interest, if any) on, the Notes and all other Obligations under the Indenture, the Guarantees under the Indenture and the Security Documents that are due and payable at or prior to the time such principal, together with accrued and unpaid interest (including additional interest, if any), are paid (including pursuant to a satisfaction and discharge of the Indenture as described below under “—Satisfaction and Discharge”) or (ii) a legal defeasance or covenant defeasance under the Indenture as described below under “—Defeasance.”

Guarantees

MSC and each direct and indirect Restricted Subsidiary of MSC that is a Domestic Subsidiary on the Issue Date and that guarantees the obligations of MSC under the Credit Agreement jointly and severally, irrevocably and unconditionally guarantee on a senior basis the performance and punctual payment when due, whether at Stated Maturity, by acceleration or otherwise, of all obligations of the Issuers under the Indenture and the Notes, whether for payment of principal of, premium, if any, or interest or additional interest on the Notes, expenses, indemnification or otherwise (all such obligations guaranteed by such Guarantors being herein called the “Guaranteed Obligations”). The Guaranteed Obligations of all Guarantors are secured by second-priority security interests (subject to Permitted Liens) in the Collateral owned by such Guarantor. Such Guarantors have agreed to pay, in addition to the amount stated above, any and all expenses (including reasonable counsel fees and expenses) incurred by the Trustee or the holders in enforcing any rights under the Guarantees.

Each Guarantee is limited to an amount not to exceed the maximum amount that can be guaranteed by the applicable Guarantor without rendering such Guarantee, as it relates to such Guarantor, voidable under applicable laws relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. See “Risk Factors—Risks Related to an Investment in the Notes—Federal and state statutes allow courts, under specific circumstances, to void notes, guarantees and security interests, and require note holders to return payments received.” After the Issue Date, MSC will cause certain domestic Subsidiaries that Incur or guarantee certain Indebtedness or that issued certain shares of Disqualified Stock or Preferred Stock to execute and deliver to the Trustee supplemental indentures pursuant to which such Restricted Subsidiary will guarantee payment of the Notes on the same basis. See “—Certain Covenants—Future Guarantors.”

Each Guarantee will be a continuing guarantee and, subject to the next succeeding paragraph, shall:

(1) remain in full force and effect until payment in full of all the Guaranteed Obligations;

(2) be binding upon each such Guarantor and its successors; and

(3) inure to the benefit of and be enforceable by the Trustee, the holders of the Notes and their successors, transferees and assigns.

 

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A Guarantee of a Restricted Subsidiary will be automatically released upon:

(a) the sale, disposition or other transfer (including through merger or consolidation) of the Capital Stock (including any sale, disposition or other transfer following which the applicable Guarantor is no longer a Restricted Subsidiary), or all or substantially all the assets, of the applicable Guarantor if such sale, disposition or other transfer is made in compliance with the Indenture, in each case other than to MSC or a Subsidiary of MSC; provided, however, that such Guarantor is released from its guarantees, if any, of, and all pledges and security, if any, granted in connection with, the Credit Agreement and any other Indebtedness of MSC or any Subsidiary Guarantor;

(b) MSC designating such Guarantor to be an Unrestricted Subsidiary in accordance with the provisions set forth under “—Certain Covenants—Limitation on Restricted Payments” and the definition of “Unrestricted Subsidiary;”

(c) the release or discharge of all guarantees by such Restricted Subsidiary and the repayment of all Indebtedness and retirement of all Disqualified Stock of such Restricted Subsidiary which, if Incurred by such Restricted Subsidiary, would require such Restricted Subsidiary to guarantee the Notes under the covenant described under “—Certain Covenants—Future Guarantors;”

(d) our exercise of our legal defeasance option or covenant defeasance option as described under “—Defeasance” with respect to the Notes, or if our obligations under the Indenture are discharged in accordance with the terms of the Indenture; and

(e) such Restricted Subsidiary ceasing to be a Subsidiary as a result of any foreclosure of any pledge or security interest in favor of First-Priority Lien Obligations, subject to, in each case, the application of the proceeds of such foreclosure in the manner described under “—Security for the Notes—Release of Collateral.”

Book-Entry, Delivery and Form

General

Except as set forth below, the Notes were initially issued in registered, global notes in global form without coupons (“Global Notes”). Each Global Note shall be deposited with the Trustee, as custodian for, and registered in the name of The Depository Trust Company (“DTC”) or a nominee thereof. The Notes to the extent validly tendered and accepted and directed by their holders in their letters of transmittal, will be exchanged through book-entry electronic transfer for the global note.

Except as set forth below, the Global Notes may be transferred, in whole but not in part, solely to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Notes may not be exchanged for Notes in certificated form except in the limited circumstances described below.

Depository Procedures

The following description of the operations and procedures of DTC is provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to changes by them. We take no responsibility for these operations and procedures and urge investors to contact the system or their participants directly to discuss these matters.

DTC has advised us that DTC is a limited-purpose trust company organized under the laws of the State of New York, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participating organizations (collectively, the “participants”) and to facilitate the clearance and settlement of transactions in those securities between participants through electronic book-entry changes in

 

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accounts of its participants. The participants include securities brokers and dealers (including the initial purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC’s system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly (collectively, the “indirect participants”). Persons who are not participants may beneficially own securities held by or on behalf of DTC only through the participants or the indirect participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the participants and indirect participants.

DTC has also advised us that, pursuant to procedures established by it:

(1) upon deposit of the Global Notes, DTC will credit the accounts of participants designated by the initial purchasers with portions of the principal amount of the Global Notes; and

(2) ownership of these interests in the Global Notes will be shown on, and the transfer of ownership of these interests will be effected only through, records maintained by DTC (with respect to the participants) or by the participants and the indirect participants (with respect to other owners of beneficial interests in the Global Notes).

Investors in the Global Notes who are participants in DTC’s system may hold their interests therein directly through DTC. Investors in the Global Notes who are not participants may hold their interests therein indirectly through organizations which are participants in such system. All interests in a Global Note may be subject to the procedures and requirements of DTC. The laws of some states require that certain Persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Note to such Persons will be limited to that extent. Because DTC can act only on behalf of participants, which in turn act on behalf of indirect participants, the ability of a Person having beneficial interests in a Global Note to pledge such interests to Persons that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests.

Except as described below, owners of an interest in the Global Notes will not have Notes registered in their names, will not receive physical delivery of Notes in certificated form and will not be considered the registered owners or “holders” thereof under the Indenture for any purpose.

Payments in respect of the principal of, and interest and premium and additional interest, if any, on a Global Note registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, the Issuers and the Trustee will treat the Persons in whose names the Notes, including the Global Notes, are registered as the owners of the Notes for the purpose of receiving payments and for all other purposes. Consequently, neither the Issuers, the Trustee nor any agent of the Issuers or the Trustee has or will have any responsibility or liability for:

(1) any aspect of DTC’s records or any participant’s or indirect participant’s records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any of DTC’s records or any participant’s or indirect participant’s records relating to the beneficial ownership interests in the Global Notes; or

(2) any other matter relating to the actions and practices of DTC or any of its participants or indirect participants.

DTC has advised us that its current practice, upon receipt of any payment in respect of securities such as the Notes (including principal and interest), is to credit the accounts of the relevant participants with the payment on the payment date unless DTC has reason to believe it will not receive payment on such payment date. Each relevant participant is credited with an amount proportionate to its beneficial ownership of an interest in the principal amount of the relevant security as shown on the records of DTC. Payments by the participants and the indirect participants to the beneficial owners of Notes will be governed by standing instructions and customary

 

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practices and will be the responsibility of the participants or the indirect participants and will not be the responsibility of DTC, the Trustee or the Issuers. Neither the Issuers nor the Trustee will be liable for any delay by DTC or any of its participants in identifying the beneficial owners of the Notes, and the Issuers and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes.

Transfers between participants in DTC will be effected in accordance with DTC’s procedures, and will be settled in same-day funds.

DTC will take any action permitted to be taken by a holder of Notes only at the direction of one or more participants to whose account DTC has credited the interests in the Global Notes and only in respect of such portion of the aggregate principal amount of the Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Notes, DTC reserves the right to exchange the Global Notes for legended Notes in certificated form, and to distribute such Notes to its participants.

Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Notes among participants, it is under no obligation to perform such procedures, and such procedures may be discontinued or changed at any time. Neither the Issuers nor the Trustee nor any of their respective agents will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

Exchange of Global Notes for Certificated Notes

A Global Note is exchangeable for Certificated Notes if:

(1) DTC (A) notifies the Issuers that it is unwilling or unable to continue as depositary for the Global Notes or (B) has ceased to be a clearing agency registered under the Exchange Act and, in each case, a successor depositary is not appointed;

(2) MSC, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Certificated Notes; or

(3) there has occurred and is continuing a Default with respect to the Notes.

In addition, beneficial interests in a Global Note may be exchanged for Certificated Notes upon prior written notice given to the Trustee by or on behalf of DTC in accordance with the Indenture. In all cases, Certificated Notes delivered in exchange for any Global Note or beneficial interests in Global Notes will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures) and will bear a restrictive legend unless that legend is not required by applicable law.

Certificated Notes issued pursuant to the Apollo Notes Exchange

Pursuant to the Indenture, the Notes issued to the selling security holder pursuant to the Apollo Notes Exchange were issued as Certificated Notes bearing certain restrictive legends relating to restrictions on transfer. Notwithstanding other restrictions on exchanging Certificated Notes for Global Notes, the Certificated Note(s) that were issued to the selling security holder may be exchanged for a beneficial interest in Global Notes if such Certificated Notes (a) are being transferred pursuant to an effective registration statement under the Securities Act, (b) have not been owned by the Issuers or an Affiliate of the Issuers during the six month period preceding such exchange, (c) are being transferred in connection with a transfer pursuant to Rule 144, subject to receipt by the Trustee of such documentation as it shall reasonably request pursuant to the Indenture or (d) in the Opinion of Counsel delivered to the Trustee, the beneficial owner can hold a beneficial interest in Global Notes without adversely affecting the ability of beneficial owners of interests in such Global Notes that are not Affiliates of the Issuer to transfer such interests pursuant to Rule 144 or pursuant to another exemption from the registration requirements of the Securities Act.

 

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Exchange of Certificated Notes for Global Notes

Certificated Notes may not be exchanged for beneficial interests in any Global Note unless the transferor first delivers to the Trustee a written certificate (in the form provided in the Indenture) to the effect that such transfer will comply with the appropriate transfer restrictions applicable to such Notes.

Exchanges Among Global Notes

Beneficial interests in the Temporary Regulation S Global Note may be exchanged for beneficial interests in the Permanent Regulation S Global Note or the Rule 144A Global Note or the IAI Global Note only after the expiration of the Distribution Compliance Period and then only upon certification in form reasonably satisfactory to the Trustee that, among other things, (1) beneficial ownership interests in such Temporary Regulation S Note are owned by or being transferred to either non-U.S. persons or U.S. persons who purchased such interests in a transaction that did not require registration under the Securities Act and (2) in the case of an exchange for an interest in an IAI Global Note, the interest in the Temporary Regulation S Global Note is being transferred to an “accredited investor” under the Securities Act that is an institutional “accredited investor” acquiring the securities for its own account or for the account of an institutional “accredited investor.”

Beneficial interest in a Rule 144A Global Note or an IAI Global Note may be transferred to a Person who takes delivery in the form of an interest in the Regulation S Global Note, whether before or after the expiration of the Distribution Compliance Period, only if the transferor first delivers to the Trustee a written certificate (in the form provided in the Indenture) to the effect that such transfer is being made in accordance with Rule 903 or 904 of Regulation S or Rule 144.

Beneficial interest in the Rule 144A Global Note may be exchanged for a beneficial interest in the IAI Global Note only upon certification in a form reasonably satisfactory to the Trustee that, among other things, (i) the beneficial interest in such Rule 144A Global Note is being transferred to an “accredited investor” under the Securities Act that is an institutional “accredited investor” acquiring the securities for its own account or for the account of an institutional “accredited investor” and (ii) such transfer is being made in accordance with all applicable securities laws of the States of the United States of America and other jurisdictions. Beneficial interest in the IAI Global Note may be exchanged for a beneficial interest in the Rule 144A Global Note only upon certification in a form reasonably satisfactory to the Trustee that, among other things, such interest is being transferred in a transaction in accordance with Rule 144A.

Transfers involving exchanges of beneficial interests between the Regulation S Global Notes, the IAI Global Notes and the Rule 144A Global Notes will be effected in DTC by means of an instruction originated by the DTC Participant through the DTC Deposit/Withdraw at Custodian system. Accordingly, in connection with any such transfer, appropriate adjustments will be made to reflect the changes in the principal amounts of the Regulation S Global Note, the IAI Global Note and the Rule 144A Global Note, as applicable. Any beneficial interest in one of the Global Notes that is transferred to a Person who takes delivery in the form of an interest in the other Global Note will, upon transfer, cease to be an interest in such Global Note and will become an interest in the other Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interest in such other Global Note for so long as it remains such an interest.

Same Day Settlement and Payment

The Issuers will make payments in respect of the Notes represented by the Global Notes (including principal, premium, if any, interest and additional interest, if any) by wire transfer of immediately available funds to the accounts specified by the Global Note holder. The Issuers will make all payments of principal, interest and premium and additional interest, if any, with respect to Certificated Notes by wire transfer of immediately available funds to the accounts specified by the holders of the Certificated Notes or, if no such account is specified, by mailing a check to each such holder’s registered address. The Notes represented by the Global

 

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Notes are expected to trade in DTC’s Same-Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. The Issuers expect that secondary trading in any Certificated Notes will also be settled in immediately available funds.

Change of Control

The occurrence of any of the following events will constitute a “Change of Control:”

(1) the sale, lease or transfer, in one or a series of related transactions, of all or substantially all the assets of MSC and its Subsidiaries, taken as a whole, to a Person other than any of the Permitted Holders; or

(2) MSC becomes aware (by way of a report or any other filing pursuant to Section 13(d) of the Exchange Act, proxy, vote, written notice or otherwise) of the acquisition by any Person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision), including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than any of the Permitted Holders, in a single transaction or in a related series of transactions, by way of merger, consolidation or other business combination or purchase of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision), of more than 50% of the total voting power of the Voting Stock of MSC; or

(3) individuals who on the Issue Date constituted the Board of Directors of MSC (together with any new directors whose election by such Board of Directors of MSC or whose nomination for election by the shareholders of MSC was approved by (a) a vote of a majority of the directors of MSC then still in office who were either directors on the Issue Date or whose election or nomination for election was previously so approved or (b) the Permitted Holders) cease for any reason to constitute a majority of the Board of Directors of MSC then in office.

The occurrence of any Change of Control will constitute an Event of Default under the Indenture unless the Issuers (i)(A) make an offer within 30 days following such Change of Control to all holders of the Notes to purchase all the Notes properly tendered (a “Change of Control Offer”) at a purchase price (the “Change of Control Purchase Price”) equal to 101% of the principal amount thereof, plus accrued and unpaid interest (if any) to the date of repurchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); and (B) purchase all the Notes properly tendered in accordance with the Change of Control Offer or (ii) exercise their right, within 30 days following such Change of Control, to redeem all the Notes as described under “—Optional Redemption.”

A “Change of Control Offer” means a notice mailed to each holder of the Notes with a copy to the Trustee stating:

(1) that a Change of Control has occurred and that such holder has the right to require the Issuers to purchase such holder’s Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, to the date of purchase (subject to the right of holders of record on a record date to receive interest on the relevant interest payment date);

(2) the circumstances and relevant facts and financial information regarding such Change of Control;

(3) the repurchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and

(4) the instructions determined by the Issuers, consistent with this covenant, that a holder must follow in order to have its Notes purchased.

A Change of Control Offer may be made in advance of a Change of Control, and conditioned upon such Change of Control, if a definitive agreement is in place for the Change of Control at the time of making of the Change of Control Offer.

 

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The Issuers will be deemed to have made a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Issuers and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer.

The Issuers will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of the Indenture applicable to a Change of Control Offer, the Issuers will comply with the applicable securities laws and regulations and will not be deemed to have failed to make a Change of Control Offer or purchase Notes pursuant thereto as described above by virtue thereof.

This Change of Control repurchase provision is a result of negotiations among MSC, the Issuers and the Initial Purchasers. MSC has no present intention to engage in a transaction involving a Change of Control, although it is possible that MSC could decide to do so in the future. Subject to the limitations discussed below, MSC could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect MSC capital structure or credit ratings.

The occurrence of events which would constitute a Change of Control would constitute a default under the Credit Agreement. Future indebtedness of MSC may contain prohibitions on certain events which would constitute a Change of Control or require such indebtedness to be repurchased upon a Change of Control. Moreover, the purchase of the Notes pursuant to a Change of Control Offer could cause a default under such other indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Issuers, MSC and the other Guarantors. Finally, our ability to pay cash to the holders upon a repurchase may be limited by our then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any such repurchases. See “Risk Factors—Risks Related to an Investment in the Notes—The Issuers may not be able to repurchase the Notes upon a change of control.”

The definition of Change of Control includes a phrase relating to the sale, lease or transfer of “all or substantially all” the assets of MSC and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of Notes to require the Issuers to repurchase such Notes as a result of a sale, lease or transfer of less than all of the assets of Issuers and its Subsidiaries taken as a whole to another Person or group may be uncertain.

The provisions under the Indenture relative to a Change of Control Event of Default may be waived or modified with the written consent of the Holders of a majority in principal amount of the Notes, respectively, until such time as tendered Notes must be purchased.

Certain Covenants

The Indenture contains covenants including, among others, the following:

Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock

MSC will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, Incur any Indebtedness (including Acquired Indebtedness) or issue any shares of Disqualified Stock and MSC will not permit any of its Restricted Subsidiaries (other than a Guarantor) to issue any shares of Preferred Stock; provided, however, that MSC and any Restricted Subsidiary may Incur Indebtedness (including Acquired Indebtedness) or issue shares of Disqualified Stock and any Restricted Subsidiary may issue shares of Preferred Stock, in each case if the Fixed Charge Coverage Ratio of MSC for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such

 

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additional Indebtedness is Incurred or such Disqualified Stock or Preferred Stock is issued would have been at least 2.00 to 1.00 determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been Incurred, or the Disqualified Stock or Preferred Stock had been issued, as the case may be, and the application of proceeds therefrom had occurred at the beginning of such four-quarter period.

The foregoing limitations will not apply to:

(a) the Incurrence by MSC or its Restricted Subsidiaries of Indebtedness under any Credit Agreement and the issuance and creation of letters of credit and bankers’ acceptances thereunder (with letters of credit and bankers’ acceptances being deemed to have a principal amount equal to the face amount thereof) up to an aggregate principal amount of $2.675 billion plus an aggregate additional principal amount of Consolidated Total Indebtedness constituting First-Priority Lien Obligations outstanding at any one time that does not cause the Consolidated Secured Debt Ratio of MSC to exceed 3.75 to 1.00 determined on a pro forma basis (including a pro forma application of the net proceeds therefrom);

(b) the Incurrence by the Issuers and the Guarantors of Indebtedness represented by the Notes or the Exchange Notes (not including any additional Notes) and the related Guarantees, as applicable;

(c) Indebtedness existing on the Issue Date (after giving effect to the Offering Transactions) (other than Indebtedness described in clauses (a) and (b)), including the Existing Debentures, the Existing Second Lien Notes, the Existing Senior Secured Notes and the guarantees thereof;

(d) Indebtedness (including Capitalized Lease Obligations) Incurred by MSC or any of its Restricted Subsidiaries to finance (whether prior to or within 270 days after) the purchase, lease, construction or improvement of property (real or personal) or equipment (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets) in an aggregate principal amount which, when aggregated with the principal amount of all other Indebtedness then outstanding that was Incurred (or deemed Incurred as provided under clause (n) below) pursuant to this clause (d), does not exceed the greater of $150.0 million and 5.0% of Total Assets at the time of Incurrence;

(e) Indebtedness Incurred by MSC or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including letters of credit in respect of workers’ compensation claims, health, disability or other employee benefits or property, casualty or liability insurance or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers’ compensation claims; provided, however, that upon the drawing of such letters of credit, such obligations are reimbursed within 30 days following such drawing;

(f) Indebtedness arising from agreements of MSC or any of its Restricted Subsidiaries providing for adjustment of purchase price or similar obligations, in each case, Incurred in connection with the disposition of any business, assets or a Subsidiary of MSC in accordance with the terms of the Indenture, other than guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided, however, that, at the time of closing, the amount of such Indebtedness is not determinable and, to the extent such Indebtedness thereafter becomes fixed and determined, the Indebtedness is paid within 60 days thereafter;

(g) Indebtedness of MSC to a Restricted Subsidiary; provided, however, that any such Indebtedness owed to a Restricted Subsidiary that is not an Issuer or a Guarantor is subordinated in right of payment to the obligations of MSC under its Guarantee; provided further, however, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such Indebtedness (except to another Restricted Subsidiary) shall be deemed, in each case to be an Incurrence of such Indebtedness;

(h) shares of Preferred Stock of a Restricted Subsidiary issued to MSC or another Restricted Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any Restricted Subsidiary that holds such shares of Preferred Stock of another

 

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Restricted Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such shares of Preferred Stock (except to MSC or another Restricted Subsidiary) shall be deemed, in each case, to be an issuance of shares of Preferred Stock;

(i) Indebtedness of a Restricted Subsidiary to MSC or another Restricted Subsidiary; provided, however, that if a Guarantor Subsidiary incurs such Indebtedness to a Restricted Subsidiary that is not an Issuer or a Guarantor such Indebtedness is subordinated in right of payment to the Guarantee of such Guarantor; provided further, however, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any Restricted Subsidiary holding such Indebtedness ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such Indebtedness (except to another Restricted Subsidiary) shall be deemed, in each case, to be an Incurrence of such Indebtedness;

(j) Hedging Obligations that are not Incurred for speculative purposes: (1) for the purpose of fixing or hedging interest rate risk with respect to any Indebtedness that is permitted by the terms of the Indenture to be outstanding; (2) for the purpose of fixing or hedging currency exchange rate risk with respect to any currency exchanges; or (3) for the purpose of fixing or hedging commodity price risk with respect to any commodity purchases;

(k) obligations in respect of performance, bid and surety bonds, including surety bonds issued in respect of workers’ compensation claims, and completion guarantees provided by MSC or any Restricted Subsidiary in the ordinary course of business;

(l) Indebtedness or Disqualified Stock of MSC or any Restricted Subsidiary not otherwise permitted hereunder in an aggregate principal amount or liquidation preference, as applicable, which when aggregated with the principal amount or liquidation preference of all other Indebtedness and Disqualified Stock then outstanding and Incurred pursuant to this clause (l), does not exceed the greater of $150.0 million and 5.0% of Total Assets at the time of Incurrence (it being understood that any Indebtedness Incurred under this clause (l) shall cease to be deemed Incurred or outstanding for purposes of this clause (l) but shall be deemed Incurred for purposes of the first paragraph of this covenant from and after the first date on which MSC, or the Restricted Subsidiary, as the case may be, could have Incurred such Indebtedness under the first paragraph of this covenant without reliance upon this clause (l));

(m) any guarantee by MSC or any of its Restricted Subsidiaries of Indebtedness or other obligations of MSC or any of its Restricted Subsidiaries so long as the Incurrence of such Indebtedness Incurred by MSC or such Restricted Subsidiary is permitted under the terms of the Indenture; provided, however, that if such Indebtedness is by its express terms subordinated in right of payment to the Notes or the Guarantee of such Restricted Subsidiary, as applicable, any such guarantee of any Guarantor with respect to such Indebtedness shall be subordinated in right of payment to such Guarantor’s Guarantee with respect to the Notes substantially to the same extent as such Indebtedness is subordinated to the Notes or the Guarantee of such Guarantor, as applicable;

(n) the Incurrence by MSC or any of its Restricted Subsidiaries of Indebtedness which serves to refund, refinance or defease any Indebtedness Incurred as permitted under the first paragraph of this covenant or clause (b), (c), (d), (n), (o) and/or (s) of this paragraph or any Indebtedness Incurred to so refund or refinance such Indebtedness, including, in each case, any Indebtedness Incurred to pay premiums (including tender premiums), expenses, defeasance costs and fees in connection therewith (subject to the following proviso, “Refinancing Indebtedness”); provided, however, that such Refinancing Indebtedness:

(1) has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is Incurred which is not less than the shorter of (x) the remaining Weighted Average Life to Maturity of the Indebtedness being refunded or refinanced or defeased and (y) the Weighted Average Life to Maturity that would result if all payments of principal on the Indebtedness being refunded or refinanced that were due on or after the date one year following the last maturity date of any Notes then outstanding were instead due on such date one year following;

 

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(2) has a Stated Maturity which is no earlier than the earlier of (x) the Stated Maturity of the Indebtedness being refunded or refinanced or (y) one year following the last maturity date of any Notes then outstanding;

(3) to the extent such Refinancing Indebtedness refinances Indebtedness junior to the Notes or the Guarantee of such Restricted Subsidiary, as applicable, such Refinancing Indebtedness is junior to the Notes or the Guarantee of such Restricted Subsidiary, as applicable;

(4) is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced plus premium, expenses, costs and fees Incurred in connection with such refinancing;

(5) shall not include (x) Indebtedness of a Restricted Subsidiary of MSC that is not a Guarantor that refinances Indebtedness of MSC or another Guarantor (unless such Restricted Subsidiary is an obligor with respect to such Indebtedness being refinanced), or (y) Indebtedness of MSC or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary; and

(6) in the case of any Refinancing Indebtedness Incurred to refinance Indebtedness outstanding under clause (d) or (t), shall be deemed to have been Incurred and to be outstanding under such clause (d) or (t), as applicable, and not this clause (n) for purposes of determining amounts outstanding under such clauses (d) and (t);

provided further, however, that subclauses (1), (2) and (3) of this clause (n) will not apply to any refunding or refinancing of (A) the Notes, (B) any Secured Indebtedness constituting a First-Priority Lien Obligation or (C) any Existing Debentures consisting of pollution control bonds;

(o) Indebtedness or Disqualified Stock of (x) MSC or any of its Restricted Subsidiaries Incurred to finance an acquisition or (y) Persons that are acquired by MSC or any of its Restricted Subsidiaries or merged with or into MSC or a Restricted Subsidiary in accordance with the terms of the Indenture; provided, however, that after giving effect to such acquisition and the Incurrence of such Indebtedness either:

(1) MSC would be permitted to Incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of this covenant; or

(2) the Fixed Charge Coverage Ratio would be greater than immediately prior to such acquisition;

(p) Indebtedness Incurred by a Receivables Subsidiary in a Qualified Receivables Financing that is not recourse to MSC or any Restricted Subsidiary other than a Receivables Subsidiary (except for Standard Securitization Undertakings);

(q) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five Business Days of its Incurrence;

(r) Indebtedness of MSC or any Restricted Subsidiary supported by a letter of credit or bank guarantee issued pursuant to the Credit Agreement, in a principal amount not in excess of the stated amount of such letter of credit;

(s) Contribution Indebtedness;

(t) Indebtedness of Foreign Subsidiaries of MSC for working capital purposes or any other purposes; provided, however, that the aggregate principal amount of Indebtedness Incurred under this clause (t) other than for working capital purposes, when aggregated with the principal amount of all other Indebtedness then outstanding and Incurred pursuant to this clause (t), does not exceed the greater of $150 million and 5.0% of Total Assets at the time of Incurrence;

 

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(u) Indebtedness of MSC or any Restricted Subsidiary consisting of (x) the financing of insurance premiums or (y) take or pay obligations contained in supply arrangements, in each case, entered into in the ordinary course of business;

(v) Indebtedness Incurred on behalf of, or representing guarantees of Indebtedness of, joint ventures of MSC or any Restricted Subsidiary not in excess, at any one time outstanding, of $7.5 million; and

(w) Indebtedness issued by MSC or a Restricted Subsidiary to current or former officers, directors and employees thereof or any direct or indirect parent thereof, or their respective estates, spouses or former spouses, in each case to finance the purchase or redemption of Equity Interests of MSC or any of its direct or indirect parent companies to the extent permitted under clause (b)(4) of the covenant described under “—Limitation on Restricted Payments.”

For purposes of determining compliance with this covenant, (A) Indebtedness need not be Incurred solely by reference to one category of permitted Indebtedness described in clauses (a) through (w) above or pursuant to the first paragraph of this covenant but is permitted to be Incurred in part under any combination thereof and (B) in the event that an item of Indebtedness (or any portion thereof) meets the criteria of one or more of the categories of permitted Indebtedness described in clauses (a) through (w) above or is entitled to be Incurred pursuant to the first paragraph of this covenant, MSC shall, in its sole discretion, classify or reclassify, or later divide, classify or reclassify, such item of Indebtedness (or any portion thereof) in any manner that complies with this covenant and will only be required to include the amount and type of such item of Indebtedness in one of the above clauses and such item of Indebtedness will be treated as having been Incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. Accrual of interest, the accretion of accreted value, amortization of original issue discount, the payment of interest in the form of additional Indebtedness with the same terms or in the form of common stock of MSC, the payment of dividends on Preferred Stock in the form of additional shares of Preferred Stock of the same class, the accretion of original issue discount or liquidation preference and increases in the amount of Indebtedness outstanding solely as a result of fluctuations in the exchange rate of currencies or increases in the value of property securing Indebtedness described in clause (3) of the definition of “Indebtedness” will not be deemed to be an Incurrence of Indebtedness for purposes of this covenant. Guarantees of, or obligations in respect of letters of credit relating to, Indebtedness which is otherwise included in the determination of a particular amount of Indebtedness shall not be included in the determination of such amount of Indebtedness; provided, however, that the Incurrence of the Indebtedness represented by such guarantee or letter of credit, as the case may be, was in compliance with this covenant.

For purposes of determining compliance with any U.S. dollar-denominated restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent principal amount of Indebtedness denominated in a foreign currency shall be calculated based on the relevant currency exchange rate in effect on the date such Indebtedness was Incurred, in the case of term debt, or first committed or first Incurred (whichever yields the lower U.S. dollar equivalent), in the case of revolving credit debt; provided that if such Indebtedness is Incurred to refinance other Indebtedness denominated in a foreign currency, and such refinancing would cause the applicable U.S. dollar-denominated restriction to be exceeded if calculated at the relevant currency exchange rate in effect on the date of such refinancing, such U.S. dollar-denominated restriction shall be deemed not to have been exceeded so long as the principal amount of such refinancing Indebtedness does not exceed the principal amount of such Indebtedness being refinanced.

Notwithstanding any other provision of this covenant, the maximum amount of Indebtedness that the Issuer and its Restricted Subsidiaries may Incur pursuant to this covenant shall not be deemed to be exceeded, with respect to any outstanding Indebtedness, solely as a result of fluctuations in the exchange rate of currencies. The principal amount of any Indebtedness Incurred to refinance other Indebtedness, if Incurred in a different currency from the Indebtedness being refinanced, shall be calculated based on the currency exchange rate applicable to the currencies in which such respective Indebtedness is denominated that is in effect on the date of such refinancing.

 

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Notwithstanding the foregoing, the Issuers may not incur any Indebtedness or issue any shares of Disqualified Stock or Preferred Stock unless all of the Issuers’ obligations with respect thereto are fully and unconditionally guaranteed by MSC; provided, however, such guarantee will be deemed to be full and unconditional even if subject to the same kinds of limitations applicable to the Guarantee by MSC of the Notes.

Limitation on Restricted Payments

(a) MSC will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly:

(1) declare or pay any dividend or make any distribution on account of MSC’s or any of its Restricted Subsidiaries’ Equity Interests, including any payment with respect to such Equity Interests made in connection with any merger or consolidation (other than (A) dividends or distributions payable solely in Equity Interests (other than Disqualified Stock) of MSC; or (B) dividends or distributions by a Restricted Subsidiary; provided, however, that, in the case of any dividend or distribution payable on or in respect of any Equity Interests issued by a Restricted Subsidiary other than a Wholly Owned Restricted Subsidiary, MSC or a Restricted Subsidiary receives at least its pro rata share of such dividend or distribution in accordance with its ownership percentage of such Equity Interests);

(2) purchase or otherwise acquire or retire for value any Equity Interests of MSC or any direct or indirect parent company of MSC;

(3) make any principal payment on, or redeem, repurchase, defease or otherwise acquire or retire for value, in each case prior to any scheduled repayment or scheduled maturity, any Subordinated Indebtedness of MSC or any Subsidiary Guarantor (other than the payment, redemption, repurchase, defeasance, acquisition or retirement of (A) Subordinated Indebtedness in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such payment, redemption, repurchase, defeasance, acquisition or retirement and (B) Indebtedness permitted under clauses (g) and (i) of the second paragraph of the covenant described under “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock”); or

(4) make any Restricted Investment

(all such payments and other actions set forth in clauses (1) through (4) above being collectively referred to as “Restricted Payments”), unless, at the time of such Restricted Payment:

(i) no Default shall have occurred and be continuing or would occur as a consequence thereof;

(ii) immediately after giving effect to such transaction on a pro forma basis, MSC could Incur $1.00 of additional Indebtedness under the provisions of the first paragraph of the covenant described under “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock;” and

(iii) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by MSC and its Restricted Subsidiaries after the Existing Second Lien Notes Issue Date (including Restricted Payments permitted by clauses (1), (4) (only to the extent of one-half of the amounts paid pursuant to such clause), (6) and (8) of paragraph (b) below, but excluding all other Restricted Payments permitted by paragraph (b) below), is less than the sum of, without duplication,

(1) 50% of the Consolidated Net Income of MSC for the period (taken as one accounting period) from June 30, 2006 to the end of MSC’s most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, in the case such Consolidated Net Income for such period is a deficit, minus 100% of such deficit), plus

(2) 100% of the aggregate net proceeds, including cash and the Fair Market Value (as determined in accordance with the next succeeding sentence) of property other than cash, received by MSC after the Existing Second Lien Notes Issue Date from the issue or sale of Equity Interests of MSC (excluding Refunding Capital Stock, Designated Preferred Stock, Cash Contribution Amounts, Excluded Contributions and Disqualified Stock), including Equity Interests issued upon conversion of

 

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Indebtedness or upon exercise of warrants or options (other than an issuance or sale to a Subsidiary of MSC or an employee stock ownership plan or trust established by MSC or any of its Subsidiaries), plus

(3) 100% of the aggregate amount of cash contributions to the capital of MSC, and the Fair Market Value (as determined in accordance with the next succeeding sentence) of property other than cash, received after the Existing Second Lien Notes Issue Date (other than Refunding Capital Stock, Designated Preferred Stock, contributions from the issuance of Designated Preferred Stock, Cash Contribution Amounts, Excluded Contributions and Disqualified Stock), plus

(4) the principal amount of any Indebtedness, or the liquidation preference or maximum fixed repurchase price, as the case may be, of any Disqualified Stock of MSC or any Restricted Subsidiary issued after the Existing Second Lien Notes Issue Date (other than Indebtedness or Disqualified Stock issued to a Restricted Subsidiary) which has been converted into or exchanged for Equity Interests in MSC (other than Disqualified Stock) or any direct or indirect parent of MSC (provided that, in the case of any parent, such Indebtedness or Disqualified Stock is retired or extinguished), plus

(5) 100% of the aggregate amount received by MSC or any Restricted Subsidiary in cash and the Fair Market Value (as determined in accordance with the next succeeding sentence) of property other than cash received by MSC or any Restricted Subsidiary, in each case subsequent to the Existing Second Lien Notes Issue Date, from:

(A) the sale or other disposition (other than to MSC or a Restricted Subsidiary of MSC) of Restricted Investments made by MSC and its Restricted Subsidiaries and from repurchases and redemptions of such Restricted Investments from MSC and its Restricted Subsidiaries by any Person (other than MSC or any of its Subsidiaries) and from repayments of loans or advances which constituted Restricted Investments (other than in each case to the extent that the Restricted Investment was made pursuant to clause (7) or (10) of paragraph (b) below),

(B) the sale (other than to MSC or a Restricted Subsidiary of MSC) of the Capital Stock of an Unrestricted Subsidiary or

(C) a distribution or dividend from an Unrestricted Subsidiary, plus

(6) in the event any Unrestricted Subsidiary of MSC has been redesignated as a Restricted Subsidiary or has been merged, consolidated or amalgamated with or into, or transfers or conveys its assets to, or is liquidated into, MSC or a Restricted Subsidiary of MSC, in each case subsequent to the Existing Second Lien Notes Issue Date, the Fair Market Value (as determined in accordance with the next succeeding sentence) of the Investment of MSC in such Unrestricted Subsidiary at the time of such redesignation, combination or transfer (or of the assets transferred or conveyed, as applicable), after deducting any Indebtedness associated with the Unrestricted Subsidiary so designated or combined or any Indebtedness associated with the assets so transferred or conveyed (other than in each case to the extent that the designation of such Subsidiary as an Unrestricted Subsidiary was made pursuant to clause (7) or (10) of paragraph (b) below or constituted a Permitted Investment).

The Fair Market Value of property other than cash covered by clauses (iii)(2), (3), (4), (5) and (6) above shall be determined in good faith by MSC and

(A) in the event of property with a Fair Market Value in excess of $15 million, shall be set forth in an Officers’ Certificate,

(B) in the event of property with a Fair Market Value in excess of $25 million, shall be set forth in a resolution approved by at least a majority of the Board of Directors of MSC or

(C) in the event of property with a Fair Market Value in excess of $50 million, shall be set forth in writing by an Independent Financial Advisor.

 

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(b) The foregoing provisions will not prohibit:

(1) the payment of any dividend or distribution (i) within 60 days after the date of declaration thereof, if at the date of declaration such payment would have complied with the provisions of the Indenture or (ii) declared on or prior to the Existing Second Lien Notes Issue Date;

(2) (A) the repurchase, retirement or other acquisition of any Equity Interests (“Retired Capital Stock”) of MSC or any direct or indirect parent company of MSC or Subordinated Indebtedness of MSC or any Subsidiary Guarantor in exchange for, or out of the proceeds of the substantially concurrent sale of, Equity Interests of MSC or any direct or indirect parent company of MSC or contributions to the equity capital of MSC (other than Designated Preferred Stock, Cash Contribution Amounts, Excluded Contributions and Disqualified Stock or any Equity Interests sold to a Subsidiary of MSC or to an employee stock ownership plan or any trust established by MSC or any of its Subsidiaries) (collectively, including any such contributions, “Refunding Capital Stock”) and

(B) the declaration and payment of dividends on the Retired Capital Stock out of the proceeds of the substantially concurrent sale (other than to a Subsidiary of MSC or to an employee stock ownership plan or any trust established by MSC or any of its Subsidiaries) of Refunding Capital Stock;

(3) the redemption, repurchase, defeasance or other acquisition or retirement of Subordinated Indebtedness of MSC or any Subsidiary Guarantor made by exchange for, or out of the proceeds of the substantially concurrent sale of new Indebtedness of Issuers or such Subsidiary Guarantor, respectively, which is Incurred in accordance with the covenant described under “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” so long as

(A) the principal amount of such new Indebtedness does not exceed the principal amount, plus any accrued and unpaid interest, of the Subordinated Indebtedness being so redeemed, repurchased, acquired or retired for value (plus the amount of any premium required to be paid under the terms of the instrument governing the Subordinated Indebtedness being so redeemed, repurchased, defeased, acquired or retired plus any tender premiums, defeasance costs or other fees and expenses incurred in connection therewith),

(B) such Indebtedness is subordinated to the Notes or the related Guarantee, as the case may be, at least to the same extent as such Subordinated Indebtedness so purchased, exchanged, redeemed, repurchased, defeased acquired or retired for value,

(C) such Indebtedness has a Stated Maturity which is no earlier than the earlier of (x) the Stated Maturity of the Subordinated Indebtedness being redeemed, repurchased, acquired or retired or (y) one year following the last maturity date of any Notes then outstanding; and

(D) such Indebtedness has a Weighted Average Life to Maturity which is not less than the shorter of (x) the remaining Weighted Average Life to Maturity of the Subordinated Indebtedness being so redeemed, repurchased, defeased or acquired or retired and (y) the Weighted Average Life to Maturity that would result if all payments of principal on the Subordinated Indebtedness being redeemed, repurchased, acquired or retired that were due on or after the date one year following the last maturity date of any Notes then outstanding were instead due on such date one year following;

(4) the redemption, repurchase, retirement or other acquisition (or dividends to any direct or indirect parent company of MSC to finance any such repurchase, retirement or other acquisition) for value of Equity Interests of MSC or any direct or indirect parent company of MSC held by any future, present or former employee, director or consultant of MSC or any direct or indirect parent company of MSC or any Subsidiary of MSC pursuant to any management equity plan or stock option plan or any other management or employee benefit plan or other agreement or arrangement; provided, however, that the aggregate amounts paid under this clause (4) do not exceed $15.0 million in any calendar year (with unused amounts in any calendar year being permitted to be carried over for the two succeeding calendar years); provided further, however, that such amount in any calendar year may be increased by an amount not to exceed:

(A) the cash proceeds received by MSC or any of its Restricted Subsidiaries from the sale of Equity Interests (excluding Refunding Capital Stock, Designated Preferred Stock, Cash Contribution

 

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Amounts, Excluded Contributions and Disqualified Stock) of MSC or any direct or indirect parent company of MSC (to the extent contributed to MSC) to members of management, directors or consultants of MSC and its Restricted Subsidiaries or any direct or indirect parent company of MSC that occurs after the Issue Date; provided, however, that the amount of such cash proceeds utilized for any such repurchase, retirement, other acquisition or dividend will not increase the amount available for Restricted Payments under clause (iii) of paragraph (a) of this covenant); plus

(B) the cash proceeds of key man life insurance policies received by MSC or any direct or indirect parent company of MSC (to the extent contributed to MSC) and its Restricted Subsidiaries after the Issue Date;

(provided, however, that MSC may elect to apply all or any portion of the aggregate increase contemplated by clauses (A) and (B) above in any calendar year and, to the extent any payment described under this clause (4) is made by delivery of Indebtedness and not in cash, such payment shall be deemed to occur only when, and to the extent, the obligor on such Indebtedness makes payments with respect to such Indebtedness);

(5) the declaration and payment of dividends or distributions to holders of any class or series of Disqualified Stock of MSC or any of its Restricted Subsidiaries issued or incurred in accordance with the covenant described under “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock;”

(6) the declaration and payment of dividends or distributions to holders of any class or series of Designated Preferred Stock (other than Disqualified Stock) issued after the Existing Second Lien Notes Issue Date and the declaration and payment of dividends to any direct or indirect parent company of MSC, the proceeds of which will be used to fund the payment of dividends to holders of any class or series of Designated Preferred Stock (other than Disqualified Stock) of any direct or indirect parent company of MSC issued after the Issue Date the proceeds of which were contributed to MSC; provided, however, that (A) for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date of issuance of such Designated Preferred Stock, after giving effect to such issuance (and the payment of dividends or distributions) on a pro forma basis (including a pro forma application of the net proceeds therefrom), MSC would have had a Fixed Charge Coverage Ratio of at least 2.00 to 1.00 and (B) the aggregate amount of dividends declared and paid pursuant to this clause (6) does not exceed the net cash proceeds actually received by MSC from the issuance of Designated Preferred Stock (other than Disqualified Stock) issued after the Existing Second Lien Notes Issue Date;

(7) Investments in Unrestricted Subsidiaries having an aggregate Fair Market Value, taken together with all other Investments made pursuant to this clause (7) that are at that time outstanding, not to exceed the greater of $40 million and 1.0% of Total Assets at the time of such Investment (with the Fair Market Value of each Investment being measured at the time made and without giving effect to subsequent changes in value);

(8) the payment of dividends on MSC’s common stock (or the payment of dividends to any direct or indirect parent of MSC to fund the payment by any direct or indirect parent of MSC of dividends on such entity’s common stock) of up to 6.0% per annum of the net proceeds received by MSC from any public offering of common stock or contributed to MSC by any direct or indirect parent of MSC from any public offering of common stock;

(9) Restricted Payments that are made with Excluded Contributions;

(10) other Restricted Payments in an aggregate amount not to exceed the greater of $50 million and 1.0% of Total Assets at the time made;

(11) the distribution, as a dividend or otherwise, of shares of Capital Stock of, or Indebtedness owed to MSC or a Restricted Subsidiary of MSC by, Unrestricted Subsidiaries;

 

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(12) (A) with respect to each tax year or portion thereof that any direct or indirect parent of MSC qualifies as a Flow Through Entity, the distribution by MSC to the holders of Capital Stock of such direct or indirect parent of MSC of an amount equal to the product of (i) the amount of aggregate net taxable income of MSC allocated to the holders of Capital Stock of MSC for such period and (ii) the Presumed Tax Rate for such period; and

(B) with respect to any tax year or portion thereof that any direct or indirect parent of MSC does not qualify as a Flow Through Entity, the payment of dividends or other distributions to any direct or indirect parent company of MSC that files a consolidated U.S. federal tax return that includes MSC and its subsidiaries in an amount not to exceed the amount that MSC and its Restricted Subsidiaries would have been required to pay in respect of federal, state or local taxes (as the case may be) in respect of such year if MSC and its Restricted Subsidiaries paid such taxes directly as a stand-alone taxpayer (or stand-alone group);

(13) the payment of any Restricted Payment, if applicable:

(A) in amounts required for any direct or indirect parent of MSC to pay fees and expenses (including franchise or similar taxes) required to maintain its corporate existence, customary salary, bonus and other benefits payable to, and indemnity provided on behalf of, officers and employees of any direct or indirect parent of MSC, and general corporate overhead expenses of any direct or indirect parent of MSC, in each case to the extent such fees, expenses, salaries, bonuses, benefits and indemnities are attributable to the ownership or operation of MSC and its respective Subsidiaries;

(B) in amounts required for any direct or indirect parent of MSC, to pay interest or principal on Indebtedness the proceeds of which have been contributed to MSC or any of its Restricted Subsidiaries and that has been guaranteed by, or is otherwise considered Indebtedness of, MSC Incurred in accordance with the covenant described under “—Limitation on incurrence of indebtedness and issuance of disqualified stock and preferred Stock;” provided, however, that any such contribution will not increase the amount available for Restricted Payments under clause (iii) of the immediately preceding paragraph or be used to incur Contribution Indebtedness or to make a Restricted Payment pursuant to paragraph (b) of this covenant (other than payments permitted by this clause (13); provided further, however, any such dividends, other distributions or other amounts used to pay interest are treated as interest payments of MSC for purposes of the Indenture; and

(C) in amounts required for any direct or indirect parent of MSC to pay fees and expenses, other than to Affiliates of MSC, related to any unsuccessful equity or debt offering of such parent;

(14) cash dividends or other distributions on MSC’s Capital Stock used to, or the making of loans to any direct or indirect parent of MSC to, fund the payment of fees and expenses incurred in connection with the Hexion Recapitalization, the Offering Transactions or in respect of amounts owed by MSC or any Restricted Subsidiary of MSC to Affiliates, in each case to the extent permitted by the covenant described under “—Transactions with Affiliates;”

(15) repurchases of Equity Interests deemed to occur upon exercise of stock options or warrants if such Equity Interests represent a portion of the exercise price of such options or warrants;

(16) purchases of receivables pursuant to a Receivables Repurchase Obligation in connection with a Qualified Receivables Financing;

(17) in the event of a Change of Control, the payment, purchase, redemption, defeasance or other acquisition or retirement of Subordinated Indebtedness or Disqualified Stock of MSC or Subordinated Indebtedness of any Guarantor or Disqualified Stock or Preferred Stock of any Restricted Subsidiary, in each case, at a purchase price not greater than 101% of the principal amount or liquidation preference, as applicable (or, if such Subordinated Indebtedness was issued with original issue discount, 101% of the accreted value), of such Subordinated Indebtedness, Disqualified Stock or Preferred Stock, plus any accrued and unpaid interest or dividends thereon; provided, however, that prior to such payment, purchase,

 

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redemption, defeasance or other acquisition or retirement, the Issuers (or a third party to the extent permitted by the Indenture) have made a Change of Control Offer with respect to the Notes as a result of such Change of Control and have repurchased all Notes validly tendered and not withdrawn in connection with such Change of Control Offer;

(18) in the event of an Asset Sale that requires the Issuers to offer to purchase Notes pursuant to the covenant described under “—Asset Sales,” the payment, purchase, redemption, defeasance or other acquisition or retirement of Subordinated Indebtedness or Disqualified Stock of MSC or Subordinated Indebtedness of any Guarantor or Disqualified Stock or Preferred Stock of any Restricted Subsidiary, in each case, at a purchase price not greater than 100% of the principal amount or liquidation preference, as applicable (or, if such Subordinated Indebtedness was issued with original issue discount, 100% of the accreted value), of such Subordinated Indebtedness, Disqualified Stock or Preferred Stock, plus any accrued and unpaid interest or dividends thereon; provided, however, that (i) prior to such payment, purchase, redemption, defeasance or other acquisition or retirement, the Issuers (or a third party to the extent permitted by the Indenture) have made an Asset Sale Offer with respect to the Notes as a result of such Asset Sale and have repurchased all Notes validly tendered and not withdrawn in connection with such Asset Sale Offer and (ii) the aggregate amount of all such payments, purchases, redemptions, defeasances or other acquisitions or retirements of all such Subordinated Indebtedness, Disqualified Stock and Preferred Stock may not exceed the amount of the Excess Proceeds used to determine the aggregate purchase price of the Notes tendered for in such Asset Sale Offer less the aggregate amount applied in connection with such Asset Sale Offer;

(19) any Restricted Payments made in connection with the consummation of the Hexion Recapitalization, as set forth under the heading “Use of Proceeds” in the Existing Second Lien Notes Offering Circular, the payment of the dividend declared in May 2005 but not yet paid in the amount included in other long-term liabilities as of June 30, 2006, and the repayment or repurchase of the Parish of Ascension, Louisiana Industrial Revenue Bonds of Holdings; and

(20) Restricted Payments by MSC or any Restricted Subsidiary to allow the payment of cash in lieu of the issuance of fractional shares upon the exercise of options or warrants or upon the conversion or exchange of Capital Stock of any such Person;

provided, however, that at the time of, and after giving effect to, any Restricted Payment permitted under clauses (6), (7), (10), (11), (17) and (18), no Default shall have occurred and be continuing or would occur as a consequence thereof.

As of the Issue Date, all of MSC’s Subsidiaries were Restricted Subsidiaries, except that (i) subsidiaries designated as Unrestricted Subsidiaries as of the Issue Date under the Existing Second Lien Notes Indenture were Unrestricted Subsidiaries and (ii) HAI is not subject to the covenants described under “—Certain Covenants.” MSC will not permit any Unrestricted Subsidiary to become a Restricted Subsidiary except pursuant to the definition of “Unrestricted Subsidiary.” For purposes of designating any Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments by MSC and its Restricted Subsidiaries (except to the extent repaid) in the Subsidiary so designated will be deemed to be Restricted Payments in an amount determined as set forth in the last sentence of the definition of “Investments.” Such designation will only be permitted if a Restricted Payment or Permitted Investment in such amount would be permitted at such time and if such Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.

For the purposes of this covenant, any payment made on or after the Existing Second Lien Notes Issue Date but prior to the Issue Date will be deemed to be a “Restricted Payment” to the extent that such payment would have been a Restricted Payment had the Indenture been in effect at the time of such payment (and, to the extent that such Restricted Payment was permitted by clauses (1) through (20) above or as a Permitted Investment, such Restricted Payment may be deemed by MSC to have been made pursuant to such clause or as such a Permitted Investment).

 

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Dividend and Other Payment Restrictions Affecting Subsidiaries

MSC will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or consensual restriction on the ability of any Restricted Subsidiary to:

(a)(i) pay dividends or make any other distributions to MSC or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or by, its profits or (ii) pay any Indebtedness owed to MSC or any of its Restricted Subsidiaries;

(b) make loans or advances to MSC or any of its Restricted Subsidiaries; or

(c) sell, lease or transfer any of its properties or assets to MSC or any of its Restricted Subsidiaries;

except in each case for such encumbrances or restrictions existing under or by reason of:

(1) contractual encumbrances or restrictions in effect on the Issue Date, including pursuant to the Credit Agreement, the other Senior Credit Documents, the Existing Debentures, the Existing Second Lien Notes, the Existing Senior Secured Notes and the guarantees thereof;

(2) the Indenture, the Notes (and any Exchange Notes and guarantees thereof), the Security Documents and the Intercreditor Agreement;

(3) applicable law or any applicable rule, regulation or order;

(4) any agreement or other instrument of a Person acquired by MSC or any Restricted Subsidiary which was in existence at the time of such acquisition (but not created in contemplation thereof or to provide all or any portion of the funds or credit support utilized to consummate such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or its Subsidiaries, or the property or assets of the Person or its Subsidiaries, so acquired;

(5) contracts or agreements for the sale of assets, including any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition;

(6) Secured Indebtedness otherwise permitted to be Incurred pursuant to the covenants described under “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” and “—Liens” that limit the right of the debtor to dispose of the assets securing such Indebtedness;

(7) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business;

(8) customary provisions in joint venture agreements and other similar agreements entered into in the ordinary course of business;

(9) purchase money obligations or Capitalized Lease Obligations, in each case for property so acquired or leased in the ordinary course of business that impose restrictions of the nature discussed in clause (c) above on the property so acquired;

(10) customary provisions contained in leases and other similar agreements entered into in the ordinary course of business that impose restrictions of the nature discussed in clause (c) above on the property subject to such lease;

(11) any encumbrance or restriction of a Receivables Subsidiary effected in connection with a Qualified Receivables Financing; provided, however, that such restrictions apply only to such Receivables Subsidiary;

(12) other Indebtedness

(i) of (A) MSC or (B) any Restricted Subsidiary of MSC, in each case that (x) is Incurred subsequent to the Issue Date pursuant to the covenant described under “—Limitation on Incurrence of

 

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Indebtedness and Issuance of Disqualified Stock and Preferred Stock” and (y) in the case of a Restricted Subsidiary that is not a Subsidiary Guarantor, an Officer determines reasonably in good faith that any such encumbrance or restriction will not materially adversely affect MSC’s ability to honor its Guarantee of the Notes, or

(ii) that is Incurred by a Foreign Subsidiary of MSC subsequent to the Issue Date pursuant to the covenant described under “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock;” provided, however, that such encumbrance or restriction applies only to Foreign Subsidiaries of MSC; or

(13) any encumbrances or restrictions of the type referred to in clauses (a), (b) and (c) above imposed by any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of the contracts, instruments or obligations referred to in clauses (1) through (12) above; provided, however, that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are, in the good faith judgment of MSC, no more restrictive with respect to such dividend and other payment restrictions than those contained in the dividend or other payment restrictions prior to such amendment, modification, restatement, renewal, increase, supplement, refunding, replacement or refinancing.

For purposes of determining compliance with this covenant, (i) the priority of any Preferred Stock in receiving dividends or liquidating distributions prior to dividends or liquidating distributions being paid on common stock shall not be deemed a restriction on the ability to make distributions on Capital Stock and (ii) the subordination of loans or advances made to MSC or a Restricted Subsidiary to other Indebtedness Incurred by MSC or any such Restricted Subsidiary shall not be deemed a restriction on the ability to make loans or advances.

Asset Sales

MSC will not, and will not permit any of its Restricted Subsidiaries to, cause or make an Asset Sale, unless (x) MSC or any of its Restricted Subsidiaries, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value (as determined in good faith by MSC) of the assets sold or otherwise disposed of, and (y) at least 75% of the consideration therefor received by MSC or such Restricted Subsidiary, as the case may be, is in the form of Cash Equivalents; provided, however, that the amount of:

(a) any liabilities (as shown on MSC’s or such Restricted Subsidiary’s most recent balance sheet or in the notes thereto) of MSC or any Restricted Subsidiary of MSC (other than liabilities that are by their terms subordinated to the Notes or the Guarantees of the Notes, as the case may be) that are assumed by the transferee of any such assets,

(b) any notes or other obligations or other securities or assets received by MSC or such Restricted Subsidiary from such transferee that are converted by MSC or such Restricted Subsidiary into cash within 180 days of the receipt thereof (to the extent of the cash received), and

(c) any Designated Non-cash Consideration received by MSC or any of its Restricted Subsidiaries in such Asset Sale having an aggregate Fair Market Value, taken together with all other Designated Non-cash Consideration received pursuant to this clause (c) that is at that time outstanding, not to exceed the greater of 3% of Total Assets and $70 million at the time of the receipt of such Designated Non-cash Consideration (with the Fair Market Value of each item of Designated Non-cash Consideration being measured at the time received and without giving effect to subsequent changes in value)

shall be deemed to be Cash Equivalents for the purposes of this provision.

 

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Within 365 days after MSC’s or any Restricted Subsidiary of MSC’s receipt of the Net Proceeds of any Asset Sale, MSC or such Restricted Subsidiary may apply the Net Proceeds from such Asset Sale at its option to any one or more of the following:

(1) to permanently reduce (A) any Indebtedness constituting First-Priority Lien Obligations or Indebtedness of a Restricted Subsidiary that is not a Guarantor (and, in the case of revolving Obligations, to correspondingly reduce commitments with respect thereto), (B) the Notes or (C) any Pari Passu Indebtedness; provided, however, that if the Issuers or any Guarantor shall so reduce any Pari Passu Indebtedness (other than any First-Priority Lien Obligation), the Issuers will equally and ratably reduce Indebtedness under the Notes as provided under “Optional Redemption”, through open market purchases (provided that such purchases are at or above 100% of the principal amount thereof) and/or by making an offer (in accordance with the procedures set forth below for an Asset Sale Offer) to all holders of Notes to purchase at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, the pro rata principal amount of the Notes); or

(2) to an investment in any one or more businesses or capital expenditures, in each case used or useful in a Similar Business; provided, however, that if such investment is in the form of the acquisition of Capital Stock of a Person, such acquisition results in such Person becoming a Restricted Subsidiary of MSC or, if such Person is a Restricted Subsidiary of MSC, in an increase in the percentage ownership of such Person by MSC or any Restricted Subsidiary of MSC; or

(3) to make an investment in any one or more businesses; provided, however, that if such investment is in the form of the acquisition of Capital Stock of a Person, such acquisition results in such Person becoming a Restricted Subsidiary of MSC or, if such Person is a Restricted Subsidiary of MSC, in an increase in the percentage ownership of such Person by MSC or any Restricted Subsidiary of MSC).

Pending the final application of any such Net Proceeds, MSC or such Restricted Subsidiary of MSC may temporarily reduce Indebtedness under a revolving credit facility, if any, or otherwise invest such Net Proceeds in any manner not otherwise prohibited by the Indenture. The Indenture provides that any Net Proceeds from any Asset Sale that are not applied as provided and within the time period set forth in the first sentence of this paragraph will be deemed to constitute “Excess Proceeds.” When the aggregate amount of Excess Proceeds exceeds $20 million, the Issuers shall make an offer to all holders of Notes (and, at the option of the Issuers, to holders of any Pari Passu Indebtedness) (an “Asset Sale Offer”) to purchase the maximum principal amount of Notes (and such Pari Passu Indebtedness), that is an integral multiple of $1,000 that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the principal amount thereof (or, in the event such Pari Passu Indebtedness was issued with significant original issue discount, 100% of the accreted value thereof), plus accrued and unpaid interest and additional interest, if any (or, in respect of such Pari Passu Indebtedness, such lesser price, if any, as may be provided for by the terms of such Pari Passu Indebtedness), to the date fixed for the closing of such offer, in accordance with the procedures set forth in the Indenture. The Issuers will commence an Asset Sale Offer with respect to Excess Proceeds within ten Business Days after the date that Excess Proceeds exceeds $20 million by mailing the notice required pursuant to the terms of the Indenture, with a copy to the Trustees. To the extent that the aggregate amount of Notes (and such Pari Passu Indebtedness) tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Issuers may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes (and such Pari Passu Indebtedness) surrendered by holders thereof exceeds the amount of Excess Proceeds, the applicable trustees shall select the Notes (and such Pari Passu Indebtedness) to be purchased in the manner described below. Upon completion of any such Asset Sale Offer, the amount of Excess Proceeds which served as the basis for such Asset Sale Offer shall be reset at zero.

The Issuers will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations to the extent such laws or regulations are applicable in connection with the repurchase of the Notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws

 

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or regulations conflict with the provisions of the Indenture, the Issuers will comply with the applicable securities laws and regulations and shall not be deemed to have breached their obligations described in the Indenture by virtue thereof.

If more Notes (and Pari Passu Indebtedness, as applicable) are tendered pursuant to an Asset Sale Offer than the Issuers are required to purchase, the principal amount of the Notes (and Pari Passu Indebtedness, as applicable) to be purchased will be determined pro rata based on the principal amounts so tendered and the selection of the actual Notes for purchase will be made by the Trustee on a pro rata basis to the extent practicable; provided, however, that no Notes (or Pari Passu Indebtedness, as applicable) of $1,000 or less shall be purchased in part.

Notices of an Asset Sale Offer shall be mailed by first class mail, postage prepaid, at least 30 but not more than 60 days before the purchase date to each holder of Notes at such holder’s registered address. If any Note is to be purchased in part only, any notice of purchase that relates to such Note shall state the portion of the principal amount thereof that has been or is to be purchased.

A new Note in principal amount equal to the unpurchased portion of any Note purchased in part will be issued in the name of the holder thereof upon cancellation of the original Note. On and after the purchase date, unless the Issuers default in payment of the purchase price, interest shall cease to accrue on Notes or portions thereof purchased.

Transactions with Affiliates

MSC will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction or series of transactions, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate of MSC (each of the foregoing, an “Affiliate Transaction”) involving aggregate consideration in excess of $7.5 million, unless:

(a) such Affiliate Transaction is on terms that are not materially less favorable to MSC or the relevant Restricted Subsidiary than those that could reasonably have been obtained in a comparable transaction by MSC or such Restricted Subsidiary with an unaffiliated Person; and

(b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $25 million, MSC delivers to the Trustee a resolution adopted in good faith by the majority of the Board of Directors of MSC approving such Affiliate Transaction and set forth in an Officers’ Certificate certifying that such Affiliate Transaction complies with clause (a) above.

The foregoing provisions will not apply to the following:

(1)(a) transactions between or among MSC or any of its Restricted Subsidiaries and (b) any merger of MSC and any direct parent company of MSC; provided, however, that such parent shall have no material liabilities and no material assets other than cash, Cash Equivalents and the Capital Stock of MSC and such merger is otherwise in compliance with the terms of the Indenture and effected for a bona fide business purpose;

(2) Restricted Payments permitted under the covenant “—Limitation on Restricted Payments” and Permitted Investments;

(3)(x) the entering into of any agreement to pay, and the payment of, annual management, consulting, monitoring and advisory fees and expenses to the Sponsor in an aggregate amount in any fiscal year not to exceed the greater of (a) $6.0 million and (b) 2.0% of EBITDA of MSC and its Restricted Subsidiaries for the immediately preceding fiscal year, and out-of-pocket expense reimbursement; provided, however, any payment not made in any fiscal year may be carried forward and paid in the following two fiscal years and

 

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(y) the payment of the present value of all amounts payable pursuant to any agreement described in clause (x) above in connection with the termination of such agreement;

(4) the payment of reasonable and customary fees and reimbursement of expenses paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of MSC or any Restricted Subsidiary or any direct or indirect parent company of MSC;

(5) payments by MSC or any of its Restricted Subsidiaries to the Sponsor made for any financial advisory, financing, underwriting or placement services or in respect of other investment banking activities, including in connection with acquisitions or divestitures, which payments are (x) approved by a majority of the Board of Directors of MSC in good faith or (y) made pursuant to any agreement described under the caption “Certain relationships and related party transactions” in the Offering Circular (or in documents incorporated by reference therein);

(6) transactions in which MSC or any of its Restricted Subsidiaries, as the case may be, delivers to the Trustee a letter from an Independent Financial Advisor stating that such transaction is fair to MSC or such Restricted Subsidiary from a financial point of view or meets the requirements of clause (a) of the preceding paragraph;

(7) payments or loans (or cancellation of loans) to employees or consultants that are approved by a majority of the Board of Directors of MSC in good faith;

(8) the existence of, or the performance by MSC or any of its Restricted Subsidiaries under the terms of, any agreement or instrument as in effect as of the Issue Date or any amendment thereto (so long as any such agreement or instrument together with all amendments thereto, taken as a whole, is not more disadvantageous to the holders of the Notes in any material respect than the original agreement or instrument as in effect on the Issue Date) or any transaction contemplated thereby;

(9) the existence of, or the performance by MSC or any of its Restricted Subsidiaries of its obligations under the terms of any stockholders agreement or investor rights agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the Issue Date, any agreement described under the caption “Certain Relationships and Related Party Transactions” in the documents incorporated by reference herein and any amendment thereto or similar agreements which it may enter into thereafter; provided, however, that the existence of, or the performance by MSC or any of its Restricted Subsidiaries of its obligations under, any future amendment to any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (9) to the extent that the terms of any such existing agreement together with all amendments thereto, taken as a whole, or new agreement are not otherwise more disadvantageous to the holders of the Notes in any material respect than the original agreement as in effect on the Issue Date;

(10) the execution of the Offering Transactions and the payment of all fees and expenses related to the Offering Transactions, including fees to the Sponsor, that are described in the Offering Circular;

(11)(a) transactions with customers, clients, suppliers, toll manufacturers or purchasers or sellers of goods or services, in each case in the ordinary course of business and otherwise in compliance with the terms of the Indenture, on terms at least as favorable as could reasonably have been obtained at such time from an unaffiliated party or (b) transactions with joint ventures or Unrestricted Subsidiaries for the purchase or sale of chemicals, equipment and services entered into in the ordinary course of business;

(12) any transaction effected as part of a Qualified Receivables Financing;

(13) the issuance of Equity Interests (other than Disqualified Stock) of MSC;

(14) the issuances of securities or other payments, awards or grants in cash, securities or otherwise pursuant to or the funding of, employment arrangements, stock option and stock ownership plans or similar employee benefit plans approved by the Board of Directors of MSC or of a Restricted Subsidiary, as appropriate, in good faith;

 

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(15) the entering into of any tax sharing agreement or arrangement and any payments permitted by clause (b)(12)(a) of the covenant described under “—Limitation on Restricted Payments;”

(16) any contribution to the capital of MSC;

(17) transactions permitted by, and complying with, the provisions of the covenant described under “—Merger, Consolidation or Sale of All or Substantially All Assets;”

(18) pledges of Equity Interests of Unrestricted Subsidiaries;

(19) any employment agreements entered into by MSC or any of the Restricted Subsidiaries in the ordinary course of business; and

(20) intercompany transactions undertaken in good faith (as certified by a responsible financial or accounting officer of MSC in an Officers’ Certificate) for the purpose of improving the consolidated tax efficiency of MSC and its Subsidiaries and not for the purpose of circumventing any covenant set forth in the Indenture.

Liens

MSC will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, Incur or suffer to exist any Lien (the “Initial Lien”) on any asset or property of MSC or such Restricted Subsidiary of MSC, or any income or profits therefrom, or assign or convey any right to receive income therefrom, whether owned at the Issue Date or thereafter acquired, (i) that secures any Indebtedness of any Person (other than Permitted Liens) unless the Notes are equally and ratably secured with (or on a senior basis to, in the case of Subordinated Indebtedness) such Indebtedness so long as such Indebtedness is so secured and (ii) that secures any First-Priority Lien Obligation of MSC or any Subsidiary Guarantor without effectively providing that the Notes or the applicable Guarantee, as the case may be, shall be granted a second-priority security interest (subject to Permitted Liens) upon the assets or property constituting the collateral for such First-Priority Lien Obligations; provided, however, that if granting such second-priority security interest requires the consent of a third party, MSC will use commercially reasonable efforts to obtain such consent with respect to the second-priority security interest for the benefit of the Trustee on behalf of the holders of the Notes; provided further, however, that if such third party does not consent to the granting of such second-priority security interest after the use of commercially reasonable efforts, MSC will not be required to provide such security interest.

Any Lien created for the benefit of the Holders of the Notes pursuant to clause (i) of the preceding paragraph shall provide by its terms that such Lien shall be automatically and unconditionally released and discharged upon the release and discharge of the Initial Lien.

For purposes of determining compliance with this covenant, (A) a Lien securing an item of Indebtedness need not be permitted solely by reference to one category of Permitted Liens described in clauses (1) through (32) of the definition of “Permitted Liens” or pursuant to the first paragraph of this covenant but may be permitted in part under any combination thereof and (B) in the event that a Lien securing an item of Indebtedness, Disqualified Stock or Preferred Stock (or any portion thereof) meets the criteria of one or more of the categories of Permitted Liens described in clauses (1) through (32) of the definition of “Permitted Liens” or pursuant to the first paragraph of this covenant, MSC shall, in its sole discretion, classify or reclassify, or later divide, classify or reclassify, such Lien securing such item of Indebtedness (or any portion thereof) in any manner that complies with this covenant and will only be required to include the amount and type of such Lien or such item of Indebtedness secured by such Lien in one of the clauses of the definition of “Permitted Liens” and such Lien securing such item of Indebtedness will be treated as being Incurred or existing pursuant to only one of such clauses or pursuant to the first paragraph hereof.

With respect to any Lien securing Indebtedness that was permitted to secure such Indebtedness at the time of the Incurrence of such Indebtedness, such Lien shall also be permitted to secure any Increased Amount of such Indebtedness. The “Increased Amount” of any Indebtedness shall mean any increase in the amount of such Indebtedness in connection with any accrual of interest, the accretion of accreted value, the amortization of original

 

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issue discount, the payment of interest in the form of additional Indebtedness with the same terms or in the form of common stock of MSC, the payment of dividends on Preferred Stock in the form of additional shares of Preferred Stock of the same class, accretion of original issue discount or liquidation preference and increases in the amount of Indebtedness outstanding solely as a result of fluctuations in the exchange rate of currencies or increases in the value of property securing Indebtedness described in clause (3) of the definition of “Indebtedness.”

Reports and Other Information

Notwithstanding that MSC may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act or otherwise report on an annual and quarterly basis on forms provided for such annual and quarterly reporting pursuant to rules and regulations promulgated by the SEC, MSC will file with the SEC (and provide the Trustee and holders of the Notes with copies thereof, without cost to each holder, within 15 days after it files them with the SEC),

(1) within 90 days after the end of each fiscal year (or such shorter period as may be required by the SEC, or such longer period as may be permitted by Rule 12b-25 of the Exchange Act), annual reports on Form 10-K (or any successor or comparable form) containing the information required to be contained therein (or required in such successor or comparable form),

(2) within 45 days after the end of each of the first three fiscal quarters of each fiscal year (or such shorter period as may be required by the SEC, or such longer period as may be permitted by Rule 12b-25 of the Exchange Act), reports on Form 10-Q (or any successor or comparable form),

(3) promptly from time to time after the occurrence of an event required to be therein reported, such other reports on Form 8-K (or any successor or comparable form), and

(4) any other information, documents and other reports which MSC would be required to file with the SEC if it were subject to Section 13 or 15(d) of the Exchange Act;

provided, however, that MSC shall not be so obligated to file such reports with the SEC if the SEC does not permit such filing, in which event MSC will make available such information to prospective purchasers of Notes, including by posting such reports on the primary website of MSC or its Subsidiaries, in addition to providing such information to the Trustee and the holders of the Notes, in each case within 15 days after the time MSC would be required to file such information with the SEC if it were subject to Section 13 or 15(d) of the Exchange Act.

In the event that (a) the rules and regulations of the SEC permit MSC and any direct or indirect parent company of MSC to report at such parent entity’s level on a consolidated basis and such parent entity of MSC is not engaged in any business in any material respect other than incidental to its ownership, directly or indirectly, of the Capital Stock of MSC, or (b) any direct or indirect parent of MSC becomes a guarantor of the Notes, the Indenture permits MSC to satisfy its obligations in this covenant with respect to financial information relating to MSC by furnishing financial information relating to such parent; provided that such financial information is accompanied by consolidating information that explains in reasonable detail the differences between the information relating to such parent and any of its Subsidiaries other than MSC and its Subsidiaries, on the one hand, and the information relating to MSC, the Guarantors, if any, and the other Subsidiaries on a standalone basis, on the other hand.

In addition, MSC shall, for so long as any Notes remain outstanding during any period when it is not subject to Section 13 or 15(d) of the Exchange Act, or otherwise permitted to furnish the SEC with certain information pursuant to Rule 12g3-2(b) of the Exchange Act, furnish to the holders of the Notes, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.

Notwithstanding the foregoing, MSC will be deemed to have furnished such reports referred to above to the Trustee and the holders of the Notes if MSC has filed such reports with the SEC via the EDGAR filing system and such reports are publicly available.

 

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Future Guarantors

Each of our Restricted Subsidiaries that is a guarantor under the Credit Agreement guarantees the Notes in the manner and on the terms set forth in the Indenture.

MSC will cause each of its Restricted Subsidiaries (other than (x) a Foreign Subsidiary; (y) or a Receivables Subsidiary or (z) a Domestic Subsidiary that is wholly owned by one or more Foreign Subsidiaries) that guarantees any Indebtedness of MSC, the Issuers or any Subsidiary Guarantor to execute and deliver to the Trustee a supplemental indenture pursuant to which such Subsidiary will guarantee payment of the Notes on the terms and conditions set forth in the Indenture. Each Guarantee will be limited to an amount not to exceed the maximum amount that can be guaranteed by that Restricted Subsidiary without rendering the Guarantee, as it relates to such Restricted Subsidiary, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally.

Each Guarantee by a Restricted Subsidiary may be released as described under “—Guarantees.”

Impairment of Security Interest

Subject to the rights of the holders of Permitted Liens, MSC will not, and will not permit any of its Restricted Subsidiaries to, take or knowingly or negligently omit to take, any action which action or omission would or could reasonably be expected to have the result of materially impairing the security interest with respect to the Collateral for the benefit of the Trustee and the Holders of the Notes, subject to limited exceptions. MSC shall not amend, modify or supplement, or permit or consent to any amendment, modification or supplement of, the Security Documents in any way that would be adverse to the holders of the Notes in any material respect, except as described above under “—Security for the Notes” or as permitted under “—Amendments and Waivers” or under the Intercreditor Agreement.

After-Acquired Property

Upon the acquisition by the Issuers, MSC or any Guarantor of any First-Priority After-Acquired Property, the Issuers, MSC or such Guarantor shall execute and deliver such mortgages, deeds of trust, security instruments, financing statements and certificates and opinions of counsel as shall be reasonably necessary to vest in the Trustee a perfected security interest, subject only to Permitted Liens, in such First-Priority After-Acquired Property and to have such First-Priority After-Acquired Property (but subject to certain limitations, if applicable, including as described under “—Security for the Notes—Limitations on Stock Collateral”) added to the Collateral, and thereupon all provisions of the Indenture relating to the Collateral shall be deemed to relate to such First-Priority After-Acquired Property to the same extent and with the same force and effect; provided, however, that if granting such second-priority security interest in such First-Priority After-Acquired Property requires the consent of a third party, MSC will use commercially reasonable efforts to obtain such consent with respect to the second-priority interest for the benefit of the Trustee on behalf of the Holders of the Notes; provided further, however, that if such third party does not consent to the granting of such second-priority security interest after the use of such commercially reasonable efforts, MSC or such Guarantor, as the case may be, will not be required to provide such security interest.

Limitation on Indenture Restricted Subsidiaries

MSC will not, and will not permit any of its Restricted Subsidiaries to, take or knowingly or negligently omit to take any action which action or omission could reasonably be expected to or would have the result of any Existing Debentures Subsidiary being an Indenture Restricted Subsidiary at any time when the negative covenants contained in the Existing Debentures are applicable to an Indenture Restricted Subsidiary unless such Subsidiary concurrently becomes a Subsidiary Guarantor and, after giving effect thereto, there is no default under the Existing Debentures.

 

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Limitation on Issuers

MSC will not cease to beneficially own (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, 100% of the Voting Stock of the Issuers (except to the extent either of the Issuers is merged with and into MSC or a Guarantor in accordance with the terms of the Indenture). The Issuers will not own any material assets or other property, other than Indebtedness or other obligations owing to the Issuers by MSC and its Restricted Subsidiaries and Cash Equivalents, or engage in any trade or conduct any business other than treasury, cash management, hedging and cash pooling activities and activities incidental thereto. The Issuers will not Incur any material liabilities or obligations other than their obligations pursuant to the Notes, the Indenture, the Credit Agreement, the Security Documents and other Indebtedness permitted to be Incurred by the Issuers as described under “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” and liabilities and obligations pursuant to business activities permitted by this covenant.

Merger, Consolidation or Sale of All or Substantially All Assets

(a) MSC will not consolidate or merge with or into or wind up into (whether or not MSC is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to any Person unless:

(1) MSC is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than MSC) or to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made is a corporation, partnership or limited liability company organized or existing under the laws of the United States, any state thereof, the District of Columbia, or any territory thereof (MSC or such Person, as the case may be, being herein called the “Successor Company”);

(2) the Successor Company (if other than MSC) expressly assumes all the obligations of MSC under the Indenture and its Guarantee of the Notes pursuant to supplemental indentures or other documents or instruments in form reasonably satisfactory to the Trustee;

(3) immediately after giving effect to such transaction no Default shall have occurred and be continuing;

(4) immediately after giving pro forma effect to such transaction, as if such transaction had occurred at the beginning of the applicable four-quarter period (and treating any Indebtedness which becomes an obligation of the Successor Company or any of its Restricted Subsidiaries as a result of such transaction as having been Incurred by the Successor Company or such Restricted Subsidiary at the time of such transaction), either

(A) the Successor Company would be permitted to Incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first sentence of the covenant described under “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” or

(B) the Fixed Charge Coverage Ratio for the Successor Company and its Restricted Subsidiaries would be greater than the Fixed Charge Coverage Ratio for MSC and its Restricted Subsidiaries immediately prior to such transaction; and

(5) MSC shall have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indentures (if any) comply with the Indenture.

The Successor Company will succeed to, and be substituted for, MSC under the Indenture and its Guarantee of the Notes and MSC, the Guarantors and the Issuers shall be released from the obligation to guarantee, or, to pay, if applicable, the principal of and interest on the Notes. Notwithstanding the foregoing clauses (3) and (4), (a) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets

 

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to MSC or to another Restricted Subsidiary, and (b) MSC may merge with an Affiliate incorporated solely for the purpose of reincorporating MSC in another state of the United States so long as the amount of Indebtedness of MSC and its Restricted Subsidiaries is not increased thereby.

(b) An Issuer may not, and MSC will not permit an Issuer to, consolidate, merge or amalgamate with or into or wind up into (whether or not such Issuer is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to any Person unless:

(1) such Issuer is the surviving entity or the Person formed by or surviving any such consolidation merger or amalgamation (if other than such Issuer) or to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made is a corporation, partnership, limited liability company or unlimited liability company organized and existing under the laws of Canada or the laws of any political subdivision thereof or the laws of the United States of America, any state thereof or the District of Columbia, or any territory thereof (such Issuer or such Person, as the case may be, being herein called, a “Successor Issuer”);

(2) a Successor Issuer (if other than such Issuer) expressly assumes, all the obligations of such Issuer under the Indenture and the Notes pursuant to supplemental indentures or other documents or instruments in form reasonably satisfactory to the Trustee;

(3) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of a Successor Issuer as a result of such transaction as having been Incurred by such Successor Issuer at the time of such transaction), no Default shall have occurred and be continuing; and

(4) MSC shall have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that such consolidation, merger, amalgamation, transfer and such supplemental indenture (if any) comply with the Indenture.

A Successor Issuer will be the successor to the predecessor Issuer and shall succeed to, and be substituted for, and may exercise every right and power of, the predecessor Issuer under the Indenture, and the predecessor Issuer, except in the case of a lease, shall be released from the obligation to pay the principal of and interest on the Notes. Notwithstanding the foregoing clause (3), an Issuer may consolidate with, merge into, amalgamate with or transfer all or part of its property and assets to MSC or a Restricted Subsidiary.

(c) MSC will not permit any Subsidiary Guarantor to, consolidate or merge with or into or wind up into (whether or not such Subsidiary Guarantor is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions to, any Person (other than any such sale, assignment, transfer, lease, conveyance or disposition in connection with the Hexion Recapitalization described in the Offering Circular) unless:

(1) such Subsidiary Guarantor is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) or to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made is a corporation, partnership or limited liability company organized and existing under the laws of the United States, any state thereof, the District of Columbia, or any territory thereof (such Subsidiary Guarantor or such Person, as the case may be, being herein called the “Successor Guarantor”);

(2) the Successor Guarantor (if other than such Guarantor) expressly assumes all the obligations of such Guarantor under the Indenture and such Guarantors’ Guarantee of the Notes pursuant to a supplemental indenture or other documents or instruments in form reasonably satisfactory to the Trustee;

(3) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Guarantor or any of its Subsidiaries as a result of such transaction as having been Incurred by the Successor Guarantor or such Subsidiary at the time of such transaction) no Default shall have occurred and be continuing; and

 

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(4) the Successor Guarantor (if other than such Subsidiary Guarantor) shall have delivered or caused to be delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture.

Subject to certain limitations described in the Indenture, the Successor Guarantor will succeed to, and be substituted for, such Guarantor under the Indenture and such Guarantor’s Guarantee of the Notes and such Guarantor shall be released from its obligation to guarantee or to pay, if applicable, the principal of, or interest on, the Notes. Notwithstanding the foregoing clause (3), (1) a Guarantor may merge with an Affiliate incorporated solely for the purpose of reincorporating such Guarantor in another state of the United States, so long as the amount of Indebtedness of the Guarantor is not increased thereby and (2) a Guarantor may merge with another Guarantor or an Issuer.

In addition, notwithstanding the foregoing, any Guarantor may consolidate, amalgamate or merge with or into or wind up into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets (collectively, a “Permitted Transfer”) to (x) MSC or any Guarantor or (y) any Restricted Subsidiary of MSC that is not a Guarantor; provided that at the time of each such Permitted Transfer pursuant to clause (y) the aggregate amount of all such Permitted Transfers since the Issue Date shall not exceed 5.0% of the Total Assets as shown on the most recent available balance sheet of MSC and the Restricted Subsidiaries after giving effect to each such Permitted Transfer and including all Permitted Transfers occurring from and after the Existing Second Lien Notes Issue Date (excluding Permitted Transfers in connection with the Hexion Recapitalization).

Defaults

An Event of Default with respect to all the Notes is defined in the Indenture as:

(1) a default in any payment of interest or any Additional Amounts on any Note when due continued for 30 days,

(2) a default in the payment of principal or premium, if any, of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise,

(3) the failure by MSC to comply with its obligations under the covenant described under “—Merger, Consolidation or Sale of All or Substantially All Assets” above,

(4) the failure by MSC or any of its Restricted Subsidiaries to comply for 30 days after notice with any of its obligations under the covenants described under “—Certain Covenants” (in each case, other than a failure to purchase Notes when required under the covenant described under “—Certain Covenants—Asset Sales”),

(5) the failure by MSC or any of its Restricted Subsidiaries to comply for 60 days after notice with its other agreements contained in the Notes or the Indenture, (other than those referred to in (1), (2), (3) or (4) above),

(6) the failure by MSC or any Significant Subsidiary to pay any Indebtedness (other than Indebtedness owing to MSC or a Restricted Subsidiary of MSC) within any applicable grace period after final maturity or the acceleration of any such Indebtedness (or, with respect to the pollution control bonds constituting Existing Debentures, failure to pay under the guarantees of MSC and its applicable Restricted Subsidiaries related thereto) by the holders thereof because of a default, in each case, if the total amount of such Indebtedness unpaid or accelerated exceeds $35 million or its foreign currency equivalent (the “cross-acceleration provision”),

(7) certain events of bankruptcy, insolvency or reorganization of MSC, either Issuer or a Significant Subsidiary (the “bankruptcy provisions”),

(8) failure by MSC or any Significant Subsidiary to pay final judgments aggregating in excess of $35 million or its foreign currency equivalent (net of any amounts which are covered by enforceable insurance

 

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policies issued by solvent carriers), which judgments are not discharged, waived or stayed for a period of 60 days (the “judgment default provision”),

(9) the Guarantee of any Notes by a Significant Subsidiary ceases to be in full force and effect (except as contemplated by the terms thereof or by the Indenture) or any Guarantor denies or disaffirms its obligations under the Indenture or any Guarantee of any Notes and such Default continues for 10 days,

(10) unless such Liens have been released in accordance with the provisions of the Security Documents, Liens in favor of the Holders of the Notes with respect to all or substantially all of the Collateral cease to be valid or enforceable, or MSC shall assert or any Subsidiary Guarantor shall assert, in any pleading in any court of competent jurisdiction, that any such security interest is invalid or unenforceable and, in the case of any such Subsidiary Guarantor, MSC fails to cause such Subsidiary Guarantor to rescind such assertions within 30 days after MSC has actual knowledge of such assertions,

(11) the failure by MSC, the Issuers or any Subsidiary Guarantor to comply for 60 days after notice with its other agreements contained in the Security Documents except for a failure that would not be material to the holders of the Notes and would not materially affect the value of the Collateral taken as a whole (together with the defaults described in clauses (9) and (10) the “security default provisions”), or

(12) a Change of Control shall occur and the Issuers do not cure this event as permitted under the Indenture (the “change of control default provisions”).

The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body.

However, a default under clause (4), (5) or (11) will not constitute an Event of Default until the Trustee notifies the Issuers or the holders of at least 25% in principal amount of outstanding Notes notify the Issuers and the Trustee of the default and the Issuers do not cure such default within the time specified in clauses (4), (5) and (11) hereof after receipt of such notice.

If an Event of Default (other than a Default relating to certain events of bankruptcy, insolvency or reorganization of either of the Issuers or MSC) occurs and is continuing, the Trustee by notification to the Issuers or the holders of at least 25% in principal amount of outstanding Notes by notice to the Issuers and the Trustee may declare the principal of, premium, if any, and accrued but unpaid interest on all the Notes to be due and payable. Upon such a declaration, such principal and interest will be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Issuers or MSC occurs, the principal of, premium, if any, and interest on all the Notes will become immediately due and payable without any declaration or other act on the part of the Trustee or any holders of the Notes. Under certain circumstances, the holders of a majority in principal amount of the outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences.

Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the holders unless such holders have offered to the Trustee reasonable indemnity or security satisfactory to it against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no holder may pursue any remedy with respect to the Indenture or the Notes unless:

(1) such holder has previously given the Trustee notice that an Event of Default is continuing,

(2) holders of at least 25% in principal amount of the outstanding Notes have requested the Trustee to pursue the remedy,

 

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(3) such holders have offered the Trustee security or indemnity reasonably satisfactory to it against any loss, liability or expense,

(4) the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity, and

(5) the holders of a majority in principal amount of the outstanding Notes have not given the Trustee a direction inconsistent with such request within such 60-day period.

Subject to certain restrictions, the holders of a majority in principal amount of outstanding Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, the Trustee will be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action.

The Indenture provides that if a Default occurs and is continuing and is actually known to the Trustee, the Trustee must mail to each holder of the Notes notice of the Default within the earlier of 90 days after it occurs or 30 days after it is actually known to a Trust Officer or written notice of it is received by the Trustee. Except in the case of a Default in the payment of principal of, premium (if any) or interest on any Note, the Trustee may withhold notice if and so long as a committee of its Trust Officers in good faith determines that withholding notice is in the interests of the Noteholders. In addition, the Issuers are required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Issuers also are required to deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any event which would constitute certain Defaults with respect to the Notes, their status and what action the Issuers are taking or propose to take in respect thereof.

Amendments and Waivers

Subject to certain exceptions and the provisions of the Intercreditor Agreement, the Indenture, the Intercreditor Agreement and the related Security Documents may be amended with the consent of the holders of a majority in principal amount of the Notes, then outstanding (which consents may be obtained in connection with a tender offer or exchange offer for the Notes) and any past default or compliance with any provisions may be waived with the consent of the holders of a majority in principal amount of the Notes then outstanding (which consents may be obtained in connection with a tender offer or exchange offer for the Notes). Notwithstanding the foregoing, without the consent of each holder of an outstanding Note affected, no amendment may, among other things:

(1) reduce the amount of such Notes whose holders must consent to an amendment,

(2) reduce the rate of or extend the time for payment of interest on such Note,

(3) reduce the principal of or change the Stated Maturity of such Note,

(4) reduce the amount payable upon the redemption of such Note or change the time when any such Note may be redeemed as described under “—Optional Redemption” or “—Redemption for Changes in Withholding Taxes,”

(5) make such Note payable in money other than that stated in such Note,

(6) impair the right of any holder to receive payment of principal of, premium, if any, and interest on such holder’s Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder’s Notes,

 

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(7) make any change in the amendment provisions which require each holder’s consent or in the waiver provisions,

(8) expressly subordinate such Note or any Guarantee of such Note to any other Indebtedness of the Issuers or any Guarantor,

(9) except as expressly permitted by the Indenture, modify the Guarantees in any manner adverse to the holders of such Note,

(10) make any change in the Intercreditor Agreement or the provisions in the Indenture dealing with the application of Trust proceeds of the Collateral that would adversely affect the Noteholders, or

(11) make any change in the provisions described under “—Additional Amounts” that adversely affects the rights of any Noteholder or amend the terms of such Notes or the Indenture in a way that would result in the loss of an exemption from any of the Taxes described thereunder.

Without the consent of the holders of at least two-thirds in aggregate principal amount of the Notes then outstanding (which consents may be obtained in connection with a tender offer or exchange offer for the Notes), no amendment or waiver may release from the Lien of the Indenture and the Security Documents all or substantially all of the Collateral.

Without the consent of any holder, the Issuers, the Guarantors and the Trustee may amend the Indenture, the Notes, any Security Document or the Intercreditor Agreement to cure any ambiguity, omission, defect, mistake or inconsistency, to provide for the assumption by a successor corporation, partnership or limited liability company of the obligations of the Issuers or any Guarantor under the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes (provided, however, that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add Guarantees with respect to the Notes, to secure the Notes, to add additional assets as Collateral, to release Collateral from the Lien pursuant to the Indenture, the Security Documents and the Intercreditor Agreement when permitted or required by the Indenture or the Security Documents, to add additional secured creditors holding other second priority obligations or additional First-Priority Lien Obligations so long as such obligations are not prohibited by the Indenture, to add to the covenants of MSC or any Restricted Subsidiaries for the benefit of the holders or to surrender any right or power conferred upon the Issuers or any Guarantor, to make any change that does not adversely affect the rights of any holder, to conform the text of the Indenture, the Notes, the Security Documents or the Intercreditor Agreement, to any provision of the “Description of Notes” to the extent that such provision in this “Description of Notes” was intended by the Issuers to be a verbatim recitation of a provision of the Indenture, the Notes, the Security Documents or the Intercreditor Agreement, to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA, to make certain changes to the Indenture to provide for the issuance of additional Notes or to make any amendment to the provisions of the Indenture relating to the transfer and legending of Notes; provided, however, that (a) compliance with the Indenture as so amended would not result in Notes being transferred in violation of the Securities Act or any other applicable securities law and (b) such amendment does not materially and adversely affect the rights of holders to transfer Notes. In addition, the Intercreditor Agreement provides that, subject to certain exceptions, any amendment, waiver or consent to any of the collateral documents with respect to First-Priority Lien Obligations will also apply automatically to the comparable Security Documents with respect to the Notes.

The consent of the noteholders is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment.

The Indenture provides that in determining whether the holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuers, any Guarantor or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuers or any Guarantor shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining

 

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whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes which the Trustee knows are so owned shall be so disregarded. Subject to the foregoing, only Notes outstanding at the time shall be considered in any such determination. As a result, Notes held by the Sponsor will not be able to vote in respect of any direction, waiver or consent so long as the Sponsor controls the Issuers.

After an amendment under the Indenture becomes effective, the Issuers are required to mail to the respective Noteholders a notice briefly describing such amendment. However, the failure to give such notice to all Noteholders entitled to receive such notice, or any defect therein, will not impair or affect the validity of the amendment.

No Personal Liability of Directors, Officers, Employees and Stockholders

No affiliate, director, officer, employee, incorporator or holder of any Equity Interests in MSC, the Issuers or any direct or indirect parent corporation of MSC, as such, will have any liability for any obligations of the Issuers under the Notes or the Indenture, or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. The waiver may not be effective to waive liabilities under the federal securities laws.

Transfer and Exchange

A noteholder may transfer or exchange Notes in accordance with the Indenture. Upon any transfer or exchange, the registrar and the Trustee may require a noteholder, among other things, to furnish appropriate endorsements and transfer documents and the Issuers may require a noteholder to pay any taxes required by law or permitted by the Indenture. The Issuers are not required to transfer or exchange any Note, selected for redemption or to transfer or exchange any such Note for a period of 15 days prior to a selection of such Notes to be redeemed. The Notes will be issued in registered form and the registered holder of a will be treated as the owner of such Note for all purposes.

Satisfaction and Discharge

The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration or transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when:

(1) either (a) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuers and thereafter repaid to the Issuers or discharged from such trust) have been delivered to the Trustee for cancellation or (b) all of the Notes (i) have become due and payable, (ii) will become due and payable at their stated maturity within one year or (iii) if redeemable at the option of the Issuers, are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Issuers, and the Issuers have irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Notes to the date of deposit together with irrevocable instructions from the Issuers directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be;

(2) the Issuers or the Guarantors have paid all other sums payable under the Indenture; and

(3) the Issuers have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with.

 

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Defeasance

The Issuers at any time may terminate all their obligations under the Notes and their obligations under the Indenture with respect to the holders of the Notes (“legal defeasance”), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the Notes, to replace Notes that have been mutilated, destroyed, lost or stolen and to maintain a registrar and paying agent in respect of the Notes. The Issuers at any time may terminate their obligations under the covenants described under “—Certain Covenants” for the benefit of the Notes, the operation of the cross acceleration provision, the bankruptcy provisions with respect to Significant Subsidiaries, the judgment default provision, the security default provisions, and the change of control default provision described under “—Defaults” (but only to the extent that those provisions relate to the Defaults with respect to the Notes) and certain provisions of the covenant described under “—Merger, Consolidation or Sale of All or Substantially All Assets” (“covenant defeasance”) for the benefit of the Notes. If the Issuers exercise their legal defeasance option or their covenant defeasance option, each Guarantor will be released from all of its obligations with respect to its Guarantee and the Security Documents so long as no Notes are then outstanding.

The Issuers may exercise their legal defeasance option notwithstanding their prior exercise of their covenant defeasance option. If the Issuers exercise their legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Issuers exercise their covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in clause (3), (4), (6), (7) with respect only to Significant Subsidiaries, (8) with respect only to Significant Subsidiaries, (9), (10), (11) or (12) under “—Defaults” or because of the failure of MSC to comply with clause (a)(4) under “—Merger, Consolidation or Sale of All or Substantially All Assets.”

In order to exercise either defeasance option, the Issuers must irrevocably deposit in trust (the “defeasance trust”) with the Trustee money or Government Obligations for the payment of principal, premium (if any) and interest on the Notes to redemption or maturity, as the case may be, and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that holders of the Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such deposit and defeasance and will be subject to U.S. federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or change in applicable Federal income tax law). Notwithstanding the foregoing, the Opinion of Counsel required with respect to a legal defeasance need not be delivered if all the Notes, not theretofore delivered to the Trustee for cancellation have become due and payable.

Concerning the Trustee

Wilmington Trust Company is the Trustee under the Indenture and has been appointed by the Issuers as Registrar and a Paying Agent with regard to the Notes. Wilmington Trust Company is also the trustee under the Existing Second Lien Notes Indenture.

Wilmington Trust FSB, an affiliate of Wilmington Trust Company, serves as trustee for the Existing Senior Secured Notes. Consequently, if a default occurs with respect to the Notes, the Existing Second Lien Notes or the Existing Senior Secured Notes, Wilmington Trust FSB or Wilmington Trust Company (as applicable) may be considered to have a conflicting interest for the purposes of the TIA. In that case, the applicable trustee may be required to resign under one or more of the indentures, and we would be required to appoint a successor trustee.

The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Issuers, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; provided, however, if it acquires any conflicting interest it must either eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign.

 

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The Holders of a majority in principal amount of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. If an Event of Default with respect to any Notes occurs (and is not cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of Notes unless such holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense and then only to the extent required by the terms of the Indenture.

Governing Law

The Indenture, the Security Documents, the Intercreditor Agreement and the Notes are governed by, and construed in accordance with, the laws of the State of New York (or, to the extent required, the law of the jurisdiction in which the Collateral is located).

Enforceability of Judgments

Since a significant portion of our operating assets and the operating assets of our Subsidiaries are situated outside the United States, any judgment obtained in the United States against us or a Subsidiary, including judgments with respect to the payment of principal, interest, Additional Amounts, redemption price and any purchase price with respect to the Notes, may not be collectible within the United States.

The Canadian Issuer has been informed by its Nova Scotia counsel Stewart McKelvey, that in such counsel’s opinion the laws of the Province of Nova Scotia (the “Province”) and the federal laws of Canada applicable therein permit an action to be brought in a court of competent jurisdiction in the Province on a final and conclusive judgment in personam of a United States federal court or a court of the State of New York sitting in the Borough of Manhattan in The City of New York (a “New York Court”), respecting the enforcement of the Notes, the Indenture, the Registration Rights Agreement or the Security Documents, that is not impeachable as void or voidable under the laws of the State of New York and that is for a sum certain in money if:

(1) the New York Court that rendered such judgment has jurisdiction over the judgment debtor, as recognized by the courts of the Province and in accordance with its conflict of laws rules (and the enforceable submission by the Canadian Issuer in the Indenture to the jurisdiction of the New York Court will be sufficient for this purpose);

(2) such judgment was not obtained by fraud or in a manner contrary to natural justice or in contravention of fundamental principles of procedure and the enforcement thereof would not be inconsistent with public policy, as each of such terms is understood under the laws of the Province and the federal laws of Canada applicable therein;

(3) such judgment was not obtained contrary to an order made by the Attorney General of Canada under the Foreign Extraterritorial Measures Act (Canada) or by the Competition Tribunal under the Competition Act (Canada);

(4) the enforcement of such judgment does not constitute, directly or indirectly, the enforcement of foreign revenue, expropriatory, public or penal laws or other laws of a public nature;

(5) the action to enforce such judgment is commenced within six years after the date of such judgment; and

(6) the judgment is not contrary to the final and conclusive judgment of any court in the Province or in any other jurisdiction.

Furthermore, we have been advised by such counsel, that absent procedural concerns or concerns respecting particular laws of the State of New York, such counsel would not foresee a court of competent jurisdiction in the Province, on public policy grounds, refusing to enforce a final and conclusive judgment in personam of a

 

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New York Court for a definite sum of money with respect to a matter under the Registration Rights Agreement, the Security Documents, the Indenture or on the Notes where a substantially similar judgment would have been granted by the Nova Scotia court had such matter been within the jurisdiction of the Nova Scotia court and properly come before it. Such counsel has no knowledge of New York law or New York procedure but is not aware of any general public policy concerns with respect thereto having been raised by any Nova Scotia court.

Consent to Jurisdiction and Service

The Canadian Issuer has appointed Corporation Service Company, 521 Fifth Avenue, New York, New York 10175 as its agent for actions relating to the Notes, the Indenture, the Registration Rights Agreement or the Security Documents or brought under Federal or state securities laws brought in any Federal or state court located in the Borough of Manhattan in The City of New York and will submit to such jurisdiction.

Certain Definitions

Acquired Indebtedness” means, with respect to any specified Person:

(1) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Restricted Subsidiary of such specified Person, and

(2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person,

in each case, other than Indebtedness Incurred as consideration in, in contemplation of, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was otherwise acquired by such Person, or such asset was acquired by such Person, as applicable.

Adjusted EBITDA” means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus, without duplication, to the extent the same was deducted in calculating Consolidated Net Income:

(1) Consolidated Taxes; plus

(2) Consolidated Interest Expense; provided, however, such amount will be included in Adjusted EBITDA notwithstanding that such amount was not deducted in calculating Consolidated Net Income; plus

(3) Consolidated Non-cash Charges; plus

(4) the amount of management, monitoring, consulting and advisory fees and related expenses paid to the Sponsor or its predecessor (or any accruals relating to such fees and related expenses) during such period; provided, however, that such amount shall not exceed in any four-quarter period commencing after September 30, 2006 the amount determined in accordance with clause (3) of the covenant described under “—Certain Covenants—Transactions with Affiliates;”

(5) plant closure and severance costs and charges; plus

(6) impairment charges, including the write-down of Investments; plus

(7) non-operating expenses; plus

(8) restructuring expenses and charges; plus

(9) the cost (or amortization of prior service cost) of subsidizing coverage for persons affected by amendments to medical benefit plans implemented prior to the Issue Date; provided, however, such amount will be included in Adjusted EBITDA notwithstanding that such amount was not deducted in calculating Consolidated Net Income; less, without duplication,

 

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(10) non-cash items increasing Consolidated Net Income for such period (excluding the recognition of deferred revenue or any items which represent the reversal of any accrual of, or cash reserve for, anticipated cash charges in any prior period and any items for which cash was received in a prior period, including the amortization of employee benefit plan prior service costs); minus

(11) non-operating income.

Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.

Applicable Premium” means, with respect to any Note on any applicable redemption date, the greater of:

(1) 1.0% of the then outstanding principal amount of such Note; and

(2) the excess of:

(A) the present value at such redemption date of the sum of (i) the redemption price of such Note at November 15, 2015 (such redemption price being set forth in the applicable table appearing above under “Optional Redemption”) plus (ii) all required interest payments due on such Note through November 15, 2015 (excluding accrued but unpaid interest), such present value to be computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over

(B) the then outstanding principal amount of such Note.

Asset Sale” means:

(1) the sale, conveyance, transfer or other disposition (whether in a single transaction or a series of related transactions) of assets (including by way of a Sale/Leaseback Transaction) of MSC or any Restricted Subsidiary of MSC other than in the ordinary course of business (each referred to in this definition as a “disposition”) or

(2) the issuance or sale of Equity Interests of any Restricted Subsidiary (other than to MSC or another Restricted Subsidiary of MSC other than directors’ or other legally required qualifying shares) (whether in a single transaction or a series of related transactions),

in each case other than:

(a) a disposition of Cash Equivalents or Investment Grade Securities;

(b) disposition of obsolete, damaged or worn out equipment or disposals of equipment in connection with reinvestment in or replacement of equipment, in each case, in the ordinary course of business;

(c) the disposition of all or substantially all of the assets of MSC in a manner permitted pursuant to paragraph (a) of the provisions described above under “—Merger, Consolidation or Sale of All or Substantially All Assets” or any disposition that constitutes a Change of Control;

(d) any Restricted Payment or Permitted Investment that is permitted to be made, and is made, under the covenant described above under “—Certain Covenants—Limitation on Restricted Payments;”

(e) any disposition of assets of MSC or any Restricted Subsidiary or issuance or sale of Equity Interests of any Restricted Subsidiary, which disposition or issuance has an aggregate Fair Market Value of less than $12.5 million;

(f) any disposition of assets to MSC or any Restricted Subsidiary of MSC, including by way of merger;

(g) any exchange of assets for assets related to a Similar Business to the extent of comparable or better market value, as determined in good faith by MSC;

 

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(h) any disposition of assets received by MSC or any of its Restricted Subsidiaries upon the foreclosure on a Lien;

(i) any disposition of Equity Interests in, or Indebtedness or other securities of, an Unrestricted Subsidiary;

(j) any disposition of inventory in the ordinary course of business;

(k) the lease, assignment or sub-lease of any real or personal property in the ordinary course of business;

(l) any disposition of accounts receivable and related assets of the type specified in the definition of “Receivables Financing” to a Receivables Subsidiary in a Qualified Receivables Financing or in factoring or similar transactions;

(m) a transfer of accounts receivable and related assets of the type specified in the definition of “Receivables Financing” (or a fractional undivided interest therein) by a Receivables Subsidiary in a Qualified Receivables Financing;

(n) any agreement or arrangement involving, relating to or otherwise facilitating, (i) requirements contracts, (ii) tolling arrangements, (iii) the reservation or presale of production capacity of MSC or any of its Restricted Subsidiaries by one or more third parties;

(o) sales or grants of licenses or sublicenses to use MSC’s or any of its Restricted Subsidiaries patents, trade secrets, know-how and technology to the extent that such license does not prohibit the licensor from using the patent, trade secret, know-how or technology; and

(p) any Sale/Leaseback Transaction pursuant to which MSC or any Restricted Subsidiaries receives with respect to such transaction aggregate consideration of less than $15 million.

Bank Indebtedness” means any and all amounts payable under or in respect of any Credit Agreement or the other Senior Credit Documents, as amended, restated, supplemented, waived, replaced, restructured, repaid, refunded, refinanced or otherwise modified from time to time (including after termination of the Credit Agreement), including principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to MSC whether or not a claim for post-filing interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, guarantees and all other amounts payable thereunder or in respect thereof.

Board of Directors” means as to any Person, the board of directors or managers, as applicable, of such Person (or, if such Person is a partnership, the board of directors or other governing body of the general partner of such Person) or any duly authorized committee thereof.

Business Day” means each day which is not a Legal Holiday.

Canadian Issuer” means Hexion Nova Scotia Finance, ULC, a Nova Scotia unlimited liability company, and any successor in interest thereto.

Capital Stock” means:

(1) in the case of a corporation, corporate stock;

(2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock;

(3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and

(4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.

 

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Capitalized Lease Obligation” means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized and reflected as a liability on a balance sheet (excluding the footnotes thereto) in accordance with GAAP.

Cash Contribution Amount” means the aggregate amount of cash contributions made to the capital of MSC described in the definition of “Contribution Indebtedness.”

Cash Equivalents” means:

(1) U.S. dollars, pounds sterling, euros, the national currency of any member state in the European Union or, in the case of any Foreign Subsidiary that is a Restricted Subsidiary, such local currencies held by it from time to time in the ordinary course of business;

(2) securities issued or directly and fully guaranteed or insured by the government of, or any agency or instrumentality thereof, the United States of America, Australia, Great Britain, Canada, the Netherlands or any other member state of the European Union, in each case with maturities not exceeding two years after the date of acquisition;

(3) in the case of any Foreign Subsidiary, securities issued or directly and fully guaranteed or insured by the government of the jurisdiction of such Foreign Subsidiary, or any agency or instrumentality thereof, in each case with maturities not exceeding 270 days after the date of acquisition and held by it from time to time in the ordinary course of business;

(4) certificates of deposit, time deposits and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers’ acceptances, in each case with maturities not exceeding one year and overnight bank deposits and demand deposits (in their respective local currencies), in each case with any commercial bank having capital and surplus in excess of $500 million or the foreign currency equivalent thereof and whose long-term debt is rated “A” or the equivalent thereof by Moody’s or S&P (or, in the case of an obligor domiciled outside of the United States, reasonably equivalent ratings of another internationally recognized credit rating agency);

(5) repurchase obligations for underlying securities of the types described in clauses (2) and (4) above entered into with any financial institution meeting the qualifications specified in clause (4) above;

(6) commercial paper issued by a corporation (other than an Affiliate of MSC) rated at least “A-1” or the equivalent thereof by Moody’s or S&P (or, in the case of an obligor domiciled outside of the United States, reasonably equivalent ratings of another internationally recognized credit rating agency) and in each case maturing within one year after the date of acquisition;

(7) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody’s or S&P in each case with maturities not exceeding two years from the date of acquisition;

(8) Indebtedness issued by Persons (other than the Sponsor or any of their Affiliates) with a rating of “A” or higher from S&P or “A-2” or higher from Moody’s (or, in the case of an obligor domiciled outside of the United States, reasonably equivalent ratings of another internationally recognized credit rating agency) in each case with maturities not exceeding two years from the date of acquisition;

(9) investment funds investing at least 95% of their assets in securities of the types described in clauses (1) through (8) above; and

(10) instruments equivalent to those referred to in clauses (1) through (8) above denominated in euros or any other foreign currency comparable in credit quality and tenor to those referred to above and commonly used by corporations for cash management purposes in any jurisdiction outside the United States to the extent reasonably required in connection with any business conducted by any Subsidiary organized in such jurisdiction.

 

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Code” means the Internal Revenue Code of 1986, as amended.

Collateral” means all the collateral described in the Security Documents.

consolidated” means, with respect to any Person, such Person consolidated with its Restricted Subsidiaries and shall not include any Unrestricted Subsidiary, but the interest of such Person in an Unrestricted Subsidiary shall be accounted for as an Investment.

Consolidated Interest Expense” means, with respect to any Person (the “Specified Person”) for any period, the sum, without duplication, of:

(1) consolidated interest expense of the Specified Person and its Restricted Subsidiaries for such period, to the extent such expense was deducted in computing Consolidated Net Income (including amortization of original issue discount, the interest component of Capitalized Lease Obligations, and net payments and receipts (if any) pursuant to interest rate Hedging Obligations and excluding amortization of deferred financing fees and expensing of any bridge or other financing fees);

(2) consolidated capitalized interest of the Specified Person and its Restricted Subsidiaries for such period, whether paid or accrued;

(3) commissions, discounts, yield and other fees and charges Incurred for such period in connection with any Receivables Financing of the Specified Person or any of its Restricted Subsidiaries which are payable to Persons other than MSC and its Restricted Subsidiaries;

(4) dividends accrued for such period in respect of all Disqualified Stock of the Specified Person and any of its Restricted Subsidiaries and all Preferred Stock (including Designated Preferred Stock) of any such Restricted Subsidiaries, in each case held by Persons other than MSC or a Wholly Owned Subsidiary (in each such case other than (x) dividends payable solely in Capital Stock (other than Disqualified Stock) of MSC and (y) dividends that are payable only at such time as there are no Notes outstanding); and

(5) interest accruing for such period on any Indebtedness of any other Person to the extent such Indebtedness is guaranteed by (or secured by the assets of) the Specified Person or any of its Restricted Subsidiaries; less

(6) interest income of the Specified Person and its Restricted Subsidiaries for such period.

Consolidated Net Income” means, with respect to any Person for any period, the aggregate Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis; provided, however, that:

(1) any net after-tax extraordinary nonrecurring or unusual gains or losses or income, expenses or charges (less all fees and expenses relating thereto), including any severance expenses, expenses related to any reconstruction, decommissioning or reconfiguration of fixed assets for alternate uses, fees, expenses or charges relating to new product lines, plant shutdown costs and acquisition integration cost and fees, expenses or charges related to any Equity Offering, Permitted Investment, acquisition or Indebtedness permitted to be Incurred by the Indenture (in each case, whether or not successful), including any such fees, expenses, charges or change in control payments related to the Hexion Recapitalization or otherwise, in each case, shall be excluded;

(2) any increase in amortization or depreciation or any one-time non-cash charges (such as purchased in-process research and development or capitalized manufacturing profit in inventory) resulting from purchase accounting in connection with any acquisition that is consummated after the Issue Date shall be excluded;

(3) the Net Income for such period shall not include the cumulative effect of a change in accounting principles during such period;

 

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(4) any net after-tax income or loss from discontinued operations and any net after-tax gains or losses on disposal of discontinued operations shall be excluded;

(5) any net after-tax gains or losses, or any subsequent charges or expenses, (less all fees and expenses or charges relating thereto) attributable to business dispositions or asset dispositions having occurred at any time other than in the ordinary course of business (as determined in good faith by the Board of Directors of MSC) shall be excluded;

(6) any net after-tax gains or losses attributable to the early extinguishment of indebtedness, Hedging Obligations or other derivative instruments shall be excluded;

(7) the Net Income for such period of any Person that is not a Subsidiary of such Person, or is an Unrestricted Subsidiary, or that is accounted for by the equity method of accounting, shall be included only to the extent of the amount of dividends or distributions or other payments paid in cash (or to the extent converted into cash) to the referent Person or a Restricted Subsidiary thereof in respect of such period;

(8) solely for the purpose of determining the amount available for Restricted Payments under clause (a)(iii)(1) of the first paragraph of “—Certain Covenants—Limitation on Restricted Payments,” the Net Income for such period of any Restricted Subsidiary (other than any Guarantor) shall be excluded to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of its Net Income is not at the date of determination permitted without any prior governmental approval (which has not been obtained) or, directly or indirectly, by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, unless such restrictions with respect to the payment of dividends or similar distributions have been legally waived; provided, however, that (without duplication) the Consolidated Net Income of such Person shall be increased by the amount of dividends or other distributions or other payments actually paid in cash (or converted into cash) by any such Restricted Subsidiary to such Person, to the extent not already included therein;

(9) an amount equal to the amount of Tax Distributions actually made to the holders of Capital Stock of such Person or any parent company of such Person in respect of such period in accordance with clause (b)(12) of the covenant described under “—Certain Covenants—Limitation on Restricted Payments” shall be included, to the extent not otherwise deducted, as though such amounts had been paid as income taxes directly by such Person for such period;

(10) any impairment charges or asset write-offs and amortization or intangibles in each case arising pursuant to the application of GAAP shall be excluded;

(11) any non-cash compensation expense realized from any deferred stock compensation plan or grants of stock appreciation or similar rights, stock options, restricted stock or other rights to officers, directors and employees of such Person or any of its Restricted Subsidiaries shall be excluded;

(12) solely for purposes of calculating Adjusted EBITDA, (a) the Net Income of any Person and its Restricted Subsidiaries shall be calculated without deducting the income attributable to, or adding the losses attributable to, the minority equity interests of third parties in any non-wholly-owned Restricted Subsidiary except to the extent of dividends declared or paid in respect of such period or any prior period on the shares of Capital Stock of such Restricted Subsidiary held by such third parties and (b) any ordinary course dividend, distribution or other payment paid in cash and received from any Person in excess of amounts included in clause (7) above shall be included;

(13)(a)(i) the non-cash portion of “straight-line” rent expense shall be excluded and (ii) the cash portion of “straight-line” rent expense which exceeds the amount expensed in respect of such rent expense shall be included and (b) non-cash gains, losses, income and expenses resulting from fair value accounting required by Statement of Financial Accounting Standards No. 133 shall be excluded;

(14) accruals and reserves that are established within twelve months after the Issue Date and that are so required to be established in accordance with GAAP shall be excluded;

 

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(15) non-cash charges for deferred tax asset valuation allowances shall be excluded;

(16) any (a) severance or relocation costs or expenses, (b) one-time non-cash compensation charges, (c) the costs and expenses after the Issue Date related to employment of terminated employees, (d) costs or expenses realized in connection with, resulting from or in anticipation of the Hexion Recapitalization or (e) costs or expenses realized in connection with or resulting from stock appreciation or similar rights, stock options or other rights existing on the Issue Date of officers, directors and employees, in each case of such Person or any of its Restricted Subsidiaries, shall be excluded; and

(17) any currency translation gains and losses related to currency remeasurements of indebtedness, and any net loss or gain resulting from hedging transactions for currency exchange risk, shall be excluded.

Notwithstanding the foregoing, for the purpose of the covenant described under “—Certain Covenants— Limitation on Restricted Payments” only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries of MSC or a Restricted Subsidiary of MSC to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clauses (iii)(4) and (5) of paragraph (a) thereof.

Consolidated Non-cash Charges” means, with respect to any Person for any period, the aggregate depreciation, amortization and other non-cash expenses of such Person and its Restricted Subsidiaries reducing Consolidated Net Income of such Person for such period on a consolidated basis and otherwise determined in accordance with GAAP, but excluding any such charge which consists of or requires an accrual of, or cash reserve for, anticipated cash charges for any future period.

Consolidated Secured Debt Ratio” means, as of any date of determination, the ratio of (a) Consolidated Total Indebtedness of MSC and its Restricted Subsidiaries on the date of determination that constitutes First-Priority Lien Obligations to (b) the aggregate amount of Adjusted EBITDA for the then most recent four fiscal quarters for which internal financial statements of MSC and its Restricted Subsidiaries are available in each case with such pro forma adjustments to Consolidated Total Indebtedness and Adjusted EBITDA as are consistent with the pro forma adjustment provisions set forth in the definition of Fixed Charge Coverage Ratio; provided, however, that solely for purposes of the calculation of the Consolidated Secured Debt Ratio, in connection with the incurrence of any Lien pursuant to clause (8) of the definition of “Permitted Liens,” MSC or its Restricted Subsidiaries may elect, pursuant to an Officers’ Certificate delivered to the Trustee, to treat all or any portion of the commitment under any Indebtedness (including any Bank Indebtedness) which is to be secured by such Lien as being Incurred at such time and any subsequent Incurrence of Indebtedness under such commitment shall not be deemed, for purposes of this calculation, to be an Incurrence at such subsequent time.

Consolidated Taxes” means provision for taxes based on income, profits or capital, including state, franchise and similar taxes and any Tax Distributions taken into account in calculating Consolidated Net Income.

Consolidated Total Indebtedness” means, as of any date of determination, an amount equal to the sum (without duplication) of (1) the aggregate amount of all outstanding Indebtedness of MSC and its Restricted Subsidiaries (excluding any undrawn letters of credit) consisting of Capitalized Lease Obligations, bankers’ acceptances, Indebtedness for borrowed money and Indebtedness in respect of the deferred purchase price of property or services, plus (2) the aggregate amount of all outstanding Disqualified Stock of MSC and its Restricted Subsidiaries and all Preferred Stock of Restricted Subsidiaries of MSC, with the amount of such Disqualified Stock and Preferred Stock equal to the greater of their respective voluntary or involuntary liquidation preferences, minus (3) the aggregate amount of all Unrestricted Cash on the consolidated balance sheet of MSC and its Restricted Subsidiaries as of such date of determination, in each case determined on a consolidated basis in accordance with GAAP.

 

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Contingent Obligations” means, with respect to any Person, any obligation of such Person guaranteeing any leases, dividends or other obligations that do not constitute Indebtedness (“primary obligations”) of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent:

(1) to purchase any such primary obligation or any property constituting direct or indirect security therefor,

(2) to advance or supply funds:

(a) for the purchase or payment of any such primary obligation; or

(b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor; or

(3) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation against loss in respect thereof.

Contribution Indebtedness” means Indebtedness of MSC or any of its Restricted Subsidiaries that is a Guarantor in an aggregate principal amount not greater than twice the aggregate amount of cash contributions (other than Excluded Contributions) made to the capital of MSC by any stockholder of MSC (other than a Restricted Subsidiary) after the Issue Date; provided, however, that:

(1) if the aggregate principal amount of such Contribution Indebtedness is greater than one times such cash contributions to the capital of MSC the amount in excess shall be Indebtedness (other than Secured Indebtedness) with a Stated Maturity later than the Stated Maturity of any Notes then outstanding,

(2) such Contribution Indebtedness (a) is Incurred within 180 days after the making of such cash contributions and (b) is so designated as Contribution Indebtedness pursuant to an Officers’ Certificate on the Incurrence date thereof; and

(3) such cash contribution is not and has not been included in the calculation of permitted Restricted Payments under the covenant described in “—Certain Covenants—Limitation on Restricted Payments.”

Credit Agreement” means (i) the amended and restated credit agreement among MSC, certain Subsidiaries of MSC, the financial institutions named therein, and JPMorgan Chase Bank, N.A, as Administrative Agent and Collateral Agent entered into prior to the consummation of the Offering Transactions, as amended, restated, supplemented, waived, replaced (whether or not upon termination, and whether with the original agents, lenders or otherwise), renewed, restructured, repaid, refunded, refinanced or otherwise modified from time to time, including any agreement or indenture or multiple agreements and indentures extending the maturity thereof, refinancing, replacing or otherwise restructuring all or any portion of the Indebtedness under such agreement or agreements or indenture or indentures or any successor or replacement agreement or agreements or indenture or indentures or increasing the amount loaned or issued thereunder or altering the maturity thereof and adding Restricted Subsidiaries as additional borrowers, issuers or guarantors thereunder and (ii) whether of not the credit agreement referred to in clause (i) remains outstanding, if designated by MSC to be included in the definition of “Credit Agreement,” one or more (A) debt facilities or commercial paper facilities, providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to lenders or to special purpose entities formed to borrow from lenders against such receivables) or letters of credit, (B) debt securities, indentures or other forms of debt financing (including convertible or exchangeable debt instruments or bank guarantees or bankers’ acceptances), or (C) instruments or agreements evidencing any other Indebtedness, in each case, with the same or different borrowers or issuers and, in each case, as amended, supplemented, modified, extended, restructured, renewed, refinanced, restated, replaced or refunded in whole or in part from time to time.

Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.

 

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Designated Non-cash Consideration” means the Fair Market Value of non-cash consideration received by MSC or one of its Restricted Subsidiaries in connection with an Asset Sale that is so designated as Designated Non-cash Consideration pursuant to an Officers’ Certificate, setting forth the basis of such valuation, less the amount of Cash Equivalents received in connection with a subsequent sale of such Designated Non-cash Consideration.

Designated Preferred Stock” means Preferred Stock of MSC or any direct or indirect parent company of MSC, as applicable (other than Disqualified Stock), that is issued for cash (other than to MSC or any of its Subsidiaries or an employee stock ownership plan or trust established by MSC or any of its Subsidiaries) and is so designated as Designated Preferred Stock, pursuant to an Officers’ Certificate, on the issuance date thereof, the cash proceeds of which are excluded from the calculation set forth in clause (a)(iii) of the covenant described under “—Certain Covenants—Limitation on Restricted Payments.”

Disqualified Stock” means, with respect to any Person, any Capital Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is redeemable or exchangeable), or upon the happening of any event:

(1) matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise (other than as a result of a change of control or asset sale; provided, however, that the relevant asset sale or change of control provisions, taken as a whole, are no more favorable in any material respect to holders of such Capital Stock than the asset sale and change of control provisions applicable to the Notes and any purchase requirement triggered thereby may not become operative until compliance with the asset sale and change of control provisions applicable to the Notes (including the purchase of any Notes tendered pursuant thereto)),

(2) is convertible or exchangeable for Indebtedness or Disqualified Stock of such Person or any of its Restricted Subsidiaries, or

(3) is redeemable at the option of the holder thereof, in whole or in part,

in each case prior to 91 days after the maturity date of the Notes;

provided, however, that only the portion of Capital Stock which so matures or is mandatorily redeemable, is so convertible or exchangeable or is so redeemable at the option of the holder thereof prior to such date shall be deemed to be Disqualified Stock; provided further, however, that if such Capital Stock is issued to any employee or to any plan for the benefit of employees of MSC or its Subsidiaries or by any such plan to such employees, such Capital Stock shall not constitute Disqualified Stock solely because it may be required to be repurchased by MSC in order to satisfy applicable statutory or regulatory obligations or as a result of such employee’s termination, death or disability; provided further, however, that any class of Capital Stock of such Person that by its terms authorizes such Person to satisfy its obligations thereunder by delivery of Capital Stock that is not Disqualified Stock shall not be deemed to be Disqualified Stock.

Domestic Subsidiary” means a Restricted Subsidiary that is not a Foreign Subsidiary.

EBITDA” means Adjusted EBITDA but without giving effect to clause (9), contained therein.

Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).

Equity Offering” means any public or private sale after the Issue Date of common stock or Preferred Stock of MSC or any direct or indirect parent company of MSC, as applicable (other than Disqualified Stock), other than:

(1) public offerings with respect to MSC’s or such direct or indirect parent company’s common stock registered on Form S-8;

 

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(2) any such public or private sale that constitutes an Excluded Contribution; and

(3) any Cash Contribution Amount.

Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.

Exchange Notes” means the additional Notes issued as contemplated by the Registration Rights Agreement.

Excluded Contributions” means Cash Equivalents or other assets (valued at their Fair Market Value as determined in good faith by senior management or the Board of Directors of MSC) received by the by MSC after the Issue Date from:

(1) contributions to its common equity capital, and

(2) the sale (other than to a Subsidiary of MSC or to any MSC or Subsidiary management equity plan or stock option plan or any other management or employee benefit plan or agreement) of Capital Stock (other than Disqualified Stock and Designated Preferred Stock) of MSC,

in each case designated as Excluded Contributions pursuant to an Officers’ Certificate executed by an Officer of MSC, the cash proceeds of which are excluded from the calculation set forth in clause (a)(iii) of “—Certain Covenants—Limitation on Restricted Payments.”

Existing Debentures” means MSC’s 7.875% Debentures due 2023, 8.375% Sinking Fund Debentures due 2016 and 9.2% Debentures due 2021.

Existing Debentures Subsidiary” means each corporation of which MSC, or MSC and one or more Existing Debentures Subsidiaries, or any one or more Existing Debentures Subsidiaries, directly or indirectly own securities entitling the holders thereof to elect a majority of the directors, either at all times or so long as there is no default or contingency which permits the holders of any other class or classes of securities to vote for the election of one or more directors.

Existing Fixed Rate Second Lien Notes” means the 9 3/4% Second-Priority Senior Secured Notes due 2014 issued by Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC.

Existing Second Lien Notes Collateral Agreement” means the Collateral Agreement dated November 3, 2006 by and among MSC, each Subsidiary of MSC party thereto and Wilmington Trust Company, as collateral agent for the holders of the Existing Second Lien Notes.

Existing Second Lien Notes Issue Date” means November 3, 2006.

Existing Second Lien Notes Offering Circular” means the Offering Circular dated October 27, 2006, with respect to the Existing Second Lien Notes.

Existing Second Lien Notes” means (i) the Second-Priority Senior Secured Floating Rate Notes due 2014 issued by Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC and (ii) the Existing Fixed Rate Second Lien Notes.

Existing Second Lien Notes Indenture” means the Indenture among the Issuers, MSC, The Wilmington Trust Company, as trustee, and the other parties thereto dated November 3, 2006 with respect to the Existing Second Lien Notes, as it may be amended, restated, supplemented or otherwise modified from time to time in accordance with the terms thereof.

Existing Senior Secured Notes” means the $1 billion of 8.875% Senior Secured Notes due 2018 issued by Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC.

 

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Existing Senior Secured Notes Indenture” means the Indenture among the Issuers, MSC, Wilmington Trust FSB, as trustee, and the other parties thereto dated January 29, 2010 with respect to the Existing Senior Secured Notes, as it may be amended, restated, supplemented or otherwise modified from time to time in accordance with the terms thereof.

Fair Market Value” means, with respect to any asset or property, the price which could be negotiated in an arm’s-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction.

First-Priority After-Acquired Property” means any property (other than the initial collateral) of MSC, the Issuer or any Subsidiary Guarantor that secures any Secured Bank Indebtedness.

“First-Priority Lien Obligations” means (i) all Secured Bank Indebtedness, (ii) all other Obligations (not constituting Indebtedness) of MSC and its Subsidiaries under the agreements governing Secured Bank Indebtedness and (iii) all other Obligations of MSC or any of its Subsidiaries in respect of Hedging Obligations or Obligations in respect of cash management services in each case that are secured by Liens granted pursuant to any Senior Credit Document.

Fixed Charge Coverage Ratio” means, with respect to any Person for any period, the ratio of Adjusted EBITDA of such Person for such period to the Consolidated Interest Expense of such Person for such period. In the event that MSC or any of its Restricted Subsidiaries Incurs, repays, repurchases or redeems any Indebtedness (other than in the case of revolving credit borrowings or revolving advances under any Qualified Receivables Financing, in which case interest expense shall be computed based upon the average daily balance of such Indebtedness during the applicable period) or issues, repurchases or redeems Disqualified Stock or Preferred Stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the event for which the calculation of the Fixed Charge Coverage Ratio is made (the “Calculation Date”), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such Incurrence, repayment, repurchase or redemption of Indebtedness, or such issuance, repurchase or redemption of Disqualified Stock or Preferred Stock, as if the same had occurred at the beginning of the applicable four-quarter period (including in the case of any Incurrence or issuance a pro forma application of the net proceeds therefrom).

For purposes of making the computation referred to above, Investments, acquisitions or dispositions of operating units of a business, mergers, consolidations, discontinued operations (as determined in accordance with GAAP), and any operational changes, business realignment projects and initiatives, restructurings and reorganizations (each a “pro forma event”) that MSC or any of its Restricted Subsidiaries has either determined to make or made during the four- quarter reference period or subsequent to such reference period and on or prior to or simultaneously with the Calculation Date shall be calculated on a pro forma basis assuming that all such Investments, acquisitions or dispositions of an operating unit of a business, mergers, consolidations, discontinued operations and any operational changes, business realignment projects and initiatives, restructurings and reorganizations (and the change of any associated fixed charge obligations, consolidated interest expense and the change in Adjusted EBITDA resulting therefrom), had occurred on the first day of the four-quarter reference period. If, since the beginning of such period any Person that subsequently became a Restricted Subsidiary of MSC or was merged with or into MSC or any Restricted Subsidiary of MSC since the beginning of such period shall have made any Investment, acquisition or disposition of an operating unit of a business, merger, consolidation, discontinued operation or operational change, business realignment project or initiative, restructuring or reorganization, that would have required adjustment pursuant to this definition, then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect thereto for such period as if such Investment, acquisition, disposition, discontinued operation, merger, consolidation, operational change, business realignment project or initiative, restructuring, or reorganization had occurred at the beginning of the applicable four-quarter period.

 

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For purposes of this definition, whenever pro forma effect is to be given to any pro forma event, the pro forma calculations shall be made in good faith by a responsible financial or accounting officer of MSC. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the Calculation Date had been the applicable rate for the entire period (taking into account any Hedging Obligations applicable to such Indebtedness if such Hedging Obligation has a remaining term in excess of 12 months). Any such pro forma calculation may include adjustments appropriate, in the reasonable good faith determination of MSC as set forth in an Officers’ Certificate, to reflect (i) operating expense reductions, other operating improvements or synergies reasonably expected to result from the applicable pro forma event (including, to the extent applicable, from the Hexion Recapitalization) and (ii) all adjustments used in connection with the calculation of “Adjusted EBITDA” to the extent such adjustments, without duplication, continue to be applicable to such four quarter period.

Flow Through Entity” means an entity that is treated as a partnership not taxable as a corporation, a grantor trust or a disregarded entity for U.S. federal income tax purposes or subject to treatment on a comparable basis for purposes of state, local or foreign tax law.

Foreign Subsidiary” means a Restricted Subsidiary not organized or existing under the laws of the United States of America or any state or territory thereof or the District of Columbia and any direct or indirect subsidiary of such Restricted Subsidiary.

GAAP” means generally accepted accounting principles set forth in (i) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) statements and pronouncements of the Financial Accounting Standards Board and (iii) in such other statements by such other entity as have been approved by a significant segment of the accounting profession, in each case which were in effect on the Existing Second Lien Notes Issue Date. For the purposes of the Indenture, the term “consolidated” with respect to any Person shall mean such Person consolidated with its Restricted Subsidiaries, and shall not include any Unrestricted Subsidiary, but the interest of such Person in an Unrestricted Subsidiary will be accounted for as an Investment.

Government Obligations” means securities that are:

(1) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged, or

(2) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or a member of the European Union the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in each case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such Government Obligations or a specific payment of principal of or interest on any such Government Obligations held by such custodian for the account of the holder of such depository receipt; provided, however, that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligations or the specific payment of principal of or interest on the Government Obligations evidenced by such depository receipt.

guarantee” means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness or other obligations.

Guarantee” means any guarantee of the obligations of the Issuers under the Indenture and the Notes by any Person in accordance with the provisions of the Indenture.

 

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Guarantor” means any Person that Incurs a Guarantee with respect to the Notes; provided, however, that upon the release or discharge of such Person from its Guarantee in accordance with the Indenture, such Person ceases to be a Guarantor.

HAI” means HA-International, LLC, a Delaware limited liability company, and any successor in interest thereto.

Hedging Obligations” means, with respect to any Person, the obligations of such Person under:

(1) currency exchange, interest rate or commodity swap agreements, currency exchange, interest rate or commodity cap agreements and currency exchange, interest rate or commodity collar agreements; and

(2) other agreements or arrangements designed to protect such Person against fluctuations in currency exchange, interest rates or commodity prices.

Hexion Recapitalization” means the Hexion Recapitalization as defined in the Existing Second Lien Notes Offering Circular.

holder”, “Holder”, “noteholder” or “Noteholder” means the Person in whose name a Note is registered on the Registrar’s books.

Incur” means issue, assume, guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Person at the time it becomes a Subsidiary.

Indebtedness” means, with respect to any Person:

(1) the principal and premium (if any) of any indebtedness of such Person, whether or not contingent, (a) in respect of borrowed money, (b) evidenced by bonds, notes, debentures or similar instruments or letters of credit or bankers’ acceptances (or, without duplication, reimbursement agreements in respect thereof), (c) representing the deferred and unpaid purchase price of any property (except (i) any such balance that constitutes a trade payable or similar obligation to a trade creditor Incurred in the ordinary course of business and (ii) any earn-out obligations until such obligation becomes a liability on the balance sheet of such Person in accordance with GAAP), which purchase price is due more than six months after the date of placing the property in service or taking delivery and title thereto, (d) in respect of Capitalized Lease Obligations, or (e) representing any Hedging Obligations, if and to the extent that any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability on a balance sheet (excluding the footnotes thereto) of such Person prepared in accordance with GAAP;

(2) to the extent not otherwise included, any obligation of such Person to be liable for, or to pay, as obligor, guarantor or otherwise, on the Indebtedness of another Person (other than by endorsement of negotiable instruments for collection in the ordinary course of business);

(3) to the extent not otherwise included, Indebtedness of another Person secured by a Lien on any asset owned by such Person (whether or not such Indebtedness is assumed by such Person); provided, however, that the amount of such Indebtedness will be the lesser of: (a) the Fair Market Value of such asset at such date of determination, and (b) the amount of such Indebtedness of such other Person; and

(4) to the extent not otherwise included, with respect to MSC and its Restricted Subsidiaries, the amount then outstanding (including amounts advanced, and received by, and available for use by, MSC or any of its Restricted Subsidiaries) under any Receivables Financing (as set forth in the books and records of MSC or any Restricted Subsidiary and confirmed by the agent, trustee or other representative of the institution or group providing such Receivables Financing);

provided, however, that notwithstanding the foregoing, Indebtedness shall be deemed not to include (1) Contingent Obligations incurred in the ordinary course of business; (2) deferred or prepaid revenues;

 

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(3) purchase price holdbacks in respect of a portion of the purchase price of an asset to satisfy warranty or other unperformed obligations of the respective seller; or (4) Obligations under or in respect of Qualified Receivables Financing.

Notwithstanding anything in the Indenture to the contrary, Indebtedness shall not include, and shall be calculated without giving effect to, the effects of Statement of Financial Accounting Standards No. 133 and related interpretations to the extent such effects would otherwise increase or decrease an amount of Indebtedness for any purpose under the Indenture as a result of accounting for any embedded derivatives created by the terms of such Indebtedness; and any such amounts that would have constituted Indebtedness under the Indenture but for the application of this sentence shall not be deemed an Incurrence of Indebtedness under the Indenture.

Indenture Restricted Subsidiary” means any Existing Debenture Subsidiary which owns, operates or leases one or more Principal Properties and shall not include any other Existing Debenture Subsidiary.

Independent Financial Advisor” means an accounting, appraisal or investment banking firm or consultant to Persons engaged in a Similar Business, in each case of nationally recognized standing that is, in the good faith determination of MSC, qualified to perform the task for which it has been engaged.

Initial Purchasers” means each of the initial purchasers listed as such in the Offering Circular.

Intercreditor Agent” has the meaning given to such term in the Intercreditor Agreement.

Intercreditor Agreement” means the intercreditor agreement dated as of November 3, 2006 among JPMorgan Chase Bank, N.A., as agent under the Senior Credit Documents, Wilmington Trust Company, as trustee under the Existing Second Lien Notes, the Issuers, MSC, each Subsidiary Guarantor and the other parties from time to time party thereto, as it may be amended, restated, supplemented or otherwise modified from time to time in accordance with the Indenture.

Investment Grade Securities” means:

(1) securities issued or directly and fully guaranteed or insured by the U.S. government or any agency or instrumentality thereof (other than Cash Equivalents) and in each case with maturities not exceeding two years from the date of acquisition,

(2) securities that have a rating equal to or higher than Baa3 (or equivalent) by Moody’s or BBB- (or equivalent) by S&P, or an equivalent rating by any other rating agency, but excluding any debt securities or loans or advances between and among MSC and its Subsidiaries

(3) investments in any fund that invests exclusively in investments of the type described in clauses (1) and (2) which fund may also hold immaterial amounts of cash pending investment or distribution, and

(4) corresponding instruments in countries other than the United States customarily utilized for high quality investments and in each case with maturities not exceeding two years from the date of acquisition.

Investments” means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the form of loans (including guarantees), advances or capital contributions (excluding accounts receivable, trade credit and advances to customers and commission, travel and similar advances to officers, employees and consultants made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities issued by any other Person and investments that are required by GAAP to be classified on the balance sheet of MSC in the same manner as the other investments included in this definition to the extent such transactions involve the transfer of cash or other property. For purposes of the definition of “Unrestricted Subsidiary” and the covenant described under “—Certain Covenants—Limitation on Restricted Payments:”

(1) “Investments” shall include the portion (proportionate to MSC’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of a Subsidiary of MSC at the time that such Subsidiary is

 

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designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, MSC shall be deemed to continue to have a permanent “Investment” in an Unrestricted Subsidiary equal to an amount (if positive) equal to:

(A) MSC’s “Investment” in such Subsidiary at the time of such redesignation less

(B) the portion (proportionate to MSC’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation; and

(2) any property transferred to or from an Unrestricted Subsidiary shall be valued at its Fair Market Value at the time of such transfer, in each case as determined in good faith by the Board of Directors of MSC.

Issue Date” means November 5, 2010, the date on which the Notes were originally issued.

Legal Holiday” means a Saturday, a Sunday or a day on which banking institutions are not required to be open in the State of New York.

Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any other agreement to give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction); provided, however, that in no event shall an operating lease be deemed to constitute a Lien.

Management Group” means all of the individuals consisting of the directors, executive officers and other management personnel of MSC or any direct or indirect parent company of MSC, as the case may be, on the Issue Date together with (1) any new directors whose election by such boards of directors or whose nomination for election by the shareholders of MSC or any direct or indirect parent company of MSC, as the case may be, as applicable, was approved by (x) a vote of a majority of the directors of MSC or any direct or indirect parent of MSC as applicable, then still in office who were either directors on the Issue Date or whose election or nomination was previously so approved or (y) the Permitted Holders and (2) executive officers and other management personnel of MSC or any direct or indirect parent company of MSC, as the case may be, as applicable, hired at a time when the directors on the Issue Date together with the directors so approved constituted a majority of the directors of MSC or any direct or indirect parent company of MSC, as the case may be, as applicable.

Momentive Canada” means Momentive Specialty Chemicals Canada Inc. (formerly known as Hexion Specialty Chemicals Canada, Inc.), a Canadian corporation, and any successor in interest thereto.

Momentive Canada Entities” means (1) Momentive Canada, (2) each Person that was a Subsidiary of Momentive Canada on the Existing Second Lien Notes Issue Date and (3) each Person that is a successor in interest, directly or indirectly, to any Person described in clause (2), including pursuant to any merger, consolidation, amalgamation or transfer of all or substantially all of its assets. Any Person referenced by clause (2) or (3) of the foregoing sentence shall be treated as a Momentive Canada Entity notwithstanding the fact that such Person is not a Subsidiary of Momentive Canada and such Person (or such Person’s direct or indirect parent entity to the extent such parent entity’s stock is pledged as Collateral) shall not be subject to the Collateral reduction provisions described under the heading “—Security for the Notes—Limitations on Stock Collateral.”

Moody’s” means Moody’s Investors Service, Inc. or any successor to the rating agency business thereof.

MSC” means Momentive Specialty Chemicals Inc., a New Jersey corporation, and any successor in interest thereto.

 

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Net Income” means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of Preferred Stock dividends.

Net Proceeds” means the aggregate cash proceeds received by MSC or any of its Restricted Subsidiaries in respect of any Asset Sale (including any cash received in respect of or upon the sale or other disposition of any Designated Non-cash Consideration received in any Asset Sale and any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding the assumption by the acquiring Person of Indebtedness relating to the disposed assets or other consideration received in any other non-cash form), net of the direct costs relating to such Asset Sale and the sale or disposition of such Designated Non-cash Consideration (including legal, accounting and investment banking fees, and brokerage and sales commissions), and any relocation expenses Incurred as a result thereof, taxes paid or payable as a result thereof, amounts required to be applied to the repayment of principal, premium (if any) and interest on Indebtedness required (other than pursuant to the second paragraph of the covenant described under “—Certain Covenants—Asset Sales”) to be paid as a result of such transaction (including to obtain any required consent therefor), and any deduction of appropriate amounts to be provided by MSC as a reserve in accordance with GAAP against any liabilities associated with the asset disposed of in such transaction and retained by MSC after such sale or other disposition thereof, including, without limitation, pension and other post-employment benefit liabilities and liabilities related to environmental matters or against any indemnification obligations associated with such transaction.

Obligations” means any principal, interest, penalties, fees, indemnifications, reimbursements (including, without limitation, reimbursement obligations with respect to letters of credit and bankers’ acceptances), damages and other liabilities payable under the documentation governing any Indebtedness; provided, however, that Obligations with respect to the Notes shall not include fees or indemnifications in favor of the Trustee and other third parties other than the holders of such Notes.

Off-Balance Sheet Financing Amount” means, at any date, with respect to any Qualified Receivables Financing, the face or notional amount of any interest in assets of the type described in the definition of the term Qualified Receivables Financing transferred to a Receivables Subsidiary in connection with such Qualified Receivables Financing by or on behalf of MSC or any of its Subsidiaries.

Offering Circular” means the Offering Circular dated October 27, 2010, with respect to the Notes.

Offering Transactions” refers collectively to (1) the offering of the Notes, (2) the Cash Tender Offer described under the heading “Offering circular summary” in the Offering Circular, (3) if necessary, discharge or the redemption of any remaining Existing Fixed Rate Second Lien Notes, (4) the Apollo Notes Exchange described under the heading “Offering circular summary” in the Offering Circular and (5) the use of the proceeds of the offering of the Notes as described in further detail under the heading “Use of proceeds” in the Offering Circular.

Officer” means the Chairman of the Board, Chief Executive Officer, President, any Executive Vice President, Senior Vice President or Vice President, the Treasurer or the Secretary of MSC.

Officers’ Certificate” means a certificate signed on behalf of MSC by two Officers of MSC, one of whom must be the Chief Executive Officer, the principal financial officer, the Treasurer or the principal accounting officer of MSC that meets the requirements set forth in the Indenture.

Opinion of Counsel” means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to MSC or the Trustee.

 

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Pari Passu Indebtedness” means:

(1) with respect to the Issuers, the Notes and any Indebtedness which ranks pari passu in right of payment to the Notes; and

(2) with respect to any Guarantor, its Guarantee and any Indebtedness which ranks pari passu in right of payment to such Guarantor’s Guarantee.

Permitted Holders” means, at any time, each of (i) the Sponsor, (ii) the Management Group, (iii) any Person that has no material assets other than the Capital Stock of MSC and, directly or indirectly, holds or acquires 100% of the total voting power of the Voting Stock of MSC, and of which no other Person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision), other than any of the other Permitted Holders specified in clauses (i), (ii) and (iii) above, holds more than 50% of the total voting power of the Voting Stock thereof and (v) any group (within the meaning of Section 1 3(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision) the members of which include any of the Permitted Holders specified in clauses (i), (ii) and (iii) above and that, directly or indirectly, hold or acquire beneficial ownership of the Voting Stock of MSC (a “Permitted Holder Group”), so long as (1) each member of the Permitted Holder Group has voting rights proportional to the percentage of ownership interests held or acquired by such member and (2) no Person or other “group” (other than Permitted Holders specified in clauses (i), (ii) and (iii) above) beneficially owns more than 50% on a fully diluted basis of the Voting Stock held by the Permitted Holder Group. Any person or group whose acquisition of beneficial ownership constitutes a Change of Control in respect of which a Change of Control Offer is made in accordance with the requirements of the Indenture will thereafter, together with its Affiliates, constitute an additional Permitted Holder.

Permitted Investments” means:

(1) any Investment in MSC or any Restricted Subsidiary of MSC;

(2) any Investment in Cash Equivalents or Investment Grade Securities;

(3) any Investment by MSC or any Restricted Subsidiary of MSC in a Person if as a result of such Investment (a) such Person becomes a Restricted Subsidiary of MSC, or (b) such Person, in one transaction or a series of related transactions, is merged, consolidated or amalgamated with or into, or transfers or conveys all or substantially all of its assets to, or is liquidated into, MSC or a Restricted Subsidiary of MSC;

(4) any Investment in securities or other assets not constituting Cash Equivalents and received in connection with an Asset Sale made pursuant to the provisions of “—Certain Covenants—Asset Sales” or any other disposition of assets not constituting an Asset Sale;

(5) any Investment existing on the Existing Second Lien Notes Issue Date;

(6) advances to employees not in excess of $25 million outstanding at any one time in the aggregate;

(7) any Investment acquired by MSC or any of its Restricted Subsidiaries (a) in exchange for any other Investment or accounts receivable or claims held by MSC or any such Restricted Subsidiary in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other Investment or accounts receivable, or (b) as a result of a foreclosure by MSC or any of its Restricted Subsidiaries with respect to any secured Investment or other transfer of title with respect to any secured Investment in default;

(8) Hedging Obligations permitted under clause (j) of the “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” covenant;

(9) any Investment by MSC or any of its Restricted Subsidiaries in a Similar Business having an aggregate Fair Market Value, taken together with all other Investments made pursuant to this clause (9) that are at that time outstanding, not to exceed the greater of (a) $150 million and (b) 4.5% of Total Assets at the time of such Investment (with the Fair Market Value of each Investment being measured at the time made

 

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and without giving effect to subsequent changes in value); provided, however, that if any Investment pursuant to this clause (9) is made in any Person that is not a Restricted Subsidiary of MSC at the date of the making of such Investment and such Person becomes a Restricted Subsidiary of MSC after such date, such Investment shall thereafter be deemed to have been made pursuant to clause (1) above and shall cease to have been made pursuant to this clause (9) for so long as such Person continues to be a Restricted Subsidiary;

(10) additional Investments by MSC or any of its Restricted Subsidiaries having an aggregate Fair Market Value, taken together with all other Investments made pursuant to this clause (10) that are at that time outstanding, not to exceed the greater of (a) $150 million and (b) 4.5% of Total Assets at the time of such Investment (with the Fair Market Value of each Investment being measured at the time made and without giving effect to subsequent changes in value);

(11) loans and advances to officers, directors and employees for business-related travel expenses, moving expenses and other similar expenses, in each case Incurred in the ordinary course of business;

(12) Investments the payment for which consists of Equity Interests (other than Disqualified Stock) of MSC or any direct or indirect parent company of MSC, as applicable; provided, however, that such Equity Interests will not increase the amount available for Restricted Payments under clause (a)(iii) of the covenant described under “—Certain Covenants—Limitation on Restricted Payments;”

(13) any transaction to the extent it constitutes an Investment that is permitted by and made in accordance with the provisions of the second paragraph of the covenant described under “—Certain Covenants—Transactions with Affiliates” (except transactions described in clauses (2), (6), (7), (11)(b) and (17) such paragraph);

(14) Investments consisting of the licensing or contribution of intellectual property pursuant to joint marketing arrangements with other Persons;

(15) guarantees issued in accordance with the covenants described under “—Certain Covenants— Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” and “—Certain Covenants—Future Guarantors;”

(16) any Investment by Restricted Subsidiaries of MSC in other Restricted Subsidiaries of MSC and Investments by Subsidiaries that are not Restricted Subsidiaries in other Subsidiaries that are not Restricted Subsidiaries of MSC;

(17) Investments consisting of purchases and acquisitions of real estate, inventory, supplies, materials and equipment or purchases of contract rights or licenses or leases of intellectual property, in each case in the ordinary course of business;

(18) any Investment in a Receivables Subsidiary or any Investment by a Receivables Subsidiary in any other Person in connection with a Qualified Receivables Financing, including Investments of funds held in accounts permitted or required by the arrangements governing such Qualified Receivables Financing or any related Indebtedness; provided, however, that any Investment in a Receivables Subsidiary is in the form of a Purchase Money Note, contribution of additional receivables or an equity interest;

(19) Investments resulting from the receipt of non-cash consideration in an Asset Sale received in compliance with the covenant described under “—Certain Covenants—Asset Sales;”

(20) additional Investments in joint ventures of MSC or any of its Restricted Subsidiaries in an aggregate amount outstanding not to exceed $50 million;

(21) any Investment in an entity which is not a Restricted Subsidiary to which a Restricted Subsidiary sells accounts receivable pursuant to a Qualified Receivables Financing; and

(22) Investments of a Restricted Subsidiary of MSC acquired after the Issue Date or of an entity merged into or consolidated with MSC or a Restricted Subsidiary in a transaction that is not prohibited by the covenant described under “—Merger, Consolidation or Sale of All or Substantially All Assets” after the

 

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Issue Date to the extent that such Investments were not made in contemplation of such acquisition, merger or consolidation and were in existence on the date of such acquisition, merger or consolidation.

Permitted Liens” means, with respect to any Person:

(1) pledges or deposits by such Person under workmen’s compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or U.S. government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each case Incurred in the ordinary course of business;

(2) Liens imposed by law, such as carriers’, warehousemen’s and mechanics’ Liens, in each case for sums not yet due or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review;

(3) Liens for taxes, assessments or other governmental charges not yet due or payable or subject to penalties for nonpayment or which are being contested in good faith by appropriate proceedings;

(4) Liens in favor of issuers of performance and surety bonds or bid bonds or with respect to other regulatory requirements or letters of credit (or deposits to secure letters of credit or surety bonds for the same purpose) issued pursuant to the request of and for the account of such Person in the ordinary course of its business;

(5) minor survey exceptions, minor encumbrances, easements or reservations of, or rights of others for, licenses, rights-of-way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real properties or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not Incurred in connection with Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person;

(6) Liens securing Indebtedness (including Capitalized Lease Obligations) Incurred to finance the purchase, lease or improvement of property (real or personal) or equipment (whether through the direct purchase of assets or Capital Stock of any Person owning such assets) of such Person; provided, however, that the Lien may not extend to any other property owned by such Person or any of its Restricted Subsidiaries at the time the Lien is Incurred (other than assets and property affixed or appurtenant thereto and except for customary cross collateral arrangements with respect to property or equipment financed by the same financing source pursuant to the same financing scheme), and the Indebtedness (other than any interest thereon) secured by the Lien may not be Incurred more than 270 days after the latest of the (i) acquisition of the property subject to the Lien, (ii) completion of construction, repair, improvement or addition of the property subject to the Lien and (iii) commencement of full operation of the property subject to the Lien;

(7) Liens securing Indebtedness of a Foreign Subsidiary permitted to be Incurred pursuant to the covenant described under “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock;” provided, however, that such Liens do not extend to the property or assets of MSC or any Domestic Subsidiary (other than a Domestic Subsidiary that is owned by one or more Foreign Subsidiaries);

(8) Liens incurred to secure Indebtedness Incurred pursuant to the first paragraph of, or clause (a) or (l) (or (m) to the extent it guarantees any such Indebtedness) of the second paragraph of, the covenant described under “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” to the extent such Lien is incurred pursuant to this clause (8) as designated by MSC; provided, however, that, other than with respect to Liens incurred to secure Indebtedness Incurred pursuant to clauses (a) and (l) (or (m) to the extent it guarantees such Indebtedness) of the second paragraph of the covenant described under “—Certain Covenants—Limitation on Incurrence of Indebtedness

 

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and Issuance of Disqualified Stock and Preferred Stock,” at the time of incurrence and after giving pro forma effect thereto (including a pro forma application of the net proceeds therefrom), the Consolidated Secured Debt Ratio would be no greater than 4.0 to 1.0; provided further, however, that the immediately preceding proviso shall not apply to any Lien which is deemed to be incurred under this clause (8) by reason of the second proviso to clause (20) of this definition of “Permitted Liens” (except to the extent such Lien also secures Indebtedness in addition to the Indebtedness permitted to be secured thereby under clause (20));

(9) Liens existing on the Issue Date (other than Liens described in clause (8) above);

(10) Liens on property or shares of stock of a Person at the time such Person becomes a Subsidiary; provided, however, such Liens are not created or Incurred in connection with, or in contemplation of, such other Person becoming such a Subsidiary; provided further, however, that such Liens may not extend to any other property owned by MSC or any Restricted Subsidiary of MSC (other than such Person becoming a Subsidiary and Subsidiaries of such Person);

(11) Liens on property at the time MSC or a Restricted Subsidiary of MSC acquired the property, including any acquisition by means of a merger or consolidation with or into MSC or any Restricted Subsidiary of MSC; provided, however, that such Liens (other than Liens to secure Indebtedness Incurred pursuant to clause (o) of the second paragraph of the covenant described under “—Certain Covenants—Limitations on incurrence of indebtedness and issuance of disqualified stock and preferred stock”) are not created or Incurred in connection with, or in contemplation of, such acquisition; provided further, however, that the Liens (other than Liens to secure Indebtedness Incurred pursuant to clause (o) of the second paragraph of the covenant described under “—Certain Covenants—Limitations on incurrence of indebtedness and issuance of disqualified stock and preferred stock”) may not extend to any other property owned by MSC or any Restricted Subsidiary of MSC (other than pursuant to after acquired property clauses in effect with respect to such Lien at the time of acquisition on property of the type that would have been subject to such Lien notwithstanding the occurrence of such acquisition);

(12) Liens securing Indebtedness or other obligations of a Restricted Subsidiary owing to MSC or a Restricted Subsidiary of MSC permitted to be Incurred in accordance with the covenant described under “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock;”

(13) Liens securing Hedging Obligations so long as the related Indebtedness is, and is permitted to be under the Indenture, secured by a Lien on the same property securing such Hedging Obligations;

(14) Liens on specific items of inventory or other goods and proceeds of any Person securing such Person’s obligations in respect of bankers’ acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods;

(15) licenses, sublicenses, leases and subleases which do not materially interfere with the ordinary conduct of the business of MSC or any of its Restricted Subsidiaries;

(16) Liens arising from Uniform Commercial Code financing statement filings regarding operating leases entered into by MSC and its Restricted Subsidiaries in the ordinary course of business;

(17) Liens in favor of MSC or any Guarantor or Liens on assets of a Restricted Subsidiary of MSC that is not a Guarantor in favor solely of another Restricted Subsidiary of MSC that is not a Guarantor;

(18) Liens on equipment of MSC or any Restricted Subsidiary granted in the ordinary course of business to MSC’s or such Restricted Subsidiary’s client at which such equipment is located;

(19) Liens on accounts receivable and related assets of the type specified in the definition of “Receivables Financing” Incurred in connection with a Qualified Receivables Financing;

(20) Liens to secure any refinancing, refunding, extension or renewal (or successive refinancings, refundings, extensions, renewals or replacements) as a whole, or in part, of any Indebtedness secured by any Lien referred to in the foregoing clauses (6), (7), (8), (9), (10) and (11); provided, however, that (x) such

 

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new Lien shall be limited to all or part of the same property (including any after acquired property to the extent it would have been subject to the original Lien) that was subject to the original Lien (plus improvements on such property), and (y) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (A) the outstanding principal amount or, if greater, committed amount of the Indebtedness described under clauses (6), (7), (8), (9), (10) and (11) at the time the original Lien became a Permitted Lien under the Indenture, and (B) an amount necessary to pay any fees and expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement; provided further, however, that in the case of any Liens to secure any refinancing, refunding, extension or renewal of Indebtedness secured by a Lien referred to in clause (8), the principal amount of any Indebtedness Incurred for such refinancing, refunding, extension or renewal shall be deemed secured by a Lien under clause (8) and not this clause (20) for purposes of determining the principal amount of Indebtedness outstanding under clause (8) and for purposes of the definition of Secured Bank Indebtedness;

(21) judgment Liens not giving rise to an Event of Default, so long as such Lien is adequately bonded any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall have expired;

(22) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with importation of goods;

(23) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by MSC or any of its Restricted Subsidiaries in the ordinary course of business;

(24) Liens securing insurance premium financing arrangements; provided that such Lien is limited to the applicable insurance carriers;

(25) Liens incurred to secure cash management services in the ordinary course of business;

(26) other Liens securing obligations in an aggregate principal amount not to exceed $30 million at any one time outstanding;

(27) deposits made in the ordinary course of business to secure liability to insurance carriers;

(28) Liens on the Equity Interests of Unrestricted Subsidiaries;

(29) grants of software and other technology licenses in the ordinary course of business;

(30) any encumbrance or restriction (including put and call arrangements) with respect to Capital Stock of any joint venture or similar arrangement pursuant to any joint venture or similar agreement;

(31) any amounts held by a trustee in the funds and accounts under an indenture securing any revenue bonds issued for the benefit of the Issuer or any Restricted Subsidiary; and

(32) Liens arising by virtue of any statutory or common law provisions relating to banker’s liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a depository or financial institution.

Any provider of additional extensions of credit shall be entitled to rely on the determination of an Officer that Liens incurred satisfy clause (8) above if such determination is set forth in an Officers’ Certificate delivered to such provider; provided, however, that such determination will not affect whether such Lien actually was incurred as permitted by clause (8).

Permitted Transfer” has the meaning set forth under the caption “—Merger, Consolidation or Sale of All or Substantially All Assets.”

Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.

 

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Preferred Stock” means any Equity Interest with preferential right of payment of dividends or upon liquidation, dissolution, or winding up.

Presumed Tax Rate” means the highest effective marginal statutory combined U.S. federal, state and local income tax rate prescribed for an individual residing in New York City (taking into account (i) the deductibility of state and local income taxes for U.S. federal income tax purposes, assuming the limitation of Section 68(a)(2) of the Code applies and taking into account any impact of Section 68(f) of the Code, and (ii) the character (long-term or short-term capital gain, dividend income or other ordinary income) of the applicable income).

Principal Property” means any single manufacturing or processing plant or warehouse owned or leased by MSC or any Existing Debenture Subsidiary of MSC and located within the United States of America (excluding its territories and possessions and the Commonwealth of Puerto Rico) other than any such plant or warehouse or portion thereof which the Board of Directors of MSC reasonably determines not to be a Principal Property after due consideration of the materiality of such property to the business of MSC and its Subsidiaries as a whole.

Purchase Money Note” means a promissory note of a Receivables Subsidiary evidencing a line of credit, which may be irrevocable, from MSC or any Subsidiary of MSC to a Receivables Subsidiary in connection with a Qualified Receivables Financing, which note is intended to finance that portion of the purchase price that is not paid by cash or a contribution of equity.

Qualified Receivables Financing” means any Receivables Financing of a Receivables Subsidiary that meets the following conditions:

(1) the Board of Directors of MSC shall have determined in good faith that such Qualified Receivables Financing (including financing terms, covenants, termination events and other provisions) is in the aggregate economically fair and reasonable to MSC and the Receivables Subsidiary,

(2) all sales of accounts receivable and related assets to the Receivables Subsidiary are made at Fair Market Value (as determined in good faith by MSC), and

(3) the financing terms, covenants, termination events and other provisions thereof shall be market terms (as determined in good faith by MSC) and may include Standard Securitization Undertakings.

The grant of a security interest in any accounts receivable of MSC or any of its Restricted Subsidiaries (other than a Receivables Subsidiary) to secure Bank Indebtedness, Indebtedness in respect of the Notes or any Indebtedness incurred to refinance the Notes shall not be deemed a Qualified Receivables Financing.

Receivables Financing” means any transaction or series of transactions that may be entered into by MSC or any of its Subsidiaries pursuant to which MSC or any of its Subsidiaries may sell, convey or otherwise transfer to (a) a Receivables Subsidiary (in the case of a transfer by MSC or any of its Subsidiaries), and (b) any other Person (in the case of a transfer by a Receivables Subsidiary), or may grant a security interest in, any accounts receivable (whether now existing or arising in the future) of MSC or any of its Subsidiaries, and any assets related thereto including, without limitation, all collateral securing such accounts receivable, all contracts and all guarantees or other obligations in respect of such accounts receivable, proceeds of such accounts receivable and other assets which are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving accounts receivable and any Hedging Obligations entered into by MSC or any such Subsidiary in connection with such accounts receivable.

Receivables Repurchase Obligation” means any obligation of a seller of receivables in a Qualified Receivables Financing to repurchase receivables arising as a result of a breach of a representation, warranty or covenant or otherwise, including as a result of a receivable or portion thereof becoming subject to any asserted defense, dispute, off-set or counterclaim of any kind as a result of any action taken by, any failure to take action by or any other event relating to the seller.

 

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Receivables Subsidiary” means a Wholly Owned Restricted Subsidiary of MSC (or another Person formed for the purposes of engaging in a Qualified Receivables Financing with MSC in which MSC or any Subsidiary of MSC makes an Investment and to which MSC or any Subsidiary of MSC transfers accounts receivable and related assets) which engages in no activities other than in connection with the financing of accounts receivable of MSC and its Subsidiaries, all proceeds thereof and all rights (contractual or other), collateral and other assets relating thereto, and any business or activities incidental or related to such business, and which is designated by the Board of Directors of MSC (as provided below) as a Receivables Subsidiary and:

(a) no portion of the Indebtedness or any other obligations (contingent or otherwise) of which (i) is guaranteed by MSC or any other Subsidiary of MSC (excluding guarantees of obligations (other than the principal of, and interest on, Indebtedness) pursuant to Standard Securitization Undertakings), (ii) is recourse to or obligates MSC or any other Subsidiary of MSC in any way other than pursuant to Standard Securitization Undertakings, or (iii) subjects any property or asset of MSC or any other Subsidiary of MSC, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to Standard Securitization Undertakings,

(b) with which neither MSC nor any other Subsidiary of MSC has any material contract, agreement, arrangement or understanding other than on terms which MSC reasonably believes to be no less favorable to MSC or such Subsidiary than those that might be obtained at the time from Persons that are not Affiliates of MSC, and

(c) to which neither MSC nor any other Subsidiary of MSC has any obligation to maintain or preserve such entity’s financial condition or cause such entity to achieve certain levels of operating results.

Any such designation by the Board of Directors of MSC shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors of MSC giving effect to such designation and an Officers’ Certificate certifying that such designation complied with the foregoing conditions.

Registration Rights Agreement” means the registration rights agreement in respect of the Notes dated the Issue Date, among MSC, the Issuers and the Initial Purchasers.

Restricted Investment” means an Investment other than a Permitted Investment.

Restricted Subsidiary” means, with respect to any Person, any Subsidiary of such Person other than an Unrestricted Subsidiary of such Person; provided, however, that, unless HAI would be a Subsidiary without giving effect to the specific 50% test for HAI as set forth in the definition of “Subsidiary,” HAI will not be treated as a Restricted Subsidiary that is subject to the covenants described under “—Certain Covenants.” Unless otherwise indicated in this “Description of the Notes,” all references to Restricted Subsidiaries shall mean Restricted Subsidiaries of MSC.

Sale/Leaseback Transaction” means an arrangement relating to property now owned or hereafter acquired by MSC or a Restricted Subsidiary whereby MSC or a Restricted Subsidiary transfers such property to a Person and MSC or such Restricted Subsidiary leases it from such Person, other than leases between MSC and a Restricted Subsidiary of MSC or between Restricted Subsidiaries of MSC.

S&P” means Standard & Poor’s Ratings Group or any successor to the rating agency business thereof.

SEC” means the Securities and Exchange Commission.

Secured Bank Indebtedness” means any Bank Indebtedness that is secured by a Permitted Lien incurred or deemed incurred pursuant to clause (8) of the definition of Permitted Lien.

Secured Indebtedness” means any Indebtedness secured by a Lien.

 

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Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.

Security Documents” means the security agreements (including the Existing Second Lien Notes Collateral Agreement, as modified by the joinder and supplement entered into on the Issue Date), pledge agreements, collateral assignments and related agreements, as amended, supplemented, restated, renewed, refunded, replaced, restructured, repaid, refinanced or otherwise modified from time to time, creating the security interests in the Collateral for the benefit of the Trustee and the holders of the Notes as contemplated by the Indenture.

Senior Credit Documents” means the collective reference to the Credit Agreement, the notes issued pursuant thereto and the guarantees thereof, and the collateral documents relating thereto, as amended, supplemented, restated, renewed, refunded, replaced, restructured, repaid, refinanced or otherwise modified from time to time.

Significant Subsidiary” means any Restricted Subsidiary that would be a “Significant Subsidiary” of MSC within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.

Similar Business” means a business, the majority of whose revenues are derived from the activities of MSC and its Subsidiaries as of the Issue Date or any business or activity that is reasonably similar thereto or a reasonable extension, development or expansion thereof or ancillary thereto.

Sponsor” means (i) Apollo Management, L.P., one or more investment funds controlled by Apollo Management, L.P. and any of their respective Affiliates (collectively, the “Apollo Sponsors”) and (ii) any Person that forms a group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision) with any Apollo Sponsors, provided that any Apollo Sponsor (x) owns (directly or indirectly) a majority of the Voting Stock and (y) controls a majority of the Board of Directors of MSC.

Standard Securitization Undertakings” means representations, warranties, covenants, indemnities and guarantees of performance entered into by MSC or any Subsidiary of MSC which MSC has determined in good faith to be customary in a Receivables Financing including, without limitation, those relating to the servicing of the assets of a Receivables Subsidiary, it being understood that any Receivables Repurchase Obligation shall be deemed to be a Standard Securitization Undertaking.

Stated Maturity” means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred).

Subordinated Indebtedness” means (a) with respect to the Issuers, any Indebtedness of such Issuer which is by its terms subordinated in right of payment to the Notes, and (b) with respect to any Guarantor, any Indebtedness of such Guarantor which is by its terms subordinated in right of payment to its Guarantee.

Subsidiary” means, with respect to any Person (1) any corporation, association or other business entity (other than a partnership, joint venture or limited liability company) of which more than 50% (or, in the case of HAI, 50% or more) of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time of determination owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person or a combination thereof, and (2) any partnership, joint venture or limited liability company of which (x) more than 50% of the capital accounts, distribution rights, total equity and voting interests or general and limited partnership interests, as applicable, are owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person or a combination thereof, whether in the form of membership, general, special or limited partnership interests or otherwise, and (y) such Person or any Restricted Subsidiary of such Person is a controlling general partner or otherwise controls such entity.

 

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Subsidiary Guarantor” means any Restricted Subsidiary that Incurs a Guarantee; provided, however, that upon the release or discharge of such Restricted Subsidiary from its Guarantee in accordance with the Indenture, such Restricted Subsidiary will cease to be a Subsidiary Guarantor.

Tax Distributions” means any dividends and distributions described in clause (b)(12) of the covenant described under “—Certain Covenants—Limitation on Restricted Payments.”

TIA” means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture.

Total Assets” means the total consolidated assets of MSC and its Restricted Subsidiaries, as shown on the most recent balance sheet of MSC.

Treasury Rate” means as of the applicable redemption date, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two business days prior to such redemption date (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from such redemption date to November 15, 2015; provided, however, that if no published maturity exactly corresponds with such date, then the Treasury Rate shall be interpolated or extrapolated on a straight-line basis from the arithmetic mean of the yields for the next shortest and next longest published maturities; provided further, however, that if the period from such redemption date to November 15, 2015 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year will be used.

Trust Officer” means:

(1) any officer within the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person’s knowledge of and familiarity with the particular subject, and

(2) who shall have direct responsibility for the administration of the Indenture.

Trustee” means the respective party named as such in the Indenture until a successor replaces it and, thereafter, means the successor.

Unrestricted Cash” means cash or Cash Equivalents of MSC or any of its Restricted Subsidiaries that would not appear as “restricted” on a consolidated balance sheet of MSC or any of its Restricted Subsidiaries.

Unrestricted Subsidiary” means:

(1) any Subsidiary of MSC that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors of MSC in the manner provided below; and

(2) any Subsidiary of an Unrestricted Subsidiary.

The Board of Directors of MSC may designate any Subsidiary of MSC (including any newly acquired or newly formed Subsidiary of MSC but excluding the Issuers) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Equity Interests or Indebtedness of, or owns or holds any Lien on any property of, MSC or any other Subsidiary of MSC that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that the Subsidiary to be so designated and its Subsidiaries do not at the time of designation have and do not thereafter Incur any Indebtedness pursuant to which the lender has recourse to any of the assets of MSC or any of its Restricted Subsidiaries; provided further, however, that either:

(a) the Subsidiary to be so designated has total consolidated assets of $1,000 or less; or

 

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(b) if such Subsidiary has consolidated assets greater than $1,000, then such designation would be permitted under the covenant described under “—Certain Covenants—Limitation on Restricted Payments.”

The Board of Directors of MSC may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation:

(x)(1) MSC could Incur $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test described under “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock,” or (2) the Fixed Charge Coverage Ratio for MSC and its Restricted Subsidiaries would be greater than such ratio for MSC and its Restricted Subsidiaries immediately prior to such designation, in each case on a pro forma basis taking into account such designation, and

(y) no Event of Default shall have occurred and be continuing.

Any such designation by the Board of Directors of MSC shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors of MSC giving effect to such designation and an Officers’ Certificate certifying that such designation complied with the foregoing provisions.

Notwithstanding anything to the contrary herein, and without any further condition, qualification or action hereunder, subsidiaries designated as Unrestricted Subsidiaries as of the Issue Date under the Existing Senior Secured Notes Indenture will be Unrestricted Subsidiaries.

U.S. Issuer” means Hexion U.S. Finance Corp., a Delaware corporation, and any successor in interest thereto.

Voting Stock” of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person.

Weighted Average Life to Maturity” means, when applied to any Indebtedness or Disqualified Stock, as the case may be, at any date, the quotient obtained by dividing (1) the sum of the products of the number of years from the date of determination to the date of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Disqualified Stock multiplied by the amount of such payment, by (2) the sum of all such payments.

Wholly Owned Restricted Subsidiary” is any Wholly Owned Subsidiary that is a Restricted Subsidiary.

Wholly Owned Subsidiary” of any Person means a Subsidiary of such Person 100% of the outstanding Capital Stock or other ownership interests of which (other than directors’ qualifying shares or shares required to be held by Foreign Subsidiaries) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person.

 

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MATERIAL TAX CONSEQUENCES

Material U.S. Federal Income Tax Consequences

The following is a discussion of the material U.S. Federal income tax consequences to U.S. Holders and Non-U.S. Holders (each term as defined below and collectively referred to as “Holders”) of owning and disposing of the Notes, but does not purport to be a complete analysis of all the potential tax considerations. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), the Treasury Regulations promulgated thereunder (the “Regulations”), and administrative and judicial interpretations thereof, all as of the date of this prospectus and all of which are subject to change, possibly on a retroactive basis. This summary is limited to the U.S. Federal income tax consequences with respect to the Notes that are held as capital assets within the meaning of Section 1221 of the Code. This summary assumes that the Notes will be treated as debt instruments for U.S. Federal income tax purposes. This summary does not purport to deal with all aspects of U.S. Federal income taxation that might be relevant to particular Holders in light of their circumstances or status, nor does it address specific tax consequences that may be relevant to particular Holders (including, for example, financial institutions, regulated investment companies, real estate investment trusts, broker-dealers, traders in securities that elect mark-to-market treatment, insurance companies, personal holding companies, controlled foreign corporations, passive foreign investment companies, U.S. expatriates, certain former citizens or residents of the United States, tax-exempt organizations, U.S. Holders that have a functional currency other than the U.S. dollar or persons who hold Notes as part of a straddle, hedge, conversion or other integrated financial transaction). In addition, this summary does not address U.S. Federal alternative minimum, estate and gift tax consequences or consequences under the tax laws of any state, local or foreign jurisdiction. We have not sought, and will not seek, any ruling from the Internal Revenue Service (the “IRS”) with respect to the statements made and the conclusions reached in this summary, and we cannot assure you that the IRS will agree with such statements and conclusions.

If an entity treated as a partnership for U.S. Federal income tax purposes holds Notes, the tax treatment of an owner of such entity will depend upon the status of the owner and the activities of the entity. If you are an owner of an entity treated as a partnership for U.S. Federal income tax purposes that holds Notes, you should consult your tax advisor.

HOLDERS OF NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX AND OTHER TAX CONSEQUENCES TO THEM OF OWNING AND DISPOSING OF THE NOTES, AS WELL AS THE APPLICATION OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.

For purposes of the following summary, a “U.S. Holder” is a beneficial owner of Notes that is, for U.S. Federal income tax purposes, (i) a citizen or individual resident of the United States; (ii) a corporation or other entity taxable as a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia; (iii) an estate, the income of which is subject to U.S. Federal income tax regardless of its source; or (iv) a trust, if a court within the United States is able to exercise primary supervision over the trust’s administration and one or more U.S. persons (within the meaning of the Code) have the authority to control all of its substantial decisions or if a valid election to be treated as a U.S. person is in effect with respect to such trust.

For purposes of the following summary, a “Non-U.S. Holder” is a beneficial owner of Notes that is not a U.S. Holder and that is, for U.S. Federal income tax purposes, an individual, corporation, estate or trust.

The terms of the Notes provide for payments by us in excess of stated interest or principal under certain circumstances. According to the Regulations, the possibility that certain payments in excess of stated interest or principal will be made will not affect the amount of income a Holder recognizes in advance of the payment of such excess amounts if there is only a remote chance as of the date the Notes were issued that such payments will be made. We intend to take the position that any payment of such excess amounts should not affect the tax treatment of the Notes prior to a change in circumstances relating to these contingencies. This position and this discussion are based on the assumption that, as of the date of the issuance of the Notes, the likelihood that we

 

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will pay such excess amounts is remote. Our position that these contingencies are remote is binding on a Holder unless such Holder discloses its contrary position in the manner required by applicable Regulations. Our position is not, however, binding on the IRS, and if the IRS were to challenge this position, a Holder might be required to include income on its Notes in excess of stated interest calculated without regard to such contingencies and might be required to treat as ordinary income rather than capital gain any income realized on the taxable disposition of a Note. In the event a contingency occurs, it would affect the amount, timing and character of the income or loss recognized by a Holder.

U.S. Federal Income Taxation of U.S. Holders

Payments of Stated Interest. Absent an election to the contrary (see “— Election to Treat All Interest as Original Issue Discount (Constant Yield Method),” below), the amount of stated interest on a Note will be treated as qualified stated interest (“QSI”) for U.S. Federal income tax purposes and will be taxable to a U.S. Holder as ordinary income at the time such interest is received or accrued, depending on the U.S. Holder’s regular method of accounting for U.S. Federal income tax purposes.

Election to Treat All Interest as Original Issue Discount (Constant Yield Method). A U.S. Holder may elect to include in gross income all “interest” (as defined below) that accrues on its Note using the constant-yield method described below. For purposes of this election, “interest” will include stated interest, market discount and de minimis market discount, as reduced by any amortizable bond premium (described in “— Bond Premium,” below). A U.S. Holder that makes this election will be required to include interest in gross income for U.S. Federal income tax purposes as it accrues (regardless of its method of tax accounting), which may be in advance of receipt of the cash attributable to that income.

Although this election applies only to the Note for which a U.S. Holder makes it, an electing U.S. Holder will be deemed to have made the election described in “— Bond Premium,” below, to apply amortizable bond premium against interest for all debt instruments with amortizable bond premium (other than debt instruments the interest on which is excludible from gross income) that it holds at the beginning of the taxable year to which the election applies or any taxable year thereafter. Additionally, if a U.S. Holders makes this election for a market discount note, such holder will be treated as having made the election discussed below under “— Market Discount” to include market discount in income currently over the life of all debt instruments that the U.S. Holder holds at the time of the election or acquire thereafter. A U.S. Holder may not revoke an election to apply the constant-yield method to all interest on a Note without the consent of the IRS.

If a U.S. Holder makes this election for its Note, then no payments on the Note will be treated as payments of QSI, and the annual amounts of interest includible in income by the U.S. Holder will equal the sum of the “daily portions” of the interest with respect to the Note for each day on which the U.S. Holder owns the Note during the taxable year. The U.S. Holder determines the daily portions of interest by allocating to each day in an “accrual period” a pro rata portion of the interest that is allocable to that accrual period. The term “accrual period” means an interval of time with respect to which the accrual of interest is measured and which may vary in length over the term of a Note provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs on either the first or last day of an accrual period. For purposes of this election, the “issue date” of the Note is the date the U.S. Holder purchases the Note.

The amount of interest allocable to an accrual period will equal the product of the “adjusted issue price” of the Note at the beginning of the accrual period and its “yield to maturity.” The adjusted issue price of a Note at the beginning of the first accrual period is the purchase price, and, on any day thereafter, it is the sum of the issue price and the amount of interest previously included in gross income, reduced by the amount of any payment previously made on the Note. If all accrual periods are of equal length except for a shorter initial and/or final accrual period, the U.S. Holder can compute the amount of interest allocable to the initial period using any reasonable method; however, the interest allocable to the final accrual period will always be the difference between the amount payable at maturity and the adjusted issue price at the beginning of the final accrual period.

 

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Market Discount. If a U.S. Holder purchased a Note for an amount that is less than its “revised issue price,” the amount of the difference should be treated as market discount for U.S. Federal income tax purposes. The amount of any market discount will be treated as de minimis and disregarded if it is less than one-quarter of one percent of the revised issue price of the Note, multiplied by the number of complete years to maturity. For this purpose, the “revised issue price” of a Note equals the issue price of the Note. Although the Code does not expressly so provide, the revised issue price of the Note is decreased by the amount of any payments previously made on the Note (other than payments of QSI). The rules described below do not apply to a U.S. Holder if such holder purchased a Note that has de minimis market discount.

Under the market discount rules, a U.S. Holder is required to treat any principal payment on, or any gain on the sale, exchange, redemption or other disposition of a Note as ordinary income to the extent of any accrued market discount that has not previously been included in income. If a U.S. Holder disposes of a Note in an otherwise nontaxable transaction (other than certain specified nonrecognition transactions), the U.S. Holder will be required to include any accrued market discount as ordinary income as if the U.S. Holder had sold the Note at its then fair market value. In addition, the U.S. Holder may be required to defer, until the maturity of the Note or its earlier disposition in a taxable transaction, the deduction of a portion of the interest expense on any indebtedness incurred or continued to purchase or carry the Note.

Market discount accrues ratably during the period from the date on which the U.S. Holder acquired the Note through the maturity date of the Note, unless the U.S. Holder makes an irrevocable election to accrue market discount under a constant yield method. The U.S. Holder may elect to include market discount in income currently as it accrues (either ratably or under the constant yield method), in which case the rule described above regarding deferral of interest deductions will not apply. If the U.S. Holder elects to include market discount in income currently, the U.S. Holder’s adjusted basis in a Note will be increased by any market discount included in income. An election to include market discount currently will apply to all market discount obligations acquired during or after the first taxable year in which the election is made, and the election may not be revoked without the consent of the IRS. If a U.S. Holder makes the election described above in “—Election to Treat All Interest as Original Issue Discount (Constant Yield Method)” for a market discount note, the U.S. Holder would be treated as having made an election to include market discount in income currently under a constant yield method, as discussed in this paragraph.

Bond Premium. If a U.S. Holder purchased a Note for an amount in excess of the sum of all amounts payable on the Note (other than QSI), the excess will be treated as bond premium. A U.S. Holder may elect to reduce the amount required to be included in income each year with respect to interest on its Note by the amount of amortizable bond premium allocable to that year, based on the Note’s yield to maturity. If a U.S. Holder makes the election to amortize bond premium, it will apply to all debt instruments (other than debt instruments the interest on which is excludible from gross income) that the U.S. Holder holds at the beginning of the first taxable year to which the election applies or thereafter acquires, and the election may not be revoked without the consent of the IRS. See also “—Election to Treat All Interest as Original Issue Discount (Constant Yield Method),” above.

Medicare Contribution Tax on Unearned Income. For taxable years beginning after December 31, 2012, a 3.8% Medicare tax will be imposed on the lesser of the “net investment income” or the amount by which modified adjusted gross income exceeds a threshold amount, in either case, of U.S. Holders that are individuals, estates and trusts. Net investment income includes, among other things, interest income not derived from the conduct of a nonpassive trade or business. Payments of interest (or, in the event a U.S. Holder makes the election described in “—Election to Treat All Interest as Original Issue Discount (Constant Yield Method),” above, accruals of “interest” (as that term in used in “—Election to Treat All Interest as Original Issue Discount (Constant Yield Method),” above) on the Notes are expected to constitute net investment income.

Disposition of the Notes. Upon the sale, exchange, redemption or other taxable disposition of a Note, a U.S. Holder will recognize taxable gain or loss equal to the difference between (i) the sum of all cash plus the fair

 

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market value of all other property received on such disposition (except to the extent such cash or other property is attributable to accrued but unpaid interest, which is treated as interest as described above in “— Payments of Stated Interest”) and (ii) such U.S. Holder’s adjusted tax basis in the Note.

A U.S. Holder’s adjusted tax basis in a Note will be the price such U.S. Holder paid for the Note, increased by any market discount previously included in gross income and reduced (but not below zero) by (i) the amount of any amortizable bond premium taken into account with respect to the Note and (ii) other payments, if any, such holder previously received other than stated interest payments. This gain or loss will be a capital gain or loss (except to the extent of accrued interest not previously includible in income or to the extent the market discount rules require the recognition of ordinary income) and will be long-term capital gain or loss if, at the time of such disposition, the U.S. Holder’s holding period for the Note is more than one year. The deductibility of capital losses is subject to limitations.

U.S. Federal Income Taxation of Non-U.S. Holders

Payment of Interest. Subject to the discussion of backup withholding below, payments of interest on the Notes to a Non-U.S. Holder will not be subject to U.S. Federal withholding tax under the “portfolio interest exemption,” provided that:

 

   

such payments are not effectively connected with the conduct of a U.S. trade or business, or, in the case of an income tax treaty resident, a U.S. permanent establishment (or, in the case of an individual, a fixed base) maintained by the Non-U.S. Holder in the United States;

 

   

the Non-U.S. Holder does not actually or constructively own either 10% or more of the total combined voting power of all classes of the stock of Hexion U.S. Finance Corp. entitled to vote or 10% or more of the capital or profits interest in Hexion Nova Scotia Finance, ULC;

 

   

the Non-U.S. Holder is not a controlled foreign corporation that, for U.S. Federal income tax purposes, is related (within the meaning of Section 864(d)(4) of the Code) to us;

 

   

the Non-U.S. Holder is not a bank described in Section 881(c)(3)(A) of the Code; and

 

   

either (i) the Non-U.S. Holder certifies on IRS Form W-8BEN (or a suitable substitute form or successor form), under penalties of perjury, that it is not a U.S. person (within the meaning of the Code) and provides its name and address, or (ii) a securities clearing organization, bank or other financial institution that holds customers’ securities in the ordinary course of its trade or business (a “financial institution”) and holds the Notes on behalf of the Non-U.S. Holder certifies to us or our agent, under penalties of perjury, that such a certification has been received from the beneficial owner by it or by a financial institution between it and the beneficial owner and furnishes us with a copy thereof.

If a Non-U.S. Holder cannot satisfy the requirements of the “portfolio interest exemption” described above, payments of interest made to such Non-U.S. Holder will be subject to a 30% U.S. Federal withholding tax unless the beneficial owner of the Note provides a properly executed:

 

   

IRS Form W-8BEN (or successor form) claiming, under penalties of perjury, an exemption from, or reduction in, U.S. Federal withholding tax under an applicable income tax treaty, or

 

   

IRS Form W-8ECI (or successor form) stating that interest paid on the Note is not subject to U.S. Federal withholding tax because it is effectively connected with a U.S. trade or business of the beneficial owner (in which case such interest will be subject to regular graduated U.S. tax rates as described below).

You should consult your tax advisor about the specific methods for satisfying these requirements. A claim for exemption will not be valid if the person receiving the applicable form has actual knowledge or reason to know that the statements on the form are false.

 

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If interest on the Note is effectively connected with a U.S. trade or business of the beneficial owner (and, if required by an applicable income tax treaty, attributable to a U.S. permanent establishment or fixed base), the Non-U.S. Holder, although exempt from the U.S. Federal withholding tax described above, will be subject to U.S. Federal income tax on such interest on a net income basis in the same manner as if it were a U.S. Holder. In addition, if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% (unless reduced by an applicable income tax treaty) in respect of such interest.

Disposition of the Notes. Subject to the discussion of backup withholding below, no withholding of U.S. Federal income tax will be required with respect to any gain or income realized by a Non-U.S. Holder upon the sale, exchange, redemption or other disposition of a Note.

Except with respect to accrued and unpaid interest, a Non-U.S. Holder will not be subject to U.S. Federal income tax on gain realized on the sale, exchange, redemption or other disposition of a Note unless (i) the Non-U.S. Holder is an individual who is present in the United States for a period or periods aggregating 183 or more days in the taxable year of the disposition and certain other conditions are met, or (ii) such gain or income is effectively connected with a U.S. trade or business (and, if required by an applicable treaty, is attributable to a U.S. permanent establishment or fixed base). Accrued and unpaid interest realized on a sale, exchange, redemption or other disposition of a Note will not be subject to U.S. Federal income tax, provided the Non-U.S. Holder satisfies the requirements of the “portfolio interest exemption” and such interest is not effectively connected with a U.S. trade or business (or, if required by an applicable income tax treaty, attributable to a U.S. permanent establishment or fixed base), in each case as discussed above under “—U.S. Federal Income Taxation of Non-U.S. Holders—Payment of Interest.”

Backup Withholding and Information Reporting

U.S. Holders. For each calendar year in which the Notes are outstanding, we are required to provide the IRS with certain information, including the beneficial owner’s name, address and taxpayer identification number, the aggregate amount of interest paid to that beneficial owner during the calendar year and the amount of tax withheld, if any. This obligation, however, does not apply with respect to payments to certain types of U.S. Holders, including corporations and tax-exempt organizations, provided that they establish entitlement to an exemption.

In the event that a U.S. Holder subject to the reporting requirements described above fails to provide its correct taxpayer identification number in the manner required by applicable law, or underreports its tax liability, we, our agent or paying agents, or a broker may be required to backup withhold tax on each payment on the Notes and on the proceeds from a sale or other disposition (including a redemption) of the Notes. The backup withholding obligation, however, does not apply with respect to payments to certain types of U.S. Holders, including corporations and tax-exempt organizations, provided that they establish entitlement to an exemption.

Backup withholding is not an additional tax and may be refunded or credited against the U.S. Holder’s U.S. Federal income tax liability, provided that the required information is timely furnished to the IRS.

U.S. Holders should consult their own tax advisors regarding their qualifications for an exemption from backup withholding, and the procedure for establishing such exemption, if applicable.

Non-U.S. Holders. Backup withholding tax will not apply to payments of interest on a Note or proceeds from the sale or other disposition (including a redemption) of a Note payable to a Non-U.S. Holder if the certification described above in “—U.S. Federal Income Taxation of Non-U.S. Holders—Payment of Interest” is duly provided by such Non-U.S. Holder or the Non-U.S. Holder otherwise establishes an exemption, provided that the payor does not have actual knowledge that the holder is a U.S. person (within the meaning of the Code) or that the conditions of any claimed exemption are not satisfied. Certain information reporting may still apply to payments of interest even if an exemption from backup withholding is established.

 

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Copies of any information returns reporting interest payments and any withholding may also be made available to the tax authorities in the country in which a Non-U.S. Holder resides under the provisions of an applicable income tax treaty.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding tax rules from a payment to a Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S. Holder’s U.S. Federal income tax liability, provided that the requisite procedures are followed.

Non-U.S. Holders should consult their own tax advisors regarding their particular circumstances and the availability of and procedure for establishing an exemption from backup withholding.

Recently Enacted Legislation on Withholding

The recently enacted Hiring Incentives to Restore Employment Act (the “Hire Act”) modifies some of the rules described above, including with respect to certification requirements and information reporting, for debt instruments issued more than two years after its date of enactment (March 18, 2010). Although the Notes are currently fully exempt from the new rules, Congress delegated broad authority to the United States Treasury Department to promulgate regulations to implement the new withholding and reporting regime. It cannot be predicted whether or how any regulations promulgated by the United States Treasury Department pursuant to this broad delegation of regulatory authority will affect Holders of the Notes. Prospective purchasers of the Notes should consult their own tax advisors regarding the Hire Act and other legislative proposals that may be relevant to their investment in Notes.

Certain Canadian Tax Consequences

Certain Canadian Tax Consequences to Non-Canadian Holders

The following is a general summary of the principal Canadian federal income tax considerations pursuant to the Income Tax Act (Canada) (the “Tax Act”) generally applicable to the ownership and disposition of a Note acquired pursuant to this offering. This summary is applicable to a beneficial owner of a Note who deals at arm’s length with the Issuers and any subsequent purchaser of a Note (a “holder”). This summary is applicable only to a holder who, at all relevant times, for the purposes of the Tax Act, is neither resident nor deemed to be resident in Canada and who does not use or hold and is not deemed to use or hold the Notes in carrying on a business in Canada. Special rules, which are not discussed in this summary, may apply to a non-resident insurer carrying on business in Canada and elsewhere.

This summary is based on the current provisions of the Tax Act and the regulations thereunder, all specific proposals to amend the Tax Act and regulations thereunder publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Proposed Amendments”) and the current published administrative and assessing practices and policies of the Canada Revenue Agency. This summary does not take into account or anticipate any changes in law, other than the Proposed Amendments, whether by legislative, regulatory, administrative or judicial action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations which may differ significantly from those discussed herein.

This summary is of a general nature only and is not a complete analysis of the tax considerations that may be applicable to a prospective investor. It is not intended to be, nor should it be construed to be, legal or tax advice to any particular investor. Therefore, prospective investors should consult their own tax advisors with respect to their particular circumstances.

Under the Tax Act, the payment to a holder of interest, principal and premium in respect of a Note will be exempt from Canadian withholding tax. No other taxes on income (including only gain realized on a disposition of a Note) will be payable under the Tax Act in respect of the acquisition, holding, redemption or disposition by a holder of a Note or the receipt by the holder of interest, principal and premium thereon solely as a consequence of such acquisition, holding, redemption or disposition.

 

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SELLING SECURITY HOLDER

The Notes were originally issued on November 5, 2010 in transactions exempt from the registration under Section 4(2) of the Securities Act and in reliance on Regulation S thereunder. The selling security holder has provided us with the information specified below and such selling security holder may from time to time offer and sell pursuant to this prospectus or a supplement hereto any or all Notes held by such selling security holder.

The following table sets forth information with respect to the selling security holder and the principal amount of Notes beneficially owned the selling security holder that may be offered under this prospectus. This information is based on information provided by, or on behalf of, the selling security holder.

The selling security holder may offer all, some or none of its Notes.

 

Name

   Principal Amount of Notes Owned
Prior to the Offering
     Principal Amount of
Notes to be Offered
     Principal Amount of Notes to be
Owned After the Offering
 

Euro VI (BC) S.à.r.l.

   $ 134,016,000       $ 134,016,000           

The selling security holder, Euro VI (BC) S.à.r.l. (the “Fund”), is an investment fund and an affiliate of Apollo. The Fund is controlled by AIF VI Euro Holdings, L.P., which serves as the investment advisor to the Fund and has voting and investment control in respect of securities held by the Fund, including the Notes. AIF VI Euro Holdings, L.P. is indirectly controlled by Apollo Global Management, LLC. Apollo Global Management, LLC is managed by AGM Management, LLC. Decisions by AGM Management, LLC are made by its executive committee, which includes Apollo’s three managing partners, Leon Black, Joshua Harris and Marc Rowan.

The selling security holder is an affiliate of Apollo Global Securities LLC and Morgan Joseph Triartisan LLC, each of which is a registered broker-dealer. The selling security holder acquired the Notes being offered pursuant to this prospectus with investment intent in the ordinary course of business (such business being the investment in and development of companies). At the time of the issuance of the Notes, neither the selling security holder nor the registered broker-dealers affiliated with the selling security holder had any agreements or understandings, directly or indirectly, with any person to distribute the Notes.

Momentive Holdco is controlled by investment funds managed by affiliates of Apollo and we have a number of material relationships with Apollo and its affiliates. Among other things, we have entered into a management consulting and advisory services agreement with Apollo for the provision of management and advisory services with an initial term extending through May 31, 2012. See “Security Ownership of Certain Beneficial Owners and Management,” “Certain Relationships and Related Party Transactions—Related Party Transactions—Apollo Notes Registration Rights Agreement,” “—Management Consulting Agreement,” “—Transactions related to the Terminated Merger Agreement and Settlement with Huntsman,” “—Other Financing Arrangements” and “—Purchases and Sales of Products and Services with Apollo Affiliates.”

 

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PLAN OF DISTRIBUTION

The selling security holder and its successors, which term includes its transferees, pledgees and donees and their successors, may sell the Notes from time to time in one or more transactions directly to purchasers or through underwriters, broker-dealers or agents, who may receive compensation in the form of discounts, concessions or commissions from the selling security holder or the purchasers. These discounts, concessions or commissions as to any particular underwriter, broker-dealer or agent may be in excess of those customary in the types of transactions involved.

The securities may be sold in one or more transactions at:

 

   

fixed prices;

 

   

prevailing market prices at the time of sale;

 

   

prices related to the prevailing market prices;

 

   

varying prices determined at the time of sale; or

 

   

negotiated prices.

These sales may be effected in transactions:

 

   

in the over-the-counter market;

 

   

otherwise than in the over-the-counter market;

 

   

through the writing of options; or

 

   

through the settlement of short sales.

These transactions may include block transactions or crosses. Crosses are transactions in which the same broker acts as agent on both sides of the trade. In connection with the sale of the Notes, the selling security holder may enter into hedging transactions with broker-dealers or other financial institutions. The selling security holder may also sell the Notes short and deliver these securities to close out such short positions, or loan or pledge the Notes to broker-dealers that in turn may sell these securities.

The aggregate proceeds to the selling security holder from the sale of the Notes offered by them hereby will be the purchase price of the Notes less discounts and commissions, if any. We will not receive any of the proceeds from this offering.

We do not intend to list the Notes for trading on any national securities exchange or on the New York Stock Exchange and can give no assurance about the development of any trading market for the Notes. In order to comply with the securities laws of some states, if applicable, the Notes may be sold in such jurisdictions only through registered or licensed brokers or dealers.

Broker-dealers or agents who participate in the sale of the Notes are “underwriters” within the meaning of Section 2(a)(11) of the Securities Act. The selling security holder who participates in the sale of the Notes may also be deemed to be “underwriters” within the meaning of Section 2(a)(11) of the Securities Act. Profits on the sale of the notes and the underlying common stock by selling security holder and any discounts, commissions or concessions received by any broker-dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act. If the selling security holder is deemed to be an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act, it will be subject to the prospectus delivery requirements of the Securities Act. To the extent the selling security holder is deemed to be an “underwriters,” it will be subject to statutory liabilities, including, but not limited to, Sections 11, 12 and 17 of the Securities Act.

The selling security holder and any other person participating in a distribution are subject to applicable provisions of the Exchange Act and the rules and regulations thereunder. Regulation M of the Exchange Act may

 

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limit the timing of purchases and sales of any of the securities by the selling security holder and any other person. In addition, Regulation M may restrict the ability of any person engaged in the distribution of the securities to engage in market-making activities with respect to the particular securities being distributed for a period of up to five business days before the distribution. The selling security holder has acknowledged that they understand their obligations to comply with the provisions of the Exchange Act and the rules thereunder relating to stock manipulation, particularly Regulation M, and have agreed that they will not engage in any transaction in violation of such provisions.

The selling security holder may decide not to sell any Notes described in this prospectus. We cannot assure holders that the selling security holder will use this prospectus to sell any or all of the Notes. Any securities covered by this prospectus which qualify for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or Rule 144A rather than pursuant to this prospectus. In addition, the selling security holder may transfer, devise or gift the Notes by other means not described in this prospectus.

With respect to a particular offering of the Notes, to the extent required, an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement of which this prospectus is a part will be prepared and will set forth the following information:

 

   

the specific Notes to be offered and sold;

 

   

the name of the selling security holder;

 

   

the respective purchase prices and public offering prices and other material terms of the offering;

 

   

the names of any participating agents, broker-dealers or underwriters; and

 

   

any applicable commissions, discounts, concessions and other items constituting, compensation from the selling security holder.

The maximum compensation the selling security holder will pay to underwriters in connection with any offering of the Notes will not exceed 8% of the maximum proceeds of such offering.

We have agreed to pay substantially all of the expenses incidental to the registration, offering and sale of the Notes to the public, including the payment of federal securities law and state blue sky registration fees, except that we will not bear any legal counsel fees (except as described below), underwriting fees, discounts or commissions or transfer taxes relating to the sale of the Notes.

 

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LEGAL MATTERS

The validity of the Notes and the enforceability of obligations under the Notes and guarantees being issued were passed upon for us by Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York. Stewart McKelvey passed on matters of Nova Scotia law. Connell Foley LLP passed on matters of New Jersey law.

EXPERTS

The financial statements of MSC and Momentive International Holdings Coöperatief U.A. as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010 included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We are required to file annual and quarterly reports and other information with the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C., 20549. Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room. In addition, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports are available free of charge to the public through our internet website at www.momentive.com or on the SEC’s website at www.sec.gov. Information on our website does not constitute part of this prospectus and should not be relied upon in connection with making any decision with respect to the offer. Our reports and other information that we have filed, or may in the future file, with the SEC are not incorporated by reference into and do not constitute part of this prospectus.

SERVICE OF PROCESS AND ENFORCEABILITY OF CIVIL LIABILITIES

Hexion Nova Scotia Finance, ULC is a Nova Scotia unlimited liability company. Certain of its officers and directors may be residents of various jurisdictions outside the United States. In addition, all of Hexion Nova Scotia Finance, ULC’s assets, which consist of advances to MSC and its affiliates, are located outside the United States. Hexion Nova Scotia Finance, ULC has agreed, in accordance with the terms of the indenture under which the Notes will be issued, to accept service of process in any suit, action or proceeding with respect to the indenture, the Notes or the security documents brought in any federal or state court located in New York City by an agent designated for such purpose, and to submit to the jurisdiction of such courts in connection with such suits, actions or proceedings. However, it may be difficult for holders of the Notes to effect service within the United States upon directors, officers and experts who are not residents of the United States or to realize or enforce in the United States upon judgments of courts of the United States predicated upon civil liability under U.S. federal securities laws. An investor’s ability to enforce civil liabilities under U.S. federal securities laws may be affected adversely because Hexion Nova Scotia Finance, ULC is incorporated under the laws of Nova Scotia and substantially all of Hexion Nova Scotia Finance, ULC’s assets are located outside the United States.

 

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EXCHANGE RATE DATA

The following table sets forth, for the periods and dates indicated, the average, high, low and end of period noon buying rates in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York. The noon buying rate on such dates differs from the rates used in the preparation of consolidated or combined financial statements as of such dates. No representation is made that Canadian dollar amounts have been, could have been or could be converted into U.S. dollars at the noon buying rate on such dates or any other dates. Such rates are set forth as U.S. dollars per Cdn$1.00 and are the inverse of rates quoted by the Federal Reserve Bank of New York for Canadian dollars per US$1.00. The certified buying rate on September 9, 2011 as published in the weekly Federal Reserve Statistical Release H.10 was US$1.00 equals Cdn$0.9970. The inverse of the certified buying rate on September 9, 2011 was Cdn$1.00 equals US$1.0030.

 

Year Ended

   Average (1)      High      Low      Period End  

December 31, 2010

     0.9711         0.9280         1.0040         0.9991   

December 31, 2009

     0.8763         0.9719         0.7695         0.9559   

December 31, 2008

     0.9381         1.0291         0.7709         0.8170   

December 31, 2007

     0.9316         1.0907         0.8437         1.0120   

December 31, 2006

     0.8844         0.9100         0.8528         0.8582   

Month Ended

   Average (2)      High      Low      Period End  

January 31, 2011

     1.0061         0.9980         1.0138         0.9980   

February 28, 2011

     1.0126         1.0045         1.0270         1.0270   

March 31, 2011

     1.0240         1.0080         1.0324         1.0291   

April 30, 2011

     1.0438         1.0321         1.0542         1.0542   

May 31, 2011

     1.0331         1.0195         1.0539         1.0322   

June 30, 2011

     1.0239         1.0143         1.0371         1.0371   

July 31, 2011

     1.0468         1.0344         1.0584         1.0483   

August 31, 2011

     1.0186         1.0092         1.0442         1.0222   

 

(1) The average of the exchange rates on the last day of each month during the applicable year.
(2) The average of the exchange rates on the last day of each month.

Although the Notes are denominated in U.S. dollars, any judgment enforcing the Notes against Hexion Nova Scotia Finance, ULC in Canada would be denominated in Canadian dollars. In addition, any judgment enforcing the collateral in any jurisdiction outside the U.S. would likely be in the local currency.

 

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INDEX TO FINANCIAL STATEMENTS

 

     Page
Number
 

Consolidated Financial Statements of Momentive Specialty Chemicals Inc.

  

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008

     F-2   

Consolidated Balance Sheets at December 31, 2010 and 2009

     F-3   

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

     F-4   

Consolidated Statements of Deficit and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008

     F-5   

Notes to Consolidated Financial Statements

     F-6   

Report of Independent Registered Public Accounting Firm

     F-61   

Schedule II – Valuation and Qualifying Accounts

     F-62   

Unaudited Condensed Consolidated Financial Statements of Momentive Specialty Chemicals Inc.

  

Condensed Consolidated Statements of Operations, six months ended June 30, 2011 and 2010

     F-63   

Condensed Consolidated Balance Sheets, June 30, 2011 and December 31, 2010

     F-64   

Condensed Consolidated Statements of Cash Flows, six months ended June 30, 2011 and 2010

     F-65   

Condensed Consolidated Statement of Deficit and Comprehensive Income, six months ended June 30, 2011

     F-66   

Notes to Condensed Consolidated Financial Statements

     F-67   

Consolidated Financial Statements of Momentive International Holdings Cooperatief U.A.

  

Consolidated Statements of Operations (Restated) for the years ended December 31, 2010, 2009 and 2008

     F-91   

Consolidated Balance Sheets (Restated) at December 31, 2010 and 2009

     F-92   

Consolidated Statements of Cash Flows (Restated) for the years ended December 31, 2010, 2009 and 2008

     F-93   

Consolidated Statements of Equity (Deficit) and Comprehensive Loss (Restated) for the years ended December 31, 2010, 2009 and 2008

     F-94   

Notes to Consolidated Financial Statements

     F-95   

Report of Independent Registered Public Accounting Firm

     F-127   

Unaudited Condensed Consolidated Financial Statements of Momentive International Holdings Cooperatief U.A.

  

Condensed Consolidated Statements of Operations, six months ended June 30, 2011 and 2010

     F-128   

Condensed Consolidated Balance Sheets, June 30, 2011 and December 31, 2010

     F-129   

Condensed Consolidated Statements of Cash Flows, six months ended June 30, 2011 and 2010

     F-130   

Condensed Consolidated Statement of Deficit and Comprehensive Income, six months ended June 30, 2011

     F-131   

Notes to Condensed Consolidated Financial Statements

     F-132   

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Year ended December 31,  

(In millions)

   2010     2009     2008  

Net sales

   $ 4,597      $ 3,549      $ 5,390   

Cost of sales

     3,866        3,077        4,807   
  

 

 

   

 

 

   

 

 

 

Gross profit

     731        472        583   

Selling, general and administrative expense

     331        305        342   

Terminated merger and settlement (income) expense, net

     (171     (62     1,027   

Integration costs (See Note 2)

     —          —          27   

Asset impairments (See Note 2)

     —          49        8   

Business realignment costs (See Note 2)

     20        37        32   

Other operating expense, net

     5        7        9   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     546        136        (862

Interest expense, net

     276        223        303   

Loss (gain) on extinguishment of debt (See Note 10)

     30        (224     —     

Other non-operating (income) expense, net

     (4     —          6   
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax and earnings from unconsolidated entities

     244        137        (1,171

Income tax expense (benefit) (See Note 16)

     35        (8     (16
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before earnings from unconsolidated entities

     209        145        (1,155

Earnings from unconsolidated entities, net of taxes

     8        2        2   
  

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     217        147        (1,153

Net loss from discontinued operations, net of taxes (See Note 3)

     (3     (30     (32
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     214        117        (1,185

Net income attributable to noncontrolling interest

     —          (3     (5
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Momentive Specialty Chemicals Inc.

   $ 214      $ 114      $ (1,190
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Momentive Specialty Chemicals Inc.

   $ 203      $ 211      $ (1,362
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

CONSOLIDATED BALANCE SHEETS

 

(In millions, except share data)

  December 31,
2010
    December 31,
2009
 

Assets

   

Current assets

   

Cash and cash equivalents (including restricted cash of $6 and $7, respectively) (See Note 2)

  $ 186      $ 142   

Short-term investments

    6        10   

Accounts receivable (net of allowance for doubtful accounts of $24 and $23, respectively)

    527        406   

Inventories:

   

Finished and in-process goods

    266        230   

Raw materials and supplies

    109        87   

Other current assets

    79        76   

Current assets of discontinued operations (See Note 3)

    243        142   
 

 

 

   

 

 

 

Total current assets

    1,416        1,093   
 

 

 

   

 

 

 

Other assets

    153        99   

Property and equipment

   

Land

    78        87   

Buildings

    295        288   

Machinery and equipment

    2,244        2,291   
 

 

 

   

 

 

 
    2,617        2,666   

Less accumulated depreciation

    (1,350     (1,309
 

 

 

   

 

 

 
    1,267        1,357   

Goodwill (See Note 7)

    169        177   

Other intangible assets, net (See Note 7)

    132        151   

Noncurrent assets of discontinued operations (See Note 3)

    —          96   
 

 

 

   

 

 

 

Total assets

  $ 3,137      $ 2,973   
 

 

 

   

 

 

 

Liabilities and Deficit

   

Current liabilities

   

Accounts and drafts payable

  $ 414      $ 440   

Debt payable within one year (See Note 10)

    82        78   

Affiliated loans payable

    2        4   

Interest payable

    69        36   

Income taxes payable

    24        35   

Accrued payroll and incentive compensation

    65        43   

Other current liabilities

    150        189   

Current liabilities of discontinued operations (See Note 3)

    59        64   
 

 

 

   

 

 

 

Total current liabilities

    865        889   

Long-term debt (See Note 10)

    3,488        3,324   

Affiliated long-term debt (See Note 10)

    100        100   

Long-term pension and post employment benefit obligations (See Note 13)

    208        224   

Deferred income taxes (See Note 16)

    110        116   

Other long-term liabilities

    160        135   

Advance from affiliates (See Note 6)

    225        225   

Noncurrent liabilities of discontinued operations (See Note 3)

    —          9   
 

 

 

   

 

 

 

Total liabilities

    5,156        5,022   
 

 

 

   

 

 

 

Commitments and contingencies (See Notes 10 and 12)

   

Deficit

   

Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at December 31, 2010 and 2009

    1        1   

Paid-in capital

    324        485   

Treasury stock, at cost—88,049,059 shares

    (296     (296

Note receivable from parent

    (24     (24

Accumulated other comprehensive income

    88        99   

Accumulated deficit

    (2,115     (2,328
 

 

 

   

 

 

 

Total Momentive Specialty Chemicals Inc. shareholder’s deficit

    (2,022     (2,063

Noncontrolling interest

    3        14   
 

 

 

   

 

 

 

Total deficit

    (2,019     (2,049
 

 

 

   

 

 

 

Total liabilities and deficit

  $ 3,137      $ 2,973   
 

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year ended December 31,  

(In millions)

   2010     2009     2008  

Cash flows provided by (used in) operating activities

      

Net income (loss)

   $ 214      $ 117      $ (1,185

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

      

Depreciation and amortization

     172        178        203   

Loss (gain) on extinguishment of debt (See Note 10)

     30        (224     —     

Push-down of (income) expense (recovered) paid by shareholder (See Note 2)

     (163     (37     200   

Write-off of deferred acquisition costs

     —          —          101   

Deferred tax provision (benefit)

     (10     (7     (13

Non-cash impairments and accelerated depreciation

     —          57        33   

Cash settlement of derivatives

     —          —          37   

Other non-cash adjustments

     10        (5     (4

Net change in assets and liabilities:

      

Accounts receivable

     (142     128        231   

Inventories

     (65     99        99   

Accounts and drafts payable

     (16     95        (299

Income taxes payable

     12        6        (10

Other assets, current and non-current

     (16     2        8   

Other liabilities, current and long-term

     19        (54     (33
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     45        355        (632
  

 

 

   

 

 

   

 

 

 

Cash flows used in investing activities

      

Capital expenditures

     (119     (131     (134

Capitalized interest

     (1     (5     —     

Proceeds from matured debt securities

     4        —          —     

Change in restricted cash

     2        2        (6

Deconsolidation of variable interest entities

     (4     —          —     

Purchases of investments

     —          (2     (7

Proceeds from the sale of assets

     14        4        13   

Investment in unconsolidated affiliates, net

     5        —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (99     (132     (134
  

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) financing activities

      

Net short-term debt (repayments) borrowings

     (7     (10     8   

Borrowings of long-term debt

     2,356        1,155        1,092   

Repayments of long-term debt

     (2,177     (1,404     (929

(Repayments) borrowings of affiliated debt

     (3     104        —     

Purchase of note receivable due from parent

     —          (24     —     

Capital contribution from parent (See Note 14)

     —          —          325   

Advance from affiliates (See Note 6)

     —          —          225   

Payment of dividends on common stock

     —          (10     (2

Long-term debt and credit facility financing fees

     (72     (5     —     

(Deconsolidation) consolidation of noncontrolling interest in variable interest entity

     —          (24     24   

Payment of dividends to noncontrolling interest holder

     —          (4     —     

Cash settlement of derivatives

     —          —          (37
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     97        (222     706   
  

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     2        13        (18

Increase (decrease) in cash and cash equivalents

     45        14        (78

Cash and cash equivalents at beginning of year

     135        121        199   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents (unrestricted) at end of year

   $ 180      $ 135      $ 121   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Cash paid for:

      

Interest, net

   $ 235      $ 234      $ 298   

Income taxes (refunded) paid, net

     36        (6     7   

See Notes to Consolidated Financial Statements

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

CONSOLIDATED STATEMENTS OF DEFICIT AND COMPREHENSIVE INCOME (LOSS)

 

(In millions)

  Common
Stock
    Paid-in
Capital
(Deficit)
    Treasury
Stock
    Note
Receivable
From
Parent
    Accumulated
Other
Comprehensive
Income (loss)(a)
    Accumulated
Deficit
    Noncontrolling
Interest
    Total  

Balance at December 31, 2007

  $ 1      $ (13   $ (296   $ —        $ 174      $ (1,252   $ 12        (1,374

Net loss

    —          —          —          —          —          (1,190     5        (1,185

Translation adjustments

    —          —          —          —          (84     —          —          (84

Net deferred losses on cash flow hedges recognized in comprehensive income

    —          —          —          —          (10     —          —          (10

Loss recognized from pension and postretirement benefits, net of tax

    —          —          —          —          (78     —          —          (78
               

 

 

 

Comprehensive loss

                  (1,357
               

 

 

 

Dividends declared to noncontrolling interest holder

    —          —          —          —          —          —          (2     (2

Capital contribution from parent (See Note 14)

    —          325        —          —          —          —          —          325   

Push-down of expense paid by shareholder (See Note 2)

    —          200        —          —          —          —          —          200   

Consolidation of variable interest entity

    —          —          —          —          —          —          24        24   

Stock-based compensation expense

    —          5        —          —          —          —          —          5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2008

    1        517        (296     —          2        (2,442     39        (2,179

Net income

    —          —          —          —          —          114        3        117   

Translation adjustments

    —          —          —          —          64        —          1        65   

Net deferred losses on cash flow hedges reclassified to income

    —          —          —          —          15        —          —          15   

Gain recognized from pension and postretirement benefits, net of tax

    —          —          —          —          18        —          —          18   
               

 

 

 

Comprehensive income

                  215   
               

 

 

 

Dividends declared to noncontrolling interest holder

    —          —          —          —          —          —          (5     (5

Push-down of recovery of expense paid by shareholder (See Note 2)

    —          (37     —          —          —          —          —          (37

Deconsolidation of variable interest entity (See Note 8)

    —          —          —          —          —          —          (24     (24

Purchase of note receivable due from parent (See Note 6)

    —          —          —          (24     —          —          —          (24

Stock-based compensation expense

    —          5        —          —          —          —          —          5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

    1        485        (296     (24     99        (2,328     14        (2,049

Net income

    —          —          —          —          —          214        —          214   

Translation adjustments

    —          —          —          —          (23     —          (1     (24

Net deferred losses on cash flow hedges reclassified to income

    —          —          —          —          18        —          —          18   

Loss recognized from pension and postretirement benefits, net of tax

    —          —          —          —          (6     —          —          (6
               

 

 

 

Comprehensive income

                  202   
               

 

 

 

Push-down of recovery of expense paid by shareholder (See Note 2)

    —          (163     —          —          —          —          —          (163

Impact of adoption of new accounting guidance for variable interest entities (See Note 2)

    —          —          —          —          —          (1     (10     (11

Stock-based compensation expense

    —          2        —          —          —          —          —          2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

  $ 1      $ 324      $ (296   $ (24   $ 88      $ (2,115   $ 3      $ (2,019
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Accumulated other comprehensive income at December 31, 2010 represents $173 of net foreign currency translation gains, net of tax, $2 of net deferred losses on cash flow hedges and a $83 loss, net of tax, relating to net actuarial losses and prior service costs for the Company’s defined benefit pension and postretirement benefit plans (see Note 13). Accumulated other comprehensive income at December 31, 2009 represents $196 of net foreign currency translation gains, net of tax, $20 of net deferred losses on cash flow hedges and a $77 unrealized loss, net of tax, related to net actuarial losses and prior service costs for the Company’s defined benefit pension and postretirement plans. Accumulated other comprehensive income at December 31, 2008 represents $132 of net foreign currency translation gains, net of tax, $35 of net deferred losses on cash flow hedges and a $95 loss, net of tax, relating to net actuarial losses and prior service costs for the Company’s defined benefit pension and postretirement benefit plans (see Note 13).

See Notes to Consolidated Financial Statements

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

Notes to Consolidated Financial Statements

(In millions, except share data)

1. Background and Basis of Presentation

Based in Columbus, Ohio, Momentive Specialty Chemicals Inc. (formerly known as Hexion Specialty Chemicals, Inc.), (which may be referred to “MSC” or the “Company”) serves global industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. At December 31, 2010, the Company has 76 active production and manufacturing facilities, with 30 located in the United States. Our business is organized based on the products that we offer and the markets that we serve. At December 31, 2010, we had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins. For discussion on the change in the Company’s reportable segments in 2011, see Note 17.

Hexion Formation

The Company was formed on May 31, 2005 by combining three Apollo Management, L.P. controlled companies: Resolution Performance Products, LLC (“Resolution Performance”), Resolution Specialty Materials, Inc. (“Resolution Specialty”) and Borden Chemical, Inc. (“Borden Chemical”), including Bakelite Aktiengesellschaft (“Bakelite”). We refer to this combination as the “Hexion Formation.”

Momentive Combination

On October 1, 2010, our parent, Momentive Specialty Chemicals Holdings LLC (“MSC Holdings”, formerly known as Hexion LLC) and Momentive Performance Materials Holdings Inc. (“MPM Holdings”), the parent company of Momentive Performance Materials Inc. (“MPM”), became subsidiaries of a newly formed holding company, Momentive Performance Materials Holdings LLC (“Momentive Holdco”). We refer to this transaction as the “Momentive Combination.”

At the time of the Momentive Combination, Hexion LLC changed its name to Momentive Specialty Chemicals Holdings LLC and Hexion Specialty Chemicals, Inc. changed its name to Momentive Specialty Chemicals Inc. As a result of the Momentive Combination, Momentive Holdco became the ultimate parent entity of MPM and MSC. Momentive Holdco is controlled by investment funds (the “Apollo Funds”) managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”). Apollo may also be referred to as the Company’s owner.

As of December 31, 2010, the Company has elected not to apply push-down accounting of its parent’s basis as a result of the Momentive Combination because it is a public reporting registrant as a result of significant public debt that was outstanding before and after the Momentive Combination.

2. Summary of Significant Accounting Policies

Principles of Consolidation—The Consolidated Financial Statements include the accounts of the Company, its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights, and variable interest entities in which the Company has the power to direct the activities that most significantly impact the variable interest entities’ economic performance. Intercompany accounts and transactions are eliminated in consolidation. The Company’s share of the net earnings of 20% to 50% owned companies, for which it has the ability to exercise significant influence over operating and financial policies (but not control), are included in Earnings from unconsolidated entities in the Consolidated Statements of Operations. Investments in the other companies are carried at cost.

The Company has recorded a noncontrolling interest for the equity interests in consolidated subsidiaries that are not 100% owned.

 

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The Company’s unconsolidated investments accounted for under the equity method of accounting include the following:

 

   

50% ownership interest in HA International, Inc, a joint venture that manufactures foundry resins

 

   

50% ownership interest in Hexion Shchekinoazot B.V. that manufactures forest products resins Russia.

 

   

50% ownership interest in Asia Dekor Borden (Hong Kong) Chemical Company, a joint venture that manufactures formaldehyde and resins in China

 

   

49.99% interest in Hexion UV Coatings (Shanghai) Co., Ltd, a joint venture that manufactures UV-curable coatings and adhesives in China.

Foreign Currency Translations—Assets and liabilities of foreign affiliates are translated at the exchange rates in effect at the balance sheet date. Income, expenses and cash flows are translated at average exchange rates during the year. In addition, gains or losses related to the Company’s intercompany loans payable and receivable denominated in a foreign currency other than the subsidiary’s functional currency that are deemed to be permanently invested are remeasured to cumulative translation. The effect of translation is accounted for as an adjustment to Deficit and is included in Accumulated other comprehensive income. Transaction gains and losses are included as a component of Net income (loss). The Company recognized transaction gains (losses) of $8, $4 and $(30) for the years ended December 31, 2010, 2009 and 2008, respectively.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and also the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. The most significant estimates that are included in the financial statements are environmental remediation, legal liabilities, deferred tax assets and liabilities and related valuation allowances, income tax accruals, pension and postretirement assets and liabilities, valuation allowances for accounts receivable and inventories, general insurance liabilities, asset impairments, fair values of stock awards and fair values of assets acquired and liabilities assumed in business acquisitions. Actual results could differ from these estimates.

Terminated merger and settlement (income) expense, net—The Company recognized net Terminated merger and settlement income, net of $171 for the year ended December 31, 2010. The amount primarily includes income of $163 for insurance recoveries by the Company’s owner related to the $200 settlement payment made by the Company’s owner that had been treated as an expense of the Company in 2008. As of December 31, 2010, the Company’s owner has recovered the $200 settlement payment in full. Terminated merger and settlement (income) expense, net also includes income of $8 in insurance recoveries recorded by the Company related to the settlement of the New York Shareholder Action (See Note 12).

The Company recognized net Terminated merger and settlement income, net of $62 for the year ended December 31, 2009. The Company recognized income during the year of $51 as the Company negotiated reductions on certain of its merger related service provider liabilities and $37 in insurance recoveries by the Company’s owner related to the $200 settlement payment made by Apollo that was treated as an expense of the Company in 2008. The income was partially offset by legal contingency accruals.

The Company incurred Terminated merger and settlement expense, net totaling $1,027 for the year ended December 31, 2008. The costs represent the $325 termination fee, the $225 settlement payment, the non-cash push-down of settlement costs paid by Apollo of $200 and the litigation costs associated with the terminated merger. These costs also include the write-off of previously deferred acquisition costs and legal, consulting, accounting and tax costs related to the terminated merger agreement and associated litigation.

Cash and Cash Equivalents—The Company considers all highly liquid investments that are purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2010 and 2009, the

 

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Company had interest-bearing time deposits and other cash equivalent investments of $75 and $54, respectively. They are included in the Consolidated Balance Sheets as a component of Cash and cash equivalents. The Company does not present cash flows from discontinued operations separately in the Consolidated Statement of Cash Flows.

Investments—Investments with original maturities greater than 90 days but less than one year are included on the Consolidated Balance Sheets as Short-term investments. At December 31, 2010 and 2009, the Company had Brazilian real denominated U.S. dollar index investments of $6 and $10, respectively. These investments, which are classified as held-to-maturity securities, are recorded at cost, which approximates fair value.

Allowance for Doubtful AccountsThe allowance for doubtful accounts is estimated using factors such as customer credit ratings and past collection history. Receivables are charged against the allowance for doubtful accounts when it is probable that the receivable will not be recovered.

Inventories—Inventories are stated at lower of cost or market using the first-in, first-out method. Costs include direct material, direct labor and applicable manufacturing overheads, which are based on normal production capacity. Abnormal manufacturing costs are recognized as period costs and fixed manufacturing overheads are allocated based on normal production capacity. An allowance is provided for excess and obsolete inventories based on management’s review of inventories on-hand compared to the estimated future usage and sales. Inventories in the Consolidated Balance Sheets are presented net of an allowance for excess and obsolete inventory of $9 and $10 at December 31, 2010 and 2009, respectively.

Deferred Expenses—Deferred financing costs are presented as a component of Other assets in the Consolidated Balance Sheets and are amortized over the life of the related debt or credit facility using the effective interest method. Upon extinguishment of any of the debt, the related debt issuance costs are written off. At December 31, 2010 and 2009, the Company’s unamortized deferred financing costs were $65 and $34, respectively.

Property and Equipment—Land, buildings and machinery and equipment are stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of properties (the average estimated useful life for buildings is 20 years and 15 years for machinery and equipment). Assets under capital leases are amortized over the lesser of their useful life or the lease term. Major renewals and betterments are capitalized. Maintenance, repairs, minor renewals and turnarounds (periodic maintenance and repairs to major units of manufacturing facilities) are expensed as incurred. When property and equipment is retired or disposed of, the asset and related depreciation are removed from the accounts and any gain or loss is reflected in operating income. The Company capitalizes interest costs that are incurred during the construction of property and equipment. Depreciation expense was $149, $149 and $170 for the years ended December 31, 2010, 2009 and 2008, respectively.

Capitalized Software—The Company capitalizes certain costs, such as software coding, installation and testing, that are incurred to purchase or create and implement computer software for internal use. Amortization is recorded on the straight-line basis over the estimated useful lives ranging from 1 to 5 years.

Goodwill and Intangibles—The excess of purchase price over net tangible and identifiable intangible assets of businesses acquired is carried as Goodwill in the Consolidated Balance Sheets. Separately identifiable intangible assets that are used in the operations of the business (e.g., patents and technology, customer lists and contracts) are recorded at cost (fair value at the time of acquisition) and reported as Other intangible assets on the Consolidated Balance Sheets. The Company does not amortize goodwill or indefinite-lived intangible assets. Intangible assets with determinable lives are amortized on a straight-line basis over the shorter of the legal or useful life of the assets, which range from 1 to 30 years. See Note 7.

Impairment—The Company reviews property and equipment and all amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may

 

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not be recoverable. Recoverability is based on estimated undiscounted cash flows. The Company tests goodwill for impairment annually, or when events or changes in circumstances indicate impairment may exist, by comparing the fair value of each reporting unit to its carrying value to determine if there is an indication that a potential impairment may exist.

During the years ended December 31, 2009 and 2008, asset impairments of $49 and $8, respectively, were included in Asset impairments in the Consolidated Statements of Operations. In addition, during the years ended December 31, 2010 and 2009, accelerated depreciation on closing facilities of $1 and $3, respectively, was included in Other operating expense, net on the Consolidated Statements of Operations.

Long-Lived and Amortizable Intangible Assets

In 2009, the Company recorded impairment charges of $46 in the Epoxy, Phenolic and Coating Resins segment as a result of the Company’s decision to indefinitely idle certain production lines. In addition, the Company recorded miscellaneous impairments of $3 related to the closure of R&D facilities in the Forest Products Resins and Epoxy, Phenolic and Coating Resins segments.

In 2008, the Company recorded an $8 charge in the Epoxy, Phenolic and Coating Resins segment for the impairment of tradenames from which cash flows are no longer generated.

Goodwill

The Company uses a probability weighted market and income approach to estimate the values of its reporting units. The Company’s market approach is a comparable analysis technique commonly used in the investment banking and private equity industries based on the EBITDA (earnings before interest, income taxes, depreciation and amortization) multiple technique. Under this technique, estimated values are the result of a market-based EBITDA multiple that is applied to an appropriate historical EBITDA amount, adjusted for the additional fair value that would be assigned by a market participant obtaining control over the reporting unit. The Company’s income approach is a discounted cash flow model. When the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of the reporting unit’s goodwill, an impairment loss is recognized for the difference.

Prior to 2010, the Company performed its annual impairment test at December 31. However, as a result of the Momentive Combination, the Company has changed the annual goodwill impairment testing date to October 1. This change was made to conform with the accounting policy and annual impairment testing date of the Company’s accounting acquirer, MPM Holdings and the Company’s ultimate parent, Momentive Holdco. Accordingly, the Company considers this accounting change preferable. This change does not accelerate, delay, avoid or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. The annual goodwill impairment testing was performed as of October 1, 2010. Consideration was given to the period between the testing date and December 31, 2010, concluding that no facts or circumstances arose that would lead to a different conclusion as of December 31, 2010.

At October 1, 2010, the fair value of the remaining reporting units exceeded the carrying amount of assets (including goodwill) and liabilities assigned to the units. At December 31, 2009, the fair value of the remaining reporting units exceeded the carrying amount of assets (including goodwill) and liabilities assigned to the units.

General Insurance—The Company is generally insured for losses and liabilities for workers’ compensation, physical damage to property, business interruption and comprehensive general, product and vehicle liability under high-deductible insurance policies. The Company records losses when a loss has been incurred and is estimable and amortizes premiums over the life of the respective insurance policies. The Company records losses when a loss has been incurred and is estimable.

 

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Legal Claims and Costs—The Company accrues for legal claims and costs in the period in which a claim is made or an event becomes known, if the amounts are probable and reasonably estimable. Each claim is assigned a range of potential liability and the most likely amount is accrued. If there is no amount in the range of potential liability that is most likely, the low end of the range is accrued. The amount accrued includes all costs associated with the claim, including settlements, assessments, judgments, fines and incurred legal fees. See Note 12.

Environmental Matters—Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Environmental accruals are reviewed on a quarterly basis and as events and developments warrant. See Note 12.

Asset Retirement Obligations—Asset retirement obligations are initially recorded at their estimated net present values in the period in which the obligation occurs, with a corresponding increase to the related long-lived asset. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset. When the liability is settled, a gain or loss is recognized for any difference between the settlement amount and the liability that was recorded.

Revenue Recognition—Revenue for product sales, net of estimated allowances and returns, is recognized as risk and title to the product transfer to the customer, which either occurs at the time shipment is made or upon delivery. In situations where product is delivered by pipeline, risk and title transfers when the product moves across an agreed-upon transfer point, which is typically the customers’ property line. Product sales delivered by pipeline are measured based on daily flow meter readings. The Company’s standard terms of delivery are included in its contracts of sale or on its invoices.

Shipping and Handling—Freight costs that are billed to customers are included in Net sales in the Consolidated Statements of Operations. Shipping costs are incurred to move the Company’s products from production and storage facilities to the customer. Handling costs are incurred from the point the product is removed from inventory until it is provided to the shipper and generally include costs to store, move and prepare the products for shipment. Shipping and handling costs are recorded in Cost of sales in the Consolidated Statements of Operations.

Research and Development Costs—Funds are committed to research and development activities for technical improvement of products and processes that are expected to contribute to future earnings. All costs associated with research and development are charged to expense as incurred. Research and development and technical service expense was $54, $53 and $62 for the years ended December 31, 2010, 2009 and 2008, respectively and is included in Selling, general and administrative expense in the Consolidated Statements of Operations.

Integration Costs—The Company incurred Integration costs totaling $27 for the year ended December 31, 2008. This represents costs to implement a single, company-wide, management information and accounting system and a new consolidations and financial reporting system, as well as, redundancy and plant rationalization costs and incremental administrative costs from integration programs that resulted from the Hexion Formation and recent acquisitions. The Company records these expenses as incurred.

Business Realignment Costs—The Company incurred Business realignment costs totaling $20, $37 and $32 for the years ended December 31, 2010, 2009 and 2008, respectively. These costs primarily represent expenses to implement productivity savings programs to reduce the Company’s cost structure and align manufacturing capacity with current volume demands (See Note 4). For the year ended December 31, 2008, these costs also represent minor restructuring programs related to headcount reduction costs associated with plant closures and divestitures.

Income Taxes—The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of the assets and liabilities.

 

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Deferred tax balances are adjusted to reflect tax rates, based on current tax laws, which will be in effect in the years in which temporary differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. See Note 16.

Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in the consolidated financial statements. Tax benefits are recognized in the consolidated financial statements when it is more likely than not that a tax position will be sustained upon examination. Tax benefits are measured as the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company classifies interest and penalties as a component of tax expense.

Derivative Financial Instruments—The Company is a party to forward exchange contracts, interest rate swaps, cross-currency swaps and natural gas futures and electricity and natural gas forward contracts to reduce its cash flow exposure to changes in foreign exchange rates, interest rates, natural gas and electricity prices. The Company does not hold or issue derivative financial instruments for trading purposes. All derivative financial instruments, whether designated in hedging relationships or not, are recorded on the Consolidated Balance Sheets at fair value. If a derivative financial instrument is designated as a fair-value hedge, the changes in the fair value of the derivative financial instrument and the hedged item are recognized in earnings. If the derivative financial instrument is designated as a cash-flow hedge, changes in the fair value of the derivative financial instrument are recorded in Accumulated other comprehensive income in the Consolidated Balance Sheets, to the extent effective, and are recognized in the Company’s Consolidated Statement of Operations when the hedged item impacts earnings. The cash flows from derivative financial instruments accounted for as hedges are classified in the same category as the item being hedged in the Consolidated Statements of Cash Flows. The Company documents effectiveness assessments in order to use hedge accounting at each reporting period. See Note 9.

Stock-Based Compensation—Stock-based compensation cost is measured at the grant date based on the fair value of the award which is amortized as expense over the requisite service period. See Note 15.

Transfers of Financial Assets—The Company executes factoring and sales agreements with respect to its trade accounts receivable to support its working capital requirements. The Company accounts for these transactions as either sales-type or financing-type transfers of financial assets based on the terms and conditions of each agreement. For the portion of the sales price that is deferred in a reserve account and subsequently collected, the Company’s policy is to classify the cash in-flows as cash flows from operating activities as the predominant source of the cash flows pertains to the Company’s trade accounts receivable. The Company generated (used) $4 and $(5) of cash for the years ended December 31, 2010 and 2009, respectively, related to the reserve account. When the Company retains the servicing rights on the transfers of accounts receivable, it measures these rights at fair value, if material. See Note 8.

Concentrations of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk are primarily temporary investments and accounts receivable. The Company places its temporary investments with high quality institutions and, by policy, limits the amount of credit exposure to any one institution. Concentrations of credit risk for accounts receivable are limited due to the large number of customers in the Company’s customer base and their dispersion across many different industries and geographies. The Company generally does not require collateral or other security to support customer receivables.

Concentrations of Supplier Risk—The Company relies on long-term agreements with key suppliers for most of its raw materials. The loss of a key source of supply or a delay in shipments could have an adverse effect on its business. Should any of the suppliers fail to deliver or should any of the key long-term supply contracts be canceled, the Company would be forced to purchase raw materials at current market prices. The Company’s largest supplier provides 9% of raw material purchases. In addition, several of the feedstocks at various facilities are transported through a pipeline from one supplier.

 

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Subsequent Events—The Company has evaluated events and transactions subsequent to December 31, 2010 through February 28, 2011, the original date of issuance of its Consolidated Financial Statements, except for discontinued operations (see Note 3) and segment changes (see Note 17).

Reclassifications—Certain prior period balances have been reclassified to conform with current presentations. The results of the North American coatings and composites resins (“CCR”) business have been reported as a discontinued operation for all periods presented and were previously included in the Epoxy, Phenolic and Coating resins segment. In addition, all notes have been recasted to reflect this presentation accordingly.

Recently Issued Accounting Standards

Newly Adopted Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 166, Accounting for Transfers of Financial Assets which was codified in December 2009 as Accounting Standards Update No. 2009-16: Accounting for Transfers of Financial Assets (“ASU 2009-16”). ASU 2009-16 removes the concept of a qualifying special-purpose entity (“QSPE”) and as a result eliminates the scope exception for QSPE’s. ASU 2009-16 also changes the criteria for a transfer of financial assets to qualify as a sales-type transfer. The Company adopted ASU 2009-16 on January 1, 2010. The adoption of ASU 2009-16 did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) which was codified in December 2009 as Accounting Standards Update No. 2009-17: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 amends current guidance requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. The Company adopted ASU 2009-17 on January 1, 2010. The Company does not have the power to direct the activities that most significantly impact two of its VIEs’ economic performance, and therefore, the Company does not have a controlling financial interest in these VIEs. As a result of the adoption of this guidance, the Company deconsolidated these two VIEs from its Consolidated Financial Statements, including its foundry joint venture between the Company and Delta-HA, Inc (“HAI”). The deconsolidation resulted in a net decrease in assets of $19, liabilities of $8 and noncontrolling interest of $10 and an increase to Accumulated deficit of $1 for the cumulative effect of adoption on January 1, 2010.

3. Discontinued Operations

North American Coatings and Composites Resins Business

On May 31, 2011, the Company sold its CCR business to PCCR USA, Inc. (“PCCR”), a subsidiary of Investindustrial, a European investment group. The CCR business is engaged in the production of coating resins for architectural and original equipment manufacturers, alkyd resins, as well as composite resins for construction, transportation, consumer goods, marine and other applications and includes four manufacturing facilities in the United States.

In conjunction with the sale, as part of a Transitional Services Agreement, the Company is providing certain transitional services to PCCR for a period of nine months, with an option held by PCCR to extend the Transitional Services Agreement by three months. The purpose of these services is to provide short-term assistance to PCCR in assuming the operations of the CCR business. These services do not confer to the Company the ability to influence the operating or financial policies of the CCR business under its new ownership. The Company’s cash inflows and outflows from these services are expected to be insignificant during the transition period.

For the year ended December 31, 2010, the CCR business had net sales of $221 and pre-tax loss of $2. The CCR business is reported as a discontinued operation for all periods presented and was previously included in the Coatings segment in 2010 and the Epoxy, Phenolic and Coating Resins segment beginning in 2011 as a result of the Company’s change in reportable segments in the first quarter of 2011 (see Note 17). The Notes herein have been recasted for the discontinued operations as necessary.

 

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IAR Business

On January 31, 2011, the Company sold its Inks and Adhesive Resins (“IAR”) business to Harima Chemicals Inc (“Harima”) for a purchase price of $120. The IAR business is engaged in the production of naturally derived resins and related products primarily used for the manufacture of printing inks, adhesives, synthetic rubber, specialty coatings and aroma chemicals and includes 11 manufacturing facilities in the United States, Europe and the Asia-Pacific region.

Harima also paid $14 for cash and $8 for working capital transferred to Harima at the time of closing as part of the Purchase Agreement, less indebtedness and pension plan liability transferred to Harima of $4. In the first quarter of 2011, a subsequent adjustment to the purchase price of $2 was accrued based upon the final expected working capital settlement as defined by the Purchase Agreement.

In conjunction with the sale, as part of a Transitional Services Agreement, the Company is providing certain transitional services to Harima for a period of six months. The purpose of these services is to provide short-term assistance to Harima in assuming the operations of the IAR business. These services do not confer to the Company the ability to influence the operating or financial policies of the IAR business under its new ownership. The Company’s cash inflows and outflows from these services are expected to be insignificant during the transition period.

The IAR business had net sales of $356 and pre-tax income of $2 for the year ended December 31, 2010. The IAR business is reported as a discontinued operation for all periods presented.

In addition, the Company incurred approximately $4 in transaction and other costs for the year ended December 31, 2010. The Company accrued a loss on the sale of the IAR business of $1 in the fourth quarter of 2010.

The aggregate carrying values of the IAR and CCR businesses were $140 and $44, respectively, as of December 31, 2010, and $124 and $41, respectively, as of December 31, 2009. The major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheets are as follows:

 

    As of December 31,  
    2010      2009  
    IAR
business
     CCR
business
     Total      IAR
business
     CCR
business
     Total  

Assets:

                

Accounts Receivable

  $ 69       $ 20       $ 89       $ 55       $ 17       $ 72   

Inventories

    42         21         63         40         22         62   

Other current assets

    6         1         7         6         2         8   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

    117         42         159         101         41         142   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Property and equipment, net

    54         21         75         61         23         84   

Other intangible assets, net

    6         —           6         7         —           7   

Other assets

    3         —           3         5         —           5   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total noncurrent assets

    63         21         84         73         23         96   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets of discontinued operations

  $ 180       $ 63       $ 243       $ 174       $ 64       $ 238   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                

Accounts and drafts payable

  $ 24       $ 16       $ 40       $ 24       $ 18       $ 42   

Other current liabilities

    7         3         10         16         6         22   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

    31         19         50         40         24         64   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt

    4         —           4         4         —           4   

Other long-term liabilities

    5         —           5         5         —           5   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total noncurrent liabilities

    9         —           9         9         —           9   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities of discontinued operations

  $ 40       $ 19       $ 59       $ 49       $ 24       $ 73   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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4. Productivity Program

At December 31, 2010, the Company had $24 of in-process productivity savings expected to be achieved over the remaining life of the projects. The Company estimates that these cost reduction activities will occur over the next 6 months. The net costs to achieve these productivity savings is estimated at $3, including restructuring costs described below and expected capital expenditures related to productivity savings programs.

The following table summarizes restructuring information by type of cost:

 

     Workforce
reductions
    Site closure
costs
    Other
projects
    Total  

Restructuring costs expected to be incurred

   $ 46      $ 9      $ 5      $ 60   

Cumulative restructuring costs incurred through December 31, 2010

   $ 46      $ 5      $ 4      $ 55   

Accrued liability at December 31, 2007

   $ —        $ —        $ —        $ —     

Restructuring charges

     11        —          —          11   

Payments

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued liability at December 31, 2008

     11        —          —          11   

Restructuring charges

     25        2        2        29   

Payments

     (17     (2     (2     (21

Foreign currency translation

     1        —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued liability at December 31, 2009

     20        —          —          20   

Restructuring charges

     10        3        2        15   

Payments

     (23     (3     (2     (28
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued liability at December 31, 2010

   $ 7      $ —        $ —        $ 7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Workforce reduction costs primarily relate to employee termination costs and are accounted for under the guidance for nonretirement postemployment benefits or as exit and disposal costs, as applicable. During the years ended December 31, 2010 , 2009 and 2008 restructuring charges of $15, $29 and $11, respectively, were recorded in Business realignment costs on the Consolidated Statements of Operations. At December 31, 2010 and 2009, the Company had accrued $7 and $20, respectively, for restructuring liabilities in Other current liabilities in the Consolidated Balance Sheets.

The following table summarizes restructuring information by reporting segment:

 

     Epoxy,
Phenolic and
Coating
Resins
    Forest Products
Resins
    Corporate
and Other
    Total  

Restructuring costs expected to be incurred

   $ 47      $ 6      $ 7      $ 60   

Cumulative restructuring costs incurred through December 31, 2010

   $ 43      $ 5      $ 7      $ 55   

Accrued liability at December 31, 2007

   $ —        $ —        $ —        $ —     

Restructuring charges

     7        1        3        11   

Payments

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued liability at December 31, 2008

     7        1        3        11   

Restructuring charges

     22        3        4        29   

Payments

     (15     (2     (4     (21

Foreign currency translation

     1        —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued liability at December 31, 2009

     15        2        3        20   

Restructuring charges

     14        1        —          15   

Payments

     (24     (2     (2     (28
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued liability at December 31, 2010

   $ 5      $ 1      $ 1      $ 7   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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5. Divestitures

2009 and 2008 Divestitures

During the years ended December 31, 2009 and 2008, the Company completed the sale of .01% and 4.99% interest in HAI, respectively. At December 31, 2009 and 2008, the Company’s economic interest in HAI was 50% and 50.01%, respectively. In addition, during the year ended December 31, 2008, the Company completed the sale of certain assets of a non-core product line.

The Company recognized net gains totaling $5 for asset divestitures during the year ended December 31, 2008. This amount is included in Other operating expense, net in the Company’s Consolidated Statements of Operations.

6. Related Party Transactions

Administrative Service, Management and Consulting Arrangements

The Company is subject to a seven-year Amended and Restated Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) that terminates on May 31, 2012 under which the Company receives certain structuring and advisory services from Apollo and its affiliates. The annual fees under the Management Consulting Agreement is $3. Due to the recent economic downturn, Apollo suspended its 2009 annual fees but has reinstated the fees in 2010. The Management Consulting Agreement provides indemnification to Apollo and its affiliates and their directors, officers and representatives for potential losses arising from these services.

Under the Management Consulting Agreement, the Company paid annual fees of $3, $0 and $3 for the years ended December 31, 2010, 2009 and 2008, respectively. These amounts are included in Other operating expense, net in the Company’s Consolidated Statements of Operations.

Shared Services Agreement

On October 1, 2010, in connection with the closing of the Momentive Combination, the Company entered into the Shared Services Agreement. Pursuant to the Shared Services Agreement, the Company will provide to MPM, and MPM provides to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, legal and procurement services. The Shared Services Agreement establishes certain criteria upon which the costs of such services will be allocated between the Company and MPM. Allocation of service costs not demonstrably attributable to either the Company or MPM will initially be 51% to the Company and 49% to MPM, except to the extent that 100% of any cost was demonstrably attributable to or for the benefit of either MPM or the Company, in which case the total cost was allocated 100% to such party. The Shared Services Agreement remains in effect until terminated according to its terms. MPM or the Company may terminate the agreement for convenience, without cause, by giving written notice not less than thirty (30) days prior to the effective date of termination. It is also anticipated that the Company and MPM will cooperate to achieve favorable pricing with respect to purchases of raw materials and logistics services.

Pursuant to this agreement, in the fourth quarter of 2010, the Company incurred approximately $42 of costs for shared services and MPM incurred approximately $43 of costs for shared services (excluding, in each case, costs allocated 100% to one party). MPM billed the Company approximately $1 which represents a true-up payment to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to 51% for the Company and 49% for MPM. The true-up amount is included in Other operating expense, net, in the Consolidated Statement of Operations. The Company has accounts payable to MPM of $1 at December 31, 2010.

 

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Financing Agreements

In connection with the terminated Huntsman merger and related litigation settlement agreement and release among the Company, Huntsman and other parties entered into on December 14, 2008, the Company paid Huntsman $225. The settlement payment was funded to the Company by an advance from Apollo, while reserving all rights with respect to reallocation of the payments to other affiliates of Apollo. Under the provisions of the settlement agreement and release, the Company is contractually obligated to reimburse Apollo for any insurance recoveries on the $225 settlement payment, net of expense incurred in obtaining such recoveries. Apollo has agreed that the payment of any such insurance recoveries will satisfy the Company’s obligation to repay amounts received under the $225 advance. The Company has recorded the $225 settlement payment advance as a long-term liability at December 31, 2010. As of December 31, 2010, the Company has not recovered any insurance proceeds related to the $225 settlement payment.

In addition, pursuant to the settlement agreement and release, certain affiliates of Apollo agreed to make a $200 investment in the Company. Certain affiliates of Apollo have entered into a commitment letter with the Company and MSC Holdings pursuant to which they committed to purchase $200 in preferred units and warrants of MSC Holdings by December 31, 2011. Prior to the purchase of all the preferred shares and warrants, certain affiliates of Apollo have committed to provide liquidity facilities to MSC Holdings or the Company on an interim basis. The aggregate liquidity facilities outstanding, together with the purchase price for any purchased preferred shares and warrants, will at no time exceed $200. In connection therewith, in 2009, certain affiliates of Apollo extended a $100 term loan to the Company and an affiliate of the Company (the “Term Loan”). The Term Loan will mature on December 31, 2011 with interest at adjusted LIBOR plus 2.25% per annum. Interest expense incurred during the years ended December 31, 2010 and 2009 on the Term Loan was $3. See Note 10 for further information on the Company’s affiliated debt. In addition, in December 2010 the Company sold $67 of trade accounts receivable to affiliates of Apollo for net cash of $60, ($7 remains held in a reserve account at December 31, 2010). See Note 8 for a description of the Company’s sale of trade accounts receivable. The available borrowings under these liquidity facilities at December 31, 2010 were $40. This amount will increase on a dollar for dollar basis as the $67 of sold receivables are collected.

On October 1, 2010, at the time of the closing of the Momentive Combination, the commitment by Apollo to purchase $200 in preferred units of MSC Holdings and warrants to purchase common units of Momentive Holdings was amended to become a commitment to purchase preferred units and warrants to purchase common units of Momentive Holdco. Momentive Holdco has agreed to contribute any proceeds from the issuance of preferred or common units under this agreement as a capital contribution to MSC Holdings, and MSC Holdings has agreed to contribute such amounts as a capital contribution to the Company.

Purchase of MSC Holdings debt

In 2009, the Company purchased $180 in face value of the outstanding MSC Holdings LLC PIK Facility for $24, including accrued interest. The loan receivable from MSC Holdings has been recorded at its acquisition value of $24 as an addition to the Company’s shareholder deficit as MSC Holdings is the Company’s parent. In addition, at December 31, 2010 the Company has not recorded accretion of the purchase discount or interest income as ultimate receipt of these cash flows is under the control of MSC Holdings. The Company will continue to assess the collectibility of these cash flows to determine future amounts to record, if any.

Purchases and Sales of Products and Services with Apollo Affiliates

The Company sells products to certain Apollo affiliates and members of Momentive Holdco. These sales were $3, $2 and $7 for the years ended December 31, 2010, 2009 and 2008, respectively. Accounts receivable from these affiliates were less than $1 at both December 31, 2010 and 2009. The Company also purchases raw materials and services from certain Apollo affiliates. These purchases were $21, $8 and $3 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company had accounts payable to Apollo affiliates of $1 and $2 at December 31, 2010 and 2009, respectively.

 

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Table of Contents

Other Transactions and Arrangements

The Company sells finished goods to and purchases raw materials from HAI. The Company also provides toll-manufacturing and other services to HAI. Prior to 2010 and the adoption of ASU 2009-17, HAI was consolidated in the Company’s Consolidated Financial Statements and these transactions were eliminated in consolidation. Beginning in 2010, the Company’s investment in HAI is recorded under the equity method of accounting and the related sales and purchases are not eliminated from the Company’s Consolidated Financial Statements. However, any profit on these transactions is eliminated in the Company’s Consolidated Financial Statements to the extent of the Company’s 50% interest in HAI. Sales to and services provided to HAI were $96 for the year ended December 31, 2010. Purchases from HAI were $58 for the year ended December 31, 2010. The Company had accounts receivable from HAI of $13 and accounts payable to HAI of $2 at December 31, 2010.

The Company’s purchase contracts with HAI represent a significant portion of HAI’s total revenue. In addition, the Company has pledged its member interest in HAI as collateral on HAI’s revolving line of credit. These factors result in the Company absorbing the majority of the risk to potential losses or gains from a majority of the expected returns. However, the Company does not have the power to direct the activities that most significantly impact HAI, and therefore, does not have a controlling financial interest. As of December 31, 2010 the value of HAI’s assets and liabilities were $44 and $22, respectively.

The Company has a loan receivable from its unconsolidated forest products joint venture in Russia of $4 as of December 31, 2010.

7. Goodwill and Intangible Assets

The Company’s gross carrying amount and accumulated impairments of goodwill consist of the following as of December 31:

 

    2010     2009  
    Gross
Carrying
Amount
    Accumulated
Impairments
    Accumulated
Foreign
Currency
Translation
    Net Book
Value
    Gross
Carrying
Amount
    Accumulated
Impairments
    Accumulated
Foreign
Currency
Translation
    Net Book
Value
 

Epoxy, Phenolic and Coating Resins

  $ 88      $ —        $ 3      $ 91      $ 95      $ —        $ 5      $ 100   

Forest Products Resins

    81        —          (3     78        82        —          (5     77   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 169      $ —        $ —        $ 169      $ 177      $ —        $ —        $ 177   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The changes in the net carrying amount of goodwill by segment for the years ended December 31, 2010 and 2009 are as follows:

 

     Epoxy, Phenolic
and Coating
Resins
    Forest Products
Resins
     Total  

Goodwill balance at December 31, 2008

   $ 98      $ 72       $ 170   

Purchase accounting adjustments

     —          1         1   

Foreign currency translation

     2        4         6   
  

 

 

   

 

 

    

 

 

 

Goodwill balance at December 31, 2009

     100        77         177   

Deconsolidation of variable interest entity

     (7     —           (7

Foreign currency translation

     (2     1         (1
  

 

 

   

 

 

    

 

 

 

Goodwill balance at December 31, 2010

   $ 91      $ 78       $ 169   
  

 

 

   

 

 

    

 

 

 

During the year ended December 31, 2008, the Company recorded an $8 charge for the impairment of tradenames from which cash flows are no longer generated. This amount is included in Other operating expense, net on the Consolidated Statements of Operations.

 

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Table of Contents

The Company’s intangible assets with identifiable useful lives consist of the following as of December 31:

 

     2010      2009  
     Gross
Carrying Amount
     Accumulated
Amortization
    Net
Book Value
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Book Value
 

Intangible assets:

               

Patents and technology

   $ 110       $ (53   $ 57       $ 112       $ (46   $ 66   

Customer lists and contracts

     91         (37     54         98         (34     64   

Other

     25         (4     21         26         (5     21   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 226       $ (94   $ 132       $ 236       $ (85   $ 151   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The impact of foreign currency translation on intangible assets is included in accumulated amortization.

During the year ended December 31, 2010, the Company wrote off gross carrying amount of $7 of fully amortized intangible assets that no longer provided economic benefits to the Company.

Total intangible amortization expense for the years ended December 31, 2010, 2009 and 2008 was $15, $17 and $19, respectively.

Estimated annual intangible amortization expense for 2011 through 2015 is as follows:

 

2011

     $14   

2012

     14   

2013

     14   

2014

     13   

2015

     13   

8. Transfers of Financial Assets

In December 2010, the Company entered into accounts receivable purchase and sale agreements to sell $67 of its trade accounts receivable to affiliates of Apollo on terms which management believes were more favorable to the Company than could have been obtained from an unaffiliated party. Under the terms of the agreements, the receivables were sold at a discount relative to their carrying value in exchange for all interests in such receivables; the Company retained the obligation to service the collection of the receivables on the purchasers’ behalf; and the purchasers’ deferred payment of a portion of the receivables purchase price and established a reserve account with the proceeds. The reserve account is used to reimburse the purchasers for credit and collection risk and remaining amounts are paid to the Company after receipt of all collections on the purchased receivables. Other than amounts held in the reserve account, the purchasers bear all credit risk on the purchased receivables.

These accounts receivable purchase and sale agreements were accounted for as sales-type transfers. Losses recorded on these sales were $1 for the years ended December 31, 2010 and 2009, and are included in Other non-operating expense, net in the Consolidated Statements of Operations. Fees for the servicing were less than $1 for the years ended December 31, 2010 and 2009.

9. Fair Value and Financial Instruments

Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:

 

   

Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 primarily consists of financial instruments traded on exchange or futures markets.

 

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Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those derivative instruments transacted primarily in over the counter markets.

 

   

Level 3: Unobservable inputs, for example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

Recurring Fair Value Measurements

Following is a summary of assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009:

 

     Fair Value Measurements Using      Total  
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
    Unobservable Inputs
(Level 3)
    

December 31, 2010

          

Derivative liabilities

   $ —         $ (10   $ —         $ (10

December 31, 2009

          

Derivative liabilities

     —           (35     —           (35

The Company calculates the fair value of its derivative liabilities using quoted market prices whenever available. When quoted market prices are not available, the Company uses standard pricing models with market-based inputs, adjusted for nonperformance risk. When its financial instruments are in a liability position, the Company evaluates its credit risk as a component of fair value. At December 31, 2010, no adjustment was made by the Company to reduce its derivative liabilities for its nonperformance risk. As a significant portion of the Company’s derivative liabilities are cash flow hedges, $0 and $1 was recognized in Accumulated other comprehensive income at December 31, 2010 and 2009, respectively.

When its financial instruments are in an asset position, the Company is exposed to credit loss in the event of nonperformance by other parties to these contracts and evaluates their credit risk as a component of fair value.

Non-recurring Fair Value Measurements

There were no significant assets or liabilities measured at fair value on a non-recurring basis during the year ended December 31, 2010.

Following is a summary of losses as a result of the Company measuring assets at fair value on a non-recurring basis during the year ended December 31, 2009:

 

     Year ended December 31, 2009  

Long-lived assets held and used

   $ (10

Long-lived assets held for sale

     (1

Long-lived assets held for disposal/abandonment

     (38
  

 

 

 

Total

   $ (49
  

 

 

 

As part of the Company’s productivity initiatives, the Company decided to indefinitely idle certain production lines. Long-lived assets with a carrying value of $57 were written down to fair value of $8, resulting in an impairment charge of $49 for the year ended December 31, 2009. These long-lived assets were valued based on appraisals from third parties or using discounted cash flow analysis based on assumptions that market participants would use. Key inputs in the model included projected revenues and manufacturing costs associated with these long-lived assets.

 

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Table of Contents

Derivative Financial Instruments

The Company is exposed to certain risks related to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange risk, interest rate risk and commodity price risk. The Company does not hold or issue derivative financial instruments for trading purposes.

The following table summarizes the Company’s derivative financial instruments as of December 31, which are recorded as Other current liabilities in the Consolidated Balance Sheets:

 

    2010     2009  

Liability Derivatives

  Average
Days
To Maturity
    Average
Contract
Rate
    Notional
Amount
    Fair
Value
Liability
    Average
Days
to Maturity
    Average
Contract
Rate
    Notional
Amount
    Fair
Value
Liability
 

Derivatives designated as hedging instruments

               

Interest Rate Swaps

               

Interest swap – 2007

    4        —        $ 375      $ (5     366        —        $ 650      $ (28

Interest swap – 2010

    732        —          350        (2     —          —          —          —     
       

 

 

         

 

 

 

Total derivatives designated as hedging instruments

        $ (7         $ (28
       

 

 

         

 

 

 

Derivatives not designated as hedging instruments

               

Foreign Exchange and Interest Rate Swaps

               

Cross-Currency and Interest Rate

    273        1.2038      $ 25      $ (3     638        1.2038      $ 25      $ (5

Interest Rate Swap

               

Interest swap – Australia Multi-Currency Term

    364        —          22        —          729        —          23        (1

Commodity Contracts

               

Electricity contracts

    —          —          4        —          —          —          3        (1

Natural gas futures

    —          —          2        —          —          —          3        —     
       

 

 

         

 

 

 

Total derivatives not designated as hedging instruments

        $ (3         $ (7
       

 

 

         

 

 

 

The following tables summarize gains and losses recognized on the Company’s derivative financial instruments:

 

Derivatives in Cash Flow Hedging
Relationship

   Amount of Loss Recognized in OCI
on Derivative for the  year ended
December 31:
    Location of Loss
Reclassified from
Accumulated OCI into
Income
     Amount of Loss Reclassified from
Accumulated OCI into Income
for the year ended
December 31:
 
     2010     2009     2008            2010     2009     2008  

Interest Rate Swaps

               

Interest swap – 2006

   $ —        $ —        $ (8     Interest expense, net       $ —        $ (8   $ (10

Interest swap – 2007

     —          (15     (16     Interest expense, net         (20     (22     (4

Interest swap – 2010

     2        —          —          Interest expense, net         —          —          —     
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 

Total

   $ (2   $ (15   $ (24      $ (20   $ (30   $ (14
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 

 

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Derivatives Not Designated

as Derivative Instruments

   Amount of Gain (Loss)
Recognized in Income on Derivative
for the year ended

December 31:
   

Location of Gain (Loss)
Recognized in Income on
Derivative

         2010             2009             2008          

Foreign Exchange and Interest Rate Swaps

        

Cross-Currency and Interest Rate Swap

   $ 2      $ (1   $ 26      Other non-operating expense, net

Interest Rate Swap

        

Interest swap – Australia

        

Multi-Currency Term

     —          —          (2   Other non-operating expense, net

Commodity Contracts

        

Electricity contracts

     1        (1     —        Cost of sales

Natural gas futures

     (1     (3     (3   Cost of sales
  

 

 

   

 

 

   

 

 

   

Total

   $ 2      $ (5   $ 21     
  

 

 

   

 

 

   

 

 

   

Foreign Exchange Rate Swaps

International operations account for a significant portion of the Company’s revenue and operating income. The Company’s policy is to reduce foreign currency cash flow exposure from exchange rate fluctuations by hedging anticipated and firmly committed transactions when it is economically feasible. The Company periodically enters into forward contracts to buy and sell foreign currencies to reduce foreign exchange exposure and protect the U.S. dollar value of certain transactions to the extent of the amount under contract. The counter-parties to our forward contracts are financial institutions with investment grade ratings. The Company does not apply hedge accounting to these derivative instruments.

In 2005, The Company entered into a three-year $289 cross-currency and interest rate swap agreement structured for a non-U.S. subsidiary’s $290 U.S. dollar denominated floating rate term loan. The swap was designed to offset balance sheet and interest rate exposures and cash flow variability associated with the exchange rate fluctuations on the term loan. The euro to U.S. dollar exchange rate under the swap agreement was 1.2038. The Company paid a variable rate equal to Euribor plus 271 basis points. The Company received a variable rate equal to the U.S. dollar LIBOR plus 250 basis points. In 2008, the Company paid $29 to settle a portion of its cross-currency and interest rate swaps, which matured in 2008.

The remaining portion of the cross-currency and interest rate swap was renegotiated and amended with the respective counterparties, effective September 30, 2008, in order to offset the ongoing balance sheet and interest rate exposures and cash flow variability associated with the exchange rate fluctuations of a non-U.S. subsidiary’s U.S. dollar denominated floating rate term loan. The amended swap agreement requires the Company to sell euros in exchange for U.S. dollars at a rate of 1.2038. The Company also will pay a variable rate equal to Euribor plus 390 basis points and will receive a variable rate equal to the U.S. dollar LIBOR plus 250 basis points. The amount the Company receives under this agreement is approximately equal to the non-U.S. subsidiary’s interest rate on its $290 term loan. This amended swap agreement has an initial notional amount of $25 that amortizes quarterly on a straight line basis to $24, prior to maturing on September 30, 2011. The Company paid a weighted average interest rate of 4.6% and 5.5% and received a weighted average interest rate of 2.8% and 3.4% on these amended swap agreements in 2010 and 2009, respectively.

Interest Rate Swaps

The Company periodically uses interest rate swaps to alter interest rate exposures between fixed and floating rates on certain long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated

 

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using an agreed-upon notional principal amount. The counter-parties to the interest rate swap agreements are financial institutions with investment grade ratings.

In May 2006, the Company entered into interest rate swap agreements with two counterparties. These swaps are three-year agreements designed to offset the cash flow variability that results from interest rate fluctuations on the Company’s variable rate debt. The initial aggregate notional amount of the swaps is $1,000, which amortizes quarterly based on the expected payments on the Company’s term loan. As a result of the interest rate swaps, the Company paid a fixed rate equal to approximately 7.6% per year and received a variable rate based on the terms of the underlying debt. The Company accounts for the swaps as qualifying cash flow hedges. These swap agreements matured and were terminated during 2009.

In January 2007, the Company entered into a three-year interest rate swap agreement designed to offset cash flow variability associated with interest rate fluctuations on the Company’s variable rate debt. This swap became effective January 1, 2008. The initial notional amount of the swap is $300, but will increase to $700 before being amortized down to $375. As a result of the interest rate swap, the Company pays a fixed rate equal to approximately 7.2% per year and receives a variable rate based on the terms of the underlying debt. The Company accounts for this swap as a qualifying cash flow hedge.

In February 2007, to effectively fix the interest rate on approximately $30 of our Australian Multi-Currency Term / Working Capital Facility, the Company entered into interest rate swap agreements with two counterparties for an initial notional amount of AUD $35, which amortizes quarterly based on the expected loan payments. The swap agreements terminate December 30, 2011. The Company pays a fixed interest rate of 6.6% and receives a floating rate based on the terms of the underlying debt. The Company has not applied hedge accounting to this derivative instrument.

In July 2010, the Company entered into a two-year interest rate swap agreement (the “July 2010 Swap”). This swap is designed to offset the cash flow variability that results from interest rate fluctuations on the Company’s variable rate debt. This swap will become effective on January 4, 2011 upon the expiration of the January 2007 interest rate swap. The initial notional amount of the swap is $350, and will subsequently be amortized down to $325. The Company pays a fixed rate of 1.032% and will receive a variable one month LIBOR rate. The Company accounts for the swap as a qualifying cash flow hedge.

Commodity Contracts

The Company is exposed to price fluctuations associated with raw materials purchases, most significantly with methanol, phenol, urea, acetone, propylene and chlorine. For these commodity raw materials, the Company has purchase contracts in place that contain periodic price adjustment provisions. The Company also adds selling price provisions to certain customer contracts that are indexed to publicly available indices for the associated commodity raw materials. The board of directors approves all commodity futures and commodity commitments based on delegation of authority documents.

The Company hedges a portion of its natural gas purchases for certain North American plants. The Company used futures contracts to hedge 42%, 70% and 72% of its 2010, 2009 and 2008 natural gas usage at these plants, respectively. The contracts are settled for cash each month based on the closing market price on the last day the contract trades on the New York Mercantile Exchange. We also enter into fixed price forward contracts for the purchase of natural gas and electricity at certain of our manufacturing plants to offset the risk associated with increases in the prices of the underlying commodities.

The Company does not apply hedge accounting to these future and forward contracts. The Company recognizes gains and losses each month as the gas and electricity is used. Remaining obligations are marked to market on a quarterly basis.

 

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Non-derivative Financial Instruments

The following table includes the carrying amount and fair value of the Company’s non-derivative financial instruments as of December 31:

 

     2010      2009  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Debt

   $ 3,672       $ 3,708       $ 3,506       $ 3,055   

Fair values of debt are determined from quoted, observable market prices, where available, based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. The carrying amounts of cash and cash equivalents, accounts receivable, accounts and drafts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

10. Debt and Lease Obligations

Debt outstanding at December 31 is as follows:

 

    2010     2009  
    Long-Term     Due Within
One Year
    Long-Term     Due Within
One Year
 

Non-affiliated debt:

       

Senior Secured Credit Facilities:

       

Revolving facility due 2011 at 3.0% at December 31, 2009

  $ —        $ —        $ 36      $ —     

Floating rate term loans due 2013 at 2.6% at December 31, 2010 and 2009

    455        8        2,211        23   

Floating rate term loans due 2015 at 4.1% at December 31, 2010

    927        15        —          —     

Senior Secured Notes:

       

8.875 % senior secured notes due 2018 (includes $6 of unamortized debt discount)

    994        —          —          —     

Floating rate second-priority senior secured notes due 2014 at 4.8% at December 31, 2010 and 2009

    120        —          120        —     

9.00% Second-priority senior secured notes due 2020

    574        —          —          —     

9.75% Second-priority senior secured notes due 2014

    —          —          533        —     

Debentures:

       

9.2% debentures due 2021

    74        —          74        —     

7.875% debentures due 2023

    189        —          189        —     

8.375% sinking fund debentures due 2016

    62        —          62        —     

Other Borrowings:

       

Australia Multi-Currency Term / Working Capital Facility due 2011 at 4.5% and 4.1% at December 31, 2010 and 2009, respectively

    38        10        46        8   

Brazilian bank loans at 9.8% and 10.6% at December 31, 2010 and 2009, respectively

    33        37        30        35   

Capital Leases

    9        1        10        1   

Other at 3.5% and 3.7% at December 31, 2010 and 2009, respectively

    13        11        13        11   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-affiliated debt

    3,488        82        3,324        78   

Affiliated debt:

       

Affiliated borrowings due on demand at 3.4%

    —          2        —          4   

Affiliated term loan due 2011 at 2.6% at December 31, 2010 and 2009

    100        —          100        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total affiliated debt

    100        2        100        4   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt

  $ 3,588      $ 84      $ 3,424      $ 82   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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2010 Refinancing Activities

January Refinancing Transactions

In late December 2009 and January 2010, the Company extended $200 of its revolving facility commitments from lenders under the Senior Secured Credit Facility, which will take effect upon the May 31, 2011 maturity of the existing revolving facility commitments. The new commitments will extend the availability of the revolving facility to February 2013.

In January 2010, through the Company’s wholly owned finance subsidiaries, Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC, the Company sold $1,000 aggregate principal amount of 8.875% senior secured notes due 2018. The Company used the net proceeds of $993 ($1,000 less original issue discount of $7) from the issuance to repay $800 of its U.S. term loans under the Senior Secured Credit Facility, pay $31 of transaction costs and expenses and provide incremental liquidity of $162. The 8.875% senior secured notes are secured by the same collateral as the Company’s existing second-priority senior secured notes, but the priority of the collateral liens securing the 8.875% senior secured notes is senior to the collateral liens securing the existing second-priority senior secured notes, and is junior to the collateral liens securing the Company’s Senior Secured Credit Facility.

In addition to, and in connection with the issuance of the $1,000 aggregate principal amount of 8.875% notes, the Company entered into an amendment of its Senior Secured Credit Facilities. Under the amendment and restatement, the Company extended the maturity of approximately $959 of its Senior Secured Credit Facility term loans from May 5, 2013 to May 5, 2015 and increased the interest rate with respect to such term loans from LIBOR plus 2.25% to LIBOR plus 3.75%. Collectively, both the issuance of the $1,000 aggregate principal amount 8.875% senior secured notes and the amendment of the Senior Secured Facilities are referred to as the “January Refinancing Transactions.”

In the first quarter of 2010 the Company incurred $31 in fees related to the January Refinancing Transactions, of which $29 were deferred and are recorded in Other assets, net in the Consolidated Balance Sheets. The deferred fees will be amortized over the contractual life of the respective debt obligations. The remaining $2 in fees were expensed as incurred and are included in Other non-operating expense, net in the Consolidated Statements of Operations. Additionally, $7 in unamortized deferred financing fees were written-off related to the $800 of U.S. term loans under the Senior Secured Credit Facility that were repaid and extinguished. The write-off of these fees are included in Loss on extinguishment of debt in the Consolidated Statements of Operations.

November Refinancing Transaction

In November 2010, Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC issued $574 aggregate principal amount of 9.00% second-priority senior secured notes due 2020 (the “New Notes”), which mature on November 15, 2020. $440 aggregate principal amount of the New Notes was offered through a private placement to unaffiliated investors (“Offering”). The cash proceeds of the Offering were used to redeem the $406 outstanding 9.75% Second-priority senior secured notes due 2014 (“Old Notes”), pay redemption premiums on the Old Notes, and pay transaction fees and expenses.

The remaining $134 aggregate principal amount of the Notes was issued in exchange for $127 aggregate principal amount of the Old Notes that were held by an affiliate of Apollo Global Management, LLC at the time of the Offering (“Apollo Exchange”). The exchange ratio was determined based on the consideration offered to holders of the Old Notes to redeem the Old Notes, which is intended to give Apollo an aggregate value equivalent to that which it would receive if it had received the total consideration upon the Company’s redemption of the Old Notes and used the proceeds received to invest in the New Notes. The new debt issued to Apollo has the same terms as the New Notes issued by the Company in the Offering. Collectively, the Offering and Apollo Exchange are referred to as the “November Refinancing Transaction.”

 

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The Company incurred $11 in transaction fees associated with the Offering and $7 in direct lender exchange premiums associated with the Apollo Exchange, which were deferred and are recorded in Other assets, net in the Consolidated Balance Sheets. The deferred fees and exchange premiums will be amortized over the contractual life of the respective debt obligations. In addition, the Company paid premiums of $21 to redeem the Old Notes and wrote-off $2 in unamortized deferred financing fees related to the Old Notes, resulting in a loss on extinguishment of $23. This amount is included in Loss on extinguishment of debt in the Consolidated Statement of Operations.

Senior Secured Credit Facilities

The terms of the amended Senior Secured Credit Facilities include a term loan facility with maturities in 2013 and 2015, a $50 synthetic letter of credit facility (“LOC”) that matures in 2013, access to a $225 revolving credit facility through May 2011 and access to a $200 revolving credit facility from May 2011 through February 2013.

The facilities are subject to an earlier maturity date, on any date that more than $200 in the aggregate principal amount of certain of the Company’s debt will mature within 91 days of that date. Repayment of 1% total per year of the term loan and LOCs must be made (in the case of the term loan facility, quarterly, and in the case of the LOC, annually) with the balance payable at the final maturity date. Further, the Company may be required to make additional repayments on the term loan, upon specific events, or if excess cash flow is generated. The terms of the Senior Secured Credit Facilities also include $200 in available incremental term loan borrowings.

Pursuant to the terms of our Senior Secured Credit Facilities, intercompany indebtedness of any borrower thereunder to any of our subsidiaries is subordinated to the prior payment of the senior indebtedness obligations under the Senior Secured Credit Facility. Certain Company subsidiaries guarantee obligations under the amended Senior Secured Credit Facilities. The amended Senior Secured Credit Facilities and certain notes are secured by certain assets of the Company and the subsidiary guarantors, subject to certain exceptions.

The credit agreement contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the Amended Senior Secured Credit Facilities may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of representation or warranty, covenant defaults, events of bankruptcy and a change of control. The Senior Secured Credit Facilities also contain cross-acceleration and cross default provisions. Accordingly, events of default under certain other foreign debt agreements could result in the Company’s outstanding debt becoming immediately due and payable.

Term Loans

The interest rates for term loans to the Company under the amended Senior Secured Credit Facilities are based on, at the Company’s option, (a) adjusted LIBOR plus 2.25% for term loans maturing 2013 and 3.75% for term loans maturing 2015 or (b) the higher of (i) JPMorgan Chase Bank, N.A.’s (JPMCB) prime rate or (ii) the Federal Funds Rate plus 0.50%, in each case plus 0.75% for term loans maturing 2013 and 2.25% for term loans maturing 2015. Term loans to the Company’s Netherlands subsidiary are at the Company’s option; (a) EURO LIBOR plus 2.25% for term loans maturing 2013 or 3.75% for term loans maturing 2015 or (b) the rate quoted by JPMCB as its base rate for those loans plus 0.75% for term loans maturing 2013 and 2.25% for term loans maturing 2015.

Revolving Credit Facility

The interest rate for the revolving credit facility through May 2011 bears interest at adjusted LIBOR plus 2.50%. The extended revolving loans will bear interest at a rate of LIBOR plus 4.50%. The Company is also

 

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Table of Contents

required to pay a 2% ticking fee on committed amounts for the extended revolver, payable quarterly through May 2011. Available borrowings under the amended Senior Secured Credit Facilities (including LOC facility) were $220 at December 31, 2010.

The amended Senior Secured Credit Facilities have commitment fees (other than with respect to the LOC) equal to 0.50% per year of the unused line plus a fronting fee of 0.25% of the aggregate face amount of outstanding letters of credit. The LOC has a commitment fee of 0.10% per year.

Affiliated Debt

In 2009, the Company borrowed $100 in term loans from affiliates of Apollo which will mature on December 31, 2011 with interest at adjusted LIBOR plus 2.25%. As the Company has the intent and ability to refinance this debt with Apollo, the amount has been classified as Affiliated long-term debt as of December 31, 2010 in the Consolidated Balance Sheets. In 2009, the Company also borrowed $4 from an affiliate of Apollo which is due upon demand, of which $2 was repaid in 2010.

The weighted average interest rate of affiliated borrowings at December 31, 2010 was 2.57%. Proceeds from the loans were used for general corporate purposes.

Debentures

 

    

Origination Date

  

Interest Payable

  

Early Redemption

9.2% debentures due 2021

   March 1991    March 15
September 15
   None

7.875% debentures due 2023

   May 1993    February 15

August 15

   None

8.375% sinking fund debentures due 2016

   April 1986    April 15

October 15

   April 2006

The 8.375% Debentures have a sinking fund requirement of $20 per year from 2007 to 2015. Previous buybacks of Debentures allows the Company to fulfill sinking fund requirements through 2013.

Other Borrowings

The Company’s Australian Multi-Currency Term / Working Capital Facility has a variable interest rate equal to the 90 day Australian or New Zealand Bank Bill Rates plus an applicable margin.

The Brazilian bank loans represent various bank loans primarily for working capital purposes and to finance plant expansions.

The Company’s capital leases are included in debt on the Consolidated Balance Sheets and range from one to forty-nine year terms for vehicles, equipment, pipeline, land and buildings. The Company’s operating leases consist primarily of vehicles, equipment, tank cars, land and buildings.

In addition, the Company finances certain insurance premiums. Short-term borrowings under this arrangement were $8 and $4 at December 31, 2010 and 2009, respectively.

 

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Scheduled Maturities

Aggregate maturities of non-affiliated debt, minimum payments under capital leases and minimum rentals under operating leases at December 31, 2010 for the Company are as follows:

 

Year

   Non-affiliated Debt      Minimum Rentals
Under

Operating Leases
     Minimum  Payments
Under
Capital Leases
 

2011

   $ 81       $ 29       $ 2   

2012

     71         21         2   

2013

     474         16         2   

2014

     161         12         1   

2015

     913         10         2   

2016 and thereafter

     1,866         28         10   
  

 

 

    

 

 

    

 

 

 

Total minimum payments

   $ 3,566       $ 116         19   
  

 

 

    

 

 

    

 

 

 

Less: Amount representing interest

           (9
        

 

 

 

Present value of minimum payments

         $ 10   
        

 

 

 

Rental expense under operating leases amounted to $36, $36 and $38 in the years ended December 31, 2010, 2009 and 2008, respectively.

Covenant Compliance

The Company is currently in compliance with all terms of its outstanding indebtedness under its Senior Secured Credit Facility, including the senior secured bank leverage ratio. A failure to comply with the Company’s senior secured bank leverage ratio contained within its Senior Secured Credit Facility, could result in a default, which if not cured or waived, could have a material adverse effect on the Company’s business and financial condition. The Company’s Senior Secured Credit Facility permits a default in its senior secured leverage ratio covenant to be cured by cash contributions to the Company’s capital from the proceeds of equity purchases or cash contributions to the capital of MSC Holdings. The cure amount can be no greater than the amount required for purposes of complying with the covenant, and in each four quarter period, the cure right can only be exercised in three quarters. Any amounts of Apollo’s $200 committed financing (see Note 6) converted to equity to cure a default would reduce the amount of available financing remaining under the $200 financing.

11. Guarantees, Indemnifications and Warranties

Standard Guarantees / Indemnifications

In the ordinary course of business, the Company enters into a number of agreements that contain standard guarantees and indemnities where the Company may indemnify another party for, among other things, breaches of representations and warranties. These guarantees or indemnifications are granted under various agreements, including those governing (i) purchases and sales of assets or businesses, (ii) leases of real property, (iii) licenses of intellectual property, (iv) long-term supply agreements, (v) employee benefits services agreements and (vi) agreements with public authorities on subsidies for designated research and development projects. These guarantees or indemnifications are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords or lessors in lease contracts, (iii) licensors or licensees in license agreements, (iv) vendors or customers in long-term supply agreements, (v) service providers in employee benefits services agreements and (vi) governments or agencies subsidizing research or development. In addition, the Company guarantees some of the payables of its subsidiaries to purchase raw materials in the ordinary course of business.

These parties may also be indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. Additionally, in connection with the sale of assets and the divestiture

 

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of businesses, the Company may agree to indemnify the buyer for liabilities related to the pre-closing operations of the assets or businesses sold. Indemnities for pre-closing operations generally include tax liabilities, environmental liabilities and employee benefit liabilities that are not assumed by the buyer in the transaction.

Indemnities related to the pre-closing operations of sold assets normally do not represent additional liabilities to the Company, but simply serve to protect the buyer from potential liability associated with the Company’s existing obligations at the time of sale. As with any liability, the Company has accrued for those pre-closing obligations that it considers to be probable and reasonably estimable. The amounts recorded at December 31, 2010 and 2009 are not significant.

While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless they are subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under its guarantees, nor is the Company able to estimate the maximum potential amount of future payments to be made under these guarantees because the triggering events are not predictable.

Our corporate charter also requires us to indemnify, to the extent allowed by New Jersey state corporate law, our directors and officers as well as directors and officers of our subsidiaries and other agents against certain liabilities and expenses incurred by them in carrying out their obligations.

Apollo Indemnification

In March 2009, the Company and affiliates of Apollo entered into an indemnification agreement. This agreement provides that the Company will indemnify affiliates of Apollo, and affiliates of Apollo will indemnify the Company, against any liabilities arising from actions brought by our respective insurance providers against the other as a result of claims paid on the Huntsman settlement. See Note 6 for additional information regarding indemnification provided by the Company to Apollo under the Management Consulting Agreement.

Warranties

The Company does not make express warranties on its products, other than that they comply with the Company’s specifications; therefore, the Company does not record a warranty liability. Adjustments for product quality claims are not material and are charged against net sales.

12. Commitments and Contingencies

Environmental Matters

The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation at the federal, state and local levels as well as foreign and international laws and regulations, and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

 

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The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at December 31, 2010 and 2009.

 

     Number of Sites      Liability      Range of
Reasonably
Possible Costs
 
     December 31,
2010
     December 31,
2009
     December 31,
2010
     December 31,
2009
     Low      High  

Geismar, LA

     1         1       $ 17       $ 17       $ 10       $ 25   

Superfund and offsite landfills – allocated share:

                 

Less than 1%

     29         27         1         1         1         2   

Equal to or greater than 1%

     12         12         7         7         5         13   

Currently-owned

     19         20         6         9         4         12   

Formerly-owned:

                 

Remediation

     10         10         1         2         1         10   

Monitoring only

     6         7         1         1         1         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     77         77       $ 33       $ 37       $ 22       $ 63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

These amounts include estimates for unasserted claims that the Company believes are probable of loss and reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based. To establish the upper end of a range, assumptions less favorable to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ materially from these estimates. At December 31, 2010 and 2009, $10 and $11, respectively, have been included in Other current liabilities in the Consolidated Balance Sheets with the remaining amount included in Other long-term liabilities.

Following is a discussion of the Company’s environmental liabilities and the related assumptions at December 31, 2010:

Geismar, LA Site—The Company formerly owned a basic chemicals and polyvinyl chloride business that was taken public as Borden Chemicals and Plastics Operating Limited Partnership (“BCPOLP”) in 1987. The Company retained a 1% interest, the general partner interest and the liability for certain environmental matters after BCPOLP’s formation. Under a Settlement Agreement approved by the United States Bankruptcy Court for the District of Delaware among the Company, BCPOLP, the United States Environmental Protection Agency and the Louisiana Department of Environmental Quality, the Company agreed to perform certain of BCPOLP’s obligations for soil and groundwater contamination at BCPOLP’s Geismar, Louisiana site. The Company bears the sole responsibility for these obligations because there are no other potentially responsible parties (“PRP”) or third parties from whom the Company could seek reimbursement.

A groundwater pump and treat system to remove contaminants is operational, and natural attenuation studies are proceeding. If closure procedures and remediation systems prove to be inadequate, or if additional contamination is discovered, costs that would approach the higher end of the range of possible outcomes could result.

Due to the long-term nature of the project, the reliability of timing and the ability to estimate remediation payments, a portion of this liability was recorded at its net present value, assuming a 3% discount rate and a time period of 28 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 28 years, is approximately $24. Over the next five years, the Company expects to make ratable payments totaling $6.

 

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Superfund Sites and Offsite Landfills—The Company is currently involved in environmental remediation activities at a number of sites for which it has been notified that it is, or may be, a Potentially Responsible Party (“PRP”) under the United States Comprehensive Environmental Response, Compensation and Liability Act or similar state “superfund” laws. The Company anticipates approximately 50% of the estimated liability for these sites will be paid within the next five years, with the remainder over the next twenty-five years. The Company generally does not bear a significant level of responsibility for these sites, and as a result, has little control over the costs and timing of cash flows.

The Company’s ultimate liability will depend on many factors including its share of waste volume, the financial viability of other PRPs, the remediation methods and technology used, the amount of time necessary to accomplish remediation and the availability of insurance coverage. The range of possible outcomes takes into account the maturity of each project, resulting in a more narrow range as the project progresses. To estimate both its current reserves for environmental remediation at these sites and the possible range of additional costs, the Company has not assumed that it will bear the entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and severally liable. The Company has limited information to assess the viability of other PRPs and their probable contribution on a per site basis. The Company’s insurance provides very limited, if any, coverage for these environmental matters.

Sites Under Current Ownership—The Company is conducting environmental remediation at a number of locations that it currently owns, of which eight sites are no longer in operation. As the Company is performing a portion of the remediation on a voluntary basis, it has some control over the costs to be incurred and the timing of cash flows. The Company expects to pay approximately $8 of these liabilities within the next five years, with the remainder over the next ten years. The factors influencing the ultimate outcome include the methods of remediation elected, the conclusions and assessment of site studies remaining to be completed, and the time period required to complete the work. No other parties are responsible for remediation at these sites.

Formerly-Owned Sites—The Company is conducting environmental remediation at a number of locations that it formerly owned. The final costs to the Company will depend on the method of remediation chosen and the level of participation of third parties.

In addition, the Company is responsible for a number of sites that require monitoring where no additional remediation is expected. The Company has established reserves for costs related to these sites. Payment of these liabilities is anticipated to occur over the next ten years. The ultimate cost to the Company will be influenced by fluctuations in projected monitoring periods or by findings that are different than anticipated.

Indemnifications—In connection with the acquisition of certain of the Company’s operating businesses, the Company has been indemnified by the sellers against certain liabilities of the acquired businesses, including liabilities relating to both known and unknown environmental contamination arising prior to the date of the purchase. The indemnifications may be subject to certain exceptions and limitations, deductibles and indemnity caps. While it is reasonably possible that some costs could be incurred, except for those sites identified above, the Company has inadequate information to allow it to estimate a potential range of liability, if any.

Non-Environmental Legal Matters

The Company is involved in various legal proceedings in the ordinary course of business and has reserves of $11 and $29 at December 31, 2010 and December 31, 2009, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At December 31, 2010 and December 31, 2009, $5 and $26, respectively, have been included in Other current liabilities in the Consolidated Balance Sheets with the remaining amount included in Other long-term liabilities.

 

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Following is a discussion of significant non-environmental legal proceedings:

Matters Related to the Terminated Merger Agreement with Huntsman Corporation—

On July 17, 2008, an individual Huntsman shareholder filed suit against the Company, Craig O. Morrison, President and Chief Executive Officer, and Joshua J. Harris, Director, in the United States District Court in the Southern District of New York related to matters arising out of the Huntsman Agreement (the “New York Shareholder Action”). The plaintiff in the New York Shareholder Action sought to represent a class of purchasers of Huntsman common stock between May 14, 2008 and June 18, 2008 (the “Class Period”). The complaint alleged that the defendants disseminated false and misleading statements and failed to disclose material facts regarding the merger during the Class Period in violation of U.S. securities laws. In October 2009, the parties reached a settlement agreement which includes payment by the Company of $18 which the Company had accrued as of December 31, 2009 and has subsequently paid in 2010. In 2010, the Company negotiated and subsequently received an $8 resolution payment from its director and officer liability insurance carrier related to the settlement agreement. The amount is included in Terminated merger and settlement income, net in the Condensed Consolidated Statements of Operations.

On September 30, 2009, the Company received a letter from counsel for affiliates of Credit Suisse and Deutsche Bank which demanded payment of the Banks’ legal fees claimed to be in excess of $60 incurred in various litigations associated with the terminated merger of the Company and Huntsman. The Company had previously rejected the Banks’ demand citing not only the Banks’ material breach of their commitment to fund the merger, but among other things, the Banks’ failure to obtain the Company’s approval of its settlement with Huntsman, the failure to provide a release for any and all liabilities in favor of the Company and the unreasonable amount of the fees sought. On October 22, 2010, the Company and affiliates of Credit Suisse and Deutsche Bank entered into a mutual general release, settling all outstanding claims.

Brazil Tax Claim—In 1992, the State of Sao Paulo Administrative Tax Bureau issued an assessment against the Company’s Brazilian subsidiary claiming that excise taxes were owed on certain intercompany loans made for centralized cash management purposes. These loans were characterized by the Tax Bureau as intercompany sales. Since that time, management and the Tax Bureau have held discussions and the subsidiary filed an administrative appeal seeking cancellation of the assessment. The Administrative Court upheld the assessment in December 2001. In 2002, the subsidiary filed a second appeal with the highest-level Administrative Court, again seeking cancellation of the assessment. In February 2007, the highest-level Administrative Court upheld the assessment. The Company requested a review of this decision. On April 23, 2008, the Brazilian Administrative Tax Tribunal issued its final decision upholding the assessment against the subsidiary. The Company filed an Annulment action in the Brazilian Judicial Courts in May 2008 along with a request for an injunction to suspend the tax collection. The injunction was denied but the Annulment action is being pursued. The Company has pledged certain properties and assets in Brazil during the pendency of the Annulment action in lieu of paying the assessment. In September 2010, in the Company’s favor, the Court adopted its appointed expert’s report finding that the transactions in question were intercompany loans. Sao Paulo has mandatory appeal rights but the Court’s decision based on the facts is likely to be upheld and therefore, the Company does not believe a loss contingency is probable. At December 31, 2010 the amount of the assessment, including tax, penalties, monetary correction and interest, is 66 Brazilian reais, or approximately $40.

Formosa Plant—Several lawsuits were filed in Sangamon County, Illinois in May 2006 against the Company on behalf of individuals injured or killed in an explosion at a Formosa Plastics Corporation (“Formosa”) plant in Illiopolis, Illinois that occurred on April 23, 2004. The Company sold the facility in 1987. The facility was operated by BCPOLP until it was sold to Formosa out of BCPOLP’s bankrupt estate in 2002. In March 2007, an independent federal agency found that operator errors caused the explosion, but that current and former owners could have implemented systems to minimize the impacts from these errors. In March 2008, the Company filed a motion for summary judgment, which is still pending. At this time there is inadequate information from which to estimate a potential range of liability, if any.

 

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Hillsborough County—The Company is named in a lawsuit filed on July 12, 2004 in Hillsborough County, Florida Circuit Court, for an animal feed supplement processing site formerly operated by the Company and sold in 1980. The lawsuit is filed on behalf of multiple residents of Hillsborough County living near the site and it alleges various injuries from exposure to toxic chemicals. The Company does not have adequate information from which to estimate a potential range of liability, if any. The court dismissed a similar lawsuit brought on behalf of a class of plaintiffs in November 2005.

Environmental Institution of Paraná IAP—On August 25, 2009, Governo Do Paraná and the Environmental Institution of Paraná IAP, an environmental agency of the Brazilian government, provided Momentive Quimica Industria, our Brazilian subsidiary, with notice of a potential fine of up to $11 in connection with alleged environmental damages to the Port of Paranagua caused in November 2004 by an oil spill from a shipping vessel carrying methanol purchased by MSC. The investigation as to the cause of the accident has not been finalized. In early October 2009, MSC was granted an injunction precluding the imposition of any fines or penalties by the Paraná IAP. In November 2010, the Court lifted its injunction; however, the Company appealed in order to preclude the IAP from levying any fines or penalties. The Company continues to believe it has a strong defense and does not believe a loss contingency is probable. At December 31, 2010, the amount of the assessment, including tax, penalties, monetary correction and interest, is 22 Brazilian reais, or approximately $13.

Other Legal Matters—The Company is involved in various other product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings in addition to those described above, including actions that allege harm caused by products the Company has allegedly made or used, containing silica, vinyl chloride monomer and asbestos. The Company believes it has adequate reserves and that it is not reasonably possible that a loss exceeding amounts already reserved would be material. Furthermore, the Company has insurance that will cover claims of these types.

Other Commitments and Contingencies

The Company entered into contractual agreements with Shell and other third parties for the supply of site services, utilities, materials and facilities and for operation and maintenance services necessary to operate certain of the Company’s facilities on a stand-alone basis. The duration of the contracts range from less than one year to 20 years, depending on the nature of services. These contracts may be terminated by either party under certain conditions as provided for in the respective agreements; generally, 90 days notice is required for short-term contracts and three years notice is required for longer-term contracts (generally those contracts in excess of five years). Contractual pricing generally includes a fixed and variable component.

In addition, the Company entered into contractual agreements with Shell and other third parties to purchase feedstocks or other services. The terms of these agreements vary from one to ten years and may be extended at the Company’s request and are cancelable by either party as provided for in each agreement. Feedstock prices are based on market prices less negotiated volume discounts or cost input formulas.

The Company is required to make minimum annual payments under these contracts as follows:

 

Year

   Minimum Annual
Purchase Commitments
 

2011

   $ 280   

2012

     203   

2013

     176   

2014

     39   

2015

     24   

2016 and beyond

     121   
  

 

 

 

Total minimum payments

     843   

Less: Amount representing interest

     (71
  

 

 

 

Present value of minimum payments

   $ 772   
  

 

 

 

 

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13. Pension and Non-Pension Postretirement Benefit Plans

The Company sponsors defined benefit pension plans covering most U.S. employees and certain non-U.S. employees primarily in Canada, Netherlands, Germany, France, Belgium and Malaysia. Benefits under these plans are generally based on eligible compensation and / or years of credited service. Retirement benefits in other foreign locations are primarily structured as defined contribution plans. Effective June 30, 2009, the Company froze the benefits for the non-bargained and some of the bargained participants in the U.S. pension plans. During 2010, in conjunction with the renegotiation of collectively bargained agreements, the Company negotiated a freeze of the benefit for the remaining active participants. The Company has replaced this benefit with an additional annual employer contribution to the existing defined contribution plan for all non-bargained associates.

The Company also provides non-pension postretirement benefit plans to certain U.S. employees, to Canadian employees and to certain employees in the Netherlands. The U.S. benefit primarily consists of a life insurance benefit for retirees, for which the premiums are paid by the Company. In addition, some U.S. participants are offered the same medical plans as active employees; however, for most participants, the premiums are paid by the retiree. The Canadian plans provide retirees and their dependents with medical and life insurance benefits, which are supplemental benefits to the respective provincial healthcare plan in Canada. The Netherlands’ plan provides a lump sum payment at retirement.

The following table presents the change in benefit obligation, change in plan assets and components of funded status for the Company’s defined benefit pension and non-pension postretirement benefit plans for the years ended December 31:

 

    Pension Benefits     Non-Pension
Postretirement Benefits
 
    2010     2009     2010     2009  
    U.S.
Plans
    Non- U.S.
Plans
    U.S.
Plans
    Non- U.S.
Plans
    U.S.
Plans
    Non- U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
 

Change in Benefit Obligation

               

Benefit obligation at beginning of year

  $ 271      $ 308      $ 276      $ 282      $ 13      $ 5      $ 13      $ 4   

Service Cost

    3        8        4        8        —          —          —          —     

Interest Cost

    15        15        17        16        1        1        1        —     

Actual losses

    10        3        6        —          —          —          —          —     

Foreign Currency exchange rate changes

    —          (19     —          10        —          —          —          1   

Benefits paid

    (20     (8     —          (8     (1     —          (1     —     

Plan curtailments/settlements

    (1     —          (21     (1     —          —          —          —     

Employee contributions

    —          1        (11     1        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at end of year

    278        308        271        308        13        6        13        5   

Change in Plan Assets

               

Fair value of plan assets at beginning of year

    185        189        156        162        —          —          —          —     

Actual return on plan assets

    22        14        38        7          —          —          —     

Foreign currency exchange rate changes

    —          (12     —          6        —          —          —          —     

Employer contributions

    20        17        12        21        1        —          (1     —     

Benefits paid

    (20     (8     (21     (8     (1     —          (1     —     

Employee contributions

    —          1        —          1        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

    207        201        185        189        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funded status of the plan at end of year

  $ (71   $ (107   $ (86   $ (119   $ (13   $ (6   $ (13   $ (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Pension Benefits     Non-Pension
Postretirement Benefits
 
     2010     2009     2010     2009  
     U.S.
Plans
    Non-
U.S.
Plans
    U.S.
Plans
    Non-
U.S.
Plans
    U.S.
Plans
    Non-
U.S.
Plans
    U.S.
Plans
    Non-
U.S.
Plans
 

Amounts recognized in the Consolidated Balance Sheets at December 31 consist of:

                

Noncurrent assets

   $ —        $ 15      $ —        $ 6      $ —        $ —        $ —        $ —     

Other current liabilities

     —          (4     (1     (4     (1     —          (1     —     

Long-term pension and post employment benefit obligations

     (71     (118     (85     (121     (12     (6     (12     (5

Accumulated other comprehensive loss (income)

     133        16        138        16        (25     (2     (35     (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts recognized

   $ 62      $ (91   $ 52      $ (103   $ (38   $ (8   $ (48   $ (7

Amounts recognized in Accumulated other comprehensive loss (income) at December 31 consist of:

                

Net actuarial loss (gain)

   $ 133      $ 12      $ 138      $ 11      $ (6   $ (1   $ (5   $ (2

Net prior service cost (benefit)

     —          6        —          7        (19     (1     (30     (1

Deferred income taxes

     —          (2     —          (2     —          —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts recognized

   $ 133      $ 16      $ 138      $ 16      $ (25   $ (2   $ (35   $ (2

Accumulated benefit obligation

   $ 278      $ 293      $ 270      $ 295           

Accumulated benefit obligation for funded plans

     275        181        268        179           

Pension plans with underfunded or non-funded accumulated benefit obligations at December 31:

                

Aggregate projected benefit obligation

   $ 278      $ 129      $ 271      $ 131           

Aggregate accumulated benefit obligation

     278        123        270        125           

Aggregate fair value of plan assets

     207        8        185        7           

Pension plans with projected benefit obligations in excess of plan assets at December 31:

                

Aggregate projected benefit obligation

   $ 278      $ 135      $ 271      $ 137           

Aggregate fair value of plan assets

     207        13        185        12           

The net accumulated unrecognized actuarial losses relating to the U.S. plans were reduced by $6 for favorable gains on assets versus expected returns during the year ended December 31, 2010. In addition, the net accumulated unrecognized actuarial losses for the U.S. plans decreased by approximately $1 due to curtailments resulting from the plan freezes, which more than offset the unrecognized actuarial loss of $10 relating to the decrease in the discount rate at December 31, 2010 and unfavorable experience. Actuarial losses of $1 for the Non-U.S. plans at December 31, 2010 primarily resulted from unfavorable asset experience and other adjustments.

The foreign currency impact reflected in these rollforward tables are primarily for changes in the euro and Canadian dollar versus the U.S. dollar.

The Pension Protection Act of 2006 (the “2006 PPA”) provides for minimum funding levels on U.S. plans, and plans not meeting the minimum funding requirement may be subject to certain restrictions. During 2009 and 2010, the Company’s U.S. qualified pension plan was under the minimum funding level as measured under the 2006 PPA, resulting in restrictions on lump sum payments to 50%.

 

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Following are the components of net pension and non-pension postretirement expense (benefit) recognized by the Company for the years ended December 31:

 

     Pension Benefits  
     U.S. Plans     Non-U.S. Plans  
     2010     2009     2008     2010     2009     2008  

Service cost

   $ 3      $ 4      $ 6      $ 8      $ 8      $ 8   

Interest cost on projected benefit obligation

     15        17        16        15        16        16   

Expected return on assets

     (16     (14     (18     (11     (10     (9

Amortization of prior service cost

     —          —          —          —          1        1   

Recognized actuarial loss (gain)

     8        9        8        1        (1     —     

Curtailment (gain) loss

     —          (1     —          —          1        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net expense

   $ 10      $ 15      $ 12      $ 13      $ 15      $ 16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Non-Pension Retirement Benefits  
     U.S. Plans     Non-U.S. Plans  
     2010     2009     2008     2010      2009     2008  

Service cost

   $ —        $ —        $ —        $ —         $ —        $ —     

Interest cost on projected benefit obligation

     1        1        1        —           —          —     

Amortization of prior service benefit

     (11     (11     (11     —           —          —     

Recognized actuarial gain

     —          (1     —          —           —          (1

Settlement gain

     —          —          —          —           (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net benefit

   $ (10   $ (11   $ (10   $ —         $ (1   $ (1
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The curtailment gain recognized on U.S. pension benefits during the year ended December 31, 2009 related to the U.S. plan freeze previously discussed. The curtailment loss recognized on non-U.S. pension benefits during the year ended December 31, 2009 related to the impact of planned workforce reductions on the Company’s pension plan in the Netherlands. The settlement gain recognized during the year ended December 31, 2009 for non-pension postretirement plans resulted from lump sum payments made under the Company’s plan offered to certain associates in the Netherlands.

The following amounts were recognized in other comprehensive income during the year ended December 31, 2010:

 

     Pension Benefits     Non-Pension
Postretirement Benefits
    Total  
     U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
 

Net actuarial losses (gains) arising during the year

   $ 3      $ 1      $ (1   $ 1      $ 2      $ 2   

Amortization of prior service (cost) benefit

     —          (1     11        —          11        (1

Amortization of net losses

     (8     —          —          —          (8     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Gain) loss recognized in other comprehensive income

     (5     —          10        1        5        1   

Deferred income taxes

     —          —          —          (1     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Gain) loss recognized in other comprehensive income, net of tax

   $ (5   $ —        $ 10      $ —        $ 5      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The amounts in Accumulated other comprehensive income that are expected to be recognized as components of net periodic benefit cost (benefit) during the next fiscal year are as follows:

 

     Pension Benefits      Non-Pension
Postretirement Benefits
     Total  
     U.S.
Plans
     Non-U.S.
Plans
     U.S.
Plans
    Non-U.S.
Plans
     U.S.
Plans
    Non-U.S.
Plans
 

Prior service cost (benefit)

   $ —         $ 1       $ (11   $ —         $ (11   $ 1   

Net actuarial loss (gain)

     7         —           (1     —           6        —     

Determination of actuarial assumptions

The Company’s actuarial assumptions are determined based on the demographics of the population, target asset allocations for funded plans, regional economic trends, statutory requirements and other factors that could impact the benefit obligation and plan assets. For our European plans, these assumptions are set by country, as the plans within these countries have similar demographics, and are impacted by the same regional economic trends and statutory requirements.

The Company merged its three U.S. qualified pension plans at December 31, 2009, and merged the Trusts holding the plan assets in September 2010. As a result, the economic actuarial assumptions for these plans at December 31, 2010 and December 31, 2009 were determined based on the demographics of the merged plan, including the Company’s assumptions for expected rate of return on assets and the target asset mix for the plan assets. Prior to 2009, these assumptions were set separately for each plan.

The discount rates selected reflect the rate at which pension obligations could be effectively settled. The Company selects the discount rates based on cash flow models using the yields of high-grade corporate bonds or the local equivalent with maturities consistent with the Company’s anticipated cash flow projections.

The expected rates of future compensation level increases are based on salary and wage trends in the chemical and other similar industries, as well as the Company’s specific long-term compensation targets by country. Input is obtained from the Company’s internal Human Resources group and from outside actuaries. These rates include components for wage rate inflation and merit increases.

The expected long-term rates of return on plan assets are determined based on the plans’ current and projected asset mix. To determine the expected overall long-term rate of return on assets, the Company takes into account the rates on long-term debt investments held within the portfolio, as well as expected trends in the equity markets, for plans including equity securities. Peer data and historical returns are reviewed and the Company consults with its actuaries, as well as investment professionals, to confirm that the Company’s assumptions are reasonable.

 

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The weighted average rates used to determine the benefit obligations were as follows at December 31:

 

     Pension Benefits     Non-Pension
Postretirement Benefits
 
     2010     2009     2010     2009  
     U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
 

Discount rate

     5.1     5.5     5.7     5.5     4.9     5.6     5.4     6.3

Rate of increase in future compensation levels

     —          3.3     4.0     3.3     —          —          —          —     

The weighted average assumed health care cost trend rates are as follows at December 31:

                

Health care cost trend rate assumed for next year

     —          —          —          —          7.9     7.2     8.1     7.4

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

     —          —          —          —          4.5     4.5     5.1     4.4

Year that the rate reaches the ultimate trend rate

     —          —          —          —          2029        2030        2026        2029   

The weighted average rates used to determine net periodic pension expense (benefit) were as follows for the years ended December 31:

 

     Pension Benefits  
     U.S. Plans     Non-U.S. Plans  
     2010     2009     2008     2010     2009     2008  

Discount rate

     5.7     6.1     6.1     5.5     5.8     5.5

Rate of increase in future compensation levels

     4.0     4.0     4.0     3.3     3.3     3.3

Expected long-term rate of return on plan assets

     8.0     8.2     8.3     5.8     5.8     5.8

 

     Non-Pension Postretirement Benefits  
     U.S. Plans     Non-U.S. Plans  
     2010     2009     2008     2010     2009     2008  

Discount rate

     5.4     6.1     6.1     6.3     7.1     5.5

A one-percentage-point change in the assumed health care cost trend rates would change the projected benefit obligation for international non-pension postretirement benefits by $1 and service cost and interest cost by a negligible amount. The impact on U.S. plans is negligible.

Pension Investment Policies and Strategies

The Company’s investment strategy for the assets of its North American defined benefit pension plans is to maximize the long-term return on plan assets using a mix of equities and fixed income investments with a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and expected timing of future cash flow requirements. The investment portfolio contains a diversified blend of equity and fixed-income investments. For U.S. plans, equity investments are also diversified across U.S. and international stocks, as well as growth, value and small and large capitalization investments, while the Company’s Canadian plan includes a blend of Canadian securities with U.S. and other foreign investments. Investment risk and performance is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset and liability studies.

 

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The Company periodically reviews its target allocation of North American plan assets among the various asset classes. The targeted allocations are based on anticipated asset performance, discussions with investment professionals and on the projected timing of future benefit payments. The target allocations for the Company’s U.S. plans have been aligned for 2010, due to the planned merger of these Trusts.

The Company observes local regulations and customs governing its European pension plans in determining asset allocations, which generally require a blended weight leaning toward more fixed income securities, including government bonds.

 

     Actual     Target  
     2010     2009     2011  

Weighted average allocations of U.S. pension plan assets at December 31:

      

Equity securities

     63     64     60

Debt securities

     30     28     40

Cash, short-term investments and other

     7     8     —     
  

 

 

   

 

 

   

 

 

 
     100     100     100
  

 

 

   

 

 

   

 

 

 

Weighted average allocations of non-U.S. pension plan assets at December 31:

      

Equity securities

     14     13     21

Debt securities

     82     87     79

Cash, short-term investments and other

     4     —          —     
  

 

 

   

 

 

   

 

 

 
     100     100     100
  

 

 

   

 

 

   

 

 

 

Fair Value of Plan Assets

Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:

 

   

Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.

 

   

Level 3: Unobservable inputs, for example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

 

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The following table presents U.S. pension plan investments measured at fair value on a recurring basis as of December 31, 2010 and 2009:

 

    Fair Value Measurements Using  
    2010     2009  
    Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Unobservable
Inputs

(Level 3)
    Total     Quoted
Prices

in  Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Unobservable
Inputs

(Level 3)
    Total  

Large cap equity funds (a)(b)

  $ 37      $ 17      $ —        $ 54      $ 26      $ 33      $ —        $ 59   

Small/mid cap equity fund (b)

    45        —          —          45        31        6        —          37   

Other international equity (b)

    —          32        —          32        —          23        —          23   

Debt securities/fixed income (c)

    2        60        —          62        —          52        —          52   

Cash, money market and other (d)

    1        13        —          14        —          14        —          14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 85      $ 122      $ —        $ 207      $ 57      $ 128      $ —        $ 185   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents non-U.S. pension plan investments measured at fair value on a recurring basis as of December 31, 2010 and 2009:

 

    Fair Value Measurements Using  
    2010     2009  
    Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Unobservable
Inputs

(Level 3)
    Total     Quoted
Prices

in  Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Unobservable
Inputs

(Level 3)
    Total  

U.S. equity (b)

  $ —        $ 19      $ —        $ 19      $ —        $ 9      $ —        $ 9   

European equity (b)

    —          —          —          —          —          7        —          7   

Other international equity (b)

    —          5        —          5        —          5        —          5   

Debt securities/fixed income (b)

    —          106        —          106        —          111        —          111   

Liability driven investments (c)(e)

    —          56        —          56        —          45        —          45   

Balanced pooled funds (b)(f)

    —          8        —          8        —          7        —          7   

Pooled insurance products with fixed income guarantee (b)

    —          5        —          5        —          5        —          5   

Cash, money market and other (d)

    —          2        —          2        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ 201      $ —        $ 201      $ —        $ 189      $ —        $ 189   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Level 1 equity securities are valued based on quoted prices in active markets.

 

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(b) Level 2 equity securities are primarily in pooled asset and mutual funds and are valued based on underlying net asset value multiplied by the number of shares held.
(c) Level 2 fixed income securities are valued using a market approach that includes various valuation techniques and sources, primarily using matrix/market corroborated pricing based on observable inputs including yield curves and indices.
(d) Cash, money market and other securities include mutual funds, certificates of deposit and other short-term cash investments for which the share price is $1 or book value is assumed to equal fair value due to the short duration of the investment term.
(e) Liability driven investments consist of a series of funds designed to provide returns matched to expected future cash flows, and include approximately 70% investments in fixed income securities targeting returns in line with 3-month euribor in the medium term, and 30% swaps, with an underlying portfolio of bonds and cash to counterbalance changes in the value of the swaps.
(f) The fund provides a mix of approximately 60% equity and 40% fixed income securities that achieves the target asset mix for the plan.

Projections of Plan Contributions and Benefit Payments

The Company expects to make contributions totaling $26 to its defined benefit pension plans in 2011.

Estimated future plan benefit payments as of December 31, 2010 are as follows:

 

     Pension Benefits      Non-Pension
Postretirement Benefits
 

Year

   U.S. Plans      Non-U.S. Plans      U.S. Plans      Non-U.S. Plans  

2011

   $ 22       $ 8       $ 1       $ —     

2012

     22         9         1         —     

2013

     21         9         1         1   

2014

     20         11         1         —     

2015

     28         11         1         1   

2016-2020

     89         72         5         2   

The Company has a U.S. defined benefit pension plan that was converted to a cash balance plan prior to 2006. Under the 2006 Pension Protection Act, cash balance plans are generally not considered to be discriminatory if certain requirements are met; however, plans converted prior to the effective date of the 2006 Pension Protection Act, such as the Company’s, are not grandfathered under the act. During 2010, the Company received a letter of determination that the plan as converted is a qualified plan.

Defined Contribution Plans

The Company sponsors a number of defined contribution plans for its employees, primarily in the U.S. , Canada, Europe and in the Asia-Pacific region. Full-time employees are generally eligible to participate immediately and may make pre-tax and after-tax contributions subject to plan and statutory limitations. For certain plans, the Company has the option to make contributions above the match provided in the plan based on financial performance. Due to the economic downturn at the end of 2008, during 2009 the Company suspended for one year the employer match provided to non-bargaining employees and to some bargained employees in its U.S. and Canadian defined contribution plans.

Effective July 1, 2009, the Company introduced an annual retirement contribution (“ARC”) to eligible U.S. associates to replace benefits previously provided under the Company’s U.S. defined benefit pension plans, which have been frozen, as previously discussed, for non-bargaining associates and for some bargained associates. The contribution, which will be paid into the existing U.S. defined contribution plan, is a percentage

 

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of eligible earnings, ranging from 2% to 7% based on years of service, subject to IRS limitations. The contribution for each year will be made in the second quarter of the following year to eligible associates actively employed with the Company at year-end.

Prior to July 1, 2009 certain U.S. employees received annual employer contributions to the U.S. defined contribution plan based on age and years of service in lieu of a defined benefit pension plan. Under this arrangement, contributions ranged from 1% to 15% on wages up to FICA limits and 2% to 20% on wages in excess of FICA limits. These benefits were eliminated effective July 1, 2009, and were replaced with the ARC (discussed above).

The Company incurred expense for contributions under these plans in 2010, 2009 and 2008 of $14, $9 and $15, respectively.

Non-Qualified and Other Retirement Benefit Plans

The Company provides key executives in some locations with non-qualified benefit plans that provide participants with an opportunity to elect to defer compensation and also provide retirement benefits, or “top-ups”, in cases where executives cannot fully participate in the defined benefit or defined contribution plans because of plan or local statutory limitations. The Company froze benefits under its U.S. non-qualified plans beginning January 1, 2009. Most of the Company’s non-qualified benefit plans are unfunded. Prior to the plan freezes, certain deferrals were matched by the Company based on years of service. The liabilities related to defined benefit top-ups are included in the previously discussed defined benefit pension disclosures. The Company’s liability for the other components of these non-qualified benefit plans was $7 and $8 at December 31, 2010 and 2009, respectively, and is included in Other long-term liabilities.

The Company’s German subsidiaries offer a government subsidized early retirement program to eligible employees called Altersteilzeit or ATZ Plans. The German government provides a subsidy in certain cases where the participant is replaced with a qualifying candidate. The Company has liabilities for these arrangements totaling $7 and $4 for the years ended December 31, 2010 and 2009, respectively. The Company incurred expense for these plans in 2010, 2009 and 2008 of $4, $1 and $2, respectively.

Some employees who are not covered by the Company’s U.S. and foreign defined benefit pension plans are covered by collective bargaining agreements, which are generally for five year terms. Under Federal pension law, the Company would have continuing liability to these pension trusts if it ceased all or most of its participation in any of these trusts, and under certain other specified conditions.

Also included in the Consolidated Balance Sheets at December 31, 2010 and 2009 are other post-employment benefit obligations relating to long-term disability and liabilities relating to European jubilee benefit plans of $8 and $8, respectively.

14. Deficit

The Company has 82,556,847 shares of $0.01 par value common stock outstanding at December 31, 2010.

In December 2008, in connection with the settlement agreement with Huntsman, MSC Holdings made a capital contribution of $325 allowing the Company to fund the $325 termination fee and affiliates of the Company’s owner paid a $200 settlement payment, while reserving all rights with respect to reallocation of the payments to certain other affiliates of the Company’s owner. The $200 settlement payment made by the Company’s owner was treated as an expense by the Company with the credit to Paid-in capital at December 31, 2008. This settlement was considered an expense of the Company as the liability was joint and several between the Company and Apollo and the settlement by Apollo was caused by its relationship with the Company as a principal shareholder.

 

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For the years ended December 31, 2010 and December 31, 2009, the Company’s owner received insurance recoveries of $163 and $37, respectively, related to the $200 settlement payment paid by the Company’s owner that had been treated as an expense of the Company in 2008. These recoveries were recorded as income by the Company for the years ended December 31, 2010 and 2009, with the corresponding debit to Paid-in capital. As of December 31, 2010, the Company’s owner has recovered the $200 settlement payment in full.

15. Stock Option Plans and Stock Based Compensation

Summary of Plans

Prior to the Hexion Formation, Resolution Performance, Resolution Specialty and BHI Acquisition (now MSC Holdings) maintained five stock-based compensation plans: the Resolution Performance 2000 Stock Option Plan (the “Resolution Performance Plan”), the Resolution Performance 2000 Non-Employee Directors Option Plan (the “Resolution Performance Director Plan”), the Resolution Performance Restricted Unit Plan (the “Resolution Performance Unit Plan”), the Resolution Specialty 2004 Stock Option Plan (the “Resolution Specialty Plan”) and the BHI Acquisition 2004 Stock Incentive Plan (the “Borden Chemical Plan”). In addition to these plans, the Company’s parent maintains a stock-based deferred compensation plan, which is discussed below. The options granted under each of the option plans were to purchase common stock of the parent company of each of the respective companies. Upon the Hexion Formation, the stock options under the Resolution Performance Plan, the Resolution Performance Director Plan, the Resolution Performance Unit Plan and Resolution Specialty Plan were exchanged for an equivalent number of options to purchase common units of MSC Holdings based on relative fair value. In 2007, the Company adopted the 2007 Long-Term Incentive Plan which granted restricted stock units and options to purchase common units of MSC Holdings.

The following is a summary of existing stock option plans and outstanding shares as of December 31, 2010:

 

Plan name

   Shares
outstanding
   Plan
expiration
  

Vesting Terms

  

Option term

   Number of shares
authorized

Resolution Performance 2000 Stock Option Plan

      November 2010       8 yrs 30 days (1)    n/a plan expired

Tranche A options

   26,476       Vest ratably over 5 years      

Tranche B performance options

   51,316       Cliff vest on 8th anniversary      

Resolution Performance 2000 Non-Employee Directors Option Plan

   302,433    November 2010    Fully vested upon Hexion Formation    8 yrs 30 days (2)    n/a plan expired

Resolution Specialty Materials 2004 Stock Option Plan

            8 yrs 30 days    1,027,197
Tranche A options    47,359    October 2014    Vest ratably over 5 years      

Tranche B performance options

   93,202       Performance-based vested due to attainment of target upon Hexion Formation      
Director options    142,664       Fully vested upon Hexion Formation      

BHI Acquisition Corp. 2004 Stock Incentive Plan

      August 2014       10 years    3,670,635
Tranche A options    951,616       Vest ratably over 5 years      
Tranche B performance options    951,616       Cliff vest on earlier of 8th anniversary or change in control      
Director options    84,423       Director grants vest upon IPO / Change in Control      
Director options    28,141       Director grants vested upon grant      

Hexion LLC 2007 Long-Term Incentive Plan

      April 2017          1,700,000
Options to purchase units    422,500       Vest upon attainment of performance targets upon change in control    8 years   
Restricted stock units    100,000       50% vest on third and fourth anniversaries of grant    n/a   

 

(1) 71,301 Options granted between November 2000—December 2003 were modified during the 4th quarter of 2010 to extend expiration date to November 13, 2012
(2) 265,550 Options granted between November 2000—December 2003 were modified to extend expiration date to November 13, 2012

 

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Conversion of Units to Momentive Holdco

Effective October 1, 2010, in conjunction with the Momentive Combination, stock options to purchase units in MSC Holdings that were granted to our Directors and those granted under the Resolution Performance 2000 Stock Option Plan, the Resolution Performance 2000 Non-Employee Directors Option Plan, the Resolution Specialty 2004 Stock Option Plan, the BHI Acquisition 2004 Stock Incentive Plan and Hexion 2007 Long-Term Incentive plan to purchase units in MSC Holdings were converted on a one-for-one basis to an equivalent number of options to purchase units in Momentive Holdco. Similarly, the restricted MSC Holdings LLC unit awards granted under the Hexion 2007 Long-Term Incentive Plan, the BHI Acquisition 2004 Deferred Compensation Plan and the Resolution Performance Restricted Unit Plan were converted on a one-for-one basis to units in Momentive Holdco. Upon modification of the outstanding option and restricted unit awards, the remeasurement of the fair value resulted in additional compensation expense of less than $1 recognized for the year ended December 31, 2010. The conversion affected approximately 125 employees.

Financial Statement Impact

Share-based compensation expense is recognized, net of estimated forfeitures, over the requisite service period on a straight-line basis. The Company adjusts compensation expense periodically for forfeitures.

The Company recognized share-based compensation expense of $2, $5 and $5 for each of the years ended December 31, 2010, 2009 and 2008, respectively all of which is the result of the remeasurement and modifications. The amounts are included in Selling, general and administrative expense in the Consolidated Statements of Operations. The Company expects additional compensation expense of $5, which will be recognized over the vesting period of the underlying share-based awards. $3 is expected to be recognized ratably over a weighted-average period of 1.6 years, while the remaining $2 will be recognized upon an initial public offering or other future contingent event.

Options Activity

Following is a summary of the Company’s stock option plan activity for the year ended December 31, 2010:

 

      Momentive
Holdco Common
Units
    Weighted Average
Exercise Price
 

Options outstanding at December 31, 2009

     3,300,253      $ 7.07   

Options granted

     —        $ —     

Options exercised

     (59,767   $ 5.64   

Options forfeited

     (138,740   $ 7.09   
  

 

 

   

Options outstanding at December 31, 2010

     3,101,746      $ 7.05   
  

 

 

   

Exercisable at December 31, 2010

     1,627,491      $ 6.52   

Expected to vest at December 31, 2010

     3,031,789      $ 7.06   

At December 31, 2010, exercise prices for options outstanding ranged from $3.51 to $29.42 with a weighted average remaining contractual life of 3.3 years. The weighted average remaining contractual life for options exercisable and options expected to vest was 2.8 and 3.3 years, respectively. At December 31, 2010, the aggregate intrinsic value of options exercisable and options expected to vest was less than $1.

The total amount of cash received and total intrinsic value (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) of options exercised during the years ended December 31, 2010, 2009 and 2008 was less than $1, $0, and less than $1, respectively.

 

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Restricted Unit Activity

Following is a summary of the Company’s restricted unit plan activity for the year ended December 31, 2010:

 

      Momentive
Holdco Common
Units
    Weighted Average
Exercise Price
 

Nonvested at December 31, 2009

     116,000      $ 10.81   

Restricted units granted

     —        $ —     

Restricted units vested

     (55,000   $ 10.81   

Restricted units forfeited

     (11,000   $ 10.81   
  

 

 

   

Nonvested at December 31, 2010

     50,000      $ 10.81   
  

 

 

   

The weighted average remaining contractual life for restricted units granted and outstanding was 0.3 years.

Stock-Based Deferred Compensation Plan

In 2004, in connection with the acquisition of Borden Chemical by Apollo, certain key employees of the Company deferred the receipt of compensation and were credited with a number of deferred stock units that were equal in value to the amount of compensation deferred. In total, the Company granted 1,007,944 deferred common stock units under the Hexion LLC 2004 Deferred Compensation Plan (the “2004 DC Plan”), which is an unfunded plan. Each unit gives the grantee the right to one common stock unit of Momentive Holdco. Under the 2004 DC Plan, the deferred common stock units are not distributed to participants until their employment with the Company ends. At December 31, 2010, there were 798,941 undistributed units under the 2004 DC Plan.

Subsequent Event

On February 23, 2011, the Compensation Committee of the Board of Managers of Momentive Holdco approved the Momentive Performance Materials Holdings LLC 2011 Equity Incentive Plan (the “2011 Equity Plan”). Under the 2011 Equity Plan, Momentive Holdco can award unit options, unit awards, restricted units, restricted deferred units, and other unit-based awards. The restricted deferred units are non-voting units of measurement which are deemed to be equivalent to one common unit of Momentive Holdco. The unit options are options to purchase common units of Momentive Holdco. The awards made pursuant to the 2011 Equity Plan will vest based on continued service and the achievement of certain unit prices following certain transactions involving Momentive Holdco. The awards contain restrictions on transferability and other typical terms and conditions. The Company is currently evaluating the impact of these unit-based compensation awards on its Consolidated Financial Statements.

 

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16. Income Taxes

Income tax (benefit) expense detail for continuing operations for the years ended December 31 is as follows:

 

     2010     2009     2008  

Current

      

Federal

   $ —        $ —        $ (6

State and local

     2        2        (4

Foreign

     45        2        5   
  

 

 

   

 

 

   

 

 

 

Total current

     47        4        (5
  

 

 

   

 

 

   

 

 

 

Deferred

      

Federal

     1        (7     1   

State and local

     —          —          —     

Foreign

     (13     (5     (12
  

 

 

   

 

 

   

 

 

 

Total deferred

     (12     (12     (11
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

   $ 35      $ (8   $ (16
  

 

 

   

 

 

   

 

 

 

A reconciliation of the differences between income taxes for continuing operations that were computed at the federal statutory tax rate of 35% and provisions for income taxes for the years ended December 31 follows:

 

     2010     2009     2008  

Income tax expense (benefit) computed at federal statutory tax rate

   $ 85      $ 48      $ (410

State tax provision, net of federal benefits

     2        2        2   

Foreign tax rate differential

     48        (9     —     

Foreign source income subject to U.S. taxation

     25        1        3   

Losses and other (income) expenses not deductible for tax

     (69     (7     116   

(Decrease) increase in the taxes due to changes in valuation allowance

     (55     (35     286   

Additional tax (benefit) on foreign unrepatriated earnings

     1        (1     (1

Changes in enacted tax rates

     (1     (2     (1

Adjustments of prior year estimates and other

     (1     (5     (11
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

   $ 35      $ (8   $ (16
  

 

 

   

 

 

   

 

 

 

For the year ending December 31, 2008, losses and other expenses not deductible for tax include the $200 non-cash push-down of settlement costs paid by Apollo (see Note 2) and increases in unrecognized tax benefits related to various intercompany transaction costs. The Company is reviewing the deductibility of these intercompany transaction costs and has not recognized a related tax benefit at December 31, 2010.

The domestic and foreign components of the income (loss) from continuing operations before income taxes for the years ended December 31 is as follows:

 

     2010     2009      2008  

Domestic

   $ 297      $ 131       $ (1,013

Foreign

     (53     6         (158
  

 

 

   

 

 

    

 

 

 

Total

   $ 244      $ 137       $ (1,171
  

 

 

   

 

 

    

 

 

 

 

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The tax effects of significant temporary differences and net operating loss and credit carryforwards, which comprise the deferred tax assets and liabilities at December 31, is as follows:

 

     2010     2009  

Assets

    

Non-pension post-employment

   $ 7      $ 8   

Accrued and other expenses

     76        99   

Loss and credit carryforwards

     553        708   

Pension liabilities

     31        38   
  

 

 

   

 

 

 

Gross deferred tax assets

     667        853   

Valuation allowance

     (479     (579
  

 

 

   

 

 

 

Net deferred tax asset

     188        274   
  

 

 

   

 

 

 

Liabilities

    

Property, plant and equipment

     (164     (181

Unrepatriated earnings of foreign subsidiaries

     (88     (73

Intangibles

     (17     (32

Deferred income from extinguishment of debt

     —          (76
  

 

 

   

 

 

 

Gross deferred tax liabilities

     (269     (362
  

 

 

   

 

 

 

Net deferred tax liability

   $ (81   $ (88
  

 

 

   

 

 

 

The following table summarizes the presentation of the net deferred tax liability on the Consolidated Balance Sheets at December 31:

 

     2010     2009  

Assets

    

Current deferred income taxes (Other current assets)

   $ 24      $ 17   

Long-term deferred income taxes (Other assets)

     5        15   

Liabilities

    

Current deferred income taxes (Other current liabilities)

     —          (4

Long-term deferred income taxes

     (110     (116
  

 

 

   

 

 

 

Net deferred tax liability

   $ (81   $ (88
  

 

 

   

 

 

 

MSC Holdings and its eligible subsidiaries file a consolidated U.S. Federal income tax return. As MSC Holdings is not a member of the registrant, its tax attributes are not reflected in the tables above. However, because MSC Holdings is the Company’s parent, the Company can utilize MSC Holdings attributes. These attributes are comprised of $366 of deferred interest deductions, which have an unlimited carryover, but have significant restrictions on their use. MSC Holdings maintains a full valuation allowance against these attributes because it is more likely than not that some portion of these assets will not be realized.

As of December 31, 2010, the Company has a $479 valuation allowance for a portion of its net deferred tax assets that management believes, more likely than not, will not be realized. In the United States, a consolidated return will be filed and future taxable income and losses of the consolidated group may be offset. The Company’s deferred tax assets include federal, state and foreign net operating losses carryforwards. The federal net operating loss carryforwards available are $1,055, which expire starting in 2020. The Company’s deferred assets also include minimum tax credits of $2, which are available indefinitely. A valuation allowance of $309 has been provided against these items. The Company had undistributed earnings of certain foreign subsidiaries of $118, on which deferred taxes have not been provided because these earnings are considered permanently invested outside of the United States.

 

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The following table summarizes the changes in the valuation allowance for the years ending December 31, 2010, 2009 and 2008:

 

     Balance at
Beginning of
Period
     Changes in related
Gross Deferred Tax
Assets/Liabilities
    Charge/
Release
    Balance at End of
Period
 

Valuation allowance on Deferred tax assets:

         

Year ended December 31, 2008

   $ 356       $ (34   $ 298      $ 620   

Year ended December 31, 2009

     620         (16     (25     579   

Year ended December 31, 2010

     579         53        (153     479   

Examination of Tax Returns

The Company conducts business globally and, as a result, certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities throughout the world, including major jurisdictions such as Brazil, Canada, the Czech Republic, France, Germany, Italy, South Korea, Netherlands and the United States.

The Company is no longer subject to U.S. federal examinations for years before December 31, 2007; however, certain state and foreign tax returns are under examination by various regulatory authorities.

The Company continuously reviews issues that are raised from ongoing examinations and open tax years to evaluate the adequacy of its liabilities. As the various taxing authorities continue with their audit/examination programs, the Company will adjust its reserves accordingly to reflect these settlements.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

     2010      2009  

Balance at beginning of year

   $ 60       $ 57   

Additions based on tax positions related to the current year

     22         7   

Additions for tax positions of prior years

     3         2   

Reductions for tax positions of prior years

     —           (6
  

 

 

    

 

 

 

Balance at end of year

   $ 85       $ 60   
  

 

 

    

 

 

 

During the year ended December 31, 2010, the company increased its amount of unrecognized tax benefits, including its accrual for interest and penalties, by $31 for various intercompany transactions and prior year changes in estimates. During the years ended December 31, 2010, 2009 and 2008, the Company recognized approximately $1, $1 and $(1), respectively, in interest and penalties. The Company had approximately $27 and $22 accrued for the payment of interest and penalties at December 31, 2010 and 2009, respectively.

$85 of unrecognized tax benefits, if recognized, would affect the effective tax rate. The Company anticipates recognizing a range of $3 to $41 of the total amount of unrecognized tax benefits, exclusive of interest, within the next 12 months as a result of negotiations with foreign jurisdictions and completion of foreign and U.S. state audit examinations.

 

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17. Segment Information

Effective January 1, 2010, the Company made certain changes to its internal reporting structure. Additionally, on January 1, 2010, upon the adoption of new accounting guidance related to the consolidation of variable interest entities, the Company deconsolidated HAI, its foundry applications joint venture between the Company and Delta-HA, Inc., from its unaudited Condensed Consolidated Financial Statements. These changes caused the Company to re-evaluate its reportable segments. Effective in the first quarter of 2010, the results of the Company’s oil field products applications and the equity earnings in its HAI joint venture are included within its Epoxy and Phenolic Resins segment. Previously the results of these businesses were reported in the Performance Products segment.

In the first quarter of 2011, the Company completed the sale of the IAR business and moved the oversight and management of the coatings reporting unit into the Epoxy and Phenolic Resins Division, which was renamed the Epoxy, Phenolic and Coating Resins Division. These organizational and internal reporting changes caused the Company to re-evaluate its reportable segments. As a result of these changes, effective in the first quarter of 2011, the results of the Company’s coatings reporting unit, which were previously reported in the Coatings segment, are included within the Epoxy, Phenolic and Coating Resins segment. The prior periods have been recast for comparability purposes. In addition, the Company has renamed its Formaldehyde and Forest Products Resins segment to Forest Products Resins. No changes were made to the product lines that comprise this segment.

In the second quarter of 2011, the Company sold its North American coatings and composites resins (“CCR”) business to PCCR USA, Inc. (“PCCR”), a subsidiary of Investindustrial, a European investment group. The CCR business was previously included in the Coatings segment in 2010 and the Epoxy, Phenolic and Coating Resins segment beginning in 2011 as a result of the change in the Company’s reportable segments discussed above. The CCR business is reported as a discontinued operation for all periods presented.

The Company’s business segments are based on the products that the Company offers and the markets that it serves. At December 31, 2010, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins. A summary of the major products of the Company’s reportable segments follows:

 

   

Epoxy, Phenolic and Coating Resins: epoxy specialty resins, oil field products, versatic acids and derivatives, basic epoxy resins and intermediates, phenolic specialty resins and molding compounds, polyester resins, acrylic resins and vinylic resins

 

   

Forest Products Resins: forest products resins and formaldehyde applications

The Company’s organizational structure continues to evolve. It is also continuing to refine its operating structure to more closely link similar products, minimize divisional boundaries and improve the Company’s ability to serve multi-dimensional common customers. These refinements may result in future changes to the Company’s reportable segments.

Reportable Segments

Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by reportable segment. Segment EBITDA is defined as EBITDA adjusted to exclude certain non-cash and certain non-recurring expenses. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. Corporate and Other is primarily corporate general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions, foreign exchange gains and losses and legacy company costs not allocated to continuing segments.

 

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Net Sales to Unaffiliated Customers for the years ended December 31 (1)(2):

 

     2010      2009      2008  

Epoxy, Phenolic and Coating Resins

   $ 2,990       $ 2,351       $ 3,341   

Forest Products Resins

     1,607         1,198         2,049   
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,597       $ 3,549       $ 5,390   
  

 

 

    

 

 

    

 

 

 

Segment EBITDA for the years ended December 31 (2):

 

     2010     2009     2008  

Segment EBITDA

      

Epoxy, Phenolic and Coating Resins (3)

   $ 491      $ 307      $ 302   

Forest Products Resins (4)

     177        110        198   

Corporate and Other

     (61     (50     (50

Depreciation and Amortization Expense for the years ended December 31 (2):

 

     2010      2009      2008  

Epoxy, Phenolic and Coating Resins

   $ 111       $ 115       $ 129   

Forest Products Resins

     47         45         48   

Corporate and Other

     6         7         12   
  

 

 

    

 

 

    

 

 

 

Total

   $ 164       $ 167       $ 189   
  

 

 

    

 

 

    

 

 

 

Total Assets as of December 31 (2):

 

     2010      2009  

Epoxy, Phenolic and Coating Resins

   $ 1,812       $ 1,884   

Forest Products Resins

     849         819   

Corporate and Other

     233         32   

Discontinued Operations

     243         238   
  

 

 

    

 

 

 

Total

   $ 3,137       $ 2,973   
  

 

 

    

 

 

 

Capital Expenditures for the years ended December 31 (2)(6)

 

     2010      2009      2008  

Epoxy, Phenolic and Coating Resins

   $ 77       $ 52       $ 73   

Forest Products Resins

     34         70         46   

Corporate and Other

     3         4         5   
  

 

 

    

 

 

    

 

 

 

Total

   $ 114       $ 126       $ 124   
  

 

 

    

 

 

    

 

 

 

 

(1) Intersegment sales are not significant and, as such, are eliminated within the selling segment.
(2) The Company changed its segment reporting in 2010. Prior period balances have been recast to conform to the Company’s current reportable segments.
(3) Included in the Epoxy, Phenolic and Coating Resins Segment EBITDA are Earnings from unconsolidated affiliates, net of taxes of $8, $2 and $1 for the years ended December 31, 2010, 2009 and 2008, respectively.
(4) Included in Forest Products Resins Segment EBITDA are Earnings from unconsolidated entities, net of taxes of less than $1, less than $1 and $1 for the years ended December 31, 2010, 2009 and 2008, respectively.
(5) Excludes capital expenditures of discontinued operations. Includes capitalized interest costs that are incurred during the construction of property and equipment.

 

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Reconciliation of Segment EBITDA to Net Income (Loss):

 

     Year ended December 31,  
     2010     2009     2008  

Segment EBITDA:

      

Epoxy, Phenolic and Coating Resins

   $ 491      $ 307      $ 302   

Forest Products Resins

     177        110        198   

Corporate and Other

     (61     (50     (50

Reconciliation:

      

Items not included in Segment EBITDA

      

Terminated merger and settlement income (expense), net

     171        62        (1,027

Integration costs

     —          —          (27

Non-cash charges

     (5     7        (4

Unusual items:

      

(Loss) gain on divestiture of assets

     (2     (6     5   

Net loss from discontinued operations

     (3     (30     (32

Business realignments

     (20     (37     (32

Asset impairments

     —          (49     (8

Other

     (29     (42     (39
  

 

 

   

 

 

   

 

 

 

Total unusual items

     (54     (164     (106
  

 

 

   

 

 

   

 

 

 

Total adjustments

     112        (95     (1,164

Interest expense, net

     (276     (223     (303

(Loss) gain on extinguishment of debt

     (30     224        —     

Income tax (expense) benefit

     (35     8        16   

Depreciation and amortization

     (164     (167     (189
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Momentive Specialty Chemicals Inc.

     214        114        (1,190

Net income attributable to noncontrolling interest

     —          3        5   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 214      $ 117      $ (1,185
  

 

 

   

 

 

   

 

 

 

Items not included in Segment EBITDA

In 2010, Terminated merger and settlement income, net primarily includes the pushdown of Apollo’s 2010 recoveries of $163 in insurance proceeds in 2010 related to the $200 settlement payment made by Apollo that was treated as a pushdown of shareholder expense in 2008 and the $8 in insurance settlements related to the New York Shareholder Action. In 2009, Terminated merger and settlement expense, net includes the pushdown of Apollo’s recovery of $37 in insurance proceeds in 2009 related to the $200 settlement payment made by Apollo, as well as discounts on certain of the Company’s merger related service provider liabilities. This income was partially offset by legal and consulting costs and legal contingency accruals related to the New York Shareholder Action. In 2008, Terminated merger and settlement expense, net primarily represented accounting, consulting, tax and legal costs related to the terminated Huntsman merger and related litigation, including the $550 payment to Huntsman to terminate the merger and settle litigation and the non-cash push-down of settlement costs paid by Apollo of $200. Terminated merger and settlement costs also include the write-off of previously deferred acquisition costs.

Integration costs primarily represent redundancy and incremental administrative costs for integration programs as a result of the Hexion Formation, as well as costs to implement a single, company-wide, management information and accounting system and a new consolidations and financial reporting system.

Non-cash charges primarily represent stock-based compensation expense, accelerated depreciation on closing facilities and unrealized derivative and foreign exchange gains and losses. Loss from discontinued operations represents the results of the IAR and CCR businesses.

 

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Not included in Segment EBITDA are certain non-cash and certain non-recurring income or expenses that are deemed by management to be unusual in nature. For 2010, these items consisted of business realignment costs primarily related to expenses from the Company’s productivity program, realized foreign exchange gains and losses and retention program costs. For 2009, these items consisted of business realignment costs primarily related to expense from the Company’s productivity program, asset impairments, retention program costs and realized foreign exchange gains and losses. For 2008, these items consisted of asset impairments, a gain on the sale of a portion of the Company’s ownership in HAI and a gain on the sale of certain assets of a non-core product line.

Geographic Information

Net Sales to Unaffiliated Customers for the years ended December 31 (1):

 

     2010      2009      2008  

United States

   $ 1,861       $ 1,366       $ 2,167   

Netherlands

     938         846         1,222   

Germany

     347         282         494   

Canada

     244         165         276   

Other international

     1,207         890         1,231   
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,597       $ 3,549       $ 5,390   
  

 

 

    

 

 

    

 

 

 

 

(1) Sales are attributed to the country in which the individual business locations reside.

Long-Lived Assets as of December 31:

 

     2010      2009  

United States

   $ 497       $ 522   

Netherlands

     251         289   

Germany

     118         135   

Canada

     70         70   

Other international

     331         341   
  

 

 

    

 

 

 

Total

   $ 1,267       $ 1,357   
  

 

 

    

 

 

 

Product Line Information

Net Sales to Unaffiliated Customers for the years ended December 31:

 

     2010      2009      2008  

Epoxy resins and intermediates

   $ 1,412       $ 1,092       $ 1,501   

Forest products resins

     1,205         927         1,534   

Coating products

     460         406         546   

Phenolic specialty resins

     488         325         545   

All other (1)

     1,032         799         1,264   
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,597       $ 3,549       $ 5,390   
  

 

 

    

 

 

    

 

 

 

 

(1) Net sales of other product lines that individually account for less than 10% of consolidated Net sales.

 

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18. Guarantor/Non-Guarantor Subsidiary Financial Information

The Company and certain of its U.S. subsidiaries guarantee debt issued by its wholly owned subsidiaries Hexion Nova Scotia, ULC and Hexion U.S. Finance Corporation (together, the “Subsidiary Issuers”), which includes the 8.875% first priority senior secured notes due 2018, the floating rate second-priority senior secured notes due 2014 and the 9% second-priority notes due 2020.

The following information contains the condensed consolidating financial information for MSC (the parent), the Subsidiary Issuers, the combined subsidiary guarantors (Momentive Specialty Chemical Investments Inc.; Borden Chemical Foundry, LLC; Lawter International Inc.; HSC Capital Corporation; Momentive International Inc.; Momentive CI Holding Company (China) LLC; NL Coop Holdings LLC and Oilfield Technology Group, Inc.) and the combined non-guarantor subsidiaries, which includes all of the Company’s foreign subsidiaries and HAI (prior to the deconsolidation of this entity).

All of the Subsidiary Issuers and subsidiary guarantors are 100% owned by MSC. All guarantees are full and unconditional, and are joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its domestic subsidiaries by dividend or loan. While the Company’s Australian, New Zealand and Brazilian subsidiaries are restricted in the payment of dividends and intercompany loans due to the terms of their credit facilities, there are no material restrictions on the Company’s ability to obtain cash from the remaining non-guarantor subsidiaries.

This information includes allocations of corporate overhead to the combined non-guarantor subsidiaries based on net sales. Income tax expense has been provided on the combined non-guarantor subsidiaries based on actual effective tax rates.

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

Notes to Consolidated Financial Statements

(dollars in millions)

YEAR ENDED DECEMBER 31, 2010

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

 

     Momentive
Specialty
Chemicals Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 2,002      $ —        $   —        $ 2,934      $ (339   $ 4,597   

Cost of sales

     1,618        —          —          2,587        (339     3,866   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     384        —          —          347        —          731   

Selling, general and administrative expense

     116        —          —          215        —          331   

Terminated merger and settlement income, net

     (171     —          —          —          —          (171

Business realignment costs

     5        —          —          15        —          20   

Other operating expense (income), net

     7        —          —          (2     —          5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     427        —          —          119        —          546   

Interest expense, net

     92        144        —          40        —          276   

Loss on extinguishment of debt

     7        5        —          18        —          30   

Intercompany interest expense (income)

     123        (169     (1     47        —          —     

Other non-operating (income) expense, net

     (18     8        —          6        —          (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax, earnings from unconsolidated entities

     223        12        1        8        —          244   

Income tax (benefit) expense

     (11     10        —          36        —          35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before earnings from unconsolidated entities

     234        2        1        (28     —          209   

Earnings from unconsolidated entities, net of taxes

     (13     —          (5     —          26        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     221        2        (4     (28     26        217   

Net (loss) income from discontinued operations, net of tax

     (7     —          —          4        —          (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 214      $ 2      $ (4   $ (24   $ 26      $ 214   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

Notes to Consolidated Financial Statements

(dollars in millions)

YEAR ENDED DECEMBER 31, 2009

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

 

     Momentive
Specialty
Chemicals Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 1,418      $ —        $ —        $ 2,475      $ (344   $ 3,549   

Cost of sales

     1,248        —          —          2,173        (344     3,077   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     170        —          —          302        —          472   

Selling, general and administrative expense

     81        —          —          224        —          305   

Terminated merger and settlement (income) expense, net

     (64     —          —          2        —          (62

Asset impairments

     37        —          —          12        —          49   

Business realignment costs

     14        —          —          23        —          37   

Other operating expense (income), net

     7        —          (1     1        —          7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     95        —          1        40        —          136   

Interest expense, net

     130        62        —          31        —          223   

Gain on extinguishment of debt

     (76     (148     —          —          —          (224

Intercompany interest expense (income)

     67        (82     (1     16        —          —     

Other non-operating (income) expense, net

     (6     7        1        (2     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax, earnings from unconsolidated entities

     (20     161        1        (5     —          137   

Income tax (benefit) expense

     (4     6        —          (10     —          (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before earnings from unconsolidated entities

     (16     155        1        5        —          145   

Earnings from unconsolidated entities, net of taxes

     145        —          2        2        (147     2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     129        155        3        7        (147     147   

Net loss from discontinued operations, net of tax

     (12     —          —          (18     —          (30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     117        155        3        7        (147     117   

Net income attributable to noncontrolling interest

     (3     —          —          —          —          (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Momentive Specialty Chemicals Inc.

   $ 114      $ 155      $ 3      $ (11   $ (147   $ 114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.

Notes to Consolidated Financial Statements

(dollars in millions)

YEAR ENDED DECEMBER 31, 2008

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

 

     Momentive
Specialty
Chemicals Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 2,265      $ —        $ —        $ 3,592      $ (467   $ 5,390   

Cost of sales

     2,043        —          —          3,231        (467     4,807   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     222        —          —          361        —          583   

Selling, general and administrative expense

     86        —          —          256        —          342   

Terminated merger and settlement expense, net

     872        —          —          155        —          1,027   

Integration costs

     13        —          —          14        —          27   

Asset impairments

     —          —          —          8        —          8   

Business realignment costs

     5        —          —          27        —          32   

Other operating expense (income), net

     2        1        (1     7        —          9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (756     (1     1        (106     —          (862

Interest expense, net

     160        77        —          66        —          303   

Intercompany interest expense (income)

     93        (90     (1     (2     —          —     

Other non-operating (income) expense, net

     (4     10        —          —          —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax, earnings from unconsolidated entities

     (1,005     2        2        (170     —          (1,171

Income tax benefit

     (13     (1     —          (2     —          (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before earnings from unconsolidated entities

     (992     3        2        (168     —          (1,155

Earnings from unconsolidated entities, net of taxes

     (175     —          6        2        169        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income from continuing operations

     (1,167     3        8        (166     169        (1,153

Net loss from discontinued operations, net of tax

     (18     —          —          (14     —          (32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (1,185     3        8        (180     169        (1,185

Net income attributable to noncontrolling interest

     (5     —          —          —          —          (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Momentive Specialty Chemicals Inc.

   $ (1,190   $ 3      $ 8      $ (180   $ 169      $ (1,190
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-55


Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.

Notes to Consolidated Financial Statements

(dollars in millions)

DECEMBER 31, 2010

CONDENSED CONSOLIDATING BALANCE SHEET

 

    Momentive
Specialty
Chemicals Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

           

Current assets

           

Cash and cash equivalents (including restricted cash of $0 and $6, respectively)

  $ 56      $ —        $ —        $ 130      $ —        $ 186   

Short-term investments

    —          —          —          6        —          6   

Accounts receivable, net

    115        —          —          412        —          527   

Inventories:

           

Finished and in-process goods

    122        —          —          144        —          266   

Raw materials and supplies

    35        —          —          74        —          109   

Other current assets

    31        —          —          48        —          79   

Discontinued operations

    102        —          —          141        —          243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    461        —          —          955        —          1,416   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets

    6        41        30        73        3        153   

Property and equipment, net

    497        —          —          770        —          1,267   

Goodwill

    93        —          —          76        —          169   

Other intangible assets, net

    62        —          —          70        —          132   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,119      $ 41      $ 30      $ 1,944      $ 3      $ 3,137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and (Deficit) Equity

           

Current liabilities

           

Accounts and drafts payable

  $ 137      $ —        $ —        $ 277      $ —        $ 414   

Intercompany accounts (receivable) payable

    (140     (46     —          186        —          —     

Debt payable within one year

    25        —          —          57        —          82   

Intercompany loans (receivable) payable

    (97     —          —          97        —          —     

Loans payable to affiliates

    2        —          —          —          —          2   

Interest payable

    21        46        —          2        —          69   

Income taxes payable

    7        —          —          17        —          24   

Accrued payroll and incentive compensation

    28        —          —          37        —          65   

Other current liabilities

    90        —          —          60        —          150   

Discontinued operations

    37        —          —          22        —          59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    110        —          —          755        —          865   

Long-term debt

    1,152        1,687        —          649        —          3,488   

Affiliated long-term debt

    80        —          —          20        —          100   

Intercompany loans payable (receivable)

    1,352        (1,887     (15     550        —          —     

Long-term pension and post employment benefit obligations

    83        —          —          125        —          208   

Deferred income taxes

    35        2        —          73        —          110   

Other long-term liabilities

    104        6        —          50        —          160   

Advance from affiliates

    225        —          —          —          —          225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    3,141        (192     (15     2,222        —          5,156   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Momentive Specialty Chemicals Inc. shareholder’s (deficit) equity

    (2,022     233        45        (281     3        (2,022

Noncontrolling interest

    —          —          —          3        —          3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shareholder’s (deficit) equity

    (2,022     233        45        (278     3        (2,019
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and (deficit) equity

  $ 1,119      $ 41      $ 30      $ 1,944      $ 3      $ 3,137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-56


Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.

Notes to Consolidated Financial Statements

(dollars in millions)

DECEMBER 31, 2009

CONDENSED CONSOLIDATING BALANCE SHEET

 

    Momentive
Specialty
Chemicals Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

           

Current assets

           

Cash and cash equivalents (including restricted cash of $0 and $7, respectively)

  $ 22      $ —        $ —        $ 120      $ —        $ 142   

Short-term investments

    —          —          —          10        —          10   

Accounts receivable, net

    18        —          —          388        —          406   

Inventories:

           

Finished and in-process goods

    110        —          —          120        —          230   

Raw materials and supplies

    29        —          —          58        —          87   

Other current assets

    21        —          —          55        —          76   

Discontinued operations

    63        —          —          79        —          142   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    263        —          —          830        —          1,093   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets

           

Investment in subsidiaries

    831        —          23        —          (854     —     

Other assets

    33        6        —          60        —          99   

Property and equipment, net

    515        —          —          842        —          1,357   

Goodwill

    94        —          —          83        —          177   

Other intangible assets, net

    68        —          —          83        —          151   

Discontinued operations

    40        —          —          56        —          96   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,844      $ 6      $ 23      $ 1,954      $ (854   $ 2,973   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and (Deficit) Equity

           

Current liabilities

           

Accounts and drafts payable

  $ 140      $ —        $ —        $ 300      $ —        $ 440   

Intercompany accounts (receivable) payable

    (13     (4     —          17        —          —     

Debt payable within one year

    22        —          —          56        —          78   

Intercompany loans payable (receivable)

    360        —          (5     (355     —          —     

Loans payable to affiliates

    4        —          —          —          —          4   

Interest payable

    27        7        —          2        —          36   

Income taxes payable

    9        —          —          26        —          35   

Accrued payroll and incentive compensation

    15        —          —          28        —          43   

Other current liabilities

    93        —          —          96        —          189   

Discontinued operations

    40        —          —          24        —          64   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    697        3        (5     194        —          889   

Long-term debt

    1,969        653        —          702        —          3,324   

Affiliated long-term debt

    80        —          —          20        —          100   

Intercompany loans payable (receivable)

    683        (868     (14     199        —          —     

Long-term pension and post employment benefit obligations

    98        —          —          126        —          224   

Deferred income taxes

    39        —          —          77        —          116   

Other long-term liabilities

    105        —          —          30        —          135   

Advance from affiliates

    225        —          —          —          —          225   

Discontinued operations

    —          —          —          9        —          9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    3,896        (212     (19     1,357        —          5,022   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Momentive Specialty Chemicals Inc. shareholder’s (deficit) equity

    (2,063     218        42        594        (854     (2,063

Noncontrolling interest

    11        —          —          3        —          14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shareholder’s (deficit) equity

    (2,052     218        42        597        (854     (2,049
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and (deficit) equity

  $ 1,844      $ 6      $ 23      $ 1,954      $ (854   $ 2,973   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-57


Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.

Notes to Consolidated Financial Statements

(dollars in millions)

YEAR ENDED DECEMBER 31, 2010

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

    Momentive
Specialty
Chemicals Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows (used in) provided by operating activities

  $ (465   $ 19      $ —        $ 491      $ —        $ 45   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) investing activities

           

Capital expenditures

    (52     —          —          (67     —          (119

Capitalized interest

    —          —          —          (1     —          (1

Change in restricted cash

    —          —          —          2        —          2   

Proceeds from the return of capital from subsidiary

    367 (a)      —          —          —          (367     —     

Dividend from subsidiary

    18        —          1        —          (19     —     

Proceeds from the sale of assets

    6        —          —          8        —          14   

Deconsolidation of variable interest entity

    —          —          —          (4     —          (4

Investment in unconsolidated affiliates, net

    —          —          4        1        —          5   

Proceeds from matured debt securities

    —          —          —          4        —          4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    339        —          5        (57     (386     (99
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) financing activities

           

Net short-term debt borrowings (repayments)

    3        —          —          (10     —          (7

Borrowings of long-term debt

    290        1,433        —          633        —          2,356   

Repayments of long-term debt

    (1,108     (406     —          (663     —          (2,177

Repayments of affiliated debt

    (3     —          —          —          —          (3

Return of capital to parent

    —          —          —          (367 )(a)      367        —     

Net intercompany loan borrowings (repayments)

    987        (973     —          (14     —          —     

Long-term debt and credit facility financing fees

    (9     (63     —          —          —          (72

Payments of dividends on common stock

    —          (10     (5     (4     19        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    160        (19     (5     (425     386        97   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

    —          —          —          2        —          2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

    34        —          —          11        —          45   

Cash and cash equivalents (unrestricted) at beginning of year

    22        —          —          113        —          135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents (unrestricted) at end of year

  $ 56      $ —        $ —        $ 124      $ —        $ 180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) In March, June, September and December 2010, Momentive Specialty Chemicals Inc. contributed receivables of $100, $100, $107 and $67, respectively to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the year ended December 31, 2010, the non-guarantor subsidiary sold $374 of the contributed receivables to affiliates of Apollo for net cash of $367 (see Note 8). The cash proceeds were returned to Momentive Specialty Chemicals Inc. by the non-guarantor subsidiary as a return of capital. The sale of receivables has been included within cash flows from operating activities on the Combined non-guarantor subsidiaries. The return of the cash proceeds from the sale of receivables has been included as a financing outflow and an investing inflow on the Combined Non-Guarantor Subsidiaries and Momentive Specialty Chemicals Inc., respectively.

 

F-58


Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.

Notes to Consolidated Financial Statements

(dollars in millions)

YEAR ENDED DECEMBER 31, 2009

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

    Momentive
Specialty
Chemicals Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows (used in) provided by operating activities

  $ (197   $ (16   $ —        $ 568      $ —        $ 355   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) investing activities

           

Capital expenditures

    (38     —          —          (93     —          (131

Capitalized interest

    —          —          —          (5     —          (5

Change in restricted cash

    —          —          —          2        —          2   

Purchases of investments

    —          —          —          (2     —          (2

Proceeds from the return of capital from subsidiary

    392 (a)      —          —          —          (392     —     

Dividend from subsidiary

    6        —          5        —          (11     —     

Proceeds from the sale of assets

    4        —          —          —          —          4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    364        —          5        (98     (403     (132
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows (used in) provided by financing activities

           

Net short-term debt repayments

    (2     —          —          (8     —          (10

Borrowings of long-term debt

    587        —          —          568        —          1,155   

Repayments of long-term debt

    (690     (24     —          (690     —          (1,404

Borrowings of affiliated debt

    84        —          —          20        —          104   

Purchase of note receivable due from parent

    —          —          —          (24     —          (24

Deconsolidation of noncontrolling interest in variable interest entity

    (24     —          —          —          —          (24

Return of capital to parent

    —          —          —          (392 )(a)      392        —     

Net intercompany loan (repayments) borrowings

    (108     40        —          68        —          —     

Payment of dividends to non-controlling interest

    —          —          —          (4     —          (4

Long-term debt and credit facility financing fees

    (5     —          —          —          —          (5

Payments of dividends on common stock

    (10     —          (5     (6     11        (10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (168     16        (5     (468     403        (222
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

    —          —          —          13        —          13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

    (1     —          —          15        —          14   

Cash and cash equivalents (unrestricted) at beginning of year

    23        —          —          98        —          121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents (unrestricted) at end of year

  $ 22      $ —        $ —        $ 113      $ —        $ 135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) In March, June, September, November and December 2009, Momentive Specialty Chemicals Inc. contributed receivables of $70, $85, $110, $33 and $104, respectively to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the year ended December 31, 2009, the non-guarantor subsidiary sold $402 of the contributed receivables to affiliates of Apollo for net cash of $392 (see Note 8). The cash proceeds were returned to Momentive Specialty Chemicals Inc. by the non-guarantor subsidiary as a return of capital. The sale of receivables has been included within cash flows from operating activities on the Combined non-guarantor subsidiaries. The return of the cash proceeds from the sale of receivables has been included as a financing outflow and an investing inflow on the Combined Non-Guarantor Subsidiaries and Momentive Specialty Chemicals Inc., respectively.

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

Notes to Consolidated Financial Statements

(dollars in millions)

YEAR ENDED DECEMBER 31, 2008

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

    Momentive
Specialty
Chemicals
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows (used in) provided by operating activities

  $ (825   $ 3      $ (7   $ 197      $ —        $ (632
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows (used in) provided by investing activities

           

Capital expenditures

    (59     —          —          (75     —          (134

Change in restricted cash

    —          —          —          (6     —          (6

Purchases of investments

    —          —          —          (7     —          (7

Dividend from subsidiary

    8        —          —          —          (8     —     

Proceeds from the sale of assets

    —          —          5        8        —          13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (51     —          5        (80     (8     (134
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) financing activities

           

Net short-term debt (repayments) borrowings

    (5     —          —          13        —          8   

Borrowings of long-term debt

    389        —          —          703        —          1,092   

Repayments of long-term debt

    (396     —          —          (533     —          (929

Payments of dividends on common stock

    (2     —          (5     (3     8        (2

Affiliated loan borrowings (repayments)

    232        (3     7        (236     —          —     

Capital contribution from parent

    325        —          —          —          —          325   

Contingent affiliate advance

    225        —          —          —          —          225   

Noncontrolling interest in variable interest entity

    24        —          —          —          —          24   

Cash settlement of derivatives

    —          —          —          (37     —          (37
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    792        (3     2        (93     8        706   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

    —          —          —          (18     —          (18
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

    (84     —          —          6        —          (78

Cash and cash equivalents (unrestricted) at beginning of year

    107        —          —          92        —          199   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents (unrestricted) at end of year

  $ 23      $ —        $ —        $ 98      $ —        $ 121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of

Momentive Specialty Chemicals Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Momentive Specialty Chemicals Inc. and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Columbus, Ohio

February 28, 2011, except for the first, second, third and ninth paragraphs of Note 3 and Note 17 as to which the date is September 22, 2011

 

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Schedule II—Valuation and Qualifying Accounts

 

Column A

   Column B      Column C      Column D     Column E  
            Additions               

Description

   Balance at
Beginning
of Period
     Charged to
cost and
expenses (1)
     Charged to
other
accounts
     Deductions     Balance at
End of Period
 

Allowance for Doubtful Accounts:

             

Year ended December 31, 2010

   $ 24       $ 6       $ —         $ (5   $ 25   

Year ended December 31, 2009

     23         7         —           (6     24   

Year ended December 31, 2008

     22         2         —           (1     23   

Reserve for Obsolete Inventory:

             

Year ended December 31, 2010

   $ 10       $ 9       $ —         $ (10   $ 9   

Year ended December 31, 2009

     8         5         —           (3     10   

Year ended December 31, 2008

     12         8         —           (12     8   

 

(1) Includes the impact of foreign currency translation

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

MOMENTIVE SPECIALTY CHEMICALS INC. (Unaudited)

 

     Six Months Ended
June 30,
 

(In millions)

   2011     2010  

Net sales

   $ 2,732      $ 2,203   

Cost of sales

     2,308        1,879   
  

 

 

   

 

 

 

Gross profit

     424        324   

Selling, general and administrative expense

     171        158   

Push-down of income recovered by owner

     —          (28

Asset impairments

     18        —     

Other operating income, net

     (13     (3
  

 

 

   

 

 

 

Operating income

     248        197   

Interest expense, net

     129        135   

Loss on extinguishment of debt

     —          8   

Other non-operating (income) expense, net

     (2     3   
  

 

 

   

 

 

 

Income from continuing operations before income tax and earnings from unconsolidated entities

     121        51   

Income tax expense

     3        17   
  

 

 

   

 

 

 

Income from continuing operations before earnings from unconsolidated entities

     118        34   

Earnings from unconsolidated entities, net of taxes

     6        4   
  

 

 

   

 

 

 

Net income from continuing operations

     124        38   

Net income from discontinued operations, net of taxes

     2        7   
  

 

 

   

 

 

 

Net income

   $ 126      $ 45   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 177      $ (35
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

MOMENTIVE SPECIALTY CHEMICALS INC. (Unaudited)

 

(In millions, except share data)

   June 30,
2011
    December 31,
2010
 

Assets

    

Current assets

    

Cash and cash equivalents (including restricted cash of $4 and $6, respectively)

   $ 196      $ 186   

Short-term investments

     6        6   

Accounts receivable (net of allowance for doubtful accounts of $22 and $24, respectively)

     811        527   

Inventories:

    

Finished and in-process goods

     346        266   

Raw materials and supplies

     139        109   

Other current assets

     86        79   

Discontinued operations

     —          243   
  

 

 

   

 

 

 

Total current assets

     1,584        1,416   
  

 

 

   

 

 

 

Other assets, net

     165        153   

Property and equipment

    

Land

     83        78   

Buildings

     315        295   

Machinery and equipment

     2,404        2,244   
  

 

 

   

 

 

 
     2,802        2,617   

Less accumulated depreciation

     (1,479     (1,350
  

 

 

   

 

 

 
     1,323        1,267   

Goodwill

     175        169   

Other intangible assets, net

     116        132   
  

 

 

   

 

 

 

Total assets

   $ 3,363      $ 3,137   
  

 

 

   

 

 

 

Liabilities and Deficit

    

Current liabilities

    

Accounts and drafts payable

   $ 579      $ 414   

Debt payable within one year

     89        82   

Affiliated debt payable within one year

     2        2   

Interest payable

     59        69   

Income taxes payable

     20        24   

Accrued payroll and incentive compensation

     62        65   

Other current liabilities

     143        150   

Discontinued operations

     —          59   
  

 

 

   

 

 

 

Total current liabilities

     954        865   
  

 

 

   

 

 

 

Long-term liabilities

    

Long-term debt

     3,450        3,488   

Affiliated long-term debt

     100        100   

Long-term pension and post employment benefit obligations

     213        208   

Deferred income taxes

     107        110   

Other long-term liabilities

     156        160   

Advance from affiliates

     225        225   
  

 

 

   

 

 

 

Total liabilities

     5,205        5,156   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 7)

    

Deficit

    

Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at June 30, 2011 and December 31, 2010

     1        1   

Paid-in capital

     326        324   

Treasury stock, at cost—88,049,059 shares

     (296     (296

Note receivable from parent

     (24     (24

Accumulated other comprehensive income

     139        88   

Accumulated deficit

     (1,989     (2,115
  

 

 

   

 

 

 

Total Momentive Specialty Chemicals Inc. shareholder’s deficit

     (1,843     (2,022

Noncontrolling interest

     1        3   
  

 

 

   

 

 

 

Total deficit

     (1,842     (2,019
  

 

 

   

 

 

 

Total liabilities and deficit

   $ 3,363      $ 3,137   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

MOMENTIVE SPECIALTY CHEMICALS INC. (Unaudited)

 

     Six Months Ended June 30,  

(In millions)

       2011             2010      

Cash flows used in operating activities

    

Net income

   $ 126      $ 45   

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and amortization

     86        86   

Pushdown of income recovered by owner

     —          (28

Deferred tax (benefit) expense

     (12     2   

Write-off of deferred financing fees

     —          7   

Non-cash asset impairments

     18        —     

Other non-cash adjustments

     (5     8   

Net change in assets and liabilities:

    

Accounts receivable

     (218     (236

Inventories

     (83     (89

Accounts and drafts payable

     138        111   

Income taxes payable

     2        3   

Other assets, current and non-current

     18        (15

Other liabilities, current and long-term

     (113     (2
  

 

 

   

 

 

 

Net cash used in operating activities

     (43     (108
  

 

 

   

 

 

 

Cash flows provided by (used in) investing activities

    

Capital expenditures

     (71     (47

Capitalized interest

     —          (1

Purchases of debt securities

     —          (2

Change in restricted cash

     2        4   

Deconsolidation of variable interest entities

     —          (4

(Funds remitted to) dividends from unconsolidated affiliates, net

     (1     3   

Proceeds from sale of businesses, net of cash transferred

     173        —     

Proceeds from sale of assets

     —          12   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     103        (35
  

 

 

   

 

 

 

Cash flows (used in) provided by financing activities

    

Net short-term debt repayments

     (8     —     

Borrowings of long-term debt

     409        1,379   

Repayments of long-term debt

     (451     (1,222

Long-term debt and credit facility financing fees

     (1     (33
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (51     124   
  

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     3        (4

Increase (decrease) in cash and cash equivalents

     12        (23

Cash and cash equivalents (unrestricted) at beginning of period

     180        135   
  

 

 

   

 

 

 

Cash and cash equivalents (unrestricted) at end of period

   $ 192      $ 112   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for:

    

Interest, net

   $ 135      $ 97   

Income taxes, net of cash refunds

     12        20   

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED STATEMENT OF DEFICIT AND COMPREHENSIVE INCOME

MOMENTIVE SPECIALTY CHEMICALS INC. (Unaudited)

 

(In millions)

  Common
Stock
    Paid-in
Capital
    Treasury
Stock
    Note
Receivable
From Parent
    Accumulated
Other
Comprehensive
Income (a)
    Accumulated
Deficit
    Total Momentive
Specialty
Chemicals Inc.
Members’ Deficit
    Noncontrolling
Interest
    Total  

Balance at December 31, 2010

  $ 1      $ 324      $ (296   $ (24   $ 88      $ (2,115   $ (2,022   $ 3      $ (2,019

Net income

    —          —          —          —          —          126        126        —          126   

Translation adjustments

    —          —          —          —          51        —          51        —          51   
             

 

 

   

 

 

   

 

 

 

Comprehensive income

                177        —          177   
             

 

 

   

 

 

   

 

 

 

Stock-based compensation expense

    —          3        —          —          —          —          3        —          3   

Distribution declared to parent

    —          (1     —          —          —          —          (1     —          (1

Divestiture of IAR business

    —          —          —          —          —          —          —          (2     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

  $ 1      $ 326      $ (296   $ (24   $ 139      $ (1,989   $ (1,843   $ 1      $ (1,842
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Accumulated other comprehensive income at June 30, 2011 represents $224 of net foreign currency translation gains, net of tax, $2 of net deferred losses on cash flow hedges and a $83 unrealized loss, net of tax, related to net actuarial losses and prior service costs for the Company’s defined benefit pension and postretirement plans. Accumulated other comprehensive income at December 31, 2010 represents $173 of net foreign currency translation gains, net of tax, $2 of net deferred losses on cash flow hedges and a $83 unrealized loss, net of tax, related to net actuarial losses and prior service costs for the Company’s defined benefit pension and postretirement benefit plans.

See Notes to Condensed Consolidated Financial Statements

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In millions, except share and common unit data)

1. Background and Basis of Presentation

Based in Columbus, Ohio, Momentive Specialty Chemicals Inc., (which may be referred to as “MSC” or the “Company”) serves global industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. The Company’s business is organized based on the products offered and the markets served. At June 30, 2011, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins.

The Company’s direct parent is Momentive Specialty Chemicals Holdings LLC (“MSC Holdings”), a holding company and wholly owned subsidiary of Momentive Performance Materials Holdings LLC (“Momentive Holdings”), the ultimate parent entity of MSC. Momentive Holdings is controlled by investment funds (the “Apollo Funds”) managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”). Apollo may also be referred to as the Company’s owner.

Basis of Presentation—The unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights and variable interest entities (“VIEs”) in which the Company has a controlling financial interest. Intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, all adjustments consisting of normal, recurring adjustments, except for the adoption of new accounting standards discussed in Note 2 below, considered necessary for a fair statement, have been included. Results for the interim periods are not necessarily indicative of results for the entire year.

Year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Pursuant to the rules and regulations of the Securities and Exchange Commission, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited financial statements should be read in conjunction with the audited financial statements and the accompanying notes included in the Company’s most recent Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Impairment—The Company reviews long-lived definite-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is based on estimated undiscounted cash flows. Measurement of the loss, if any, is based on the difference between the carrying value and fair value.

During the six months ended June 30, 2011, as a result of the loss of a large customer that went out of business in the second quarter of 2011 and continued competitive pressures resulting in successive periods of negative cash flows associated with certain assets within the Company’s European forest products business, the Company recorded impairments of $18 on certain of its long-lived assets in its Forest Products Resins segment.

Subsequent Events—The Company has evaluated events and transactions subsequent to June 30, 2011 through September 22, 2011, the date of issuance of its unaudited Condensed Consolidated Financial Statements.

Reclassifications—Certain prior period balances have been reclassified to conform with current presentations.

 

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Recently Issued Accounting Standards

Newly Adopted Accounting Standards

There were no newly issued accounting standards adopted by the Company in the first half of 2011.

Newly Issued Accounting Standards

In September 2011, the FASB issued Accounting Standards Update No. 2011-08: Testing for Goodwill Impairment (“ASU 2011-08”). ASU 2011-08 amends current goodwill impairment testing guidance by providing entities with an option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 will be effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. The Company is currently assessing the impact of ASU 2011-08 on its annual goodwill impairment test, as well as whether it will elect to early adopt ASU 2011-08 for its annual goodwill impairment test for the year ended December 31, 2011.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05: Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends current presentation guidance by eliminating the option for an entity to present the components of comprehensive income as part of the statement of changes in stockholder’s equity and requires presentation of comprehensive income in a single continuous financial statement or in two separate but consecutive financial statements. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 will be effective for the Company on January 1, 2012. The Company is currently assessing the impact of ASU 2011-05 to the presentation of its Statement of Comprehensive Income within its unaudited financial statements.

3. Discontinued Operations

North American Coatings and Composites Resins business

On May 31, 2011, the Company sold its North American coatings and composites resins (“CCR”) business to PCCR USA, Inc. (“PCCR”), a subsidiary of Investindustrial, a European investment group. The CCR business is engaged in the production of coating resins for architectural and original equipment manufacturers, alkyd resins, as well as composite resins for construction, transportation, consumer goods, marine and other applications and includes four manufacturing facilities in the United States.

In conjunction with the sale, as part of a Transitional Services Agreement, the Company is providing certain transitional services to PCCR for a period of nine months, with an option held by PCCR to extend the Transitional Services Agreement by three months. The purpose of these services is to provide short-term assistance to PCCR in assuming the operations of the CCR business. These services do not confer to the Company the ability to influence the operating or financial policies of the CCR business under its new ownership. The Company’s cash inflows and outflows from these services are expected to be insignificant during the transition period.

For the six months ended June 30, 2011, the CCR business had net sales of $114 and pre-tax loss of $3. The CCR business had net sales of $113 for the six months ended June 30, 2010 and pre-tax loss of $1 for the six months ended June 30, 2010. The CCR business is reported as a discontinued operation for all periods presented and was previously included in the Coatings segment in 2010 and the Epoxy, Phenolic and Coating Resins segment beginning in 2011 as a result of the Company’s change in reportable segments in the first quarter of 2011 (see Note 9).

In addition, the Company incurred approximately $2 of transaction and other costs for the six months ended June 30, 2011. The Company recorded a loss on sale of the CCR business of $1 in the six months ended June 30, 2011.

 

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IAR business

On January 31, 2011, the Company sold its Inks and Adhesive Resins (“IAR”) business to Harima Chemicals Inc. (“Harima”) for a purchase price of $120. The IAR business is engaged in the production of naturally derived resins and related products primarily used for the manufacture of printing inks, adhesives, synthetic rubber, specialty coatings and aroma chemicals and includes 11 manufacturing facilities in the United States, Europe and the Asia-Pacific region.

Harima also paid $14 for cash and $8 for working capital transferred to Harima at the time of closing as part of the Purchase Agreement, less indebtedness and pension plan liability transferred to Harima of $4. In the first quarter of 2011, a subsequent adjustment to the purchase price of $2 was accrued based upon the final expected working capital settlement as defined by the Purchase Agreement.

In conjunction with the sale, as part of a Transitional Services Agreement, the Company is providing certain transitional services to Harima for a period of six months. The purpose of these services is to provide short-term assistance to Harima in assuming the operations of the IAR business. These services do not confer to the Company the ability to influence the operating or financial policies of the IAR business under its new ownership. The Company’s cash inflows and outflows from these services are expected to be insignificant during the transition period.

The IAR business had net sales of $31 and pre-tax income of $6 for the six months ended June 30, 2011. For the six months ended June 30, 2010, the IAR business had net sales of $163 and pre-tax income of $9. The IAR business is reported as a discontinued operation for all periods presented.

In addition, the Company incurred approximately $4 in transaction and other costs for the year ended December 31, 2010. The Company accrued a loss on sale of the IAR business of $1 in the fourth quarter of 2010.

The aggregate carrying values of the IAR and CCR businesses were $140 and $44, respectively, as of December 31, 2010. The major classes of assets and liabilities of discontinued operations included in the unaudited Condensed Consolidated Balance Sheets are as follows:

 

     December 31, 2010  
     IAR business      CCR business      Total
Discontinued
Operations
 

Assets:

        

Accounts Receivable

   $ 69       $ 20       $ 89   

Inventories

     42         21         63   

Other current assets

     6         1         7   
  

 

 

    

 

 

    

 

 

 

Total current assets

     117         42         159   
  

 

 

    

 

 

    

 

 

 

Property and equipment, net

     54         21         75   

Other intangible assets, net

     6         —           6   

Other assets

     3         —           3   
  

 

 

    

 

 

    

 

 

 

Total noncurrent assets

     63         21         84   
  

 

 

    

 

 

    

 

 

 

Total assets of discontinued operations

   $ 180       $ 63       $ 243   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Accounts and drafts payable

   $ 24       $ 16       $ 40   

Other current liabilities

     7         3         10   
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     31         19         50   
  

 

 

    

 

 

    

 

 

 

Long-term debt

     4         —           4   

Other long-term liabilities

     5         —           5   
  

 

 

    

 

 

    

 

 

 

Total noncurrent liabilities

     9         —           9   
  

 

 

    

 

 

    

 

 

 

Total liabilities of discontinued operations

   $ 40       $ 19       $ 59   
  

 

 

    

 

 

    

 

 

 

 

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4. Related Party Transactions

Administrative Service, Management and Consulting Arrangements

The Company is subject to a seven-year Amended and Restated Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) that terminates on May 31, 2012 with an automatic one year extension provided on an annual basis, unless notice to the contrary is given by either party. Under the Management Consulting Agreement, the Company receives certain structuring and advisory services from Apollo and its affiliates. The Management Consulting Agreement provides indemnification to Apollo, its affiliates and their directors, officers and representatives for potential losses arising from these services. Apollo is entitled to an annual fee equal to the greater of $3 or 2% of the Company’s Adjusted EBITDA. Apollo elected to defer payment of any portion of the annual fee due in excess of $3 for the years ended December 31, 2011, 2010, 2008 and 2007. Due to the economic downturn, Apollo elected to waive payment of the 2009 fee in its entirety.

During the six months ended June 30, 2011, the Company recognized expense under the Management Consulting Agreement of $2. These amounts are included in Other operating expense, net in the Company’s unaudited Condensed Consolidated Statements of Operations.

Apollo Notes Registration Rights Agreements

On November 5, 2010, in connection with the issuance of the Company’s 9.00% Second-Priority Senior Secured Notes due 2020, the Company entered into a separate registration rights agreement with Apollo. The registration rights agreements give Apollo the right to make three requests by written notice to the Company specifying the maximum aggregate principal amount of notes to be registered. The agreements require the Company to file a registration statement with respect to the notes it issued to Apollo as promptly as possible following receipt of each such notice. There are no cash or additional penalties under the registration rights agreements resulting from delays in registering the notes.

Shared Services Agreement

On October 1, 2010, the Company entered into a shared services agreement, as amended on March 17, 2011, with Momentive Performance Materials Inc. (“MPM”). Pursuant to the shared services agreement, the Company will provide to MPM, and MPM will provide to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, technology development, legal and procurement services. The shared services agreement establishes certain criteria upon which the costs of such services will be allocated between the Company and MPM. Allocation of service costs not demonstrably attributable to either the Company or MPM will initially be 51% to the Company and 49% to MPM, except to the extent that 100% of any cost was demonstrably attributable to or for the benefit of either MPM or the Company, in which case the total cost was allocated 100% to such party. The Shared Services Agreement remains in effect until terminated according to its terms. MPM or the Company may terminate the agreement for convenience, without cause, by giving written notice not less than thirty (30) days prior to the effective date of termination. It is also anticipated that the Company and MPM will cooperate to achieve favorable pricing with respect to purchases of raw materials and logistics services.

Pursuant to this agreement, during the six months ended June 30, 2011, the Company incurred approximately $94 of costs for shared services and MPM incurred approximately $83 of costs for shared services (excluding, in each case, costs allocated 100% to one party). During the six months ended June 30, 2011, the Company realized approximately $14 in cost savings as a result of the Shared Services Agreement. MSC billed MPM approximately $4 which represents a true-up payment to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to 51% for the Company and 49% for MPM. The true-up amount is included in Other operating expense, net, in the unaudited Condensed Consolidated Statements of Operations. The Company has accounts receivable from MPM of $4 at June 30, 2011 and accounts payable to MPM of $1 as of December 31, 2010.

 

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Financing Agreements

In connection with the terminated Huntsman merger and related litigation settlement agreement and release among the Company, Huntsman and other parties entered into on December 14, 2008, the Company paid Huntsman $225. The settlement payment was funded to the Company by an advance from Apollo, while reserving all rights with respect to reallocation of the payments to other affiliates of Apollo. Under the provisions of the settlement agreement and release, the Company is only contractually obligated to reimburse Apollo for any insurance recoveries on the $225 settlement payment, net of expense incurred in obtaining such recoveries. Apollo has agreed that the payment of any such insurance recoveries will satisfy the Company’s obligation to repay amounts received under the $225 advance. The Company has recorded the $225 settlement payment advance as a long-term liability at June 30, 2011. As of June 30, 2011, the Company has not recovered any insurance proceeds related to the $225 settlement payment.

In addition, certain affiliates of Apollo have agreed to make a $200 investment in Momentive Holdings. Certain affiliates of Apollo have entered into a commitment letter with the Company and MSC Holdings pursuant to which they committed to purchase $200 in preferred units and warrants to purchase 28,785,935 common units of Momentive Holdings by December 31, 2011. The preferred units have an aggregate liquidation value equal to $200, plus accrued but unpaid distributions. Momentive Holdings has agreed to contribute any proceeds from the issuance of preferred or common units under this agreement as a capital contribution to MSC Holdings, and MSC Holdings has agreed to contribute such amounts as a capital contribution to the Company.

In conjunction with and prior to the purchase of all the preferred shares and warrants, certain affiliates of Apollo also committed to provide liquidity facilities to the Company on an interim basis. The aggregate liquidity facilities outstanding, together with the purchase price for any purchased preferred shares and warrants, will at no time exceed $200. In connection therewith, the Company has $100 in term loans outstanding with affiliates of Apollo which will mature on December 31, 2011, with interest at adjusted LIBOR plus 2.25%. The Company also has $2 outstanding with an affiliate of Apollo, which is due upon demand. The weighted average interest rate of affiliated borrowings at June 30, 2011 was 2.57%.

Purchase of MSC Holdings debt

In 2009, the Company purchased $180 in face value of the outstanding MSC Holdings LLC PIK Debt Facility for $24, including accrued interest. The loan receivable from MSC Holdings has been recorded at its acquisition value of $24 as a reduction of equity in the unaudited Condensed Consolidated Statement of Deficit and Comprehensive Income as MSC Holdings is the Company’s parent. In addition, at June 30, 2011 the Company has not recorded accretion of the purchase discount or interest income as ultimate receipt of these cash flows is under the control of MSC Holdings. The Company will continue to assess the collectibility of these cash flows to determine future amounts to record, if any.

Purchases and Sales of Products and Services with Apollo Affiliates

The Company sells products to certain Apollo affiliates and members of Momentive Holdings. These sales were $1 for each of the six months ended June 30, 2011 and 2010. Accounts receivable from these affiliates were $1 and less than $1 at June 30, 2011 and December 31, 2010, respectively. The Company also purchases raw materials and services from certain Apollo affiliates. These purchases were $20 and $7 for the six months ended June 30, 2011 and 2010, respectively. The Company had accounts payable to Apollo affiliates of $2 and $1 at June 30, 2011 and December 31, 2010, respectively.

Other Transactions and Arrangements

The Company sells finished goods to and purchases raw materials from its foundry joint venture between the Company and Delta-HA, Inc. (“HAI”). The Company also provides toll-manufacturing and other services to

 

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HAI. The Company’s investment in HAI is recorded under the equity method of accounting and the related sales and purchases are not eliminated from the Company’s unaudited Condensed Consolidated Financial Statements. However, any profit on these transactions is eliminated in the Company’s unaudited Condensed Consolidated Financial Statements to the extent of the Company’s 50% interest in HAI. Sales and services provided to HAI were $77 and $45 for the six months ended June 30, 2011 and 2010, respectively. Accounts receivable from HAI were $21 and $13 at June 30, 2011 and December 31, 2010, respectively. Purchases from HAI were $46 for each of the six months ended June 30, 2011 and 2010. The Company had accounts payable to HAI of $7 and $2 at June 30, 2011 and December 31, 2010, respectively. Additionally, HAI declared a dividend of $5 and $4 in the six months ended June 30, 2011 and 2010, respectively. No amounts remain outstanding related to these previously declared dividends as of June 30, 2011.

The Company’s purchase contracts with HAI represent a significant portion of HAI’s total revenue. In addition, the Company has pledged its member interest in HAI as collateral on HAI’s revolving line of credit. These factors result in the Company absorbing the majority of the risk to potential losses or gains from a majority of the expected returns. However, the Company does not have the power to direct the activities that most significantly impact HAI, and therefore, does not have a controlling financial interest. The carrying value of HAI’s assets were $51 and $44 at June 30, 2011 and December 31, 2010, respectively. The carrying value of HAI’s liabilities were $27 and $22 at June 30, 2011 and December 31, 2010, respectively.

The Company has a loan receivable from its unconsolidated forest products joint venture in Russia of $4 as of June 30, 2011 and December 31, 2010.

5. Fair Value

Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:

 

   

Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.

 

   

Level 3: Unobservable inputs, for example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

Recurring Fair Value Measurements

Following is a summary of assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

 

     Fair Value Measurements Using      Total  
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
    Unobservable Inputs
(Level 3)
    

June 30, 2011

          

Derivative liabilities

   $ —         $ (9   $ —         $ (9

December 31, 2010

          

Derivative liabilities

     —           (10     —           (10

Level 1 primarily consists of financial instruments traded on exchange or futures markets. Level 2 includes those derivative instruments transacted primarily in over the counter markets.

 

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The Company calculates the fair value of its derivative liabilities using quoted market prices whenever available. When quoted market prices are not available, the Company uses standard pricing models with market-based inputs, adjusted for nonperformance risk. When its financial instruments are in a liability position, the Company evaluates its credit risk as a component of fair value. At June 30, 2011 and December 31, 2010, no adjustment was made by the Company to reduce its derivative liabilities for nonperformance risk.

When its financial instruments are in an asset position, the Company is exposed to credit loss in the event of nonperformance by other parties to these contracts and evaluates their credit risk as a component of fair value.

Non-recurring Fair Value Measurements

Following is a summary of losses as a result of the Company measuring assets at fair value on a non-recurring basis during the six months ended June 30, 2011:

 

     Six months
ended June 30,
2011
 

Long-lived assets held and used

   $ 18   

As a result of the loss of a large customer that went out of business in the second quarter of 2011 and continued competitive pressures resulting in successive periods of negative cash flows associated with certain assets within the Company’s European forest products business, the Company has written down long-lived assets with a carrying value of $29 to fair value of $11, resulting in an impairment charge of $18 for the six months ended June 30, 2011. These assets were valued using a discounted cash flow analysis based on assumptions that market participants would use and incorporates probability-weighted cash flows based on the likelihood of various possible scenarios. Key inputs in the model included projected revenues, operating expenses, and asset usage charges associated with certain intangible assets.

Non-derivative Financial Instruments

The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:

 

     June 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Debt

   $ 3,641       $ 3,627       $ 3,672       $ 3,708   

Fair values of debt are determined from quoted, observable market prices, where available, based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. The carrying amounts of cash and cash equivalents, accounts receivable, accounts and drafts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

6. Derivative Instruments and Hedging Activities

Derivative Financial Instruments

The Company is exposed to certain risks related to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange risk, interest rate risk and commodity price risk. The Company does not hold or issue derivative financial instruments for trading purposes.

 

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Foreign Exchange Rate Swaps

International operations account for a significant portion of the Company’s revenue and operating income. The Company’s policy is to reduce foreign currency cash flow exposure from exchange rate fluctuations by hedging anticipated and firmly committed transactions when it is economically feasible. The Company periodically enters into forward contracts to buy and sell foreign currencies to reduce foreign exchange exposure and protect the U.S. dollar value of certain transactions to the extent of the amount under contract. The counter-parties to our forward contracts are financial institutions with investment grade ratings. The Company does not apply hedge accounting to these derivative instruments.

Interest Rate Swaps

The Company periodically uses interest rate swaps to alter interest rate exposures between fixed and floating rates on certain long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated using an agreed-upon notional principal amount. The counter-parties to the interest rate swap agreements are financial institutions with investment grade ratings.

In January 2007, the Company entered into an interest rate swap agreement. This swap is designed to offset the cash flow variability that results from interest rate fluctuations on the Company’s variable rate debt and matured in the first quarter of 2011. The Company previously accounted for the swap as a qualifying cash flow hedge.

In February 2007, the Company entered into interest rate swap agreements to offset the cash flow variability that results from interest rate fluctuations on the Company’s Australian variable rate debt. The Company has not applied hedge accounting to this derivative instrument.

In July 2010, the Company entered into a two-year interest rate swap agreement . This swap is designed to offset the cash flow variability that results from interest rate fluctuations on the Company’s variable rate debt. This swap became effective on January 4, 2011 upon the expiration of the January 2007 interest rate swap. The initial notional amount of the swap is $350, and will subsequently be amortized down to $325. The Company pays a fixed rate of 1.032% and will receive a variable one month LIBOR rate. The Company accounts for the swap as a qualifying cash flow hedge.

Commodity Contracts

The Company hedges a portion of its electricity purchases for certain North American plants. The Company enters into forward contracts with fixed prices to hedge electricity pricing at these plants. Any unused electricity is net settled for cash each month based on the market electricity price versus the contract price. The Company also hedges a portion of its natural gas purchases for certain North American plants. The Company uses futures contracts to hedge natural gas pricing at these plants. The natural gas contracts are settled for cash each month based on the closing market price on the last day the contract trades on the New York Mercantile Exchange. The Company does not apply hedge accounting to these electricity or natural gas future contracts.

 

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The following tables summarize the Company’s derivative financial instruments:

 

          June 30, 2011     December 31, 2010  

Liability Derivatives

  

Balance Sheet Location

   Notional
Amount
     Fair Value
Liability
    Notional
Amount
     Fair  Value
Liability
 

Derivatives designated as hedging instruments

             

Interest Rate Swaps

             

Interest swap—2007

   Other current liabilities    $ —         $ —        $ 375       $ (5

Interest swap—2010

   Other current liabilities      350         (3     350         (2
        

 

 

      

 

 

 

Total derivatives designated as hedging instruments

         $ (3      $ (7
        

 

 

      

 

 

 

Derivatives not designated as hedging instruments

             

Foreign Exchange and Interest Rate Swaps

             

Cross-Currency and Interest Rate Swap

   Other current liabilities    $ 25       $ (5   $ 25       $ (3

Interest Rate Swap

             

Interest swap—Australia Multi-Currency Term

   Other current liabilities      22         —          22         —     

Commodity Contracts

             

Electricity contracts

   Other current liabilities      3         (1     4         —     

Natural gas futures

   Other current liabilities      2         —          2         —     
        

 

 

      

 

 

 

Total derivatives not designated as hedging instruments

         $ (6      $ (3
        

 

 

      

 

 

 

 

Derivatives in Cash Flow

Hedging Relationship

   Amount of Loss
Recognized in OCI on Derivative
for the six months ended:
   

Location of Loss
Reclassified from
Accumulated OCI into
Income

   Amount of Loss Reclassified
from Accumulated OCI
into Income for the six
months ended:
 
   June 30, 2011     June 30, 2010        June 30,
2011
    June 30,
2010
 

Interest Rate Swaps

           

Interest swap—2007

   $ —        $ (1   Interest expense, net    $ —        $ (13

Interest swap—2010

     (2     —        Interest expense, net      (2     —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total

   $ (2   $ (1      $ (2   $ (13
  

 

 

   

 

 

      

 

 

   

 

 

 

 

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     Amount of (Loss) Gain
Recognized in Income on
Derivative for the six months
ended:
   

Location of (Loss) Gain Recognized in
Income on Derivative

Derivatives Not Designated as Hedging Instruments

   June 30,
2011
    June 30,
2010
   

Foreign Exchange and Interest Rate Swaps

      

Cross-Currency and Interest Rate Swap

   $ (2   $ 4      Other non-operating expense, net

Interest Rate Swap

      

Interest swap—Australia Multi-Currency Term

     —          1      Other non-operating expense, net

Commodity Contracts

      

Electricity contracts

     (1     1      Cost of sales

Natural gas futures

     —          (1   Cost of sales
  

 

 

   

 

 

   

Total

   $ (3   $ 5     
  

 

 

   

 

 

   

7. Commitments and Contingencies

Environmental Matters

The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation at the federal, state and local levels as well as foreign laws and regulations, and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at June 30, 2011 and December 31, 2010:

 

     Number of Sites      Liability      Range of
Reasonably
Possible Costs
 

Site Description

   June 30, 2011      December 31,
2010
     June 30, 2011      December 31,
2010
     Low      High  

Geismar, LA

     1         1       $ 17       $ 17       $ 10       $ 25   

Superfund and offsite landfills—allocated share:

                 

Less than 1%

     28         29         1         1         1         2   

Equal to or greater than 1%

     12         12         7         7         6         13   

Currently-owned

     18         21         7         9         4         12   

Formerly-owned:

                 

Remediation

     10         10         1         1         1         10   

Monitoring only

     6         7         1         1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     75         80       $ 34       $ 36       $ 22       $ 63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

These amounts include estimates for unasserted claims that the Company believes are probable of loss and reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based. To establish the upper end of a range, assumptions less favorable to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ materially from these estimates. At June 30, 2011 and December 31, 2010, $10 and $10, respectively, has been included in Other current liabilities in the unaudited Condensed Consolidated Balance Sheets with the remaining amount included in Other long-term liabilities.

 

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Following is a discussion of the Company’s environmental liabilities and the related assumptions at June 30, 2011:

Geismar, LA Site—The Company formerly owned a basic chemicals and polyvinyl chloride business that was taken public as Borden Chemicals and Plastics Operating Limited Partnership (“BCPOLP”) in 1987. The Company retained a 1% interest, the general partner interest and the liability for certain environmental matters after BCPOLP’s formation. Under a Settlement Agreement approved by the United States Bankruptcy Court for the District of Delaware among the Company, BCPOLP, the United States Environmental Protection Agency and the Louisiana Department of Environmental Quality, the Company agreed to perform certain of BCPOLP’s obligations for soil and groundwater contamination at BCPOLP’s Geismar, Louisiana site. The Company bears the sole responsibility for these obligations because there are no other potentially responsible parties (“PRP”) or third parties from whom the Company could seek reimbursement.

A groundwater pump and treat system to remove contaminants is operational, and natural attenuation studies are proceeding. If closure procedures and remediation systems prove to be inadequate, or if additional contamination is discovered, costs that would approach the higher end of the range of possible outcomes could result.

Due to the long-term nature of the project, the reliability of timing and the ability to estimate remediation payments, a portion of this liability was recorded at its net present value, assuming a 3% discount rate and a time period of 28 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 28 years, is approximately $24. Over the next five years, the Company expects to make ratable payments totaling $6.

Superfund Sites and Offsite Landfills—The Company is currently involved in environmental remediation activities at a number of sites for which it has been notified that it is, or may be, a PRP under the United States Comprehensive Environmental Response, Compensation and Liability Act or similar state “superfund” laws. The Company anticipates approximately 50% of the estimated liability for these sites will be paid within the next five years, with the remainder over the next twenty-five years. The Company generally does not bear a significant level of responsibility for these sites, and as a result, has little control over the costs and timing of cash flows.

The Company’s ultimate liability will depend on many factors including its share of waste volume, the financial viability of other PRPs, the remediation methods and technology used, the amount of time necessary to accomplish remediation and the availability of insurance coverage. The range of possible outcomes takes into account the maturity of each project, resulting in a more narrow range as the project progresses. To estimate both its current reserves for environmental remediation at these sites and the possible range of additional costs, the Company has not assumed that it will bear the entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and severally liable. The Company has limited information to assess the viability of other PRPs and their probable contribution on a per site basis. The Company’s insurance provides very limited, if any, coverage for these environmental matters.

Sites Under Current Ownership—The Company is conducting environmental remediation at a number of locations that it currently owns, of which eight sites are no longer in operation. As the Company is performing a portion of the remediation on a voluntary basis, it has some control over the costs to be incurred and the timing of cash flows. The Company expects to pay approximately $8 of these liabilities within the next five years, with the remainder over the next ten years. The factors influencing the ultimate outcome include the methods of remediation elected, the conclusions and assessment of site studies remaining to be completed, and the time period required to complete the work. No other parties are responsible for remediation at these sites.

Formerly-Owned Sites—The Company is conducting environmental remediation at a number of locations that it formerly owned. The final costs to the Company will depend on the method of remediation chosen and the level of participation of third parties.

 

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In addition, the Company is responsible for a number of sites that require monitoring where no additional remediation is expected. The Company has established reserves for costs related to these sites. Payment of these liabilities is anticipated to occur over the next ten or more years. The ultimate cost to the Company will be influenced by fluctuations in projected monitoring periods or by findings that are different than anticipated.

Indemnifications—In connection with the acquisition of certain of the Company’s operating businesses, the Company has been indemnified by the sellers against certain liabilities of the acquired businesses, including liabilities relating to both known and unknown environmental contamination arising prior to the date of the purchase. The indemnifications may be subject to certain exceptions and limitations, deductibles and indemnity caps. While it is reasonably possible that some costs could be incurred, except for those sites identified above, the Company has inadequate information to allow it to estimate a potential range of liability, if any.

Non-Environmental Legal Matters

The Company is involved in various legal proceedings in the ordinary course of business and has reserves of $8 and $11 at June 30, 2011 and December 31, 2010, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At June 30, 2011 and December 31, 2010, $4 and $5, respectively, have been included in Other current liabilities in the unaudited Condensed Consolidated Balance Sheets with the remaining amount included in Other long-term liabilities.

Following is a discussion of significant non-environmental legal proceedings:

Brazil Tax Claim—In 1992, the State of Sao Paulo Administrative Tax Bureau issued an assessment against the Company’s Brazilian subsidiary claiming that excise taxes were owed on certain intercompany loans made for centralized cash management purposes. These loans were characterized by the Tax Bureau as intercompany sales. Since that time, management and the Tax Bureau have held discussions and the subsidiary filed an administrative appeal seeking cancellation of the assessment. The Administrative Court upheld the assessment in December 2001. In 2002, the subsidiary filed a second appeal with the highest-level Administrative Court, again seeking cancellation of the assessment. In February 2007, the highest-level Administrative Court upheld the assessment. The Company requested a review of this decision. On April 23, 2008, the Brazilian Administrative Tax Tribunal issued its final decision upholding the assessment against the subsidiary. The Company filed an Annulment action in the Brazilian Judicial Courts in May 2008 along with a request for an injunction to suspend the tax collection. The injunction was denied but the Annulment action is being pursued. The Company has pledged certain properties and assets in Brazil during the pendency of the Annulment action in lieu of paying the assessment. In September 2010, in the Company’s favor, the Court adopted its appointed expert’s report finding that the transactions in question were intercompany loans. Sao Paulo has mandatory appeal rights but the Court’s decision based on the facts is likely to be upheld and therefore, the Company does not believe a loss is probable. At June 30, 2011, the amount of the assessment, including tax, penalties, monetary correction and interest, is 67 Brazilian reais, or approximately $43.

Formosa Plant—Several lawsuits were filed in Sangamon County, Illinois in May 2006 against the Company on behalf of individuals injured or killed in an explosion at a Formosa Plastics Corporation (“Formosa”) plant in Illiopolis, Illinois that occurred on April 23, 2004. The Company sold the facility in 1987. The facility was operated by BCPOLP until it was sold to Formosa out of BCPOLP’s bankrupt estate in 2002. In March 2007, an independent federal agency found that operator errors caused the explosion, but that current and former owners could have implemented systems to minimize the impacts from these errors. In March 2008, the Company filed a motion for summary judgment. On May 19, 2011, four of the plaintiffs voluntarily withdrew their claims against the Company. On August 15, 2011, the Court granted the Company’s motion for summary judgment against the remaining plaintiffs, and it entered an order dismissing the Company from the lawsuit.

Hillsborough County—The Company is named in a lawsuit filed on July 12, 2004 in Hillsborough County, Florida Circuit Court, for an animal feed supplement processing site formerly operated by the Company and sold in 1980. The lawsuit is filed on behalf of multiple residents of Hillsborough County living near the site and it

 

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alleges various injuries from exposure to toxic chemicals. The Company does not have adequate information from which to estimate a potential range of liability, if any. The court dismissed a similar lawsuit brought on behalf of a class of plaintiffs in November 2005.

Environmental Institution of Paraná IAP—On August 10, 2005, Governo Do Paraná and the Environmental Institution of Paraná IAP, an environmental agency of the Brazilian government, provided Hexion Quimica Industria, our Brazilian subsidiary, with notice of a potential fine of up to $12 in connection with alleged environmental damages to the Port of Paranagua caused in November 2004 by an oil spill from a shipping vessel carrying methanol purchased by the Company. The investigation as to the cause of the accident has not been finalized. In early October 2009, the Company was granted an injunction precluding the imposition of any fines or penalties by the Paraná IAP which was filed in November 2010. The Company has filed an appeal to preclude the Paraná IAP from levying any assessment, and still believes it has a strong defense and does not believe a loss is probable. At June 30, 2011, the amount of the assessment, including tax, penalties, monetary correction and interest, is 27 Brazilian reais, or approximately $17.

Other Legal Matters—The Company is involved in various other product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings in addition to those described above, including actions that allege harm caused by products the Company has allegedly made or used, containing silica and asbestos. The Company believes it has adequate reserves and that it is not reasonably possible that a loss exceeding amounts already reserved would be material. Furthermore, the Company has insurance to cover claims of these types.

8. Pension and Postretirement Expense

Following are the components of net pension and postretirement expense (benefit) recognized by the Company for the six months ended June 30, 2011 and 2010:

 

     Pension Benefits     Non-Pension Postretirement Benefits  
     Six Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011      2010  
     U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
     U.S.
Plans
    Non-U.S.
Plans
 

Service cost

   $ 1      $ 4      $ 2      $ 4      $ —        $ —         $ —        $ —     

Interest cost on projected benefit obligation

     6        9        7        8        —          —           —          —     

Expected return on assets

     (8     (6     (8     (6     —          —           —          —     

Amortization of prior service cost (benefit)

     —          —          —          1        (5     —           (5     —     

Recognized actuarial loss

     4        —          4        —          —          —           —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net expense (benefit)

   $ 3      $ 7      $ 5      $ 7      $ (5   $ —         $ (5   $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

9. Segment Information

In the first quarter of 2011, the Company completed the sale of the IAR business and moved the oversight and management of the coatings reporting unit into the Epoxy and Phenolic Resins Division, which was renamed the Epoxy, Phenolic and Coating Resins Division. These organizational and internal reporting changes caused the Company to re-evaluate its reportable segments. As a result of these changes, effective in the first quarter of 2011, the results of the Company’s coatings reporting unit, which were previously reported in the Coatings segment, are included within the Epoxy, Phenolic and Coating Resins segment. The prior periods have been recast for comparability purposes. In addition, the Company has renamed its Formaldehyde and Forest Products Resins segment to Forest Products Resins. No changes were made to the product lines that comprise this segment.

 

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The Company’s business segments are based on the products that the Company offers and the markets that it serves. At June 30, 2011, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins. A summary of the major products of the Company’s reportable segments follows:

 

   

Epoxy, Phenolic and Coating Resins: epoxy specialty resins, oil field products, versatic acids and derivatives, basic epoxy resins and intermediates, phenolic specialty resins and molding compounds, polyester resins, acrylic resins and vinylic resins

 

   

Forest Products Resins: forest products resins and formaldehyde applications

In the second quarter of 2011, the Company sold its North American coatings and composites resins (“CCR”) business to PCCR USA, Inc. (“PCCR”), a subsidiary of Investindustrial, a European investment group. The CCR business was previously included in the Coatings segment in 2010 and the Epoxy, Phenolic and Coating Resins segment beginning in 2011 as a result of the change in the Company’s reportable segments discussed above. The CCR business is reported as a discontinued operation for all periods presented.

Reportable Segments

Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by reportable segment. Segment EBITDA is defined as EBITDA adjusted to exclude certain non-cash, other income and expenses and discontinued operations. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. Corporate and Other is primarily corporate general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions, foreign exchange gains and losses and legacy company costs not allocated to continuing segments.

Total assets by segment has been disclosed below due to the changes to the Company’s reportable segments in the first half of 2011.

Net Sales to Unaffiliated Customers (1)(2):

 

     Six months ended
June 30,
 
     2011      2010  

Epoxy, Phenolic and Coating Resins

   $ 1,818       $ 1,395   

Forest Products Resins

     914         808   
  

 

 

    

 

 

 
   $ 2,732       $ 2,203   
  

 

 

    

 

 

 

Segment EBITDA (2):

 

     Six months ended
June 30,
 
       2011         2010    

Epoxy, Phenolic and Coating Resins

   $ 307      $ 205   

Forest Products Resins

     95        92   

Corporate and Other

     (35     (26

 

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Total Assets (2):

 

     As of June 30,
2011
     As of December 31,
2010
 

Epoxy, Phenolic and Coating Resins

   $ 2,097       $ 1,815   

Forest Products Resins

     893         849   

Corporate and Other

     373         230   

Discontinued Operations

     —           243   
  

 

 

    

 

 

 
   $ 3,363       $ 3,137   
  

 

 

    

 

 

 

 

(1) Intersegment sales are not significant and, as such, are eliminated within the selling segment.
(2) The Company changed its reportable segments in the first quarter of 2011. Prior period balances have been recast to conform to the Company’s current reportable segments and to exclude the results of the CCR business, which is reported as a discontinued operation for all periods presented.

Reconciliation of Segment EBITDA to Net Income:

 

     Six Months Ended  June
30,
 
         2011             2010      

Segment EBITDA:

    

Epoxy, Phenolic and Coating Resins

   $ 307      $ 205   

Forest Products Resins

     95        92   

Corporate and Other

     (35     (26

Reconciliation:

    

Items not included in Segment EBITDA

    

Push-down of income recovered by owner

     —          28   

Asset impairments and other non-cash charges

     (21     (5

Unusual items:

    

Gain on divestiture of assets

     1        1   

Net income from discontinued operations

     2        7   

Other

     (7     (16
  

 

 

   

 

 

 

Total unusual items

     (4     (8
  

 

 

   

 

 

 

Total adjustments

     (25     15   

Loss on extinguishment of debt

     —          (8

Interest expense, net

     (129     (135

Income tax expense

     (3     (17

Depreciation and amortization

     (84     (81
  

 

 

   

 

 

 

Net income

   $ 126      $ 45   
  

 

 

   

 

 

 

Items not included in Segment EBITDA

Non-cash charges primarily represent stock-based compensation expense and unrealized derivative and foreign exchange gains and losses.

Not included in Segment EBITDA are certain non-cash and other income or expenses that are deemed by management to be unusual in nature. For the six months ended June 30, 2011, these items include asset impairments, business optimization expenses, retention program costs and realized foreign exchange gains and losses, offset by a gain recognized on the termination of an operator agreement with a customer. For the six months ended June 30, 2010, these items consisted of business realignment costs primarily related to expenses

 

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from the Company’s productivity program, realized foreign exchange gains and losses and retention program costs. For the six months ended June 30, 2010, these items also consist of financing fees incurred as part of refinancing transaction in the first half of 2010, partially offset by insurance settlements related to previous litigation matters.

10. Stock Option Plans and Stock-Based Compensation

On February 23, 2011, the Compensation Committee of the Board of Managers of Momentive Holdings approved the Momentive Performance Materials Holdings LLC 2011 Equity Incentive Plan (the “2011 Equity Plan”). Under the 2011 Equity Plan, Momentive Holdings can award unit options, unit awards, restricted units, restricted deferred units, and other unit-based awards. The restricted deferred units are non-voting units of measurement which are deemed to be equivalent to one common unit of Momentive Holdings. The unit options are options to purchase common units of Momentive Holdings. The awards contain restrictions on transferability and other typical terms and conditions.

The following is a summary of key terms of the stock-based awards granted to MSC employees under the 2011 Equity Plan on February 23, 2011:

 

Tranche

   Units
Granted
    

Vesting Terms

  

Option/Unit
Term

Unit Options:

         10 years

Tranche A Options

     2,755,594       Time-vest ratably over 4 years; Accelerated vesting six months after a change of control event as defined by the 2011 Equity Plan   

Tranche B Options

     1,377,787       Performance-based: Vest upon the earlier of i) two years from the achievement of the targeted common unit value and a realization event or ii) six months from a change of control event and the achievement of the targeted common unit value as defined by the 2011 Equity Plan   

Tranche C Options

     1,377,787       Performance-based: Vest upon the earlier of i) one year from the achievement of the targeted common unit value and a realization event or ii) six months from a change in control event and the achievement of the targeted common unit value as defined by the 2011 Equity Plan   

Restricted Deferred Units (“RDUs”):

         N/A

Tranche A RDUs

     918,535       Time-vest ratably over 4 years; Accelerated vesting six months from a change in control event as defined by the 2011 Equity Plan   

Tranche B RDUs

     459,258       Performance-based: Vest upon the earlier of i) two years from the achievement of the targeted common unit value and a realization event or ii) six months from a change of control event and the achievement of the targeted common unit value as defined by the 2011 Equity Plan   

Tranche C RDUs

     459,258       Performance-based: Vest upon the earlier of i) one year from the achievement of the targeted common unit value and a realization event or ii) six months from a change in control event and the achievement of the targeted common unit value as defined by the 2011 Equity Plan   

Unit Options

The Tranche A Options were granted with an aggregate grant date fair value of approximately $6. The fair value of each option was estimated at the grant date using a Black-Scholes option pricing model. The assumptions used to estimate the fair value were a 2.21% risk-free interest rate, a 6.25 year expected life, a 37.4% expected volatility rate and a 0% dividend rate. Compensation cost of $2 related to these awards was recognized during the six months ended June 30, 2011.

 

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The Tranche B and Tranche C Options were granted with performance and market conditions each with an aggregate grant date fair value of approximately $3. The fair value was estimated at the grant date using a Monte Carlo valuation method, which is a commonly accepted valuation model for awards with market and performance conditions. The Monte Carlo valuation method requires the use of a range of assumptions. The range of risk-free interest rates were 0.16% to 3.49%, expected volatility rates ranged from 34.5% to 41.5% and a 0% dividend rate. The expected life assumption is not used in the Monte Carlo valuation method, but the output of the model indicated a weighted-average expected life of 9.2 years. Compensation cost has not been recognized for the Tranche B and Tranche C Options during the six months ended June 30, 2011 because as of June 30, 2011, it is not probable the related options will vest. Compensation cost will be recognized over the service period once the satisfaction of the performance condition is probable.

Restricted Deferred Units

The Tranche A RDUs were granted with an aggregate grant date fair value of approximately $4. Compensation cost of $1 related to these awards was recognized during the six months ended June 30, 2011.

The Tranche B RDUs and Tranche C RDUs were granted each with an aggregate grant date fair value of approximately $2. The fair value was estimated at the grant date using the same Monte Carlo valuation method and assumptions. The RDUs have an indefinite life, thus the term used in the valuation model was 30 years, which resulted in a weighted-average expected life of 21.4 years. Compensation cost has not been recognized for the Tranche B RDUs and Tranche C RDUs during the six months ended June 30, 2011 because as of June 30, 2011, it is not probable the related restricted deferred units will vest. Compensation cost will be recognized over the service period once the satisfaction of the performance condition is probable.

Although the 2011 Equity Plan is issued by Momentive Holdings, the underlying compensation cost represents compensation costs paid for by Momentive Holdings on MSC’s behalf, as a result of the employees’ service to MSC. All compensation cost is recorded over the requisite service period on a graded-vesting basis and is included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Operations.

11. Other events

In the second quarter of 2011, the Company agreed to terminate an operator contract (“Contract”) with a customer in response to the customer’s desire to restructure certain of its manufacturing capacity. The customer agreed to pay the Company a one-time compensation payment of 16 euro, or approximately $23, of which 11 euro, or $15, was paid to the Company in the second quarter of 2011 with the remaining to be paid upon the Company’s disabling of the related manufacturing assets. The compensation payment represents a contract termination penalty and payment for all unpaid minimum obligations incurred by the customer to date under the Contract. The Company recorded a net gain of $21 for the six months ended June 30, 2011 related to the termination of the Contract, which represents the full compensation payment net of the Company’s estimated cost to disable the related manufacturing assets. The amount is recorded in Other operating income, net in the unaudited Condensed Consolidated Statements of Operations.

12. Guarantor/Non-Guarantor Subsidiary Financial Information

The Company and certain of its U.S. subsidiaries guarantee debt issued by its wholly owned subsidiaries Hexion Nova Scotia, ULC and Hexion U.S. Finance Corporation (together, the “Subsidiary Issuers”), which includes the 8.875% first priority senior secured notes due 2018, the floating rate second-priority senior secured notes due 2014 and the 9% second-priority notes due 2020.

 

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The following information contains the condensed consolidating financial information for MSC (the parent), the Subsidiary Issuers, the combined subsidiary guarantors (Momentive Specialty Chemical Investments Inc.; Borden Chemical Foundry; LLC, Lawter International Inc.; HSC Capital Corporation; Momentive International, Inc.; Momentive CI Holding Company; NL COOP Holdings LLC and Oilfield Technology Group, Inc.) and the combined non-guarantor subsidiaries, which includes all of the Company’s foreign subsidiaries.

All of the Subsidiary Issuers and subsidiary guarantors are 100% owned by MSC. All guarantees are full and unconditional, and are joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its domestic subsidiaries by dividend or loan. While the Company’s Australian, New Zealand and Brazilian subsidiaries are restricted in the payment of dividends and intercompany loans due to the terms of their credit facilities, there are no material restrictions on the Company’s ability to obtain cash from the remaining non-guarantor subsidiaries.

This information includes allocations of corporate overhead to the combined non-guarantor subsidiaries based on net sales. Income tax expense has been provided on the combined non-guarantor subsidiaries based on actual effective tax rates.

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

SIX MONTHS ENDED JUNE 30, 2011

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 

     Momentive
Specialty
Chemicals
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 1,180      $ —        $ —        $ 1,725      $ (173   $ 2,732   

Cost of sales

     955        —          —          1,526        (173     2,308   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     225        —          —          199        —          424   

Selling, general and administrative expense

     64        —          —          107        —          171   

Asset impairments

     —          —          —          18        —          18   

Other operating (income) expense, net

     (19     —          —          6        —          (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     180        —          —          68        —          248   

Interest expense, net

     35        75        —          19        —          129   

Intercompany interest expense (income)

     64        (90     —          26        —          —     

Other non-operating (income) expense, net

     (36     —          (1     35        —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax, earnings from unconsolidated entities

     117        15        1        (12     —          121   

Income tax (benefit) expense

     (19     2        —          20        —          3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before earnings from unconsolidated entities

     136        13        1        (32     —          118   

Earnings from unconsolidated entities, net of taxes

     8        —          15        —          (17     6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     144        13        16        (32     (17     124   

Net (loss) income from discontinued operations, net of tax

     (18     —          —          20        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 126      $ 13      $ 16      $ (12   $ (17   $ 126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

SIX MONTHS ENDED JUNE 30, 2010

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 

     Momentive
Specialty
Chemicals
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
     Combined
Non-

Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net sales

   $ 993      $ —        $ —         $ 1,433       $ (223   $ 2,203   

Cost of sales

     850        —          —           1,252         (223     1,879   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     143        —          —           181         —          324   

Selling, general and administrative expense

     53        —          —           105         —          158   

Push-down of income recovered by owner

     (28     —          —           —           —          (28

Other operating (income) expense, net

     (5     —          —           2         —          (3
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

     123        —          —           74         —          197   

Interest expense, net

     48        68        —           19         —          135   

Intercompany interest expense (income)

     63        (81     —           18         —          —     

Loss on extinguishment of debt

     8        —          —           —           —          8   

Other non-operating (income) expense, net

     (6     5        —           4         —          3   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income from continuing operations before income tax, earnings from unconsolidated entities

     10        8        —           33         —          51   

Income tax expense

     3        1        —           13         —          17   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income from continuing operations before earnings from unconsolidated entities

     7        7        —           20         —          34   

Earnings from unconsolidated entities, net of taxes

     39        —          13         —           (48     4   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income from continuing operations

     46        7        13         20         (48     38   

Net (loss) income from discontinued operations, net of tax

     (1     —          —           8         —          7   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 45      $ 7      $ 13       $ 28       $ (48   $ 45   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

JUNE 30, 2011

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

 

    Momentive
Specialty
Chemicals
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

           

Current assets

           

Cash and cash equivalents (including restricted cash of $0 and $4, respectively)

  $ 64      $ —        $ —        $ 132      $ —        $ 196   

Short-term investments

    —          —          —          6        —          6   

Accounts receivable, net

    238        —          —          573        —          811   

Inventories:

           

Finished and in-process goods

    153        —          —          193        —          346   

Raw materials and supplies

    46        —          —          93        —          139   

Other current assets

    19        —          —          67        —          86   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    520        —          —          1,064        —          1,584   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets

    9        39        41        95        (19     165   

Property and equipment, net

    514        —          —          809        —          1,323   

Goodwill

    93        —          —          82        —          175   

Other intangible assets, net

    62        —          —          54        —          116   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,198      $ 39      $ 41      $ 2,104      $ (19   $ 3,363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and (Deficit) Equity

           

Current liabilities

           

Accounts and drafts payable

  $ 186      $ —        $ —        $ 393      $ —        $ 579   

Intercompany accounts (receivable) payable

    (169     (42     —          211        —          —     

Debt payable within one year

    17        —          —          72        —          89   

Intercompany loans (receivable) payable

    (36     —          —          36        —          —     

Loans payable to affiliates

    2        —          —          —          —          2   

Interest payable

    13        44        —          2        —          59   

Income taxes payable

    —          2        —          18        —          20   

Accrued payroll and incentive compensation

    30        —          —          32        —          62   

Other current liabilities

    73        —          —          70        —          143   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    116        4        —          834        —          954   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

    1,143        1,687        —          620        —          3,450   

Affiliated long-term debt

    80        —          —          20        —          100   

Intercompany loans payable (receivable)

    1,259        (1,907     (15     663        —          —     

Long-term pension and post employment benefit obligations

    76        —          —          137        —          213   

Deferred income taxes

    25        2        —          80        —          107   

Other long-term liabilities

    117        6        —          33        —          156   

Advance from affiliates

    225        —          —          —          —          225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    3,041        (208     (15     2,387        —          5,205   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Momentive Specialty Chemicals Inc. shareholders (deficit) equity

    (1,843     247        56        (284     (19     (1,843

Noncontrolling interest

    —          —          —          1        —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (deficit) equity

    (1,843     247        56        (283     (19     (1,842
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and (deficit) equity

  $ 1,198      $ 39      $ 41      $ 2,104      $ (19   $ 3,363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

DECEMBER 31, 2010

CONDENSED CONSOLIDATING BALANCE SHEET

 

    Momentive
Specialty
Chemicals
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

           

Current assets

           

Cash and cash equivalents (including restricted cash of $0 and $6, respectively)

  $ 56      $ —        $ —        $ 130      $ —        $ 186   

Short-term investments

    —          —          —          6        —          6   

Accounts receivable, net

    115        —          —          412        —          527   

Inventories:

           

Finished and in-process goods

    122        —          —          144        —          266   

Raw materials and supplies

    35        —          —          74        —          109   

Other current assets

    31        —          —          48        —          79   

Discontinued operations

    102        —          —          141        —          243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    461        —          —          955        —          1,416   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets

    6        41        30        73        3        153   

Property and equipment, net

    497        —          —          770        —          1,267   

Goodwill

    93        —          —          76        —          169   

Other intangible assets, net

    62        —          —          70        —          132   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,119      $ 41      $ 30      $ 1,944      $ 3      $ 3,137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and (Deficit) Equity

           

Current liabilities

           

Accounts and drafts payable

  $ 137      $ —        $ —        $ 277      $ —        $ 414   

Intercompany accounts (receivable) payable

    (140     (46     —          186        —          —     

Debt payable within one year

    25        —          —          57        —          82   

Intercompany loans (receivable) payable

    (97     —          —          97        —          —     

Loans payable to affiliates

    2        —          —          —          —          2   

Interest payable

    21        46        —          2        —          69   

Income taxes payable

    7        —          —          17        —          24   

Accrued payroll and incentive compensation

    28        —          —          37        —          65   

Other current liabilities

    90        —          —          60        —          150   

Discontinued operations

    37        —          —          22        —          59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    110        —          —          755        —          865   

Long-term debt

    1,152        1,687        —          649        —          3,488   

Affiliated long-term debt

    80        —          —          20        —          100   

Intercompany loans payable (receivable)

    1,352        (1,887     (15     550        —          —     

Long-term pension and post employment benefit obligations

    83        —          —          125        —          208   

Deferred income taxes

    35        2        —          73        —          110   

Other long-term liabilities

    104        6        —          50        —          160   

Advance from affiliates

    225        —          —          —          —          225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    3,141        (192     (15     2,222        —          5,156   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Momentive Specialty Chemicals Inc. shareholders (deficit) equity

    (2,022     233        45        (281     3        (2,022

Noncontrolling interest

    —          —          —          3        —          3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (deficit) equity

    (2,022     233        45        (278     3        (2,019
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and (deficit) equity

  $ 1,119      $ 41      $ 30      $ 1,944      $ 3      $ 3,137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

SIX MONTHS ENDED JUNE 30, 2011

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

 

    Momentive
Specialty
Chemicals
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows (used in) provided by operating activities

  $ (97   $ —        $ 1      $ 53      $ —        $ (43
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) investing activities

           

Capital expenditures

    (46     —          —          (25     —          (71

Change in restricted cash

    —          —          —          2        —          2   

Funds remitted to unconsolidated affiliates, net of dividend

    5        —          4        (5     (5     (1

Dividend from subsidiary

    51        —          —          —          (51     —     

Proceeds from sale of business, net of cash transferred

    173        —          —          —          —          173   

Proceeds from the return of capital from subsidiary

    33        —          —          —          (33     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    216        —          4        (28     (89     103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows (used in) provided by financing activities

           

Net short-term debt repayments

    (8     —          —          —          —          (8

Borrowings of long-term debt

    144        —          —          265        —          409   

Repayments of long-term debt

    (153     —          —          (298     —          (451

Common stock dividends paid

    —          (4     (5     (47     56        —     

Net intercompany loan (repayments) borrowings

    (93     4        —          89        —          —     

Long-term debt and credit facility financing fees

    (1     —          —          —          —          (1

Return of capital to parent

    —          —          —          (33     33        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (111     —          (5     (24     89        (51
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

    —          —          —          3        —          3   

Increase in cash and cash equivalents

    8        —          —          4        —          12   

Cash and cash equivalents (unrestricted) at beginning of period

    56        —          —          124        —          180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents (unrestricted) at end of period

  $ 64      $ —        $ —        $ 128      $ —        $ 192   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MOMENTIVE SPECIALTY CHEMICALS INC.

SIX MONTHS ENDED JUNE 30, 2010

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

 

    Momentive
Specialty
Chemicals
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-

Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows (used in) provided by operating activities

  $ (232 )(a)    $ 12      $ (5   $ 117(a   $ —        $ (108
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) investing activities

           

Capital expenditures

    (23     —          —          (24     —          (47

Capitalized interest

    —          —          —          (1     —          (1

Purchases of debt securities

    —          —          —          (2     —          (2

Change in restricted cash

    —          —          —          4        —          4   

Proceeds from the return of capital from subsidiary

    190 (a)      —          —          —          (190     —     

Deconsolidation of variable interest entities

    —          —          —          (4     —          (4

Dividend from subsidiary

    11        —          3        —          (11     3   

Proceeds from the sale of assets

    6        —          —          6        —          12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    184        —          3        (21     (201     (35
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) financing activities

           

Net short-term debt (repayments) borrowings

    (4     —          —          4        —          —     

Borrowings of long-term debt

    130        993        —          256        —          1,379   

Repayments of long-term debt

    (939     —          —          (283     —          (1,222

Return of capital to parent

    —          —          —          (190 )(a)      190        —     

Net intercompany loan borrowings (repayments)

    853        (973     5        115        —          —     

Long-term debt and credit facility financing fees

    (1     (24     —          (8     —          (33

Payments of dividends on common stock

    —          (8     (3     —          11        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    39        (12     2        (106     201        124   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

    —          —          —          (4     —          (4

Decrease in cash and cash equivalents

    (9     —          —          (14     —          (23

Cash and cash equivalents (unrestricted) at beginning of period

    22        —          —          113        —          135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents (unrestricted) at end of period

  $ 13      $ —        $ —        $ 99      $ —        $ 112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) In both March and June 2010, Momentive Specialty Chemicals Inc. contributed receivables of $100 to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the six months ended June 30, 2010, the non-guarantor subsidiary sold $200 of the contributed receivables to affiliates of Apollo for net cash of $190. The cash proceeds were returned to Momentive Specialty Chemicals Inc. by the non-guarantor subsidiary as a return of capital. The sale of receivables has been included within cash flows from operating activities on the Combined Non-Guarantor Subsidiaries. The return of the cash proceeds from the sale of receivables has been included as a financing outflow and an investing inflow on the Combined Non-Guarantor Subsidiaries and Momentive Specialty Chemicals Inc., respectively.

 

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MOMENTIVE INTERNATIONAL HOLDINGS COOPERATIEF U.A.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Restated, see Note 2)

 

     Year ended December 31,  

(In millions)

   2010     2009     2008  

Net sales

   $ 2,714      $ 2,237      $ 3,362   

Cost of sales

     2,366        1,992        3,033   
  

 

 

   

 

 

   

 

 

 

Gross profit

     348        245        329   

Selling, general and administrative expense

     256        209        247   

Terminated merger costs (See Note 2)

     —          2        159   

Integration costs (See Note 2)

     —          —          10   

Asset impairments (See Note 2)

     —          11        13   

Business realignment costs (See Note 2)

     15        22        27   

Other operating (income) expense, net

     (3     —          8   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     80        1        (135

Interest expense, net

     39        31        65   

Affiliated interest expense, net (See Note 11)

     47        16        2   

Other non-operating (income) expense, net

     (18     9        (34
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes and earnings from unconsolidated entities

     12        (55     (168

Income tax expense (benefit) (See Note 16)

     25        (18     3   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before earnings from unconsolidated entities

     (13     (37     (171

Loss from unconsolidated entities, net of taxes

     (1     —          —     
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (14     (37     (171

Net income (loss) from discontinued operations, net of taxes

     3        (13     (11
  

 

 

   

 

 

   

 

 

 

Net loss

     (11     (50     (182

Net income attributable to noncontrolling interest

     —          —          (1
  

 

 

   

 

 

   

 

 

 

Net loss attributable to Momentive International Holdings Cooperatief U.A.

   $ (11   $ (50   $ (183
  

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Momentive International Holdings Cooperatief U.A.

   $ (95   $ (61   $ (196
  

 

 

   

 

 

   

 

 

 

 

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MOMENTIVE INTERNATIONAL HOLDINGS COOPERATIEF U.A.

CONSOLIDATED BALANCE SHEETS

(Restated, see Note 2)

 

(In millions)

   December 31,
2010
    December 31,
2009
 

Assets

    

Current assets

    

Cash and cash equivalents (including restricted cash of $6 and $7, respectively) (See Note 2)

   $ 83      $ 65   

Short-term investments

     6        10   

Accounts receivable (net of allowance for doubtful accounts of $20 and $18, respectively)

     368        323   

Accounts receivable from affiliates (See Note 5)

     63        65   

Loans receivable from affiliates (See Note 11)

     33        24   

Inventories:

    

Finished and in-process goods

     128        111   

Raw materials and supplies

     71        56   

Other current assets

     48        48   

Current assets of discontinued operations (See Note 3)

     145        77   
  

 

 

   

 

 

 

Total current assets

     945        779   
  

 

 

   

 

 

 

Long-term loans receivable from affiliates (See Note 11)

     20        424   

Other assets

     70        59   

Property and equipment

    

Land

     49        56   

Buildings

     194        181   

Machinery and equipment

     1,238        1,250   
  

 

 

   

 

 

 
     1,481        1,487   

Less accumulated depreciation

     (714     (656
  

 

 

   

 

 

 
     767        831   

Goodwill (See Note 7)

     114        118   

Other intangibles assets, net (See Note 7)

     112        132   

Noncurrent assets of discontinued operations (See Note 3)

     —          61   
  

 

 

   

 

 

 

Total assets

   $ 2,028      $ 2,404   
  

 

 

   

 

 

 

Liabilities and (Deficit) Equity

    

Current liabilities

    

Accounts and drafts payable

   $ 246      $ 264   

Accounts payable to affiliates (See Note 5)

     193        42   

Debt payable within one year (See Note 10)

     57        62   

Affiliated debt payable within one year (See Note 11)

     79        92   

Income taxes payable

     19        21   

Other current liabilities

     95        108   

Current liabilities of discontinued operations (See Note 3)

     32        34   
  

 

 

   

 

 

 

Total current liabilities

     721        623   
  

 

 

   

 

 

 

Long-term liabilities

    

Long-term debt (See Note 9)

     649        701   

Affiliated long-term debt (See Note 11)

     746        771   

Deferred income taxes (See Note 16)

     105        118   

Long-term pension and post employment benefit obligations (See Note 14)

     125        126   

Other long-term liabilities

     55        32   

Noncurrent liabilities of discontinued operations (See Note 3)

     —          8   
  

 

 

   

 

 

 

Total liabilities

     2,401        2,379   

Commitments and contingencies (See Notes 10, 12 and 13)

    

(Deficit) Equity

    

Paid-in (deficit) capital

     (135     629   

Loans receivable from parent

     (87     (549

Accumulated other comprehensive (loss) income

     (82     2   

Accumulated deficit

     (72     (60
  

 

 

   

 

 

 

Total Momentive International Holdings Cooperatief U.A. shareholder’s (deficit) equity

     (376     22   

Noncontrolling interest

     3        3   
  

 

 

   

 

 

 

Total (deficit) equity

     (373     25   
  

 

 

   

 

 

 

Total liabilities and (deficit) equity

   $ 2,028      $ 2,404   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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MOMENTIVE INTERNATIONAL HOLDINGS COOPERATIEF U.A.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Restated, see Note 2)

 

     Year ended
December 31,
 

(In millions)

   2010     2009     2008  

Cash flows provided by operating activities

      

Net loss

   $ (11   $ (50   $ (182

Adjustments to reconcile net loss to net cash provided by operating activities:

      

Depreciation and amortization

     107        109        124   

Allocations of corporate overhead, net (See Note 5)

     14        16        16   

Loss (gain) on disposal of assets, net of taxes

     —          3        (3

Settlement of foreign exchange guarantee agreement with parent (See Note 5)

     13        —          —     

Terminated merger expenses billed by parent (See Note 5)

     —          —          140   

Deferred tax benefit

     (14     (6     (14

Impairments and accelerated depreciation

     2        13        27   

Cash settlement of derivatives

     —          —          37   

Unrealized foreign exchange gain

     (12     (7     (53

Other non-cash adjustments

     (1     3        2   

Net change in assets and liabilities:

      

Accounts receivable

     (65     47        182   

Inventories

     (41     70        44   

Accounts and drafts payable

     121        12        (159

Income taxes payable

     15        4        (6

Other assets

     (3     (12     2   

Other liabilities

     11        (29     (32
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     136        173        125   
  

 

 

   

 

 

   

 

 

 

Cash flows used in investing activities

      

Capital expenditures

     (66     (92     (73

Capitalized interest

     (1     (5     —     

Proceeds from the sale of assets

     7        —          7   

Change in restricted cash

     2        7        (9

Proceeds from the sale of (purchases of) investments

     4        (2     2   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (54     (92     (73
  

 

 

   

 

 

   

 

 

 

Cash flows used in financing activities

      

Net short-term debt (repayments) borrowings

     (8     (15     18   

Borrowings of long-term debt

     633        568        701   

Repayments of long-term debt

     (663     (692     (531

Affiliated loan (repayments) borrowings, net

     (18     15        (162

Deferred financing fees paid

     (8     —          —     

Cash settlement of derivatives

     —          —          (37

Common stock dividends paid

     —          —          (2
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (64     (124     (13

Effect of exchange rates on cash and cash equivalents

     1        19        (20
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     19        (24     19   

Cash and cash equivalents at beginning of year

     58        82        63   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents (unrestricted) at end of year

   $ 77      $ 58      $ 82   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Cash paid for:

      

Interest, net

   $ 78      $ 38      $ 50   

Income taxes paid (refunded), net

     25        (9     6   

Non-cash investing and financing activity:

      

Distribution to parent—acquisition of subsidiaries previously combined (See Note 1)

     (700     —          —     

Affiliate note assumed to acquire subsidiaries (See Note 1)

     700        —          —     

Distribution to parent—settlement of foreign exchange guarantee agreement with parent

     (78     —          —     

Accounts payable to affiliates reclassified to affiliated long-term debt

     —          140        —     

See Notes to Consolidated Financial Statements

 

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MOMENTIVE INTERNATIONAL HOLDINGS COOPERATIEF U.A.

CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

(Restated, see Note 2)

 

(In millions)   Paid-in
(Deficit)
Capital
    Loans
Receivable
from Parent
    Accumulated
Other
Comprehensive
(Loss)
Income(a)
    Accumulated
Deficit
    Total
Momentive
International
Holdings
Cooperatief
U.A.
Shareholder’s
(Deficit)
Equity
    Noncontrolling
Interest
    Total  

Balance at December 31, 2007

  $ 597      $ (238   $ 26      $ 175      $ 560      $ 4      $ 564   

Net (loss) income

    —          —          —          (183     (183     1        (182

Loss recognized in comprehensive income from pension and postretirement benefits, net of tax

    —          —          (1     —          (1     —          (1

Translation adjustments

    —          —          (12     —          (12     —          (12
         

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

            (196     1        (195
         

 

 

   

 

 

   

 

 

 

Dividends declared

    —          —          —          (2     (2     —          (2

Net repayments from parent

    —          30        —          —          30        —          30   

Translation adjustment and other non-cash changes in principal

    —          (7     —          —          (7     —          (7

Interest purchased from noncontrolling interest holder

    —          —          —          —          —          (2     (2

Allocations of corporate overhead (See Note 5)

    16        —          —          —          16        —          16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2008

    613        (215     13        (10     401        3        404   

Net loss

    —          —          —          (50     (50     —          (50

Loss recognized in comprehensive income from pension and postretirement benefits, net of tax

    —          —          (7     —          (7     —          (7

Translation adjustments

    —          —          (4     —          (4     —          (4
         

 

 

   

 

 

   

 

 

 

Comprehensive loss

            (61     —          (61
         

 

 

   

 

 

   

 

 

 

Net borrowings to parent

    —          (319     —          —          (319     —          (319

Translation adjustment and other non-cash changes in principal

    —          (15     —          —          (15     —          (15

Allocations of corporate overhead (See Note 5)

    16        —          —          —          16        —          16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

    629        (549     2        (60     22        3        25   

Net loss

    —          —          —          (11     (11     —          (11

Translation adjustments

    —          —          (84     —          (84     —          (84
         

 

 

   

 

 

   

 

 

 

Comprehensive loss

            (95     —          (95
         

 

 

   

 

 

   

 

 

 

Distribution to parent—acquisition of subsidiaries previously combined through assumption of note payable to parent (See Note 1 and Note 11)

    (697     466        —          —          (231     —          (231

Distribution to parent—acquisition of subsidiaries previously combined for purposes of IAR divestiture

    (3     —          —          —          (3     —          (3

Translation adjustment and other non-cash changes in principal

    —          (4     —          —          (4     —          (4

Dividends declared

    —          —          —          (1     (1     —          (1

Distribution to parent—settlement of foreign exchange guarantee agreement with parent (See Note 5)

    (78     —          —          —          (78     —          (78

Allocations of corporate overhead (See Note 5)

    14        —          —          —          14        —          14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

  $ (135   $ (87   $ (82   $ (72   $ (376   $ 3      $ (373
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Accumulated other comprehensive income at December 31, 2010 represents $67 of net foreign currency translation losses and a $14 loss, net of tax, relating to net actuarial gains and prior service costs for the Company’s defined benefit pension and postretirement benefit plans (see Note 14). Accumulated other comprehensive income at December 31, 2009 represents $16 of net foreign currency translation gains and a $14 loss, net of tax, relating to net actuarial gains and prior service costs for the Company’s defined benefit pension and postretirement benefit plans (see Note 14).

 

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Momentive International Holdings Cooperatief U.A.

Notes to Consolidated Financial Statements

(In millions)

1. Background and Basis of Presentation

On June 4, 2010, Momentive International Holdings Cooperatief U.A. (“CO-OP”) was formed as a holding company for the purpose of acquiring ownership in Momentive Specialty Chemicals B.V. (“MSC B.V.”) and Momentive Specialty Chemicals Canada, Inc. (“MSC Canada”), and their respective subsidiaries. CO-OP was formed through capital contributions from Momentive Specialty Chemicals Inc. (“MSC”) and NL CO-OP Holdings LLC, a subsidiary of MSC. CO-OP subsequently purchased from MSC 100% of its shares in Momentive Specialty Chemicals Holding B.V. (“MSC Holding B.V.”), MSC B.V.’s parent, in exchange for CO-OP assuming a note payable from MSC to MSC B.V. The face value of the note payable assumed is equivalent to the fair value of MSC Holding B.V. and its consolidated subsidiaries and was in excess of the historical carrying value of the assets. As such, the Company’s acquisition of the investment in MSC Holding B.V. and the excess by which the note payable assumed exceeded the carrying value have been recorded as a distribution to its parent and a reduction to Paid-in capital. See Note 11.

On December 15, 2010, in a series of transactions among certain subsidiaries of MSC, certain subsidiaries of CO-OP acquired the shares in National Borden Chemical Germany GmbH (“NBCG”) and ownership in its respective subsidiaries and CO-OP acquired the shares in MSC Canada and ownership in its respective subsidiaries through a capital contribution from MSC and certain of MSC’s subsidiaries.

Together CO-OP, through its investments in MSC Canada and MSC B.V. and its respective subsidiaries, (collectively referred to as the “Company”), is engaged in the manufacture and marketing of urea, phenolic, epoxy and epoxy specialty resins and coatings applications primarily used in forest and industrial and construction products and other specialty and industrial chemicals worldwide. At December 31, 2010, the Company’s operations included 45 manufacturing facilities in Europe, North America, South America, Australia, New Zealand and Korea.

MSC serves global industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. MSC (formerly known as Hexion Specialty Chemicals, Inc.) was formed on May 31, 2005 from the combination of three Apollo Management, L.P. (“Apollo”) controlled companies (the “Hexion Formation”).

Prior to the formation of the Company, and for all financial statement periods presented, all subsidiaries of the Company were considered entities under the common control of MSC as defined in the guidance for business combinations. As a result of the formation of the Company, these entities are presented in the accompanying financial statements retroactively on a combined basis. In addition, as all entities are under the common control of MSC, all entities have been accounted for on a historical cost basis consistent with the basis of MSC, and as such, the acquisition method of accounting has not been applied.

Restatement of Previously Issued Financial Statements

The Company has restated its financial statements for the years ended December 31, 2010, 2009 and 2008 to correct the reporting of gains and losses relating to the remeasurement of certain foreign currency transactions. As previously disclosed, foreign currency transaction gains and losses related to all affiliated loans payable and receivable denominated in a foreign currency other than the subsidiary’s functional currency and deemed to be permanently invested were reported as a component of Equity in Accumulated other comprehensive (loss) income. However, under the guidance for foreign currency translation, the Company has determined that such foreign currency transactions gains and losses related to affiliates that are not consolidated, combined or accounted for under the equity method in the Company’s Consolidated Financial Statements, should be more

 

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appropriately reported as a component of Net loss rather than a component of Equity in Accumulated other comprehensive (loss) income. In addition, the Company has restated its financial statements to reflect the results of a subsidiary that was improperly excluded from its Consolidated Financial Statements including the subsidiary’s subsequent acquisition of an investment in a previously combined subsidiary. The investment in the previously combined subsidiary was acquired through the Company’s assumption of accounts payable due to the Company’s parent and certain of its subsidiaries and has been reflected as a distribution to the Company’s parent and a reduction to Paid-in capital in the Consolidated Financial Statements. The Company has also corrected other out of period errors impacting the years ended December 31, 2010, 2009 and 2008 which were deemed to be individually immaterial to the Consolidated Financial Statements but deemed to be material in the aggregate.

The impacts of correcting the financial statements presented elsewhere herein are as follows:

 

    Consolidated Statements of Operations for the year ended December 31,  
    2010     2009     2008  
    As
Previously
Reported
    Adjust-
ments
    As
Restated
    As
Previously
Reported
    Adjust-
ments
    As
Restated
    As
Previously
Reported
    Adjust-
ments
    As Restated  

Cost of sales

  $ 2,367      $ (1   $ 2,366      $ 1,992      $ —        $ 1,992      $ 3,033      $ —        $ 3,033   

Gross profit

    347        1        348        245        —          245        329        —          329   

Other operating income, net

    (3     —          (3     (1     1        —          8        —          8   

Operating income

    79        1        80        2        (1     1        (135     —          (135

Other non-operating expense (income), net

    24        (42     (18     1        8        9        (3     (31     (34

(Loss) income from continuing operations before income taxes and earnings from unconsolidated entities

    (31     43        12        (46     (9     (55     (199     31        (168

Income tax expense (benefit)

    14        11        25        (16     (2     (18     (5     8        3   

Loss from continuing operations before earnings from unconsolidated entities

    (45     32        (13     (30     (7     (37     (194     23        (171

Loss from continuing operations

    (46     32        (14     (30     (7     (37     (194     23        (171

Net income (loss) from discontinued operations, net of taxes

    4        (1     3        (13     —          (13     (10     (1     (11

Net loss

    (42     31        (11     (43     (7     (50     (204     22        (182

Net loss attributable to Momentive International Holdings Cooperatief U.A.

    (42     31        (11     (43     (7     (50     (205     22        (183

Comprehensive loss attributable to Momentive International Holdings Cooperatief U.A.

    (94     (1     (95     (61     —          (61     (194     (2     (196

 

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    Consolidated Statements of Cash Flows for the year ended December 31,  
    2010     2009     2008  
    As
Previously
Reported
    Adjust-
ments
    As
Restated
    As
Previously
Reported
    Adjust-
ments
    As
Restated
    As
Previously
Reported
    Adjust-
ments
    As Restated  

Net loss

  $ (42   $ 31      $ (11   $ (43   $ (7   $ (50   $ (204   $ 22      $ (182

Depreciation and amortization

    101        6        107        109        —          109        124        —          124   

Deferred tax benefit

    (15     1        (14     (7     1        (6     (15     1        (14

Unrealized foreign exchange gains

    —          (12     (12     —          (7     (7     —          (53     (53

Other non-cash adjustments

    29        (30     (1     (12     15        3        (20     22        2   

Change in accounts receivable

    (85     20        (65     47        —          47        182        —          182   

Change in accounts and drafts payable

    117        4        121        12        —          12        (159     —          (159

Change in income taxes payable

    15        —          15        6        (2     4        (6     —          (6

Change in other assets

    2        (5     (3     (12     —          (12     3        (1     2   

Change in other liabilities

    27        (15     12        (29     1        (28     (41     10        (31

Cash and cash equivalents (unrestricted) at end of year

    78        (1     77        58        —          58        82        —          82   

 

     Consolidated Balance Sheets as of December 31,  
     2010     2009  
     As
Previously
Reported
    Adjust-
ments
    As
Restated
    As
Previously
Reported
    Adjust-
ments
    As
Restated
 

Cash and cash equivalents

   $ 84      $ (1   $ 83      $ 65      $ —        $ 65   

Accounts receivable

     388        (20     368        323        —          323   

Other current assets

     49        (1     48        48        —          48   

Total current assets

     967        (22     945        779        —          779   

Total assets

     2,050        (22     2,028        2,404        —          2,404   

Accounts payable to affiliates

     189        4        193        42        —          42   

Income taxes payable

     20        (1     19        22        (1     21   

Other current liabilities

     116        (21     95        107        1        108   

Total current liabilities

     739        (18     721        623        —          623   

Deferred income taxes

     103        2        105        116        2        118   

Other long-term liabilities

     54        1        55        32        —          32   

Total liabilities

     2,416        (15     2,401        2,377        2        2,379   

Paid in (deficit) capital

     (132     (3     (135     629        —          629   

Accumulated other comprehensive (loss) income

     (16     (66     (82     36        (34     2   

Accumulated deficit

     (134     62        (72     (92     32        (60

Total Momentive International Holdings Cooperatief U.A. shareholder’s (deficit) equity

     (369     (7     (376     24        (2     22   

Total (deficit) equity

     (366     (7     (373     27        (2     25   

Total liabilities and (deficit) equity

     2,050        (22     2,028        2,404        —          2,404   

 

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Consolidated Statements of Shareholder’s Equity (Deficit) and Comprehensive Loss

 
     As Previously
Reported
    Adjustments     As Restated  

Balance at December 31, 2007:

      

Accumulated other comprehensive income

   $ 43      $ (17   $ 26   

Accumulated deficit

     158        17        175   

Year ended December 31, 2008:

      

Translation adjustments

     12        (24     (12

Comprehensive loss

     (194     (2     (196

Year ended December 31, 2009:

      

Translation adjustments

     (11     7        (4

Year ended December 31, 2010:

      

Translation adjustments

     (52     (32     (84

Comprehensive loss

     (94     (1     (95

Accumulated other comprehensive income at December 31, 2010:

      

Net foreign currency translation losses

     2        65        67   

Accumulated other comprehensive income at December 31, 2009:

      

Net foreign currency translation gains

     50        (34     16   

Footnotes contained elsewhere herein have been restated, where applicable, for the corrections discussed above.

2. Summary of Significant Accounting Policies

Principles of Consolidation—The Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries, all of which are under the common control and management of MSC, and for which no substantive participating rights are held by minority shareholders. Intercompany transactions and balances have been eliminated. Noncontrolling interests exist for the equity interests in subsidiaries that are not 100% owned by the Company. However, due to common ownership, MSC’s 34% interest in Momentive Specialty Chemicals Sdn. Bhd. (“MSC Malaysia”), MSC’s 20% interest in Hexion Quimica Argentina SA (“Hexion Argentina”), MSC’s 5% interest in Quimica Borden Argentina (“Borden Argentina”) and MSC’s interest in New Nimbus KG (“Nimbus”) are included within the Consolidated Financial Statements presented herein.

Foreign Currency Translation—Assets and liabilities of foreign affiliates are translated at the exchange rates in effect at the balance sheet date. Income, expenses and cash flows are translated at average exchange rates prevailing during the year. The effect of translation is accounted for as an adjustment to Equity and is included in Accumulated other comprehensive income. Foreign currency transaction gains and losses are included as a component of net income (loss) except for gains and losses related to affiliated loans payable and receivable which are deemed to be permanently invested and are between entities that are consolidated, combined or accounted for under the equity method in these consolidated financial statements. The gains and losses resulting from the remeasurement of such loans into an entity’s functional currency are accounted for as an adjustment to Equity in Accumulated other comprehensive income.

The Company recognized net transaction gains (losses) of $49 (restated), $(9) and $8 for the years ended December 31, 2010, 2009 and 2008, respectively. Of the amounts recognized, $42, $(9) and $31 represent net transaction gains (losses) for the years ended December 31, 2010, 2009 and 2008, respectively, related to affiliated loans payable and receivable with entities that are not consolidated, combined or accounted for under the equity method in these consolidated financial statements.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. The most significant estimates that are included in the financial statements are environmental remediation, legal liabilities, deferred tax assets and liabilities and related valuation allowances,

 

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income tax accruals, pension and postretirement assets and liabilities, valuation allowances for accounts receivable and inventories, general insurance liabilities, asset impairments and fair values of assets acquired and liabilities assumed in business acquisitions. Actual results could differ from these estimates.

Cash and Cash Equivalents—The Company considers all highly liquid investments that are purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2010 and 2009, the Company had interest-bearing time deposits and other cash equivalent investments of $20 and $18, respectively. They are included on the Consolidated Balance Sheets as a component of Cash and cash equivalents.

Investments—Investments with original maturities greater than 90 days but less than one year are included on the Consolidated Balance Sheets as Short-term investments. At December 31, 2010 and 2009, the Company had Brazilian real denominated U.S. dollar index investments of $6 and $10, respectively. These investments, which are classified as held-to-maturity securities, are recorded at cost, which approximates fair value.

Allowance for Doubtful Accounts—The allowance for doubtful accounts is estimated using factors such as customer credit ratings and past collection history. Receivables are charged against the allowance for doubtful accounts when it is probable that the receivable will not be recovered.

Inventories—Inventories are stated at lower of cost or market using the first-in, first-out method. Costs include direct material, direct labor and applicable manufacturing overheads, which are based on normal production capacity. Abnormal manufacturing costs are recognized as period costs and fixed manufacturing overheads are allocated based on normal production capacity. An allowance is provided for excess and obsolete inventories based on management’s review of inventories on-hand compared to the estimated future usage and sales. Inventories on the Consolidated Balance Sheets are presented net of an allowance for excess and obsolete inventory of $4 and $5 at December 31, 2010 and 2009, respectively.

Property and Equipment—Land, buildings and machinery and equipment are stated at cost less accumulated depreciation. Depreciation is recorded on the straight-line basis over the estimated useful lives of properties (the average estimated useful lives for buildings is 20 years and for machinery and equipment 15 years). Assets under capital leases are amortized over the lesser of their useful lives or the lease term. Major renewals and betterments are capitalized. Maintenance, repairs, minor renewals and turnarounds (periodic maintenance and repairs to major units of manufacturing facilities) are expensed as incurred. When property and equipment is retired or disposed of, the asset and related depreciation are removed from the accounts and any gain or loss is reflected in operating income. The Company capitalizes interest costs that are incurred during the construction of property and equipment. Depreciation expense was $89, $88 and $100 for the years ended December 31, 2010, 2009 and 2008, respectively.

Goodwill and Intangibles—The excess of purchase price over net tangible and identifiable intangible assets of businesses acquired is carried as Goodwill in the Consolidated Balance Sheets. Separately identifiable intangible assets that are used in the operations of the business (e.g. patents and technology, customer lists and contracts) are recorded at cost (fair value at the time of acquisition) and reported as Other intangible assets, net in the Consolidated Balance Sheets. The Company does not amortize goodwill or indefinite-lived intangible assets. Intangible assets with determinable lives are amortized on a straight-line basis over the shorter of the legal or useful life of the assets, which range from 1 to 30 years. See Note 7.

Impairment—The Company reviews property and equipment and all amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is based on estimated undiscounted cash flows. The Company tests goodwill for impairment annually, or when events or changes in circumstances indicate impairment may exist, by comparing the fair value of each reporting unit to its carrying value to determine if there is an indication that a potential impairment may exist.

During the years ended December 31, 2009 and 2008, asset impairments of $11 and $13, respectively, were included in Asset impairments in the Consolidated Statements of Operations.

 

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Long-Lived and Amortizable Intangible Assets

In 2009, the Company recorded impairment charges of $11 as a result of the Company’s decision to indefinitely idle certain production lines and close certain R&D facilities. In 2008, the Company recorded an $8 charge for the impairment of tradenames from which cash flows are no longer generated.

Goodwill

The Company uses a probability weighted market and income approach to estimate the values of its reporting units. The Company’s market approach is a comparable analysis technique commonly used in the investment banking and private equity industries based on the EBITDA (earnings before interest, income taxes, depreciation and amortization) multiple technique. Under this technique, estimated values are the result of a market-based EBITDA multiple that is applied to an appropriate historical EBITDA amount, adjusted for the additional fair value that would be assigned by a market participant obtaining control over the reporting unit. The Company’s income approach is a discounted cash flow model. When the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of the reporting unit’s goodwill, an impairment loss is recognized for the difference. See Note 7.

Prior to 2010, the Company performed its annual impairment test at December 31. In 2010, the Company has changed the annual goodwill impairment testing date to October 1. The purpose of this change is to conform with the accounting policy and annual impairment testing date of MSC and MSC’s parent’s accounting acquirer, Momentive Performance Materials Holdings Inc. Accordingly, the Company considers this accounting change preferable. This change does not accelerate, delay, avoid or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. The annual goodwill impairment testing was performed as of October 1, 2010. Consideration was given to the period between the testing date and December 31, 2010, concluding that no facts or circumstances arose that would lead to a different conclusion as of December 31, 2010.

At October 1, 2010, the fair value of the remaining reporting units exceeded the carrying amount of assets (including goodwill) and liabilities assigned to the reporting units. At December 31, 2009, the fair value of the remaining reporting units exceeded the carrying amount of assets (including goodwill) and liabilities assigned to the reporting units. In the fourth quarter of 2008, the Company recognized goodwill impairments in its Coatings reporting unit of $5.

General Insurance—The Company is generally insured for losses and liabilities for workers’ compensation, physical damage to property, business interruption and comprehensive general, product and vehicle liability under policies maintained by MSC and is allocated a share of the related premiums. The Company records losses when a loss has been incurred and is estimable. See Note 5.

Legal Claims and Costs—The Company accrues for legal claims and costs in the period in which a claim is made or an event becomes known, if the amounts are probable and reasonably estimable. Each claim is assigned a range of potential liability, with the most likely amount accrued. If there is no amount in the range of potential liability that is most likely, the low end of the range is accrued. The amount accrued includes all costs associated with the claim, including settlements, assessments, judgments, fines and incurred legal fees. See Note 13.

Environmental Matters—Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Environmental accruals are reviewed on a quarterly basis and as events and developments warrant. See Note 13.

Asset Retirement Obligations—Asset retirement obligations are initially recorded at their estimated net present values in the period in which the obligation occurs, with a corresponding increase to the related long-

 

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lived asset. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset. When the liability is settled, a gain or loss is recognized for any difference between the settlement amount and the liability that was recorded.

Revenue Recognition—Revenue for product sales, net of estimated allowances and returns, is recognized as risk and title to the product transfer to the customer, which either occurs at the time shipment is made or upon delivery. In situations where product is delivered by pipeline, risk and title transfers when the product moves across an agreed-upon transfer point, which is typically the customers’ property line. Product sales delivered by pipeline are measured based on daily flow meter readings. The Company’s standard terms of delivery are included in its contracts of sale and on its invoices.

Shipping and Handling—Freight costs that are billed to customers are included in Net sales in the Consolidated Statements of Operations. Shipping costs are incurred to move the Company’s products from production and storage facilities to the customer. Handling costs are incurred from the point the product is removed from inventory until it is provided to the shipper and generally include costs to store, move and prepare the products for shipment. Shipping and handling costs are recorded in Cost of sales in the Consolidated Statements of Operations.

Research and Development Costs—Funds are committed to research and development activities for technical improvement of products and processes that are expected to contribute to future earnings. All costs associated with research and development are charged to expense as incurred. Research and development and technical service expense of $38, $34 and $38 for the years ended December 31, 2010, 2009 and 2008, respectively, are included in Selling, general and administrative expense in the Consolidated Statements of Operations.

Terminated Merger Costs—The Company incurred terminated merger costs totaling $2 and $159 for the years ended December 31, 2009 and 2008, respectively. These costs primarily represent legal, consulting, accounting and tax costs related to MSC’s terminated Huntsman Corporation merger agreement and litigation. For the year ended December 31, 2008, the amount also includes costs billed by MSC to the Company, including costs associated with the write-off of previously deferred acquisition costs incurred by MSC. See Note 5.

Integration Costs—The Company incurred integration costs totaling $10 for the year ended December 31, 2008. These costs represent costs to implement a single, company-wide, management information and accounting system as well as redundancy and plant rationalization costs and incremental administrative costs from integration programs that resulted from the Hexion Formation and recent acquisitions. The Company records these expenses as incurred.

Business Realignment Costs—The Company incurred business realignment costs totaling $15, $22 and $27 for the years ended December 31, 2010, 2009 and 2008, respectively. These costs primarily represent expenses to implement productivity savings programs to reduce the Company’s cost structure and align manufacturing capacity with current volume demands. See Note 4. For the year ended December 31, 2008, these costs also represent minor restructuring programs related to headcount reduction costs associated with plant closures and divestitures.

Income Taxes—The Company files tax returns in the respective countries in which it operates. Income tax expense is based on reported results of operations before income taxes using the prevailing rates for each tax jurisdiction. Deferred income taxes represent the tax effect of temporary differences between amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Income tax expense is based on reported results of operations accounts for income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of the assets and liabilities. Deferred tax balances are adjusted to reflect tax rates, based on current tax laws that will be in effect in the years in which temporary differences are

 

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expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. For purposes of these financial statements, the international subsidiaries are treated as foreign subsidiaries of a domestic parent, the Company, for all periods presented. Reconciliations of tax rates are calculated at the statutory tax rates.

Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in the Consolidated Financial Statements. Tax benefits are recognized in the Consolidated Financial Statements when it is more likely than not that a tax position will be sustained upon examination. Tax benefits are measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. The Company classifies interest and penalties as a component of tax expense.

Derivative Financial Instruments—The Company periodically enters into forward exchange contracts or interest rate swaps to reduce the Company’s cash flow exposure to changes in foreign exchange rates or interest rates. The Company does not hold or issue derivative financial instruments for trading purposes. These instruments are not accounted for using hedge accounting, but are measured at fair value and recorded on the balance sheet as an asset or liability, depending upon the Company’s underlying rights or obligations. Changes in fair value are recognized in earnings. See Notes 8 and 9.

Transfers of Financial Assets—The Company executes factoring and sales agreements with respect to its trade accounts receivable to support its working capital requirements. The Company accounts for these transactions as either sales-type or financing-type transfers of financial assets based on the terms and conditions of each agreement. See Note 6.

Stock-Based Compensation—Stock-based compensation cost is measured at the grant date based on the fair value of the award which is amortized as expense over the requisite service period. The Company does not maintain any stock option plans. However, certain of the Company’s employees have been granted MSC equity awards, and the Company is allocated a share of the related compensation expense. See Note 5.

Concentrations of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk are primarily temporary investments and accounts receivable. The Company places its temporary investments with high quality institutions and, by policy, limits the amount of credit exposure to any one institution. Concentrations of credit risk for accounts receivable are limited due to the large number of customers in the Company’s customer base and their dispersion across many different industries and geographies. The Company generally does not require collateral or other security to support customer receivables.

Corporate Overhead Allocations—In order to properly depict the financial results of the Company on a stand-alone basis, corporate controlled expenses incurred by MSC that are not reimbursed by the Company are allocated to the Company. The amounts are allocated on the basis of Net sales. Management believes that the amounts allocated in such a manner are reasonable and consistent. However, the amounts are not necessarily indicative of the costs that would have been incurred if the Company had operated independently. See Note 5.

Subsequent Events—The Company has evaluated events and transactions subsequent to December 31, 2010 through February 28, 2011, the original date of issuance of its Consolidated Financial Statements, except for the restatement of previously issued financial statements (see Note 2).

Recently Issued Accounting Standards

Newly Adopted Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 166, Accounting for Transfers of Financial Assets which was codified in December 2009 as Accounting Standards Update 2009-16: Accounting for Transfers of Financial Assets (“ASU 2009-16”). ASU 2009-16 removes the concept of a

 

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qualifying special-purpose entity (“QSPE”) and as a result eliminates the scope exception for QSPE’s. ASU 2009-16 also changes the criteria for a transfer of financial assets to qualify as a sales-type transfer. The Company adopted ASU 2009-16 on January 1, 2010. The adoption of ASU 2009-16 did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) which was codified in December 2009 as Accounting Standards Update 2009-17: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 amends current guidance requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (“VIE”). The Company adopted ASU 2009-17 on January 1, 2010. The Company does not have the power to direct the activities that most significantly impact one of its VIE’s economic performance, and therefore, the Company does not have a controlling financial interest in this VIE. As a result of the adoption of this guidance, the Company deconsolidated one of its VIE’s from its Consolidated Financial Statements. The deconsolidation of this VIE did not have a material impact on the Company’s Consolidated Financial Statements.

3. Discontinued Operations

On January 31, 2011, the Company sold its Inks and Adhesive Resins (“IAR”) business to Harima Chemicals Inc. (the “Buyer”) for a purchase price of $120. The Buyer also paid $14 for cash and $8 for working capital transferred to the Buyer at the time of closing as part of the purchase agreement, less indebtedness and pension plan liability transferred to the Buyer of $4. A subsequent adjustment to the purchase price may be made based upon the final settlement as defined by the Purchase Agreement.

Immediately prior to the sale, MSC completed a legal restructuring to move all of the IAR businesses and entities to be owned by a subsidiary of the Company. The company acquired these assets, located primarily in the U.S. and China for the purchase price allocation as agreed upon with the Buyer.

In conjunction with the sale, as part of a Transitional Services Agreement, MSC and the Company will provide certain transitional services to the Buyer for a period of six months. The purpose of these services is to provide short-term assistance to the Buyer in assuming the operations of the IAR business. These services do not confer to MSC or the Company the ability to influence the operating or financial policies of the IAR business under its new ownership. MSC and the Company’s cash inflows and outflows from these services are expected to be insignificant during the transition period.

The portion of the IAR business held by the Company as of December 31, 2010 represent substantially all of the international operations of the IAR business. The IAR business is engaged in the production of naturally derived resins and related products primarily used for the manufacture of printing inks, adhesives, synthetic rubber, specialty coatings and aroma chemicals. The international operations of the IAR business includes 9 manufacturing facilities in the Europe, South America and Asia-Pacific regions and had 2010 net sales of approximately $250 and pre-tax income of $8. The IAR business is reported as a discontinued operation as of December 31, 2010 and for all periods presented.

The Company has recorded an estimated loss on the sale of the IAR business of $1 for the year ended December 31, 2010, which is included in Net income (loss) from discontinued operations in the Consolidated Statements of Operations.

 

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The aggregate carrying value of the IAR business was $113 as of December 31, 2010. The major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheets are as follows:

 

     December 31,
2010
     December 31,
2009
 

Assets:

     

Accounts Receivable

   $ 51       $ 41   

Inventories

     34         30   

Other current assets

     5         6   
  

 

 

    

 

 

 

Total current assets

     90         77   
  

 

 

    

 

 

 

Property and equipment, net

     45         49   

Other intangible assets, net

     6         7   

Other assets

     4         5   
  

 

 

    

 

 

 

Total noncurrent assets

     55         61   
  

 

 

    

 

 

 

Total assets of discontinued operations

   $ 145       $ 138   
  

 

 

    

 

 

 

Liabilities:

     

Accounts and drafts payable

   $ 18       $ 20   

Other current liabilities

     6         14   
  

 

 

    

 

 

 

Total current liabilities

     24         34   
  

 

 

    

 

 

 

Long-term debt

     4         4   

Other long-term liabilities

     4         4   
  

 

 

    

 

 

 

Total noncurrent liabilities

     8         8   
  

 

 

    

 

 

 

Total liabilities of discontinued operations

   $ 32       $ 42   
  

 

 

    

 

 

 

4. Productivity Program

At December 31, 2010, the Company has in-process productivity savings expected to be achieved over the remaining life of the projects as part of MSC’s overall productivity savings initiatives.

The following table summarizes restructuring information by type of cost:

 

     Workforce
reductions
    Site closure costs     Other
projects
    Total  

Restructuring costs expected to be incurred

   $ 34      $ 8      $ 5      $ 47   

Cumulative restructuring costs incurred at December 31, 2010

   $ 34      $ 3      $ 4      $ 41   

Accrued liability at December 31, 2007

   $ —        $ —        $ —        $ —     

Restructuring charges

     10        —          —          10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued liability at December 31, 2008

     10        —          —          10   

Restructuring charges

     16        —          2        18   

Payments

     (9     —          (2     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued liability at December 31, 2009

     17        —          —          17   

Restructuring charges

     8        3        2        13   

Payments

     (18     (3     (2     (23

Foreign currency translation

     (1     —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued liability at December 31, 2010

   $ 6      $ —        $ —        $ 6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Workforce reduction costs primarily relate to employee termination costs and are accounted for under the guidance for nonretirement postemployment benefits or as exit and disposal costs, as applicable. During the years ended December 31, 2010, 2009 and 2008 restructuring charges of $13, $18 and $10, respectively, were recorded in Business realignment costs on the Consolidated Statements of Operations. At December 31, 2010 and 2009, the Company had accrued $6 and $17, respectively, for restructuring liabilities in Other current liabilities in the Consolidated Balance Sheets.

5. Related Party Transactions

Product Sales and Purchases

The Company sells finished goods and certain raw materials to MSC and certain of its subsidiaries. Total sales were $216, $179 and $198 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company also purchases raw materials and finished goods from MSC and certain of its subsidiaries, which were $87, $67 and $132 for the years ended December 31, 2010, 2009 and 2008, respectively. In addition, the Company purchases raw materials and services from certain Apollo affiliates. These purchases were $2 for the year ended December 31, 2010. The Company had accounts payable to Apollo affiliates of less than $1 at December 31, 2010.

The Company believes that the terms of these transactions were not more favorable than could be obtained from an unaffiliated party. These transactions are included in Net sales and Cost of sales in the Consolidated Statements of Operations, accordingly.

Billed Allocated Expenses

MSC incurs various administrative and operating costs on behalf of the Company that are reimbursed. These costs include engineering and technical support, purchasing, quality assurance, sales and customer service, information systems, research and development and certain administrative services. These service costs have been allocated to the Company generally based on sales or sales volumes and when determinable, based on the actual usage of resources. These costs were $62, $46 and $49 for the years ended December 31 2010, 2009 and 2008, respectively, and are primarily included within Selling, general and administrative expense in the Consolidated Statements of Operations.

MSC provides global services relating to procurement, productivity enhancement and health, safety and environmental issues to the Company. Beginning in 2008, MSC implemented a revenue-based royalty charge for these services. The Company’s expense relating to these services totaled $45, $22 and $79 for the years ended December 31, 2010, 2009 and 2008, respectively, and are classified in Selling, general and administrative expense in the Consolidated Statements of Operations.

In addition, MSC maintains certain insurance policies that benefit the Company. Expenses pertaining to these policies, and allocated to the Company based upon sales, were $4, $6 and $7 for the years ended December 31, 2010, 2009 and 2008, respectively, and are classified in Selling, general and administrative expense in the Consolidated Statements of Operations.

Terminated Huntsman Merger

The Company incurred Terminated merger costs of $159 for the year ended December 31, 2008 associated with the termination of MSC’s merger with Huntsman Corporation which is comprised of the write-off of previously deferred acquisition costs and consulting, legal, tax and accounting costs. Of the $159, $140 represents amounts incurred by MSC and billed to MSC B.V., as MSC B.V. was to be the acquiring entity party to the merger agreement and such costs were incurred by MSC on the Company’s behalf. In 2009, the $140 due to MSC was converted to a loan.

 

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Foreign exchange gain/loss agreement

In December 2010, the Company entered into a foreign exchange gain/loss guarantee agreement with MSC whereby MSC agreed to hold the Company neutral for any foreign exchange gains or losses incurred by the Company for income tax purposes associated with certain of its affiliated loans. The agreement was effective retroactive for all of 2010 and terminated at the end of 2010. The settlement of the agreement resulted in approximately a $91 payable to MSC. The losses incurred by the Company attributable to the period January 1, 2010 through the inception of the agreement of $78 have been recorded as a deemed distribution to MSC, and the losses incurred from the contract’s inception through the end of 2010 of $13 have been recorded within Other non-operating expense, net in the Consolidated Statements of Operations. The Company is currently evaluating a similar agreement with its parent for 2011.

At December 31, 2010 and 2009, the Company had affiliated receivables of $63 and $65, respectively, and affiliated payables of $193 (restated) and $42, respectively, pertaining to the related party transactions described above.

Unbilled Allocated Corporate Controlled Expenses

In addition to direct charges, MSC provides certain administrative services that are not reimbursed by the Company. These costs include corporate controlled expenses such as executive management, legal, health and safety, accounting, tax and credit, and have been allocated herein to the Company on the basis of Net sales. The charge also includes allocated stock-based compensation expense of $1, $2 and $3 for each of the years ended December 31, 2010, 2009 and 2008, respectively, and is included in Finance in the table below. Management believes that the amounts allocated in such a manner are reasonable and consistent and are necessary in order to properly depict the financial results of the Company on a stand-alone basis. However, the amounts are not necessarily indicative of the costs that would have been incurred if the Company had operated independently. This expense is included in Selling, general and administrative expense in the Consolidated Statements of Operations with the offsetting credit recorded in Equity. There is no income tax provided on these amounts because they are not deductible.

The following table summarizes these allocations for the years ended December 31:

 

     2010      2009      2008  

Executive group

   $ 6       $ 4       $ 2   

Environmental, health and safety services

     3         2         3   

Finance

     5         10         11   
  

 

 

    

 

 

    

 

 

 

Total

   $ 14       $ 16       $ 16   
  

 

 

    

 

 

    

 

 

 

See Note 11 for a description of the Company’s affiliated financing and investing activities.

6. Transfers of Financial Assets

The Company’s Brazilian subsidiary regularly enters into accounts receivable factoring arrangements with its local banks for purposes of accelerating collection of its receivables. Under the terms of the agreements, the receivables are sold at a discount with the Company retaining the underlying related credit risk. Further, the assets are not isolated in the event of bankruptcy on the part of the subsidiary. As such, these transfers are accounted for as financing-type transfers and reported as secured borrowings (see Note 10). Approximately $1 and $8 of borrowings under these arrangements are outstanding at December 31, 2010 and 2009, respectively. Accordingly, the corresponding related cash flows are classified as financing activities within Net short-term debt (repayments) borrowings in the Consolidated Statements of Cash Flows.

 

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7. Goodwill and Other Intangible Assets

The gross carrying amount and accumulated impairments of goodwill consist of the following as of December 31:

 

2010

  

2009

Gross

Carrying

Amount

  

Accumulated
Impairments

  

Accumulated
Foreign Currency
Translation

  

Net

Book

Value

  

Gross
Carrying
Amount

  

Accumulated
Impairments

  

Accumulated
Foreign Currency
Translation

  

Net

Book

Value

$ 106

   $(5)    $13    $114    $106    $(5)    $17    $118

The changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009 are as follows:

 

     Total  

Goodwill balance at December 31, 2008

   $ 110   

Purchase accounting adjustments

     1   

Foreign currency translation

     7   
  

 

 

 

Goodwill balance at December 31, 2009

     118   

Foreign currency translation

     (4
  

 

 

 

Goodwill balance at December 31, 2010

   $ 114   
  

 

 

 

Goodwill impairment charges for the year ended December 31, 2008 of $5 were recognized in the Coatings reporting unit as a result of the continued weakness in the housing and construction markets and competitive pressures in this reporting unit resulting in lower future reporting unit earnings and cash flows than previously projected. The amount of the charge was determined using a probability weighted market approach using EBITDA multiples and an income approach using discounted cash flows. The entire goodwill balance in the Coatings reporting unit has been impaired as the implied fair value of the reporting units’ goodwill was zero.

The Company’s intangible assets with identifiable useful lives consist of the following as of December 31:

 

     2010      2009  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Book
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Book
Value
 

Intangible assets:

               

Patents and technology

   $ 65       $ (22   $ 43       $ 65       $ (13   $ 52   

Customer lists and contracts

     78         (26     52         82         (21     61   

Other

     19         (2     17         19         —          19   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 162       $ (50   $ 112       $ 166       $ (34   $ 132   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The impact of foreign currency translation on intangible assets is included in accumulated amortization.

During the year ended December 31, 2008, the Company recorded an $8 charge for the impairment of tradenames from which cash flows are no longer generated. This amount is included in Other operating expense, net on the Consolidated Statements of Operations.

Total intangible amortization expense for the years ended December 31, 2010, 2009 and 2008 was $13 (restated), $14 and $15, respectively.

 

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Estimated annual intangible amortization expense for 2011 through 2015 is as follows:

 

2011

   $ 11   

2012

     10   

2013

     10   

2014

     10   

2015

     10   

8. Fair Value

Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:

 

   

Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 primarily consists of financial instruments traded on exchange or futures markets.

 

   

Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those derivative instruments transacted primarily in over the counter markets.

 

   

Level 3: Unobservable inputs, for example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

Recurring Fair Value Measurements

Following is a summary of assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009:

 

     Fair Value Measurements Using         
     Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Unobservable
Inputs (Level 3)
     Total  

December 31, 2010

          

Derivative liabilities

   $ —         $ (3   $ —         $ (3

December 31, 2009

          

Derivative liabilities

     —           (6     —           (6

Non-recurring Fair Value Measurements

Following is a summary of losses as a result of the Company measuring assets at fair value on a non-recurring basis during the year ended December 31, 2009:

 

     Year ended
December 31, 2009
 

Long-lived assets held and used

   $ (9

Long-lived assets held for sale

     (1

Long-lived assets held for disposal/abandonment

     (1
  

 

 

 

Total

   $ (11
  

 

 

 

As part of the Company’s productivity initiatives, the Company decided to indefinitely idle certain production lines. Long-lived assets with a carrying value of $18 were written down to fair value of $7, resulting in an impairment charge of $11 for the year ended December 31, 2009. These long-lived assets were valued

 

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based on appraisals from third parties or using discounted cash flow analysis based on assumptions that market participants would use. Key inputs in the model included projected revenues and manufacturing costs associated with these long-lived assets.

Non-derivative Financial Instruments

The following table includes the carrying amount and fair value of the Company’s non-derivative financial instruments as of December 31:

 

     2010      2009  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Debt

   $ 706       $ 696       $ 763       $ 686   

Fair values of debt are determined from quoted, observable market prices, where available, based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. The carrying amounts of cash and cash equivalents, accounts receivable, accounts and drafts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments

9. Derivative Instruments and Hedging Activities

Derivative Financial Instruments

The Company is exposed to certain risks related to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange risk, interest rate risk and commodity price risk. The Company does not hold or issue derivative financial instruments for trading purposes.

Foreign Exchange and Interest Rate Swap

The Company periodically enters into forward and option contracts to buy and sell foreign currencies to reduce foreign exchange exposure and protect the U.S. dollar value of such transactions to the extent of the amount under contract. The counter-parties to the Company’s forward contracts are financial institutions with investment grade ratings. The Company does not apply hedge accounting to these derivative instruments.

The Company periodically uses interest rate swaps to alter interest rate exposures between fixed and floating rates on certain long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated using an agreed-upon notional principal amount. The counter-parties to the interest rate swap agreements are financial institutions with investment grade ratings.

The Company calculates the fair value of its derivative liabilities using quoted market prices whenever available. When quoted market prices are not available, the Company uses standard pricing models with market-based inputs, adjusted for nonperformance risk. When its financial instruments are in a liability position, the Company evaluates its credit risk as a component of fair value. When its financial instruments are in an asset position, the Company is exposed to credit loss in the event of nonperformance by other parties to these contracts and evaluates their credit risk as a component of fair value.

In 2005, the Company entered into a three-year $289 cross-currency and interest rate swap agreement structured for a subsidiary’s $290 U.S. dollar denominated floating rate term loan. The swap was designed to offset balance sheet and interest rate exposures and cash flow variability associated with the exchange rate fluctuations on the term loan. The euro to U.S. dollar exchange rate under the swap agreement was 1.2038. The Company paid a variable rate equal to Euribor plus 271 basis points. The Company received a variable rate equal

 

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to the U.S. dollar LIBOR plus 250 basis points. In 2008, the Company paid $29 to settle a portion of its cross-currency and interest rate swaps, which matured in 2008.

The remaining portion of the cross-currency and interest rate swap was renegotiated and amended with the respective counterparties, effective September 30, 2008, in order to offset the ongoing balance sheet and interest rate exposures and cash flow variability associated with the exchange rate fluctuations of a subsidiary’s U.S. dollar denominated floating rate term loan. The amended swap agreement requires the Company to sell euros in exchange for U.S. dollars at a rate of 1.2038. The Company also will pay a variable rate equal to Euribor plus 390 basis points and will receive a variable rate equal to the U.S. dollar LIBOR plus 250 basis points. The amount the Company receives under this agreement is approximately equal to the subsidiary’s interest rate on its $290 term loan. This amended swap agreement has an initial notional amount of $25 that amortizes quarterly on a straight line basis to $24, prior to maturing on September 30, 2011. The Company paid a weighted average interest rate of 4.6% and 5.5% and received a weighted average interest rate of 2.8% and 3.4% on these amended swap agreements in 2010 and 2009, respectively.

In February 2007, the Company financed the Orica A&R Acquisition with proceeds of approximately $70 from a new five-year Australian Multi-Currency Term / Working Capital Facility. To effectively fix the interest rate on approximately $30 of this facility, the Company entered into interest rate swap agreements with two counterparties for an initial notional amount of AUD $35, which amortizes quarterly based on the expected loan payments. The swap agreements terminate December 30, 2011. The Company pays a fixed interest rate of 6.6% and receives a floating rate based on the terms of the underlying debt. The Company has not applied hedge accounting to this derivative instrument.

Commodity Contracts

The Company hedges a portion of its natural gas purchases for certain manufacturing plants. The Company enters into fixed price forward contracts for the purchase of natural gas to offset the risk associated with increases in the prices of the underlying commodities. The Company does not apply hedge accounting to these derivative instruments.

The following table summarizes the Company’s derivative financial instruments as of December 31, which are recorded as Other current liabilities in the Consolidated Balance Sheets:

 

     2010     2009  
     Average
Days to
Maturity
     Average
Contract
Rate
     Notional
Amount
     Fair Value
Asset
(Liability)
    Average
Days to
Maturity
     Average
Contract
Rate
     Notional
Amount
     Fair Value
Asset
(Liability)
 

Foreign Exchange and Interest Rate Swaps

                      

Cross-currency and Interest Rate Swap

     273         1.2038       $ 25       $ (3     638         1.2038       $ 25       $ (5

Interest Rate Swap

                      

Australia Multi-Currency Term

     364         —           22         —          729         —           23         (1
           

 

 

            

 

 

 

Total

            $ (3            $ (6
           

 

 

            

 

 

 

 

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The following table summarizes gains and losses recognized on the Company’s derivative financial instruments:

 

Derivatives Not Designated as
Hedging Instruments

   Amount of Gain (Loss) Recognized in Income
for the year  ended December 31:
   

Location of Gain (Loss) Recognized in

Income on Derivative

       2010              2009             2008        

Foreign Exchange and Interest Rate Swaps

         

Cross-Currency and Interest Rate Swap

   $ 2       $ (1   $ 26      Other non-operating expense, net

Interest Rate Swap

         

Interest swap – Australia Multi-Currency Term

     —           —          (2   Other non-operating expense, net
  

 

 

    

 

 

   

 

 

   

Total

   $ 2       $ (1   $ 24     
  

 

 

    

 

 

   

 

 

   

10. Debt and Lease Obligations

Debt outstanding at December 31 follows:

 

     2010      2009  
     Long Term      Due Within
One Year
     Long Term      Due Within
One Year
 

MSC Senior Secured Credit Facilities:

           

Revolving facility due 2011 at 3.0% at December 31, 2009

   $ —         $ —         $ 36       $ —     

Floating rate term loans due 2013 at 2.7% and 2.6% at December 31, 2010 and 2009, respectively

     189         1         574         6   

Floating rate term loans due 2015 at 4.1% at December 31, 2010

     373         5         —           —     

Other Borrowings:

           

Australia Multi-Currency Term / Working Capital Facility due 2012 at 4.5% and 4.1% at December 31, 2010 and 2009, respectively

     38         10         44         9   

Brazilian bank loans, various maturities through 2017, variable interest, 9.8% and 10.6% at December 31, 2010 and 2009, respectively

     33         37         30         35   

Capital Leases and Other

     16         3         17         4   

Secured borrowings (See Note 6)

     —           1         —           8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

   $ 649       $ 57       $ 701       $ 62   
  

 

 

    

 

 

    

 

 

    

 

 

 

2010 Refinancing Activities

January Refinancing Transactions

In late December 2009 and January 2010, MSC renewed its revolving facility commitments from lenders under the Senior Secured Credit Facility, which will take effect upon the May 31, 2011 maturity of the existing revolving facility commitments. Under the new commitments, the Company’s European subsidiaries are able to borrow an aggregate maximum of $111, while the Company’s Canadian operating subsidiary may borrow a maximum of $45. The new commitments will mature 91 days prior to the May 5, 2013 maturity date of the term loans under the Senior Secured Credit Facility. The new revolving loans, which cannot be drawn until the existing revolving credit facility matures, will bear interest at a rate of LIBOR plus 4.50%. The extension also

 

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includes a 2.00% ticking fee to be paid quarterly on committed amounts until the revolver facility is effective. The terms and conditions of MSC’s existing revolving credit facility will remain in effect, and are unaltered by the new extension, including but not limited to the interest rate.

In January 2010, MSC amended its Senior Secured Credit Facilities. Under the amendment and restatement, MSC extended the maturity of approximately $957 of its term loans from May 5, 2013 to May 5, 2015 and increased the interest rate with respect to such term loans from LIBOR plus 2.25% to LIBOR plus 3.75%. MSC B.V. is a party to approximately $382 of the extended maturity term loans.

The interest rates for term loans to MSC under the amended Senior Secured Credit Facilities are based on, at MSC’s option, (a) adjusted LIBOR plus 2.25% for term loans maturing 2013 and 3.75% for term loans maturing 2015 or (b) the higher of (i) JPMorgan Chase Bank, N.A.’s (JPMCB) prime rate or (ii) the Federal Funds Rate plus 0.50%, in each case plus 0.75% for term loans maturing 2013 and 2.25% for term loans maturing 2015. Interest rates for term loans to MSC B.V. are at the Company’s option; (a) EURO LIBOR plus 2.25% for term loans maturing 2013 or 3.75% for term loans maturing 2015 or (b) the rate quoted by JPMCB as its base rate for those loans plus 0.75% for term loans maturing 2013 and 2.25% for term loans maturing 2015.

Senior Secured Credit Facilities of MSC

Certain of the Company’s subsidiaries, MSC B.V., MSC Canada and MSC’s UK subsidiary, are eligible to participate in MSC’s amended Senior Secured Credit Facilities.

Under MSC’s amended five-year $225 revolving facility, MSC B.V. is able to borrow an aggregate maximum of $125, while MSC Canada may borrow a maximum of $50. As of December 31, 2009, the Company had $36 outstanding under the MSC revolving facilities.

Under MSC’s amended seven-year $2,300 term loan facility, MSC B.V. is party to approximately $580 in term loans. The interest rates for term loans to MSC under the amended Senior Secured Credit Facilities are based on, at MSC’s option, (a) adjusted LIBOR plus 2.25% or (b) the higher of (i) JPMorgan Chase Bank, N.A.’s (JPMCB) prime rate or (ii) the Federal Funds Rate plus 0.50%, in each case plus 0.75%.

In addition, the terms of MSC’s amended Senior Secured Credit Facilities include a seven-year $50 synthetic letter of credit facility (“LOC”). The amended Senior Secured Credit Facilities also have commitment fees (other than with respect to the LOC) equal to 0.50% per year of the unused line plus a fronting fee of 0.25% of the aggregate face amount of outstanding letters of credit. The LOC has a commitment fee of 0.10% per year.

The amended Senior Secured Credit Facilities of MSC are collateralized by substantially all the assets of MSC, including the Company, subject to certain exceptions. Cross collateral guarantees exist whereby MSC is a guarantor of the Company’s borrowings under the amended Senior Secured Credit Facilities; while the Company’s subsidiaries guarantee against any default by MSC. The amended Senior Secured Credit Facilities contain, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of a certain financial ratio. Payment of borrowings under the amended Senior Secured Credit Facilities may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of representation or warranty, covenant defaults, events of bankruptcy and a change of control. In addition, the Senior Secured Credit Facilities of MSC contain cross-acceleration and cross default provisions. Accordingly, certain foreign borrowing defaults under other debt agreements could result in certain of the Company’s outstanding debt becoming immediately due and payable. As of December 31, 2010, the Company was in compliance with all terms of its outstanding indebtedness. In addition, MSC was in compliance with all terms under its Senior Secured Credit Facility.

 

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Other Borrowings

The Australian Multi-Currency Term / Working Capital Facility is a five year facility maturing in January 2012. Interest rates for the facility are equal to the 90 day Australian or New Zealand Bank Bill Rates plus an applicable margin. The interest rate on approximately $30 of this facility is effectively fixed at a rate of 6.6% through the use of interest rate swap agreements.

The Brazilian bank loans represent various bank loans primarily for working capital purposes and to finance plant expansions.

In addition to available borrowings under the amended Senior Secured Credit Facilities, the Company has available borrowings under various international credit facilities. At December 31, 2010, under these international credit facilities the Company had $71 available to fund working capital needs and capital expenditures. While these facilities are primarily unsecured, portions of the lines are collateralized by equipment and cash and short term investments at December 31, 2010.

Aggregate maturities of total non-affiliated debt and minimum annual rentals under operating leases at December 31, 2010, for the Company are as follows:

 

Year

   Non-affiliated
Debt
     Minimum
Rentals Under
Operating Leases
 

2011

   $ 57       $ 9   

2012

     53         7   

2013

     201         6   

2014

     10         5   

2015

     374         5   

2016 and beyond

     11         16   
  

 

 

    

 

 

 
   $ 706       $ 48   
  

 

 

    

 

 

 

The Company’s operating leases consist primarily of vehicle, equipment and land and buildings. Rental expense amounted to $10 for each of the years ended December 31, 2010, 2009 and 2008.

 

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11. Affiliated Financing

The following table summarizes the Company’s outstanding loans receivable and loans payable with related parties as of December 31:

 

     2010     2009  
     Long Term      Due Within
One Year
     Interest
expense
(income)
    Long Term      Due Within
One Year
     Interest
expense
(income)
 

Affiliated debt payable:

                

Loan payable to MSC due 2010 at 7.5% at December 31, 2009

   $ —         $ —         $ 5      $ 165       $ —         $ 6   

Loan payable to MSC due 2020 at 9.0% at December 31, 2010

     340         —           1        —           —           —     

Loan payable due to Hexion NSF due 2018 at 10% and 10.8% at December 31, 2010 and 2009, respectively

     102         —           54        509         —           50   

Other loans due to MSC and affiliates at 4.68% and 4.76% at December 31, 2010 and 2009, respectively

     304         79         6        97         92         8   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total affiliated debt payable

   $ 746       $ 79       $ 66      $ 771       $ 92       $ 64   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Affiliated debt receivable:

                

Loan receivable from MSC due 2011 at a weighted average interest rate of 3.8% at December 31, 2009

   $ —         $ —         $ (12   $ 793       $ —         $ (40

Loan receivable from MSC due 2012 at 3.9%

     64         —           (4     133         —           (6

Other loans due from MSC and affiliates at 4.1% and at 5.2% December 31, 2010 and 2009, respectively

     43         33         (3     47         24         (2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total affiliated debt receivable

   $ 107       $ 33       $ (19   $ 973       $ 24       $ (48
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Transactions associated with the formation of CO-OP

In conjunction with the formation of CO-OP, the Company purchased from MSC 100% of its shares in MSC Holding B.V., in exchange for CO-OP assuming a note payable from MSC to MSC B.V. (the “Note”). Approximately $793 and $69 of amounts due from MSC and loans payable of $165 due to MSC were assigned and effectively settled upon CO-OP assuming the Note from MSC to MSC B.V. The face value of the note payable assumed is equivalent to the fair value of MSC Holding B.V. and its consolidated subsidiaries and was in excess of the historical carrying value of the assets. As such, the Company’s acquisition of the shares in MSC Holding B.V. and the excess by which the note payable assumed exceeded the carrying value of the shares in MSC Holding B.V. have been recorded as a distribution to its parent and reflected as a reduction to Paid-in capital in the Statement of Shareholder’s Equity (Deficit) and Comprehensive Loss. Approximately $466 of the loans payable assumed by CO-OP as a result of the formation of CO-OP represent amounts that were reported as a reduction of equity as of December 31, 2009 as further described in the discussion on balance sheet classification below.

MSC Canada has outstanding balances of CDN $102, or $102, at December 31, 2010 and CDN $532, or $509, at December 31, 2009 due to MSC’s subsidiary, Hexion Nova Scotia Finance, ULC (“Hexion NSF”) related to the acquisition of certain international subsidiaries from MSC and the acquisition of Bakelite

 

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Aktiengesellschaft. In conjunction with the issuance of this note, MSC entered into a common share forward subscription agreement with Momentive Canada requiring MSC to subscribe to shares of MSC Canada stock (“Stock Subscription Agreement”).

In November 2010, in conjunction with Hexion NSF’s refinancing of its second priority senior secured fixed notes, the Company and Hexion NSF agreed to amend the interest rate from 10.8% to 10% and extend the maturity date to November 15, 2020. As consideration, Hexion NSF billed the Company $18, which has been included in Other non-operating expense, net in the Consolidated Statements of Operations.

In conjunction with CO-OP’s acquisition of NBC Germany, CO-OP issued a note payable to MSC Canada of 254€, or $340, at December 31, 2010. In turn, MSC Canada assigned this note to Hexion NSF in partial settlement of its note payable to Hexion NSF. Interest expense related to this note totaled $1 for the year ended December 31, 2010. This partial settlement triggered the requirement of MSC to subscribe to shares in MSC Canada under the Stock Subscription Agreement, which was subsequently waived by MSC Canada.

Balance sheet classification

Of the outstanding loans receivable as of December 31, 2010 and 2009, $87 and $549, respectively, represent amounts receivable from MSC that are not expected to be repaid for the foreseeable future. As MSC is the Company’s parent, these amounts have been recorded as a reduction of equity in the Consolidated Balance Sheets. The remaining outstanding balances are included within Affiliated debt payable due within one year and Affiliated long-term debt within the Consolidated Balance Sheets.

The total outstanding loan balances are included within Affiliated debt payable within one year and Affiliated long-term debt within the Consolidated Balance Sheets.

12. Guarantees, Indemnities and Warranties

Standard Guarantees / Indemnifications

In the ordinary course of business, the Company enters into a number of agreements that contain standard guarantees and indemnities where the Company may indemnify another party for, among other things, breaches of representations and warranties. These guarantees or indemnifications are granted under various agreements, including those governing (i) purchases and sales of assets or businesses, (ii) leases of real property, (iii) licenses of intellectual property, (iv) long-term supply agreements, (v) employee benefits services agreements and (vi) agreements with public authorities on subsidies received for designated research and development projects. These guarantees or indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords or lessors in lease contracts, (iii) licensors or licensees in license agreements, (iv) vendors or customers in long-term supply agreements, (v) service providers in employee benefits services agreements and (vi) governments or agencies subsidizing research or development. In addition, the Company guarantees some of the payables of its subsidiaries to purchase raw materials in the ordinary course of business.

These parties may also be indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. Additionally, in connection with the sale of assets and the divestiture of businesses, the Company may agree to indemnify the buyer with respect to liabilities related to the pre-closing operations of the assets or businesses sold. Indemnities for pre-closing operations generally include tax liabilities, environmental liabilities and employee benefit liabilities that are not assumed by the buyer in the transaction.

Indemnities related to the pre-closing operations of sold assets normally do not represent additional liabilities to the Company, but simply serve to protect the buyer from potential liability associated with the Company’s existing obligations at the time of sale. As with any liability, the Company has accrued for those pre-closing obligations that it considers probable and reasonably estimable. The amounts recorded at December 31, 2010 and 2009 are not significant.

 

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While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless they are subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments to be made under these guarantees because the triggering events are not predictable.

Warranties

The Company does not make express warranties on its products, other than that they comply with the Company’s specifications; therefore, the Company does not record a warranty liability. Adjustments for product quality claims are not material and are charged against net sales.

13. Commitments and Contingencies

Environmental Matters

The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at December 31, 2010 and 2009.

 

     Number of Sites      Liability      Range of
Reasonably
Possible Costs
 

Site Description

   December 31,
2010
     December 31,
2009
     December 31,
2010
     December 31,
2009
     Low      High  

Currently-owned

     10         11       $ 5       $ 7       $ 3       $ 8   

Formerly-owned:

                 

Remediation

     1         1         —           —           —           —     

Monitoring only

     2         2         —           —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     13         14       $ 5       $ 7       $ 3       $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

These amounts include estimates for unasserted claims that the Company believes are probable of loss and reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based. To establish the upper end of a range, assumptions less favorable to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ materially from these estimates. At December 31, 2010 and 2009, $5 and $7, respectively, has been included in Other current liabilities in the Consolidated Balance Sheets with the remaining amount included in Other long-term liabilities.

At six of these locations, the Company is conducting environmental remediation and restoration under business realignment programs due to closure of the sites. Much of this remediation is being performed by the Company on a voluntary basis; therefore, the Company has greater control over the costs to be incurred and the timing of cash flows. The Company anticipates the amounts under these reserves will be paid within the next five years.

Non-Environmental Legal Matters

The Company is involved in various product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings that are considered to be in the ordinary course of business.

 

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The Company has reserves of $6 at December 31, 2010 and 2009 for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. The following legal claim is not in the ordinary course of business:

Brazil Tax Claim—In 1992, the State of Sao Paulo Administrative Tax Bureau issued an assessment against the Company’s Brazilian subsidiary claiming that excise taxes were owed on certain intercompany loans made for centralized cash management purposes. These loans were characterized by the Tax Bureau as intercompany sales. Since that time, management and the Tax Bureau have held discussions and the subsidiary filed an administrative appeal seeking cancellation of the assessment. The Administrative Court upheld the assessment in December 2001. In 2002, the subsidiary filed a second appeal with the highest-level Administrative Court, again seeking cancellation of the assessment. In February 2007, the highest-level Administrative Court upheld the assessment. The Company requested a review of this decision. On April 23, 2008, the Brazilian Administrative Tax Tribunal issued its final decision upholding the assessment against the subsidiary. The Company filed an Annulment action in the Brazilian Judicial Courts in May 2008 along with a request for an injunction to suspend the tax collection. The injunction was denied but the Annulment action is being pursued. The Company has pledged certain properties and assets in Brazil during the pendency of the Annulment action in lieu of paying the assessment. In September 2010, in the Company’s favor, the Court adopted its appointed expert’s report finding that the transactions in question were intercompany loans. Sao Paulo has mandatory appeal rights but the Court’s decision based on the facts is likely to be upheld and therefore, the Company does not believe a loss contingency is probable. At December 31, 2010 the amount of the assessment, including tax, penalties, monetary correction and interest, is 66 Brazilian reais, or approximately $40.

Environmental Institution of Paraná IAP—On August 25, 2009, Governo Do Paraná and the Environmental Institution of Paraná IAP, an environmental agency of the Brazilian government, provided Momentive Quimica Industria, our Brazilian subsidiary, with notice of a potential fine of up to $11 in connection with alleged environmental damages to the Port of Paranagua caused in November 2004 by an oil spill from a shipping vessel carrying methanol purchased by MSC. The investigation as to the cause of the accident has not been finalized. In early October 2009, MSC was granted an injunction precluding the imposition of any fines or penalties by the Paraná IAP. In November 2010, the Court lifted its injunction; however, the Company appealed in order to preclude the IAP from levying any fines or penalties. The Company continues to believe it has a strong defense and does not believe a loss contingency is probable. At December 31, 2010, the amount of the assessment, including tax, penalties, monetary correction and interest, is 22 Brazilian reais, or approximately $13.

Other Commitments and Contingencies

The Company entered into contractual agreements with third parties for the supply of site services, utilities, materials and facilities and for operation and maintenance services necessary to operate certain of the Company’s facilities on a stand-alone basis. The duration of the contracts range from less than one year to 20 years, depending on the nature of services. These contracts may be terminated by either party under certain conditions as provided for in the respective agreements; generally, 90 days notice is required for short-term contracts and three years notice is required for longer-term contracts (generally those contracts in excess of five years). Contractual pricing generally includes a fixed and variable component.

In addition, the Company entered into contractual agreements with third parties to purchase feedstocks or other services. The terms of these agreements vary from one to ten years and may be extended at the Company’s request and are cancelable by either party as provided for in each agreement. Feedstock prices are based on market prices less negotiated volume discounts or cost input formulas.

 

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The Company is required to make minimum annual payments under these contracts as follows:

 

Year

   Minimum
Annual
Purchase
Commitments
 

2011

   $ 178   

2012

     114   

2013

     95   

2014

     32   

2015

     17   

2016 and beyond

     87   
  

 

 

 

Total minimum payments

     523   

Less: Amount representing interest

     (57
  

 

 

 

Present value of minimum payments

   $ 466   
  

 

 

 

14. Pension and Non-Pension Postretirement Benefit Plans

Certain of the Company’s subsidiaries sponsor defined benefit pension plans covering certain employees primarily in Canada, Netherlands, Germany, France, Belgium and Malaysia. Depending on the plan, benefits are based on eligible compensation and/or years of credited service. The Company also sponsors defined contribution plans in some locations. Non-pension postretirement benefit plans are also provided to employees in Canada and to certain employees in the Netherlands. The Canadian plan provides retirees and their dependents with medical and life insurance benefits, which are supplemental benefits to the respective provincial healthcare plan in Canada. The Netherlands’ plan provides a lump sum payment at retirement.

The following table presents the change in benefit obligation, change in plan assets and components of funded status for the Company’s defined benefit pension and non-pension postretirement benefit plans for the years ended December 31:

 

     Pension Benefits     Postretirement
Benefits
 
     2010     2009     2010     2009  

Change in Benefit Obligation

        

Benefit obligation at beginning of year

   $ 308      $ 282      $ 5      $ 4   

Service cost

     8        8        —          —     

Interest cost

     15        16        —          —     

Actuarial losses

     3        —          1        —     

Foreign currency exchange rate changes

     (19     10        —          1   

Benefits paid

     (8     (8     —          —     

Plan curtailments/settlements

     —          (1     —          —     

Employee contributions

     1        1        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at end of year

   $ 308      $ 308      $ 6      $ 5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in Plan Assets

        

Fair value of plan assets at beginning of year

   $ 189      $ 162      $ —        $ —     

Actual return on plan assets

     14        7        —          —     

Employer contribution

     17        21        —          —     

Foreign currency exchange rate changes

     (12     6        —          —     

Benefits paid

     (8     (8     —          —     

Employee contributions

     1        1        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

     201        189        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded status of the plan at end of year

   $ (107   $ (119   $ (6   $ (5
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The foreign currency impact reflected in these rollforward tables are for changes in the euro and Canadian dollar versus the U.S. dollar.

 

     Pension Benefits     Postretirement
Benefits
 
     2010     2009     2010     2009  

Amounts recognized in the Consolidated Balance Sheets at December 31 consist of:

        

Noncurrent assets

   $ 15      $ 6      $ —        $ —     

Other current liabilities

     (4     (4     —          —     

Long-term pension obligations

     (118     (121     (6     (5

Accumulated other comprehensive loss (income)

     16        16        (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts recognized

   $ (91   $ (103   $ (8   $ (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in Accumulated other comprehensive (loss) income at December 31 consist of:

        

Net actuarial loss (gain)

   $ 12      $ 11      $ (1   $ (2

Net prior service cost (benefit)

     6        7        (1     (1

Deferred income taxes

     (2     (2     —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts recognized

   $ 16      $ 16      $ (2   $ (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated benefit obligation

   $ 293      $ 295       

Accumulated benefit obligation for funded plans

   $ 181      $ 179       

Pension plans with underfunded or non-funded accumulated benefit obligations at December 31:

        

Aggregate projected benefit obligation

   $ 129      $ 131       

Aggregate accumulated benefit obligation

     123        125       

Aggregate fair value of plan assets

     8        7       

Pension plans with projected benefit obligations in excess of plan assets at December 31:

        

Aggregate projected benefit obligation

   $ 135      $ 137       

Aggregate fair value of plan assets

     13        12       

Following are the components of net pension and postretirement expense (benefit) recognized by the Company for the years ended December 31:

 

     Pension Benefits     Postretirement benefits  
     2010     2009     2008     2010      2009     2008  

Service cost

   $ 8      $ 8      $ 8      $ —         $ —        $ —     

Interest cost on projected benefit obligation

     15        16        16        —           —          —     

Expected return on assets

     (11     (10     (9     —           —          —     

Amortization of prior service cost

     1        1        1        —           —          —     

Recognized actuarial gain

     —          (1     —          —           —          (1

Curtailment loss

     —          1        —          —           —          —     

Settlement gain

     —          —          —          —           (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net expense (benefit)

   $ 13      $ 15      $ 16      $ —         $ (1   $ (1
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The curtailment loss recognized on pension benefits during the year ended December 31, 2009 related to the impact of planned workforce reductions on a pension plan in the Netherlands. The settlement gain recognized during the year ended December 31, 2009 for postretirement plans resulted from lump sum payments made under the Company’s plan offered to certain associates in the Netherlands.

 

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The following amounts were recognized in other comprehensive income during the year ended December 31, 2010:

 

     Pension
Benefits
    Postretirement
Benefits
    Total  

Net actuarial losses arising during the year

   $ 1      $ 1      $ 2   

Amortization of prior service cost

     (1     —          (1
  

 

 

   

 

 

   

 

 

 

Loss recognized in other comprehensive income

     —          1        1   

Deferred income taxes

     —          (1     (1
  

 

 

   

 

 

   

 

 

 

Loss recognized in other comprehensive income, net of tax

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

The amounts in Accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during the next fiscal year are as follows:

 

     Pension
Benefits
     Postretirement
Benefits
     Total  

Prior service cost

   $ 1       $ —         $ 1   

Determination of actuarial assumptions

The Company’s actuarial assumptions are determined separately for each plan, taking into account the demographics of the population, the target asset allocations for funded plans, regional economic trends, statutory requirements and other factors that could impact the benefit obligation and plan assets. For the European plans, these assumptions are set by country, as the plans within these countries have similar demographics, and are impacted by the same regional economic trends and statutory requirements.

The discount rates selected reflect the rate at which pension obligations could be effectively settled. The Company selects the discount rates based on cash flow models using the yields of high-grade corporate bonds or the local equivalent with maturities consistent with the Company’s anticipated cash flow projections.

The expected rates of future compensation level increases are based on salary and wage trends in the chemical and other similar industries, as well as the Company’s specific compensation targets by country. Input is obtained from the Company’s internal Human Resources group and from outside actuaries. These rates include components for wage rate inflation and merit increases.

The expected long-term rate of return on Canadian plan assets is determined based on the plan’s current and projected asset mix. To determine the expected overall long-term rate of return on assets, the Company takes into account the rates on long-term debt investments held within the portfolio, as well as expected trends in the equity markets. Peer data and historical returns are reviewed and the Company consults with its actuaries, as well as investment professionals, to confirm that the Company’s assumptions are reasonable.

The weighted average rates used to determine the benefit obligations were as follows at December 31:

 

     Pension
Benefits
    Postretirement
Benefits
 
     2010     2009     2010     2009  

Discount rate

     5.5     5.5     5.6     6.3

Rate of increase in future compensation levels

     3.3     3.3     —          —     

The weighted average assumed health care cost trend rates are as follows at December 31:

        

Health care cost trend rate assumed for next year

     —          —          7.2     7.4

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

     —          —          4.5     4.4

Year that the rate reaches the ultimate trend rate

     —          —          2030        2029   

 

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The weighted average rates used to determine net periodic pension and postretirement expense were as follows for the years ended December 31:

 

     Pension Benefits     Postretirement Benefits  
     2010     2009     2008     2010     2009     2008  

Discount rate

     5.5     5.8     5.5     6.3     7.1     5.5

Rate of increase in future compensation levels

     3.3     3.3     3.3      

Expected long-term rate of return on plan assets

     5.8     5.8     5.8      

A one-percentage-point change in the assumed health care cost trend rates would change the projected benefit obligation for postretirement benefits by $1 and service cost and interest cost by a negligible amount.

Pension Investment Policies and Strategies

The Company’s investment strategy for the assets of its Canadian defined benefit pension plans is to maximize the long-term return on plan assets using a mix of equities and fixed income investments with a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and expected timing of future cash flow requirements. The investment portfolio contains a diversified blend of equity and fixed-income investments. Equity investments are also diversified across Canadian and foreign stocks, as well as growth, value and small and large capitalization investments. Investment risk and performance are measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset and liability studies.

The Company periodically reviews its target allocation of Canadian plan assets among various asset classes. The targeted allocations are based on anticipated asset performance, discussions with investment professionals and on the projected timing of future benefit payments.

The Company observes local regulations and customs regarding its European pension plans in determining asset allocations, which generally require a blended weight leaning toward more fixed income securities, including government bonds.

 

     Actual     Target  
     2010     2009     2011  

Weighted average allocations of European pension plan assets at December 31:

      

Equity securities

     14     13     21

Debt securities

     82     87     79

Cash, short-term investments and other

     4     —          —     
  

 

 

   

 

 

   

 

 

 
     100     100     100
  

 

 

   

 

 

   

 

 

 

Fair Value of Plan Assets

Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:

 

   

Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 equity securities are primarily in pooled asset and mutual funds and are valued based on underlying net asset value multiplied by the number of shares held.

 

   

Level 3: Unobservable inputs, for example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

 

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The following table presents pension plan investments measured at fair value on a recurring basis as of December 31, 2010 and 2009:

 

    Fair Value Measurements Using  
    2010     2009  
    Quoted
Prices  in

Active
Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Unobservable
Inputs
(Level 3)
    Total     Quoted
Prices  in

Active
Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Unobservable
Inputs
(Level 3)
    Total  

U.S. equity (a)

  $ —        $ 19      $ —        $ 19      $ —        $ 9      $ —        $ 9   

European equity (a)

    —          —          —          —          —          7        —          7   

Other international equity (a)

    —          5        —          5        —          5        —          5   

Debt securities/fixed income (a)

    —          106        —          106        —          111        —          111   

Liability driven investments (b)(d)

    —          56        —          56        —          45        —          45   

Balanced pooled funds (a)(e)

    —          8        —          8        —          7        —          7   

Pooled insurance products w/ fixed income guarantee (a)

    —          5        —          5        —          5        —          5   

Cash, money market and other (c)

    —          2        —          2        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ 201      $ —        $ 201      $ —        $ 189      $ —        $ 189   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Level 2 equity securities in pooled asset funds and are valued based on underlying net asset value multiplied by the number of shares held.
(b) Level 2 fixed income securities are valued using a market approach that includes various valuation techniques and sources, primarily using matrix/market corroborated pricing based on observable inputs including yield curves and indices.
(c) Cash, money market and other securities include mutual funds, certificates of deposit and other short-term cash investments for which the share price is $1 or book value is assumed to equal fair value due to the short duration of the investment term.
(d) Liability driven investments consist of a series of funds designed to provide returns matched to expected future cash flows, and include approximately 70% investments in fixed income securities targeting returns in line with 3-month euribor in the medium term, and 30% swaps, with an underlying portfolio of bonds and cash to counterbalance changes in the value of the swaps.
(e) The fund provides a mix of approximately 60% equity and 40% fixed income securities that achieves the target asset mix for the plan.

Projections of Plan Contributions and Benefit Payments

The Company expects to make contributions totaling $11 to its defined benefit pension plans in 2011.

 

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Estimated future plan benefit payments as of December 31, 2010 are as follows:

 

     Pension Benefits      Postretirement
Benefits
 

2011

   $ 8       $ —     

2012

     9         —     

2013

     9         1   

2014

     11         —     

2015

     11         1   

2016 to 2020

     72         2   

Defined Contribution and Other Plans

The Company sponsors a number of defined contribution plans for its employees in various countries. For most plans, employee contributions are voluntary, and the Company provides contributions ranging from 2% to 10%. Total charges to operations for matching contributions under these plans were $3, $3 and $4 for the years ended December 31, 2010, 2009 and 2008, respectively.

The Company’s German subsidiaries offer a government subsidized early retirement program to eligible employees called an Altersteilzeit Plan. The German government provides a subsidy in certain cases where the participant is replaced with a qualifying candidate. This subsidy has been discontinued for employees electing participation in the program after December 31, 2009. The Company has liabilities for these arrangements totaling $7 and $4 for the years ended December 31, 2010 and 2009, respectively. The Company incurred expense for these plans for the years ended December 31, 2010, 2009 and 2008 of $4, $1 and $2, respectively.

Also included in the Consolidated Balance Sheets at December 31, 2010 and 2009 are other post-employment benefit obligations primarily relating to liabilities for jubilee benefit plans offered to certain European employees of $4 and $4, respectively.

15. Shareholder’s (Deficit) Equity

Shareholder’s equity reflects the common equity of the Company with all of the common equity of its subsidiaries eliminated, except for the equity of Hexion Argentina, representing MSC’s 20% interest; MSC Malaysia, representing MSC’s 34% interest; Borden Argentina, representing MSC’s 5% interest and Nimbus, representing MSC’s interest as of December 31, 2010 and 2009.

The Company’s acquisition of the shares in MSC Holding B.V. and the excess by which the note payable assumed exceeded the carrying value of the shares in MSC Holding B.V. have been recorded as a distribution to its parent and reflected as a $697 reduction to Paid-in capital in the Consolidated Statements of Equity (Deficit) and Comprehensive Loss.

The Company incurred a loss of $78 associated with the termination of a foreign exchange gain/loss guarantee agreement with its parent attributable to the period from January 1, 2010 until the inception of the agreement in December 2010. This amount has been recorded as a deemed distribution to MSC.

 

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16. Income Taxes

Income tax expense (benefit) for the years ended December 31 is as follows:

 

     2010     2009     2008  
     (Restated, see Note 2)  

Current

      

Federal and provincial

   $ 33      $ (7   $ (3

Foreign

     9        —          18   
  

 

 

   

 

 

   

 

 

 

Total current

     42        (7     15   

Deferred

      

Federal and provincial

     (17     (3     2   

Foreign

     —          (8     (14
  

 

 

   

 

 

   

 

 

 

Total deferred

     (17     (11     (12
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

   $ 25      $ (18   $ 3   
  

 

 

   

 

 

   

 

 

 

A reconciliation of the combined differences between income taxes computed at the Dutch federal statutory tax rate of 25.5% and provisions for income taxes for the years ended December 31 are as follows:

 

     2010     2009     2008  
     (Restated, see Note 2)  

Income taxes computed at federal statutory tax rate

   $ 3      $ (14   $ (43

Foreign rate differentials

     (12     (7     2   

Losses and other expenses not deductible for tax

     23        6        40   

Increase in the taxes due to changes in valuation allowance

     11        2        4   

Additional tax benefit on foreign unrepatriated earnings

     1        —          —     

Changes in enacted tax rates

     (1     —          —     

Adjustment of prior estimates and other

     —          (5     —     
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

   $ 25      $ (18   $ 3   
  

 

 

   

 

 

   

 

 

 

The domestic and foreign components of income (loss) before income taxes for the years ended December 31 is as follows:

 

     2010     2009     2008  
     (Restated, see Note 2)  

Domestic

   $ (24   $ (60   $ (160

Foreign

     36        5        (8
  

 

 

   

 

 

   

 

 

 
   $ 12      $ (55   $ (168
  

 

 

   

 

 

   

 

 

 

 

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The tax effects of significant temporary differences and net operating loss and credit carryforwards which comprise the deferred tax assets and liabilities at December 31, 2010 and 2009, are as follows:

 

     2010     2009  

Assets

    

Non-pension post-employment

   $ 1      $ 1   

Accrued and other expenses

     14        26   

Net operating loss and credit carryforwards

     43        36   

Pension liabilities

     7        9   
  

 

 

   

 

 

 

Gross deferred tax assets

     65        72   

Valuation allowance

     (36     (22
  

 

 

   

 

 

 

Net deferred tax asset

     29        50   
  

 

 

   

 

 

 

Liabilities

    

Property, plant and equipment

     (75     (93

Unrepatriated earnings of foreign subsidiaries

     (33     (33

Intangibles

     (4     (19
  

 

 

   

 

 

 

Gross deferred tax liabilities

     (112     (145
  

 

 

   

 

 

 

Net deferred tax liability

   $ (83   $ (95
  

 

 

   

 

 

 

The following table summarizes the presentation of the net deferred tax liability on the consolidated balance sheets at December 31:

 

     2010     2009  

Assets

    

Current deferred income taxes (Other current assets)

   $ 17      $ 11   

Long-term deferred income taxes (Other assets)

     5        16   

Liabilities

    

Current deferred income taxes (Other current liabilities)

     —          (4

Long-term deferred income taxes

     (105     (118
  

 

 

   

 

 

 

Net deferred tax liability

   $ (83   $ (95
  

 

 

   

 

 

 

The Company’s deferred tax assets primarily include domestic and foreign net operating loss carryforwards. As of December 31, 2010, the domestic net operating loss carryforwards available are $48, which expire starting 2018. The foreign net operating loss carryforwards available are $110, related primarily to France, Germany, and the U.K. These net operating loss carryforwards have an unlimited carryover and do not expire. A valuation allowance of $36 has been provided against these foreign attributes.

The Company is no longer subject to federal examinations in the Netherlands for years before December 31, 2007. The Company conducts business globally and, as a result, certain of its subsidiaries file income tax returns in various foreign jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities throughout the world, including major jurisdictions such as Australia, Brazil, Canada, Germany, Italy, Korea, and the U.K.

The Company continuously reviews issues that are raised from ongoing examinations and open tax years to evaluate the adequacy of its liabilities. As the various taxing authorities continue with their audit/examination programs, the Company will adjust its reserves accordingly to reflect these settlements.

 

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Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

     2010      2009  

Balance at beginning of year

   $ 42       $ 45   

Additions based on tax positions related to the current year

     23         1   

Additions for tax positions of prior years

     1         2   

Reductions for tax positions of prior years

     —           (6
  

 

 

    

 

 

 

Balance at end of year

   $ 66       $ 42   
  

 

 

    

 

 

 

During the year ended December 31, 2010, the Company increased its amount of unrecognized tax benefits by $24 for various intercompany transactions related to current year tax positions and prior year changes in estimates. The Company did not recognize any interest or penalties for the years ended December 31, 2010 and 2009. The Company does not have any interest and penalties accrued at December 31, 2010 and 2009, respectively.

$66 of unrecognized tax benefits, if recognized, would affect the effective tax rate. The Company anticipates recognizing up to $38 of the total amount of the unrecognized tax benefits within the next 12 months as a result of negotiations with domestic and foreign jurisdictions.

 

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Report of Independent Registered Public Accounting Firm

To the Board of Managers of

Momentive International Holdings Cooperatief U.A.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholder’s equity and comprehensive loss and of cash flows present fairly, in all material respects, the financial position of Momentive International Holdings Cooperatief U.A. and its subsidiaries (the Company) at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 5 to the financial statements, the Company has entered into significant transactions with Momentive Specialty Chemicals Inc. Due to the significance of the related party transactions, the accompanying financial statements may not be indicative of the operating results and cash flows of the Company had it operated as a standalone entity.

As discussed in Note 1, the Company has restated its 2010, 2009 and 2008 financial statements to correct errors.

/s/ PricewaterhouseCoopers LLP

Columbus, Ohio

February 28, 2011, except as for the sixth paragraph of Note 1 and Note 16, as to which the date is September 22, 2011

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

MOMENTIVE INTERNATIONAL HOLDINGS COOPERATIEF U.A. (Unaudited)

 

     Six Months Ended
June 30,
 

(In millions)

   2011     2010  

Net sales

   $ 1,619      $ 1,324   

Cost of sales

     1,410        1,170   
  

 

 

   

 

 

 

Gross profit

     209        154   

Selling, general and administrative expense

     125        100   

Asset impairments

     18        —     

Other operating income, net

     (7     —     
  

 

 

   

 

 

 

Operating income

     73        54   

Interest expense, net

     19        19   

Affiliated interest expense, net

     26        19   

Other non-operating expense (income), net

     71        (37
  

 

 

   

 

 

 

(Loss) income from continuing operations before income tax and earnings from unconsolidated entities

     (43     53   

Income tax (benefit) expense

     (10     16   
  

 

 

   

 

 

 

(Loss) income from continuing operations before earnings from unconsolidated entities

     (33     37   

Loss from unconsolidated entities, net of taxes

     (1     (1
  

 

 

   

 

 

 

Net (loss) income from continuing operations

     (34     36   

Net income from discontinued operations, net of taxes

     8        8   
  

 

 

   

 

 

 

Net (loss) income

   $ (26   $ 44   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 22      $ (78
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

MOMENTIVE INTERNATIONAL HOLDINGS COOPERATIEF U.A. (Unaudited)

 

(In millions)

   June 30,
2011
    December 31,
2010
 

Assets

    

Current assets

    

Cash and cash equivalents (including restricted cash of $4 and $6, respectively)

   $ 116      $ 83   

Short-term investments

     6        6   

Accounts receivable (net of allowance for doubtful accounts of $18 and $20, respectively)

     512        368   

Accounts receivable from affiliates

     70        63   

Loans receivable from affiliates due within one year

     56        33   

Inventories:

    

Finished and in-process goods

     178        128   

Raw materials and supplies

     90        71   

Other current assets

     67        48   

Discontinued operations (See Note 3)

     —          145   
  

 

 

   

 

 

 

Total current assets

     1,095        945   
  

 

 

   

 

 

 

Long-term loans receivable from affiliates

     4        20   

Other assets, net

     78        70   

Property and equipment

    

Land

     54        49   

Buildings

     212        194   

Machinery and equipment

     1,359        1,238   
  

 

 

   

 

 

 
     1,625        1,481   

Less accumulated depreciation

     (821     (714
  

 

 

   

 

 

 
     804        767   

Goodwill

     123        114   

Other intangible assets, net

     98        112   
  

 

 

   

 

 

 

Total assets

   $ 2,202      $ 2,028   
  

 

 

   

 

 

 

Liabilities and Deficit

    

Current liabilities

    

Accounts and drafts payable

   $ 348      $ 246   

Accounts payable to affiliates

     226        193   

Debt payable within one year

     72        57   

Affiliated debt payable within one year

     358        79   

Income taxes payable

     18        19   

Other current liabilities

     105        95   

Discontinued operations (See Note 3)

     —          32   
  

 

 

   

 

 

 

Total current liabilities

     1,127        721   
  

 

 

   

 

 

 

Long-term liabilities

    

Long-term debt

     620        649   

Affiliated long-term debt

     657        746   

Deferred income taxes

     105        105   

Long-term pension and post employment benefit obligations

     137        125   

Other long-term liabilities

     58        55   
  

 

 

   

 

 

 

Total liabilities

     2,704        2,401   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 8)

    

Deficit

    

Paid-in deficit

     (121     (135

Loans receivable from parent

     (249     (87

Accumulated other comprehensive loss

     (34     (82

Accumulated deficit

     (99     (72
  

 

 

   

 

 

 

Total Momentive International Holdings Cooperatief U.A. shareholder’s deficit

     (503     (376

Noncontrolling interest

     1        3   
  

 

 

   

 

 

 

Total deficit

     (502     (373
  

 

 

   

 

 

 

Total liabilities and deficit

   $ 2,202      $ 2,028   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

MOMENTIVE INTERNATIONAL HOLDINGS COOPERATIEF U.A. (Unaudited)

 

      Six Months
Ended June 30,
 

(In millions)

   2011     2010  

Cash flows provided by operating activities

    

Net (loss) income

   $ (26   $ 44   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Depreciation and amortization

     54        52   

Allocations of corporate overhead

     5        8   

Gain on disposal of assets, net of taxes

     —          (1

Unrealized loss on foreign exchange guarantee with parent (See Note 4)

     37        —     

Deferred tax (benefit) provision

     (2     1   

Non-cash asset impairments and accelerated depreciation

     18        1   

Unrealized foreign currency loss

     31        1   

Other non-cash adjustments

     4        (2

Net change in assets and liabilities:

    

Accounts receivable

     (120     (129

Inventories

     (71     (45

Accounts and drafts payable

     79        72   

Income taxes payable

     (1     8   

Other assets

     18        5   

Other liabilities

     (14     52   
  

 

 

   

 

 

 

Net cash provided by operating activities

     12        67   
  

 

 

   

 

 

 

Cash flows provided by (used in) investing activities

    

Capital expenditures

     (24     (24

Capitalized interest

     —          (1

Proceeds from the sale of business, net of cash transferred

     124        7   

Change in restricted cash

     2        4   

Purchases of investments

     —          (3

Investment in unconsolidated affiliate

     —          (1
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     102        (18
  

 

 

   

 

 

 

Cash flows used in financing activities

    

Net short-term debt borrowings

     —          5   

Borrowings of long-term debt

     265        256   

Repayments of long-term debt

     (298     (283

Affiliated loan repayments, net

     (61     (15

Capital contribution

     14        —     

Common stock dividends paid

     (1     —     

Deferred financing fees paid

     —          (8
  

 

 

   

 

 

 

Net cash used in financing activities

     (81     (45
  

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     2        (4

Increase in cash and cash equivalents

     35        —     

Cash and cash equivalents (unrestricted) at beginning of period

     77        58   
  

 

 

   

 

 

 

Cash and cash equivalents (unrestricted) at end of period

   $ 112      $ 58   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for:

    

Interest, net

   $ 52      $ 36   

Income taxes, net of cash refunds

     4        8   

Non-cash investing and financing activity:

    

Distribution to parent - acquisition of subsidiaries previously combined

     —          (697

Affiliate note assumed to acquire subsidiaries

     —          697   

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED STATEMENT OF DEFICIT AND COMPREHENSIVE INCOME

MOMENTIVE INTERNATIONAL HOLDINGS COOPERATIEF U.A. (Unaudited)

 

(In millions)

  Paid-in
Deficit
    Loans
Receivable
From Parent
    Accumulated
Other
Comprehensive
Loss (a)
    Accumulated
Deficit
    Total
Momentive
International
Holdings
Cooperatief
U.A.
Shareholder’s
Deficit
    Noncontrolling
Interest
    Total  

Balance at December 31, 2010

  $ (135   $ (87   $ (82   $ (72   $ (376   $ 3      $ (373

Net loss

    —          —          —          (26     (26     —          (26

Gain recognized from pension and postretirement benefits, net of tax

    —          —          2        —          2        —          2   

Translation adjustments

    —          —          46        —          46        —          46   
         

 

 

   

 

 

   

 

 

 

Comprehensive income

            22        —          22   
         

 

 

   

 

 

   

 

 

 

Capital contribution from owners

    14        —          —          —          14        —          14   

Net borrowings to parent

    —          (139     —          —          (139     —          (139

Translation adjustments and other non-cash changes in principal

    —          (23     —          —          (23     —          (23

Dividends declared

    —          —          —          (1     (1     —          (1

Allocations of corporate overhead

    5        —          —          —          5        —          5   

Divestiture of IAR business

    (5     —          —          —          (5     (2     (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

  $ (121   $ (249   $ (34   $ (99   $ (503   $ 1      $ (502
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Accumulated other comprehensive loss at June 30, 2011 represents $21 of net foreign currency translation losses, net of tax and a $12 unrealized loss, net of tax, related to net actuarial losses and prior service costs for the Company’s defined benefit pension and postretirement plans. Accumulated other comprehensive income at December 31, 2010 represents $67 of net foreign currency translation losses, net of tax and a $14 loss, net of tax, related to net actuarial losses and prior service costs for the Company’s defined benefit pension and postretirement benefit plans.

See Notes to Condensed Consolidated Financial Statements

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In millions, except share and common unit data)

 

1. Background and Basis of Presentation

Momentive International Holdings Cooperatief U.A. (“CO-OP”) is a holding company whose primary assets are its investments in Momentive Specialty Chemicals B.V. (“MSC B.V.”) and Momentive Specialty Chemicals Canada, Inc. (“MSC Canada”), and their respective subsidiaries. Together, CO-OP, through its investments in MSC Canada and MSC B.V. and its respective subsidiaries, (collectively referred to as the “Company”), is engaged in the manufacture and marketing of urea, phenolic, epoxy and epoxy specialty resins and coatings applications primarily used in forest and industrial and construction products and other specialty and industrial chemicals worldwide. The Company is a wholly owned subsidiary of Momentive Specialty Chemicals Inc. (“MSC”) and has significant related party transactions with MSC as discussed in Note 5. CO-OP operates as a business under the direction and with support of its parent, MSC.

MSC serves global industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries.

Basis of Presentation—The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries, all of which are under the common control and management of MSC, and for which no substantive participating rights are held by minority shareholders. Intercompany transactions and balances have been eliminated. Noncontrolling interests exist for the equity interests in subsidiaries that are not 100% owned by the Company. However, due to common ownership, the full interest in these subsidiaries are included within the unaudited Condensed Consolidated Financial Statements presented herein.

Prior to the formation of the Company on June 4, 2010, and for all financial statement periods presented, all subsidiaries of the Company were considered entities under the common control of MSC as defined in the guidance for business combinations. As a result of the formation of the Company, these entities are presented in the accompanying financial statements retroactively on a combined basis. In addition, as all entities are under the common control of MSC, all entities have been accounted for on a historical cost basis consistent with the basis of MSC, and as such, the acquisition method of accounting has not been applied.

Year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Pursuant to the rules and regulations of the Securities and Exchange Commission, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited financial statements should be read in conjunction with the Company’s most recent audited financial statements and the accompanying notes included elsewhere in this prospectus.

 

2. Summary of Significant Accounting Policies

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Foreign Currency Translation—The Company recognized net transaction (losses) gains of $(40) and $38 for the six months ended June, 30, 2011 and 2010, respectively. Of the amounts recognized, $(38) and $42 represent net transaction (losses) gains for the six months ended June, 30, 2011 and 2010, respectively related to affiliated loans payable and receivable with entities that are not consolidated, combined or accounted for under the equity method in these consolidated financial statements.

 

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Impairment—The Company reviews long-lived definite-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is based on estimated undiscounted cash flows. Measurement of the loss, if any, is based on the difference between the carrying value and fair value.

During the six months ended June 30, 2011, as a result of the loss of a large customer that went out of business in the second quarter of 2011 and continued competitive pressures resulting in successive periods of negative cash flows associated with certain assets within the Company’s European forest products business, the Company recorded impairments of $18 on certain of its long-lived assets.

Subsequent Events—The Company has evaluated events and transactions subsequent to June 30, 2011 through September 22, 2011, the date of issuance of its unaudited Condensed Consolidated Financial Statements.

Reclassifications—Certain prior period balances have been reclassified to conform with current presentations.

Recently Issued Accounting Standards

Newly Adopted Accounting Standards

There were no newly issued accounting standards adopted by the Company in the first half of 2011.

Newly Issued Accounting Standards

In September 2011, the FASB issued Accounting Standards Update No. 2011-08: Testing for Goodwill Impairment (“ASU 2011-08”). ASU 2011-08 amends current goodwill impairment testing guidance by providing entities with an option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 will be effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. The Company is currently assessing the impact of ASU 2011-08 on its annual goodwill impairment test, as well as whether it will elect to early adopt ASU 2011-08 for its annual goodwill impairment test for the year ended December 31, 2011.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05: Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends current presentation guidance by eliminating the option for an entity to present the components of comprehensive income as part of the statement of changes in stockholder’s equity and requires presentation of comprehensive income in a single continuous financial statement or in two separate but consecutive financial statements. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 will be effective for the Company on January 1, 2012. The Company is currently assessing the impact of ASU 2011-05 to the presentation of its Statement of Comprehensive Income within its unaudited Condensed Consolidated Financial Statements.

 

3. Discontinued Operations

On January 31, 2011, the Company sold its Inks and Adhesive Resins (“IAR”) business to Harima Chemicals Inc. (“Harima”) for a purchase price of $120. The IAR business is engaged in the production of naturally derived resins and related products primarily used for the manufacture of printing inks, adhesives, synthetic rubber, specialty coatings and aroma chemicals and includes 11 manufacturing facilities in the United States, Europe and the Asia-Pacific region. Harima also paid $14 for cash and $8 for working capital transferred to Harima at the time of closing as part of the Purchase Agreement, less indebtedness and pension plan liability

transferred to Harima of $4. In the first half of 2011, a subsequent adjustment to the purchase price of $2 was accrued based upon the final expected working capital settlement as defined by the Purchase Agreement.

 

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In conjunction with the sale, as part of a Transitional Services Agreement, MSC and the Company will provide certain transitional services to the Buyer for a period of six months. The purpose of these services is to provide short-term assistance to the Buyer in assuming the operations of the IAR business. These services do not confer to MSC or the Company the ability to influence the operating or financial policies of the IAR business under its new ownership. MSC and the Company’s cash inflows and outflows from these services are expected to be insignificant during the transition period.

The portion of the IAR business held by the Company before the sale date represents substantially all of the international operations of the IAR business. The international operations of the IAR business includes 9 manufacturing facilities in the Europe, South America and Asia-Pacific regions. The IAR business held by the Company had net sales of $23 and pre-tax income of $9 for the six months ended June 30, 2011. For the six months ended June 30, 2010, the IAR business held by the Company had net sales of $114 and pre-tax income of $9. The IAR business is reported as a discontinued operation for all periods presented.

Immediately prior to the sale, MSC completed a legal restructuring to move all of the IAR businesses and entities to be owned by a subsidiary of the Company. The Company acquired these assets, located primarily in the U.S. and China for the purchase price allocation as agreed upon with the Buyer which resulted in a gain of $6 for the six months ended June 30, 2011. The amount is included in Net income from discontinued operations, net of tax in the unaudited Condensed Consolidated Statements of Operations.

The equity interests of certain of the Company’s subsidiaries included in the sale were partially held by MSC subsidiaries outside of the Company. The elimination of such equity interests has been recorded as a reduction of Paid-in deficit in the unaudited Condensed Consolidated Statement of Deficit and Comprehensive Income.

The Company recorded an estimated loss on the sale of the IAR business of $1 for the year ended December 31, 2010.

The aggregate carrying value of the IAR business held by the Company was $113 as of December 31, 2010. The major classes of assets and liabilities of discontinued operations included in the unaudited Condensed Consolidated Balance Sheets are as follows:

 

     December 31,
2010
 

Assets:

  

Accounts Receivable

   $ 51   

Inventories

     34   

Other current assets

     5   
  

 

 

 

Total current assets

     90   
  

 

 

 

Property and equipment, net

     45   

Other intangible assets, net

     6   

Other assets

     4   
  

 

 

 

Total noncurrent assets

     55   
  

 

 

 

Total assets of discontinued operations

   $ 145   
  

 

 

 

Liabilities:

  

Accounts and drafts payable

   $ 18   

Other current liabilities

     6   
  

 

 

 

Total current liabilities

     24   
  

 

 

 

Long-term debt

     4   

Other long-term liabilities

     4   
  

 

 

 

Total noncurrent liabilities

     8   
  

 

 

 

Total liabilities of discontinued operations

   $ 32   
  

 

 

 

 

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The assets and liabilities of discontinued operations are classified as current in the unaudited Condensed Consolidated Balance Sheets as of December 31, 2010.

 

4. Related Party Transactions

Product Sales and Purchases

The Company sells finished goods and certain raw materials to MSC and certain of its subsidiaries. Total sales were $123 and $114 for the six months ended June 30, 2011 and 2010, respectively. The Company also purchases raw materials and finished goods from MSC and certain of its subsidiaries, which were $41 for each of the six months ended June 30, 2011 and 2010. The Company believes that the terms of these transactions were not more favorable than could be obtained from an unaffiliated party. These transactions are included in Net sales and Cost of sales in the unaudited Condensed Consolidated Statements of Operations, accordingly.

Foreign exchange gain/loss agreement

In January 2011, the Company entered into a foreign exchange gain/loss guarantee agreement with MSC whereby MSC agreed to hold the Company neutral for any foreign exchange gains or losses incurred by the Company for income tax purposes associated with certain of its affiliated loans. The agreement matures in December 2011 with the right of either party to renew the contract on an annual basis. The Company has incurred unrealized losses related to this agreement of $37 for the six months ended June 30, 2011, which have been recorded within Other non-operating expense (income), net in the unaudited Condensed Consolidated Statements of Operations.

Unbilled Allocated Corporate Controlled Expenses

In addition to direct charges, MSC provides certain administrative services that are not reimbursed by the Company. These costs include corporate controlled expenses such as executive management, legal, health and safety, accounting, tax and credit, and have been allocated herein to the Company on the basis of Net sales. The charge also includes allocated stock-based compensation expense of $1 and less than $1 for the six months ended June 30, 2011 and 2010, respectively, which is included in Finance in the table below. Management believes that the amounts allocated in such a manner are reasonable and consistent and are necessary in order to properly depict the financial results of the Company on a stand-alone basis. However, the amounts are not necessarily indicative of the costs that would have been incurred if the Company had operated independently. This expense is included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Operations with the offsetting credit recorded in Equity.

The following table summarizes these allocations for the for the six months ended June 30:

 

     2011      2010  

Executive group

   $ 1       $ 3   

Environmental, health and safety services

     1         1   

Finance

     3         4   
  

 

 

    

 

 

 

Total

   $ 5       $ 8   
  

 

 

    

 

 

 

 

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5. Fair Value

Fair Value

Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:

 

   

Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.

 

   

Level 3: Unobservable inputs, for example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

Recurring Fair Value Measurements

Following is a summary of assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

 

     Fair Value Measurements Using      Total  
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
    Unobservable
Inputs (Level 3)
    

June 30, 2011

          

Derivative liabilities

   $ —         $ (42   $ —         $ (42

December 31, 2010

          

Derivative liabilities

     —           (3     —           (3

Level 2 includes those derivative instruments transacted primarily in over the counter markets.

The Company calculates the fair value of its derivative liabilities using quoted market prices whenever available. When quoted market prices are not available, the Company uses standard pricing models with market-based inputs, adjusted for nonperformance risk. When its financial instruments are in a liability position, the Company evaluates its credit risk as a component of fair value. At June 30, 2011 and December 31, 2010, no adjustment was made by the Company to reduce its derivative liabilities for nonperformance risk.

When its financial instruments are in an asset position, the Company is exposed to credit loss in the event of nonperformance by other parties to these contracts and evaluates their credit risk as a component of fair value.

Non-recurring Fair Value Measurements

Following is a summary of losses as a result of the Company measuring assets at fair value on a non-recurring basis during the six months ended June 30, 2011:

 

     Six months
ended June 30,
2011
 

Long-lived assets held and used

   $ 18   

As a result of the loss of a large customer that went out of business in the second quarter of 2011 and continued competitive pressures resulting in successive periods of negative cash flows associated with certain assets within the Company’s European forest products business, the Company has written down long-lived assets with a carrying value of $29 to fair value of $11, resulting in an impairment charge of $18 for the six months ended June 30, 2011. These assets were valued using a discounted cash flow analysis based on assumptions that

 

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market participants would use and incorporates probability-weighted cash flows based on the likelihood of various possible scenarios. Key inputs in the model included projected revenues, operating expenses, and asset usage charges associated with certain intangible assets.

Non-derivative Financial Instruments

The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:

 

     June 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Non-affiliated debt

   $ 692       $ 682       $ 706       $ 696   

Fair values of debt are determined from quoted, observable market prices, where available, based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. The carrying amounts of cash and cash equivalents, accounts receivable, accounts and drafts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

 

6. Derivative Instruments and Hedging Activity

Derivative Financial Instruments

The Company is exposed to certain risks related to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange risk and interest rate risk. The Company does not hold or issue derivative financial instruments for trading purposes.

Foreign Exchange Rate Swaps

The Company periodically enters into forward contracts to buy and sell foreign currencies to reduce foreign exchange exposure and protect the U.S. dollar value of certain transactions to the extent of the amount under contract. The counter-parties to our forward contracts are financial institutions with investment grade ratings. The Company does not apply hedge accounting to these derivative instruments.

Foreign Exchange Gain/Loss Agreement

The Company has entered into a foreign exchange gain/loss guarantee agreement with MSC whereby MSC agreed to hold the Company neutral for any foreign exchange gains or losses incurred by the Company for income tax purposes associated with certain of its affiliated loans. This arrangement qualifies as a derivative and is recorded at fair value. The Company does not apply hedge accounting to this derivative instrument.

Interest Rate Swaps

The Company periodically uses interest rate swaps to alter interest rate exposures between fixed and floating rates on certain long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated using an agreed-upon notional principal amount. The counter-parties to the interest rate swap agreements are financial institutions with investment grade ratings.

In February 2007, the Company entered into interest rate swap agreements to offset the cash flow variability that results from interest rate fluctuations on the Company’s Australian variable rate debt. The Company has not applied hedge accounting to this derivative instrument.

 

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The following tables summarize the Company’s derivative financial instruments:

 

          June 30, 2011     December 31, 2010  

Liability Derivatives

  

Balance Sheet Location

   Notional
Amount
     Fair Value
Liability
    Notional
Amount
     Fair Value
Liability
 

Derivatives not designated as hedging instruments

             

Foreign Exchange and Interest Rate Swaps

             

Cross-Currency and Interest Rate Swap

   Other current liabilities    $ 25       $ (5   $ 25       $ (3

Foreign Exchange Gain/Loss Agreement

             

Foreign Exchange Gain/Loss Agreement with Affiliate

   Accounts payable to affiliates      415         (37     —           —     

Interest Rate Swap

             

Interest swap—Australia Multi-Currency Term

   Other current liabilities      22         —          22         —     
        

 

 

      

 

 

 

Total derivatives not designated as hedging instruments

         $ (42      $ (3
        

 

 

      

 

 

 

 

Derivatives Not Designated as
Hedging Instruments

   Amount of (Loss) Gain
Recognized in Income on Derivative for
the six months ended:
    

Location of (Loss) Gain Recognized in
Income on Derivative

   June 30, 2011     June 30, 2010     

Foreign Exchange and Interest Rate Swaps

       

Cross-Currency and Interest Rate Swap

   $ (2   $ 4       Other non-operating expense, net

Foreign Exchange Gain/Loss Agreement

       

Foreign Exchange Gain/Loss Agreement

     (37     —         Other non-operating expense, net

Interest Rate Swap

       

Interest swap—Australia Multi-Currency Term

     —          1       Other non-operating expense, net
  

 

 

   

 

 

    

Total

   $ (39   $ 5      
  

 

 

   

 

 

    

 

7. Affiliated Financing

In the first half of 2011, in conjunction with the sale of the IAR business, a loan of $139 was made to MSC under a new note that bears interest at 3.263% and matures in January of 2013. In addition, for cash management purposes, the Company borrowed $88 from MSC under an existing loan that bears interest at 3.545% and matures in May of 2012.

Balance sheet classification

Of the outstanding loans receivable as of June 30, 2011 and December 31, 2010, $249 and $87, respectively, represent amounts receivable from MSC that are not expected to be repaid for the foreseeable future. As MSC is the Company’s parent, these amounts have been recorded as a reduction of equity in the unaudited Condensed Consolidated Balance Sheets. The remaining outstanding balances are included within Affiliated debt payable within one year and Affiliated long-term debt within the unaudited Condensed Consolidated Balance Sheets.

 

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The total outstanding loan payable balances are included within Affiliated debt payable within one year and Affiliated long-term debt within the unaudited Condensed Consolidated Balance Sheets.

 

8. Commitments and Contingencies

Environmental Matters

The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation at the federal, state and local levels as well as foreign laws and regulations, and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at June 30, 2011 and December 31, 2010:

 

     Number of Sites      Liability      Range of Reasonably
Possible Costs
 
Site Description    June 30, 2011      December 31,
2010
     June 30, 2011      December 31,
2010
     Low      High  

Currently-owned

     9         10       $ 6       $ 5       $ 3       $ 8   

Formerly-owned:

                 

Remediation

     1         1         —           —           —           —     

Monitoring only

     1         2         —           —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     11         13       $ 6       $ 5       $ 3       $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

These amounts include estimates for unasserted claims that the Company believes are probable of loss and reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based. To establish the upper end of a range, assumptions less favorable to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ materially from these estimates. At June 30, 2011 and December 31, 2010, $6 and $5, respectively, has been included in Other current liabilities in the unaudited Condensed Consolidated Balance Sheets.

At six of these locations, the Company is conducting environmental remediation and restoration under business realignment programs due to closure of the sites. Much of this remediation is being performed by the Company on a voluntary basis; therefore, the Company has greater control over the costs to be incurred and the timing of cash flows. The Company anticipates the amounts under these reserves will be paid within the next five years.

Non-Environmental Legal Matters

Following is a discussion of significant non-environmental legal proceedings: The Company is involved in various product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings that are considered to be in the ordinary course of business. The Company has reserves of $4 and $6 at June 30, 2011 and December 31, 2010, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. The following legal claim is not in the ordinary course of business.

Brazil Tax Claim—In 1992, the State of Sao Paulo Administrative Tax Bureau issued an assessment against the Company’s Brazilian subsidiary claiming that excise taxes were owed on certain intercompany loans

 

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made for centralized cash management purposes. These loans were characterized by the Tax Bureau as intercompany sales. Since that time, management and the Tax Bureau have held discussions and the subsidiary filed an administrative appeal seeking cancellation of the assessment. The Administrative Court upheld the assessment in December 2001. In 2002, the subsidiary filed a second appeal with the highest-level Administrative Court, again seeking cancellation of the assessment. In February 2007, the highest-level Administrative Court upheld the assessment. The Company requested a review of this decision. On April 23, 2008, the Brazilian Administrative Tax Tribunal issued its final decision upholding the assessment against the subsidiary. The Company filed an Annulment action in the Brazilian Judicial Courts in May 2008 along with a request for an injunction to suspend the tax collection. The injunction was denied but the Annulment action is being pursued. The Company has pledged certain properties and assets in Brazil during the pendency of the Annulment action in lieu of paying the assessment. In September 2010, in the Company’s favor, the Court adopted its appointed expert’s report finding that the transactions in question were intercompany loans. Sao Paulo has mandatory appeal rights but the Court’s decision based on the facts is likely to be upheld and therefore, the Company does not believe a loss is probable. At June 30, 2011, the amount of the assessment, including tax, penalties, monetary correction and interest, is 67 Brazilian reais, or approximately $43.

Environmental Institution of Paraná IAP—On August 10, 2005, Governo Do Paraná and the Environmental Institution of Paraná IAP, an environmental agency of the Brazilian government, provided Hexion Quimica Industria, our Brazilian subsidiary, with notice of a potential fine of up to $12 in connection with alleged environmental damages to the Port of Paranagua caused in November 2004 by an oil spill from a shipping vessel carrying methanol purchased by the Company. The investigation as to the cause of the accident has not been finalized. In early October 2009, the Company was granted an injunction precluding the imposition of any fines or penalties by the Paraná IAP which was filed in November 2010. The Company has filed an appeal to preclude the Paraná IAP from levying any assessment, and still believes it has a strong defense and does not believe a loss is probable. At June 30, 2011, the amount of the assessment, including tax, penalties, monetary correction and interest, is 27 Brazilian reais, or approximately $17.

Other Commitments and Contingencies

The Company entered into contractual agreements with third parties for the supply of site services, utilities, materials and facilities and for operation and maintenance services necessary to operate certain of the Company’s facilities on a stand-alone basis. The duration of the contracts range from less than one year to 20 years, depending on the nature of services. These contracts may be terminated by either party under certain conditions as provided for in the respective agreements; generally, 90 days notice is required for short-term contracts and three years notice is required for longer-term contracts (generally those contracts in excess of five years). Contractual pricing generally includes a fixed and variable component.

In addition, the Company entered into contractual agreements with third parties to purchase feedstocks or other services. The terms of these agreements vary from one to ten years and may be extended at the Company’s request and are cancelable by either party as provided for in each agreement. Feedstock prices are based on market prices less negotiated volume discounts or cost input formulas.

 

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9. Pension and Postretirement Expense

Following are the components of net pension and postretirement expense recognized by the Company for the six months ended June 30, 2011 and 2010:

 

     Six Months Ended June 30,  
     Non-U.S. Pension Benefits     Non-U.S.  Non-Pension
Postretirement Benefits
 
       2011         2010         2011          2010    

Service cost

   $ 4      $ 4      $ —         $ —     

Interest cost on projected benefit obligation

     9        8        —           —     

Expected return on assets

     (6     (6     —           —     

Amortization of prior service cost

     —          1        —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net expense

   $ 7      $ 7      $ —         $ —     
  

 

 

   

 

 

   

 

 

    

 

 

 

 

10. Other Events

In the second quarter of 2011, the Company agreed to terminate an operator contract (“Contract”) with a customer in response to the customer’s desire to restructure certain of its manufacturing capacity. The customer agreed to pay the Company a one-time compensation payment of 16 euro, or approximately $23, of which 11 euro, or $15, was paid to the Company in the second quarter of 2011 with the remaining to be paid upon the Company’s disabling of the related manufacturing assets. The compensation payment represents a contract termination penalty and payment for all unpaid minimum obligations incurred by the customer to date under the Contract. The Company recorded a net gain of $21 for the six months ended June 30, 2011 related to the termination of the Contract, which represents the full compensation payment net of the Company’s estimated cost to disable the related manufacturing assets. The amount is recorded in Other operating income, net in the unaudited Condensed Consolidated Statements of Operations.

 

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PART II: INFORMATION NOT REQUIRED IN THE PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution

Set forth below is a table of the registration fee for the Securities and Exchange Commission and estimates of all other expenses to be incurred in connection with the sale of the securities being registered:

 

SEC Registration fee

   $ 15,560   

Printing fees and expenses

   $ *   

Legal fees and expenses

   $ *   

Accounting fees and expense

   $ *   

Total

   $ *   
  

 

 

 

 

* To be filed by amendment.

 

Item 14. Indemnification of Directors and Officers

Registrants Incorporated in Delaware

With respect to the registrants incorporated in Delaware, Section 145(a) of the Delaware General Corporation Law (the “DGCL”) provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.

Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper.

Further subsections of DGCL Section 145 provide that:

 

   

to the extent a present or former director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses, including attorneys’ fees, actually and reasonably incurred by such person in connection therewith;

 

   

the indemnification and advancement of expenses provided for pursuant to Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise; and

 

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the corporation shall have the power to purchase and maintain insurance of behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under Section 145.

As used in this Item 20, the term “proceeding” means any threatened, pending, or completed action, suit, or proceeding, whether or not by or in the right of Registrant, and whether civil, criminal, administrative, investigative or otherwise.

Section 145 of the DGCL makes provision for the indemnification of officers and directors in terms sufficiently broad to indemnify officers and directors of each of the registrants incorporated in Delaware under certain circumstances from liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the “Act”). Each of the registrants incorporated in Delaware may, in their discretion, similarly indemnify their employees and agents. The Bylaws of each of the registrants incorporated in Delaware provide, in effect, that, to the fullest extent and under the circumstances permitted by Section 145 of the DGCL, each of the registrants incorporated in Delaware will indemnify any and all of its officers, directors, employees and agents. In addition, the Certificate of Incorporation of each of the registrants incorporated in Delaware relieves its directors from monetary damages to it or its stockholders for breach of such director’s fiduciary duty as a director to the fullest extent permitted by the DGCL. Under Section 102(b)(7) of the DGCL, a corporation may relieve its directors from personal liability to such corporation or its stockholders for monetary damages for any breach of their fiduciary duty as directors except (i) for a breach of the duty of loyalty, (ii) for failure to act in good faith, (iii) for intentional misconduct or knowing violation of law, (iv) for willful or negligent violations of certain provisions in the DGCL imposing certain requirements with respect to stock repurchases, redemptions and dividends, or (v) for any transactions from which the director derived an improper personal benefit.

Hexion Nova Scotia Finance, ULC

Under applicable Nova Scotia law, a company is permitted to indemnify its officers and directors on terms acceptable to its shareholders subject only to the general common law restrictions based on public policy and restrictions residing under specific legislation of relevant jurisdictions. The Articles of Association of Hexion Nova Scotia Finance, ULC provide that directors and officers shall be indemnified in the absence of any dishonesty on their part, against all costs, losses and expenses arising in respect of any claim made against such person or civil, criminal or administrative action or proceeding to which such person is made a party by reason of such person’s position at the company. Additionally, no director, officer, former director or officer, or person who acts or acted at the company’s request, in the absence of any dishonesty of such person’s part, shall be liable for the acts, receipts, neglects or defaults of any other director, officer or such person, or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Company through insufficiency or deficiency of title to any property acquired for or on behalf of the company, or through the insufficiency or deficiency of any security in or upon which any of the funds of the company are invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any funds, securities or effects are deposited, or for any loss occasioned by error of judgment or oversight on the part of such person, or for any other loss, damage or misfortune whatsoever which happens in the execution of the duties of such person or in relation thereto.

Momentive CI Holding Company (China) LLC, Borden Chemical Foundry, LLC and NL Coop Holdings LLC

Section 18-108 of the Delaware Limited Liability Company Act provides that, subject to such standards and restrictions, if any, as are set forth in its limited liability company agreement, a limited liability company may,

 

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and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims whatsoever. The limited liability company agreements for Momentive CI Holding Company (China) LLC, Borden Chemical Foundry, LLC and NL Coop Holdings LLC provide that each company shall, to the full extent permitted by applicable law, indemnify and hold harmless each member and each officer against liabilities incurred by it in connection with any action, suit or proceeding to which it may be made a party or otherwise involved or with which such member or such officer shall be threatened by reason of its being a member or officer or while acting as a member or officer on behalf of the company or in its interest.

Momentive Specialty Chemicals Inc.

With respect to Momentive Specialty Chemicals Inc. (“MSC”), the New Jersey Business Corporation Act provides that a New Jersey corporation has the power to indemnify a director or officer against his or her expenses and liabilities in connection with any proceeding involving the director or officer by reason of his or her being or having been such a director or officer, other than a proceeding by or in the right of the corporation, if such a director or officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation; and with respect to any criminal proceeding, such director or officer had no reasonable cause to believe his or her conduct was unlawful.

The indemnification and advancement of expenses shall not exclude any other rights, including the right to be indemnified against liabilities and expenses incurred in proceedings by or in the right of the corporation, to which a director or officer may be entitled under a certificate of incorporation, by-law, agreement, vote of shareholders, or otherwise; provided that no indemnification shall be made to or on behalf of a director or officer if a judgment or other final adjudication adverse to the director or officer establishes that his or her acts or omissions (a) were in breach of his or her duty of loyalty to the corporation or its shareholders, (b) were not in good faith or involved a knowing violation of law or (c) resulted in receipt by the director or officer of an improper personal benefit.

MSC’s Restated Certificate of Incorporation provides that every person who is or was a director or an officer of the corporation shall be indemnified by the corporation to the fullest extent allowed by law, including the indemnification permitted by New Jersey Business Corporation Act §14A:3-5(8), against all liabilities and expenses imposed upon or incurred by that person in connection with any proceeding in which that person may be made, or threatened to be made, a party, or in which that person may become involved by reason of that person being or having been a director or an officer of or of serving or having served in any capacity with any other enterprise at the request of the corporation, whether or not that person is a director or an officer or continues to serve the other enterprise at the time the liabilities or expenses are imposed or incurred. During the pendency of any such proceeding, the corporation shall, to the fullest extent permitted by law, promptly advance expenses that are incurred, from time to time, by a director or an officer in connection with the proceeding, subject to the receipt by the corporation of an undertaking as required by law.

In addition, MSC has obtained liability insurance coverage for its directors and officers, which insures against liabilities that directors and officers may incur while acting in such capacities. These policies contain standard exclusions and endorsements.

Insurance

Each of the Registrants’ currently maintains an insurance policy which, within the limits and subject to the terms and conditions thereof, covers certain expenses and liabilities that may be incurred by directors and officers in connection with proceedings that may be brought against them as a result of an act or omission committed or suffered while acting as a director or officer of this Registrant.

 

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Item 15. Recent Sales of Unregistered Securities

The following is a summary of our transactions within the past three years involving sales of our securities that were not registered under the Securities Act.

On January 29, 2010, Hexion Finance Escrow LLC and Hexion Escrow Corporation, our wholly owned subsidiaries, issued $1,000,000,000 in aggregate principal amount of 8.875% senior secured notes due 2018, pursuant to an indenture dated as of January 29, 2010, among Hexion Finance Escrow LLC, Hexion Escrow Corporation and Wilmington Trust FSB, as trustee, which each of the Issuers, together assumed pursuant to a supplemental indenture dated of January 29, 2010, among the Issuers, us, certain other of our subsidiaries acting as subsidiary guarantors and Wilmington Trust FSB, as trustee. These notes were issued in transactions exempt from registration under Section 4(2) of the Securities Act and in reliance on Regulation S thereunder.

On November 5, 2010, the Issuers issued $574,016,000 in aggregate principal amount of 9.00% Second-Priority Senior Secured Notes due 2020, pursuant to an indenture among the Issuers, us, certain other of our subsidiaries party thereto as subsidiary guarantors and Wilmington Trust Company, as trustee. $440,000,000 in aggregate principal amount of the Notes were issued to unaffiliated investors and $134,016,000 in aggregate principal amount of the Notes were issued to an affiliate of Apollo Global Management, LLC. The Notes were issued in transactions exempt from registration under Section 4(2) of the Securities Act and in reliance on Regulation S thereunder.

 

Item 16. Exhibits and Financial Statement Schedules

(a) The following exhibits are attached hereto:

 

          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
2.1†    Transaction Agreement dated as of April 22, 2005 among RPP Holdings, Resolution Specialty Materials Holdings LLC, BHI Acquisition Corp., BHI Merger Sub One, BHI Merger Sub Two Inc. and Borden Chemical Inc.      S-1/A         333-124287         2.1         7/15/2005      
2.2†    SOC Resins Master Sale Agreement dated July 10, 2000 among Shell Oil Company, Resin Acquisition, LLC and Shell Epoxy Resins Inc.      S-4         333-57170         2.1         3/16/2001      
2.3†    SPNV Resins Sale Agreement dated as of September 11, 2000 between Shell Petroleum N.V. and Shell Epoxy Resins Inc.      S-4         333-57170         2.2         3/16/2001      
2.4    Assignment and Assumption Agreement dated November 13, 2000 between Shell Epoxy Resins Inc. and Shell Epoxy Resins LLC      S-4         333-57170         2.3         3/16/2001      
2.5    Assignment and Assumption Agreement dated November 14, 2000 between Resin Acquisition, LLC and RPP Holdings LLC      S-4         333-57170         2.4         3/16/2001      
3.1    Certificate of Incorporation of Hexion U.S. Finance Corp.      S-4/A         333-122826         3.1         12/28/2005      

 

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          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
3.2    Bylaws of Hexion U.S. Finance Corp.      S-4/A         333-122826         3.2         12/28/2005      
3.3    Memorandum of Association of Hexion Nova Scotia Finance, ULC      S-4/A         333-122826         3.3         12/28/2005      
3.4    Articles of Association of Hexion Nova Scotia Finance, ULC      S-4/A         333-122826         3.4         12/28/2005      
3.5    Restated Certificate of Incorporation of Hexion Specialty Chemicals, Inc. dated as of July 18, 2006      S-4         333-135482         3.5         8/1/2006      
3.6    Amended and Restated Bylaws of Hexion Specialty Chemicals, Inc. dated as of July 18, 2006      S-4         333-135482         3.6         8/1/2006      
3.7    Agreement of Combination with Momentive Performance Material Holdings Inc on September 11, 2010      8-K         001-00071         99.1         9/13/2010      
3.8    Certificate of Amendment to the Certificate of Incorporation, dated October 1, 2010 changing the name of the corporation to Momentive Specialty Chemicals Inc.      8-K         001-00071         3.1         10/1/2010      
3.9    Certificate of Incorporation of Borden Chemical Investments, Inc.      S-4/A         333-122826         3.9         12/28/2005      
3.10    Bylaws of Borden Chemical Investments, Inc.      S-4/A         333-122826         3.10         12/28/2005      
3.11    Certificate of Amendment of Certificate of Incorporation, dated November 16, 2010 changing the name of the corporation to Momentive Specialty Chemicals Investments Inc.      S-4         333-172943         3.11         3/18/2011      
3.12    Certificate of Conversion of Borden Chemical Foundry, LLC      S-4         333-142173         3.9         4/17/2007      
3.13    Certificate of Formation of Borden Chemical Foundry, LLC      S-4         333-142173         3.10         4/17/2007      
3.14    Limited Liability Company Agreement of Borden Chemical Foundry, LLC      S-4         333-142173         3.11         4/17/2007      
3.15    Certificate of Incorporation of HSC Capital Corporation      S-4/A         333-122826         3.13         12/28/2005      
3.16    Bylaws of HSC Capital Corporation      S-4/A         333-122826         3.14         12/28/2005      
3.17    Certificate of Incorporation of Lawter International Inc.      S-4/A         333-122826         3.15         12/28/2005      
3.18    Bylaws of Lawter International Inc.      S-4/A         333-122826         3.16         12/28/2005      

 

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          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
3.19    Certificate of Incorporation of Borden Chemical International, Inc.      S-4/A         333-122826         3.17         12/28/2005      
3.20    Bylaws of Borden Chemical International, Inc.      S-4/A         333-122826         3.18         12/28/2005      
3.21    Certificate of Amendment of Certificate of Incorporation, dated February 2, 2011 changing the name of the corporation to Momentive International Inc.      S-4         333-172943         3.21         3/18/2011      
3.22    Certificate of Incorporation of Oilfield Technology Group, Inc.      S-4/A         333-122826         3.23         12/28/2005      
3.23    Bylaws of Oilfield Technology Group, Inc.      S-4/A         333-122826         3.24         12/28/2005      
3.24    Certificate of Formation of Hexion CI Holding Company (China) LLC      S-4/A         333-122826         3.25         12/28/2005      
3.25    Limited Liability Company Agreement of Hexion CI Holding Company (China) LLC      S-4/A         333-122826         3.26         12/28/2005      
3.26    Certificate of Amendment to Certificate of Formation, dated November 16, 2010 changing the name of the company to Momentive CI Holding Company (China) LLC      S-4         333-172943         3.26         3/18/2011      
3.27    Certificate of Formation of NL Coop Holdings LLC      S-4         333-172943         3.27         3/18/2011      
3.28    Limited Liability Company Agreement of NL Coop Holdings LLC      S-4         333-172943         3.28         3/18/2011      
4.1    Form of Indenture between Borden, Inc. and The First National Bank of Chicago, as Trustee, dated as of January 15, 1983, as supplemented by the First Supplemental Indenture dated as of March 31, 1986, and the Second Supplemental Indenture, dated as of June 26, 1996, relating to the $200,000,000 8 3/8% Sinking Fund Debentures due 2016     

 

 

S-3

 

10-Q

  

 

  

    

 

 

33-4381

 

001-00071

  

 

  

    

 

 

 

 

(4)(a)

and (b)

 

 

(4)(iv)

  

  

 

 

  

  

 

 

 

 

 

8/14/1996

 

 

  

  
4.2    Form of Indenture between Borden, Inc. and The Bank of New York, as Trustee, dated as of December 15, 1987, as supplemented by the First Supplemental Indenture dated as of December 15, 1987, the Second Supplemental Indenture dated as of February 1, 1993 and the Third Supplemental Indenture dated as of June 26, 1996.     

 

 

S-3

 

10-Q

  

 

  

    

 

 

33-45770

 

001-00071

  

 

  

    

 

 

 

4(a)

thru 4(d)

 

(4)(iii)

  

  

 

  

  

 

 

 

8/14/1996

 

  

  

 

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          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
  4.3    Indenture dated as of November 3, 2006 among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, Hexion Specialty Chemicals, Inc., the guarantors named therein and Wilmington Trust Company, as trustee, related to the $200,000,000 second-priority senior secured floating rate notes due 2014 and the $625,000,000 9 3/4% second-priority senior secured notes due 2014.      10-Q         001-00071         4.3         11/14/2006      
  4.4    Indenture, dated as of January 29, 2010, by and among Hexion Finance Escrow LLC, Hexion Escrow Corporation and Wilmington Trust FSB, as trustee.      8-K         001-00071         4.1         2/4/2010      
  4.5    Supplemental Indenture, dated as of January 29, 2010, by and among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Wilmington Trust FSB, as trustee.      8-K         001-00071         4.2         2/4/2010      
  4.6    Supplemental Indenture, dated as of June 4, 2010, by and among NL COOP Holdings LLC, Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Wilmington Trust FSB, as trustee.      8-K         001-00071         4.1         6/9/2010      
  4.7    Supplemental Indenture, dated as of June 4, 2010, by and among NL COOP Holdings LLC, Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Wilmington Trust Company, as trustee.      8-K         001-00071         4.2         6/9/2010      
  4.8    Indenture dated as of November 5, 2010 among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the Company, the guarantors named therein and Wilmington Trust Company, as trustee, related to the 9.0% second-priority senior secured floating rate notes due 2020.      8-K         001-00071         4.1         11/12/2010      
  4.9    Registration Rights Agreement, dated November 5, 2010, among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the Guarantors, including the Company, and Euro VI (BC) S.à r.l., (the “Holder”)      8-K         001-00071         4.3         11/12/2010      
  5.1*    Opinion of Paul, Weiss, Rifkind, Wharton & Garrison LLP               
  5.2*    Opinion of Connell Foley LLP               
  5.3*    Opinion of Stewart McKelvey               

 

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          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.1‡    BHI Acquisition Corp. 2004 Deferred Compensation Plan      10-Q         001-00071         10(iv)         11/15/2004      
10.2‡    BHI Acquisition Corp. 2004 Stock Incentive Plan      10-Q         001-00071         10(v)         11/15/2004      
10.3‡    Resolution Performance Products Inc. 2000 Stock Option Plan      S-4         333-57170         10.26         3/16/2001      
10.4‡    Resolution Performance Products Inc. 2000 Non - Employee Directors Stock Option Plan      S-4         333-57170         10.27         3/16/2001      
10.5‡    Amended and Restated Resolution Performance Products, Inc. Restricted Unit Plan as amended and restated May 31, 2005      S-1/A         333-124287         10.34         9/19/2005      
10.6‡    Form of Non-Qualified Stock Option Agreement between BHI Acquisition Corp. and certain optionees      S-4         333-122826         10.12         2/14/2005      
10.7‡    Resolution Specialty Materials Inc. 2004 Stock Option Plan      S-1/A         333-124287         10.52         7/15/2005      
10.8‡    Form of Nonqualified Stock Option Agreement for Resolution Specialty Materials Inc. 2004 Stock Option Plan      S-1/A         333-124287         10.53         7/15/2005      
10.9‡    Form of Nonqualified Stock Option Agreement for Resolution Performance Products Inc. 2000 Stock Option Plan      S-1/A         333-124287         10.54         7/15/2005      
10.10‡    Form of Nonqualified Stock Option Agreement for Resolution Performance Products Inc. 2000 Non-Employee Director Stock Option Plan      S-1/A         333-124287         10.55         7/15/2005      
10.11‡    Hexion LLC 2007 Long-Term Incentive Plan dated April 30, 2007      10-Q         001-00071         10.1         8/14/2007      
10.12    Amended and Restated Investor Rights Agreement dated as of May 31, 2005 between Hexion LLC, Hexion Specialty Chemicals, Inc. and the holders that are party thereto      S-1/A         333-124287         10.63         7/15/2005      
10.13    Registration Rights Agreement dated as of May 31, 2005 between Hexion Specialty Chemicals, Inc. and Hexion LLC      S-1/A         333-124287         10.64         7/15/2005      
10.14‡    Amended and Restated Executives’ Supplemental Pension Plan for Hexion Specialty Chemicals, Inc., dated as of September 7, 2005      8-K         001-00071         10         9/12/2005      

 

II-8


Table of Contents
         Incorporated by Reference

Exhibit

Number

 

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.15   Borden, Inc. Advisory Directors Plan dated 7/1/89      10-K         001-00071         10(viii)         3/1989      
10.16‡   Hexion Specialty Chemicals, Inc. 2009 Leadership Long-Term Cash Incentive Plan      10-K         001-00071         10.21         3/11/2009      
10.17‡   Hexion Specialty Chemicals, Inc. 2009 Incentive Compensation Plan      10-K         001-00071         10.25         3/11/2009      
10.18‡   Hexion Specialty Chemicals, Inc. 2010 Incentive Compensation Plan      10-K         001-00071         10.20         3/9/2010      
10.19‡   Amended and Restated Employment Agreement dated as of August 12, 2004 between Hexion Specialty Chemicals, Inc. and Craig O. Morrison      10-Q         001-00071         10(i)         11/15/2004      
10.20‡   Amended and Restated Employment Agreement dated as of August 12, 2004 between Hexion Specialty Chemicals, Inc. and Joseph P. Bevilaqua      10-Q         001-00071         10(ii)         11/15/2004      
10.21‡   Summary of Terms of Employment between Hexion Specialty Chemicals, Inc. and Joseph P. Bevilaqua dated August 10, 2008      10-K         001-00071         10.23         3/9/2010      
10.22‡   International assignment agreement dated as of November 13, 2008 between Hexion Specialty Chemicals, Inc. and Joseph P. Bevilaqua      10-K         001-00071         10.28         3/11/2009      
10.23‡   Amended and Restated Employment Agreement dated as of August 12, 2004 between Hexion Specialty Chemicals, Inc. and William H. Carter      10-Q         001-00071         10(iii)         11/15/2004      
10.24‡   Summary of Terms of Employment between Hexion Specialty Chemicals, Inc. and Judith A. Sonnett dated September 21, 2007      10-K         001-00071         10.29         3/9/2010      
10.25**‡   Addition of Terms of Employment between Hexion Specialty Chemicals, Inc. and Dale N. Plante, Supplement to August 2008 Promotional Employment Offer dated as of July 16, 2009      10-K         001-00071         10.27         2/28/2011      
10.26   Master Asset Conveyance and Facility Support Agreement, dated as of December 20, 2002, between Borden Chemical and Borden Chemicals and Plastics Operating Limited Partnership      10-K         001-00071         (10)(xxvi)         3/28/2003      

 

II-9


Table of Contents
          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.27    Environmental Servitude Agreement, dated as of December 20, 2002, between Borden Chemical and Borden Chemicals and Plastics Operating Limited Partnership      10-K         001-00071         (10)(xxvii)         3/28/2003      
10.28    Intellectual Property Transfer and License Agreement and Contribution Agreement dated as of November 14, 2000 between Shell Oil Company and Shell Epoxy Resins LLC      S-4         333-57170         10.13         3/16/2001      
10.29    Intellectual Property Transfer and License Agreement and Contribution Agreement dated as of November 14, 2000 between Shell Internationale Research Maatschappij B.V. and Shell Epoxy Resins Research B.V.      S-4         333-57170         10.14         3/16/2001      
10.30    First Amended and Restated Deer Park Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2000 between Shell Chemical Company, for itself and as agent for Shell Oil Company, and Shell Epoxy Resins LLC      S-4         333-57170         10.19         3/16/2001      
10.31    First Amended and Restated Pernis Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2000 between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell Nederland Raffinaderij B.V.      S-4         333-57170         10.21         3/16/2001      
10.32    First Amended and Restated Pernis Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2000 between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell Nederland Chemie B.V.      S-4         333-57170         10.22         3/16/2001      
10.33†    Second Amended and Restated Norco Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2004 between Shell Chemical L.P. and Resolution Performance Products LLC.      10-K         001-00071         10.45         3/22/2007      
10.34    Deer Park Ground Lease and Grant of Easements dated as of November 1, 2000 between Shell Oil Company and Shell Epoxy Resins LLC      S-4         333-57170         10.23         3/16/2001      
10.35    Norco Ground Lease and Grant of Servitudes dated as of November 1, 2000 between Shell Oil Company and Shell Epoxy Resins LLC      S-4         333-57170         10.24         3/16/2001      

 

II-10


Table of Contents
          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.36    Amended and Restated Agreement of Sub-Lease (Pernis) dated as of November 1, 2000 between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell Nederland Raffinaderij B.V.      S-4         333-57170         10.25         3/16/2001      
10.37    Amended and Restated Management Consulting Agreement dated as of May 31, 2005 between Borden Chemical, Inc. and Apollo Management V, L.P.      S-1/A         333-124287         10.66         7/15/2005      
10.38    Intercreditor Agreement dated as of November 3, 2006 among Hexion Specialty Chemicals, Inc., Hexion LLC, the subsidiary parties thereto, Wilmington Trust Company as trustee and JPMorgan Chase Bank, N.A. as intercreditor agent      10-Q         001-00071         10.1         11/14/2006      
10.39    Registration Rights Agreement dated as of November 3, 2006 among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance ULC, Hexion Specialty Chemicals, Inc. and subsidiary parties thereto and Credit Suisse Securities (USA) LLC and JPMorgan Securities, Inc. as initial purchasers.      10-Q         001-00071         10.2         11/14/2006      
10.40    Collateral Agreement dated as of November 3, 2006 among Hexion Specialty Chemicals, Inc. and subsidiary parties thereto, and Wilmington Trust Company, as Collateral Agent.      10-K         001-00071         10.57         3/11/2009      
10.41    Second Amended and Restated Collateral Agreement dated as of November 3, 2006 among Hexion LLC, Hexion Specialty Chemicals, Inc. and subsidiary parties thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.      10-K         001-00071         10.58         3/11/2009      
10.42    Second Amended and Restated Credit Agreement with exhibits and schedules dated as of November 3, 2006 among Hexion LLC, Hexion Specialty Chemicals, Inc., Hexion Specialty Chemicals Canada, Inc., Hexion Specialty Chemicals B.V., Hexion Specialty Chemicals UK Limited, Borden Chemical UK Limited, the lenders party thereto and JP Morgan Chase Bank, N.A., as Administrative Agent, Credit Suisse, as Syndication Agent and J.P. Morgan Securities Inc. and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and Joint Bookrunners.      10-Q         001-00071         10.1         8/13/2009      

 

II-11


Table of Contents
          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.43    Incremental Facility Amendment and Amendment No. 1 with exhibits and schedules to the Second Amended and Restated Credit Agreement dated as of June 15, 2007 among Hexion LLC, Hexion Specialty Chemicals, Inc., Hexion Specialty Chemicals Canada, Inc., Hexion Specialty Chemicals B.V., Hexion Specialty Chemicals UK Limited, Borden Chemical UK Limited, the lenders party thereto and JP Morgan Chase Bank, N.A., as Administrative Agent      10-Q         001-00071         10.2         8/13/2009      
10.44    Second Incremental Facility Amendment with exhibits and schedules to the Second Amended and Restated Credit Agreement dated as of August 7, 2007 among Hexion LLC, Hexion Specialty Chemicals, Inc., Hexion Specialty Chemicals Canada, Inc., Hexion Specialty Chemicals B.V., Hexion Specialty Chemicals UK Limited, Borden Chemical UK Limited, the lenders party thereto and JP Morgan Chase Bank, N.A., as Administrative Agent      10-Q         001-00071         10.3         8/13/2009      
10.45    Settlement Agreement and Release, dated December 14, 2008, among Huntsman Corporation, Jon M. Huntsman, Peter R. Huntsman, Hexion Specialty Chemicals, Inc., Hexion LLC, Nimbus Merger Sub, Inc., Craig O. Morrison, Leon Black, Joshua J. Harris and Apollo Global Management, LLC and certain of its affiliates      8-K         001-00071         10.1         12/15/2008      
10.46    Commitment Letter dated as of March 3, 2009 among the Hexion Specialty Chemicals, Inc., Hexion LLC, Euro VI (BC) S.a.r.l., Euro V (BC) S.a.r.l. and AAA Co-Invest VI (EHS-BC) S.a.r.l.      8-K         001-00071         10.1         3/3/2009      
10.47    Credit Agreement with exhibits and schedules dated as of March 3, 2009 among Hexion Specialty Chemicals, Inc., Borden Luxembourg S.a.r.l., Euro V (BC) S.a.r.l., Euro VI (BC) S.a.r.l. and AAA Co-Invest VI (EHS-BC) S.a.r.l.      10-Q         001-00071         10.4         8/13/2009      
10.48    Indemnification Agreement dated as of March 3, 2009 among Apollo Management, L.P. and subsidiary parties thereto, Hexion LLC, Hexion Specialty Chemicals, Inc. and Nimbus Merger Sub Inc.      8-K         001-00071         10.3         3/3/2009      

 

II-12


Table of Contents
          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing
Date
     Filed
Herewith
10.49    Amendment Agreement to Credit Agreement, dated as of January 25, 2010, among Hexion LLC, Hexion Specialty Chemicals, Inc., Hexion Specialty Chemicals Canada, Inc., Hexion Specialty Chemicals B.V., Hexion Specialty Chemicals UK Limited, Borden Chemical UK Limited, the Subsidiary Loan Parties party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent.      8-K/A         001-00071         10.1         2/4/2010      
10.50    Registration Rights Agreement, dated as of January 29, 2010, by and among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Credit Suisse Securities (USA) LLC, as representative of the initial purchasers.      8-K         001-00071         4.3         2/4/2010      
10.51    Third Amended and Restated Credit Agreement, dated as of January 29, 2010, among Hexion LLC, Hexion Specialty Chemicals, Inc., each subsidiary of Hexion Specialty Chemicals, Inc. from time to time party thereto, the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent.      8-K/A         001-00071         10.1         2/4/2010      
10.52    Intercreditor Agreement, dated as of January 29, 2010, by and among JPMorgan Chase Bank, as intercreditor agent, Wilmington Trust FSB, as trustee and collateral agent, Hexion LLC, Hexion Specialty Chemicals, Inc. and certain subsidiaries of Hexion Specialty Chemicals, Inc.      8-K/A         001-00071         10.1         2/4/2010      
10.53    Joinder and Supplement to Intercreditor Agreement, dated as of January 29, 2010, by and among Wilmington Trust FSB, as trustee under the Indenture, JPMorgan Chase Bank, as intercreditor agent, Wilmington Trust Company, as trustee and collateral agent and as second-priority agent, Hexion LLC, Hexion Specialty Chemicals, Inc. and each subsidiary of Hexion Specialty Chemicals, Inc. from time to time party thereto.      8-K         001-00071         10.3         2/4/2010      
10.54    Notes Collateral Agreement dated and effective as of January 29, 2010, among Hexion Specialty Chemicals, Inc., each Subsidiary Party thereto and Wilmington Trust FSB, as collateral agent.      8-K         001-00071         10.4         2/4/2010      

 

II-13


Table of Contents
          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing
Date
     Filed
Herewith
10.55    SUPPLEMENT dated as of June 4, 2010, to the U.S. Guarantee Agreement dated as of May 31, 2005, among HEXION LLC, a Delaware limited liability company, HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Domestic Subsidiary Loan Party party thereto and JPMORGAN CHASE BANK, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”) for the Lenders (as defined therein).      8-K         001-00071         10.1         6/9/2010      
10.56    SUPPLEMENT dated as of June 4, 2010, to the Foreign Guarantee Agreement dated as of May 31, 2005, among HEXION LLC, a Delaware limited liability company, HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Foreign Subsidiary Loan Party party thereto and JPMORGAN CHASE BANK, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”) for the Lenders (as defined therein).      8-K         001-00071         10.2         6/9/2010      
10.57    SUPPLEMENT dated as of June 4, 2010, to the Third Amended and Restated Collateral Agreement dated as of January 29, 2010, among HEXION LLC, a Delaware limited liability company, HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Subsidiary Party party thereto and JPMORGAN CHASE BANK, N.A., as Applicable First Lien Representative (in such capacity, the “Applicable First Lien Representative”) for the Secured Parties (as defined therein).      8-K         001-00071         10.3         6/9/2010      
10.58    SUPPLEMENT dated as of June 4, 2010, to the Collateral Agreement dated as of January 29, 2010, among HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Subsidiary Party party thereto and WILMINGTON TRUST FSB, as Collateral Agent (in such capacity, the “Collateral Agent”) for the Secured Parties (as defined therein).      8-K         001-00071         10.4         6/9/2010      

 

II-14


Table of Contents
          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.59    SUPPLEMENT dated as of June 4, 2010, to the Collateral Agreement dated as of November 3, 2006, among HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Subsidiary Party party thereto and WILMINGTON TRUST COMPANY, as Collateral Agent (in such capacity, the “Collateral Agent”) for the Secured Parties (as defined therein).      8-K         001-00071         10.5         6/9/2010      
10.60    Registration Rights Agreement dated as of November 5, 2010 among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance ULC, the Company and subsidiary parties thereto and Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., UBS Securities LLC, Deutsche Bank Securities Inc, Goldman, Sachs & Co., BMO Capital Markets Corp and JPMorgan Securities LLC as initial purchasers.      8-K         001-00071         4.2         11/12/2010      
10.61    Third Joinder and Supplement to Intercreditor Agreement, dated as of November 5, 2010, by and among JPMorgan Chase Bank, as intercreditor agent, Wilmington Trust Company, as trustee and collateral agent, Hexion LLC, the Company and certain of its subsidiaries.      8-K         001-00071         10.1         11/12/2010      
10.62    Joinder and Supplement to Collateral Agreement dated November 5, 2010 among the Company and subsidiary parties thereto, and Wilmington Trust Company, as trustee and collateral agent.      8-K         001-00071         10.2         11/12/2010      
10.63    Supplement, dated as of December 15, 2010 to the Foreign Guarantee Agreement, dated as of May 31, 2005 among Momentive Specialty Chemicals Holdings LLC, Momentive Specialty Chemicals Inc., each Foreign Subsidiary Loan Party party thereto and JP Morgan Chase Bank, as administrative agent for the Lenders.      8-K         001-00071         10.1         12/15/2010      
10.64    Shared Services agreement, dated as of October 1, 2010, by and among Hexion Specialty Chemicals, Inc. and Momentive Performance Materials Inc., and the other Persons party thereto      10-K         001-00071         10.68         2/28/2011      

 

II-15


Table of Contents
          Incorporated by Reference

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.65    Purchase and Sale Agreement, dated November 30, 2010, by and between Momentive Specialty Chemicals Inc. and Harima Chemicals, Inc.      8-K         001-00071         2.01         2/4/2011      
10.66‡    Momentive Performance Materials Holdings LLC 2011 Equity Incentive Plan      S-4         333-172943         10.69         3/18/2011      
10.67‡    Form of Restricted Deferred Unit Award Agreement of Momentive Performance Materials Holdings LLC      S-4         333-172943         10.70         3/18/2011      
10.68‡    Form of Unit Option Agreement of Momentive Performance Materials Holdings LLC      S-4         333-172943         10.71         3/18/2011      
10.69‡    Form of Director Unit Option Agreement of Momentive Performance Materials Holdings LLC      S-4         333-172943         10.72         3/18/2011      
10.70‡    Management Investor Rights Agreement, dated as of February 23, 2011 by and among Momentive Performance Materials Holdings LLC and the Holders      S-4         333-172943         10.73         3/18/2011      
10.71    Amended and Restated Shared Services Agreement dated March 17, 2011 by and among Momentive Performance Materials Inc., its subsidiaries and Momentive Specialty Chemicals Inc.      8-K         001-00071         10.1         3/17/2011      
10.72    Master Confidentiality Agreement and Joint Development Agreement entered into on March 17, 2011 by and between Momentive Performance Materials Inc. and Momentive Specialty Chemicals Inc.      8-K         001-00071         10.2         3/17/2011      
10.73‡    Momentive Performance Materials Holdings LLC 2011 Incentive Compensation Plan      10-Q         001-00071         10.1         5/13/2011      
10.74    Amendment Two to Second Amended and Restated Norco Site Services, Utilities, Materials and Facilities Agreement dated January 1, 2011 between Shell Chemical L.P. and Momentive Specialty Chemicals Inc.      10-Q         001-00071         10.2         5/13/2011      
10.75    Third Incremental Facility Amendment, dated as of May 18, 2011, by and among Momentive Specialty Chemicals Inc., the other borrowers named therein, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent.      8-K         001-00071         10.1         5/23/2011      

 

II-16


Table of Contents
          Incorporated by Reference  

Exhibit

Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
 
12.1    Statement regarding Computation of Ratios                  X   
18.1    Letter from PricewaterhouseCoopers, dated February 28, 2011 regarding preferability of a change in accounting principle      10-K         001-00071         18.1         2/28/2011      
21.1    List of Subsidiaries of Momentive Specialty Chemicals Inc.      S-4         333-172943         21.1         3/18/2011      
23.1    Consent of PricewaterhouseCoopers LLP, an independent registered public accounting firm                  X   
23.2*    Consent of Paul, Weiss, Rifkind, Wharton & Garrison LLP (included in Exhibit 5.1)               
23.3*    Consent of Connell Foley LLP (included in Exhibit 5.2)               
23.4*    Consent of Stewart McKelvey (included in Exhibit 5.3)               
24.1    Powers of Attorney of the Directors and Officers of the Registrants (included in signature pages)                  X   
25.1    Form T-1 (Wilmington Trust Company)                  X   

 

* To be filed by amendment.
** Exhibit itself is labeled as 10.70.
The schedules and exhibits to these agreements are omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedule or exhibit.
Represents a management contract or compensatory plan or arrangement.

 

II-17


Table of Contents

(b) Financial Statement Schedules

Momentive Specialty Chemicals Inc.

Schedule II – Valuation and Qualifying Accounts

 

Column A

   Column B      Column C      Column D     Column E  
            Additions               

Description

   Balance at
Beginning
of Period
     Charged
to cost and
expenses (1)
     Charged
to other
accounts
     Deductions     Balance at
End of
Period
 

Allowance for Doubtful Accounts:

             

Year ended December 31, 2010

   $ 24       $ 6       $ —         $ (5   $ 25   

Year ended December 31, 2009

     23         7         —           (6     24   

Year ended December 31, 2008

     22         2         —           (1     23   

Reserve for Obsolete Inventory:

             

Year ended December 31, 2009

     10         9         —           (10     9   

Year ended December 31, 2008

     8         5         —           (3     10   

Year ended December 31, 2007

     12         8         —           (12     8   

 

(1) Includes the impact of foreign currency translation

 

Item 17. Undertakings

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually of in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(4) That, for purposes of determining liability under the Securities Act of 1933 to any purchaser:

(i) Each prospectus filed pursuant to Rule 424(b) as part of the registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is

 

II-18


Table of Contents

first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of securities:

The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the act and will be governed by the final adjudication of such issue.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

HEXION U.S. FINANCE CORP.
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   Chief Financial Officer and Vice President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    CRAIG O. MORRISON        

Craig O. Morrison

   Director   September 22, 2011

/S/    WILLIAM H. CARTER        

William H. Carter

   Chief Financial Officer and Vice President (Principal Executive Officer, Principal Financial and Principal Accounting Officer)   September 22, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

HEXION NOVA SCOTIA FINANCE, ULC
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    WILLIAM H. CARTER        

William H. Carter

   Director and President (Principal Executive Officer, Principal Financial and Principal Accounting Officer)   September 22, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus Ohio, on September 22, 2011.

 

MOMENTIVE SPECIALTY CHEMICALS INC.
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   Executive Vice President and Chief Financial Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    CRAIG O. MORRISON        

Craig O. Morrison

   Director, Chairman, President and Chief Executive Officer (Principal Executive Officer)   September 22, 2011

/S/    WILLIAM H. CARTER        

William H. Carter

   Director, Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)   September 22, 2011

/S/    DAVID B. SAMBUR        

David B. Sambur

   Director   September 22, 2011

/S/    ROBERT V. SEMINARA        

Robert V. Seminara

   Director   September 22, 2011

/S/    JORDAN C. ZAKEN        

Jordan C. Zaken

   Director   September 22, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

MOMENTIVE SPECIALTY CHEMICALS INVESTMENTS INC.
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    GEORGE F. KNIGHT        

George F. Knight

   Vice President and Treasurer (Principal Financial and Principal Accounting Officer)   September 22, 2011

/S/    WILLIAM H. CARTER        

William H. Carter

   Director and President (Principal Executive Officer)   September 22, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

BORDEN CHEMICAL FOUNDRY, LLC
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   Vice President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    CRAIG O. MORRISON        

Craig O. Morrison

   Director   September 22, 2011

/S/    WILLIAM H. CARTER        

William H. Carter

   Director and Vice President (Principal Executive Officer, Principal Financial and Principal Accounting Officer)   September 22, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

HSC CAPITAL CORPORATION
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    CRAIG O. MORRISON        

Craig O. Morrison

   Director   September 22, 2011

/S/    WILLIAM H. CARTER        

William H. Carter

   Director and President (Principal Executive Officer, Principal Financial and Principal Accounting Officer)   September 22, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

LAWTER INTERNATIONAL INC.
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    WILLIAM H. CARTER        

William H. Carter

   Director and President (Principal Executive Officer)   September 22, 2011

/S/    GEORGE F. KNIGHT        

George F. Knight

   Vice President and Treasurer Principal Financial and Principal Accounting Officer)   September 22, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

MOMENTIVE INTERNATIONAL INC.
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    WILLIAM H. CARTER        

William H. Carter

   Director and President (Principal Executive Officer, Principal Financial and Principal Accounting Officer)   September 22, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

OILFIELD TECHNOLOGY GROUP, INC.

By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   Vice President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    WILLIAM H. CARTER        

William H. Carter

   Vice President (Principal Executive Officer, Principal Financial and Principal Accounting Officer)   September 22, 2011

/S/    GEORGE F. KNIGHT        

George F. Knight

   Vice President and Treasurer Principal Financial and Principal Accounting Officer)   September 22, 2011

/S/    CRAIG O. MORRISON        

Craig O. Morrison

   Director   September 22, 2011

/S/    JOSEPH P. BEVILAQUA        

Joseph P. Bevilaqua

   Director   September 22, 2011

/S/    JERRY F. BORGES        

Jerry F. Borges

   Director   September 22, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

MOMENTIVE CI HOLDING COMPANY
(CHINA) LLC
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/     WILLIAM H. CARTER        

William H. Carter

   President (Principal Executive Officer)   September 22, 2011

/S/    GEORGE F. KNIGHT        

George F. Knight

   Vice President and Treasurer (Principal Financial and Principal Accounting Officer)   September 22, 2011
LAWTER INTERNATIONAL INC.    Sole Managing Member   September 22, 2011

 

By:  

/S/    ELLEN GERMAN BERNDT      

  Name:    Ellen German Berndt
  Title:   Vice President and Secretary

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Columbus, Ohio, on September 22, 2011.

 

NL COOP HOLDINGS, LLC
By:  

/S/    WILLIAM H. CARTER        

  Name:   William H. Carter
  Title:   Vice President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints William H. Carter and Douglas A. Johns, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

Signature

  

Title

 

Date

/S/    WILLIAM H. CARTER        

William H. Carter

   President (Principal Executive Officer)   September 22, 2011

/S/    GEORGE F. KNIGHT        

George F. Knight

   Senior Vice President and Treasurer (Principal Financial and Principal Accounting Officer)   September 22, 2011
MOMENTIVE SPECIALTY CHEMICALS INC.    Sole Managing Member   September 22, 2011

 

By:  

/S/    ELLEN GERMAN BERNDT        

  Name:   Ellen German Berndt
  Title:   Vice President and Secretary

 

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Table of Contents

EXHIBIT INDEX

 

         Incorporated by Reference

Exhibit
Number

 

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
2.1†   Transaction Agreement dated as of April 22, 2005 among RPP Holdings, Resolution Specialty Materials Holdings LLC, BHI Acquisition Corp., BHI Merger Sub One, BHI Merger Sub Two Inc. and Borden Chemical Inc.      S-1/A         333-124287         2.1         7/15/2005      
2.2†   SOC Resins Master Sale Agreement dated July 10, 2000 among Shell Oil Company, Resin Acquisition, LLC and Shell Epoxy Resins Inc.      S-4         333-57170         2.1         3/16/2001      
2.3†   SPNV Resins Sale Agreement dated as of September 11, 2000 between Shell Petroleum N.V. and Shell Epoxy Resins Inc.      S-4         333-57170         2.2         3/16/2001      
2.4   Assignment and Assumption Agreement dated November 13, 2000 between Shell Epoxy Resins Inc. and Shell Epoxy Resins LLC      S-4         333-57170         2.3         3/16/2001      
2.5   Assignment and Assumption Agreement dated November 14, 2000 between Resin Acquisition, LLC and RPP Holdings LLC      S-4         333-57170         2.4         3/16/2001      
3.1   Certificate of Incorporation of Hexion U.S. Finance Corp.      S-4/A         333-122826         3.1         12/28/2005      
3.2   Bylaws of Hexion U.S. Finance Corp.      S-4/A         333-122826         3.2         12/28/2005      
3.3   Memorandum of Association of Hexion Nova Scotia Finance, ULC      S-4/A         333-122826         3.3         12/28/2005      
3.4   Articles of Association of Hexion Nova Scotia Finance, ULC      S-4/A         333-122826         3.4         12/28/2005      
3.5   Restated Certificate of Incorporation of Hexion Specialty Chemicals, Inc. dated as of July 18, 2006      S-4         333-135482         3.5         8/1/2006      
3.6   Amended and Restated Bylaws of Hexion Specialty Chemicals, Inc. dated as of July 18, 2006      S-4         333-135482         3.6         8/1/2006      
3.7   Agreement of Combination with Momentive Performance Material Holdings Inc on September 11, 2010      8-K         001-00071         99.1         9/13/2010      
3.8   Certificate of Amendment to the Certificate of Incorporation, dated October 1, 2010 changing the name of the corporation to Momentive Specialty Chemicals Inc.      8-K         001-00071         3.1         10/1/2010      
3.9   Certificate of Incorporation of Borden Chemical Investments, Inc.      S-4/A         333-122826         3.9           12/28/2005      
3.10   Bylaws of Borden Chemical Investments, Inc.      S-4/A         333-122826         3.10         12/28/2005      

 

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          Incorporated by Reference

Exhibit
Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
3.11    Certificate of Amendment of Certificate of Incorporation, dated November 16, 2010 changing the name of the corporation to Momentive Specialty Chemicals Investments Inc.      S-4         333-172943         3.11         3/18/2011      
3.12    Certificate of Conversion of Borden Chemical Foundry, LLC      S-4         333-142173         3.9           4/17/2007      
3.13    Certificate of Formation of Borden Chemical Foundry, LLC      S-4         333-142173         3.10         4/17/2007      
3.14    Limited Liability Company Agreement of Borden Chemical Foundry, LLC      S-4         333-142173         3.11         4/17/2007      
3.15    Certificate of Incorporation of HSC Capital Corporation      S-4/A         333-122826         3.13         12/28/2005      
3.16    Bylaws of HSC Capital Corporation      S-4/A         333-122826         3.14         12/28/2005      
3.17    Certificate of Incorporation of Lawter International Inc.      S-4/A         333-122826         3.15         12/28/2005      
3.18    Bylaws of Lawter International Inc.      S-4/A         333-122826         3.16         12/28/2005      
3.19    Certificate of Incorporation of Borden Chemical International, Inc.      S-4/A         333-122826         3.17         12/28/2005      
3.20    Bylaws of Borden Chemical International, Inc.      S-4/A         333-122826         3.18         12/28/2005      
3.21    Certificate of Amendment of Certificate of Incorporation, dated February 2, 2011 changing the name of the corporation to Momentive International Inc.      S-4         333-172943         3.21         3/18/2011      
3.22    Certificate of Incorporation of Oilfield Technology Group, Inc.      S-4/A         333-122826         3.23         12/28/2005      
3.23    Bylaws of Oilfield Technology Group, Inc.      S-4/A         333-122826         3.24         12/28/2005      
3.24    Certificate of Formation of Hexion CI Holding Company (China) LLC      S-4/A         333-122826         3.25         12/28/2005      
3.25    Limited Liability Company Agreement of Hexion CI Holding Company (China) LLC      S-4/A         333-122826         3.26         12/28/2005      
3.26    Certificate of Amendment to Certificate of Formation, dated November 16, 2010 changing the name of the company to Momentive CI Holding Company (China) LLC      S-4         333-172943         3.26         3/18/2011      
3.27    Certificate of Formation of NL Coop Holdings LLC      S-4         333-172943         3.27         3/18/2011      
3.28    Limited Liability Company Agreement of NL Coop Holdings LLC      S-4         333-172943         3.28         3/18/2011      

 

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Table of Contents
          Incorporated by Reference

Exhibit
Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
  4.1    Form of Indenture between Borden, Inc. and The First National Bank of Chicago, as Trustee, dated as of January 15, 1983, as supplemented by the First Supplemental Indenture dated as of March 31, 1986, and the Second Supplemental Indenture, dated as of June 26, 1996, relating to the $200,000,000 8 3/8% Sinking Fund Debentures due 2016     

 

 

S-3

 

10-Q

  

 

  

    

 

 

33-4381

 

001-00071

  

 

  

    
 

 

 

(4)(a)
and (b)

 

(4)(iv)

  
  

 

  

  

 

 

 

8/14/1996

 

  

  
  4.2    Form of Indenture between Borden, Inc. and The Bank of New York, as Trustee, dated as of December 15, 1987, as supplemented by the First Supplemental Indenture dated as of December 15, 1987, the Second Supplemental Indenture dated as of February 1, 1993 and the Third Supplemental Indenture dated as of June 26, 1996.     

 

 

S-3

 

10-Q

  

 

  

    

 

 

33-45770

 

001-00071

  

 

  

    

 

 

 

4(a)

thru 4(d)

 

(4)(iii)

  

  

 

  

  

 

 

 

8/14/1996

 

  

  
  4.3    Indenture dated as of November 3, 2006 among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, Hexion Specialty Chemicals, Inc., the guarantors named therein and Wilmington Trust Company, as trustee, related to the $200,000,000 second-priority senior secured floating rate notes due 2014 and the $625,000,000 9 3/4% second-priority senior secured notes due 2014.      10-Q         001-00071         4.3         11/14/2006      
  4.4    Indenture, dated as of January 29, 2010, by and among Hexion Finance Escrow LLC, Hexion Escrow Corporation and Wilmington Trust FSB, as trustee.      8-K         001-00071         4.1         2/4/2010      
  4.5    Supplemental Indenture, dated as of January 29, 2010, by and among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Wilmington Trust FSB, as trustee.      8-K         001-00071         4.2         2/4/2010      
  4.6    Supplemental Indenture, dated as of June 4, 2010, by and among NL COOP Holdings LLC, Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Wilmington Trust FSB, as trustee.      8-K         001-00071         4.1         6/9/2010      
  4.7    Supplemental Indenture, dated as of June 4, 2010, by and among NL COOP Holdings LLC, Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Wilmington Trust Company, as trustee.      8-K         001-00071         4.2         6/9/2010      

 

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Table of Contents
         Incorporated by Reference

Exhibit
Number

 

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
  4.8   Indenture dated as of November 5, 2010 among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the Company, the guarantors named therein and Wilmington Trust Company, as trustee, related to the 9.0% second-priority senior secured floating rate notes due 2020.      8-K         001-00071         4.1         11/12/2010      
  4.9   Registration Rights Agreement, dated November 5, 2010, among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the Guarantors, including the Company, and Euro VI (BC) S.à r.l. (the “Holder”)      8-K         001-00071         4.3         11/12/2010      
  5.1*   Opinion of Paul, Weiss, Rifkind, Wharton & Garrison LLP               
  5.2*   Opinion of Connell Foley LLP               
  5.3*   Opinion of Stewart McKelvey               
10.1‡   BHI Acquisition Corp. 2004 Deferred Compensation Plan      10-Q         001-00071         10(iv)         11/15/2004      
10.2‡   BHI Acquisition Corp. 2004 Stock Incentive Plan      10-Q         001-00071         10(v)         11/15/2004      
10.3‡   Resolution Performance Products Inc. 2000 Stock Option Plan      S-4         333-57170         10.26         3/16/2001      
10.4‡   Resolution Performance Products Inc. 2000 Non - Employee Directors Stock Option Plan      S-4         333-57170         10.27         3/16/2001      
10.5‡   Amended and Restated Resolution Performance Products, Inc. Restricted Unit Plan as amended and restated May 31, 2005      S-1/A         333-124287         10.34         9/19/2005      
10.6‡   Form of Non-Qualified Stock Option Agreement between BHI Acquisition Corp. and certain optionees      S-4         333-122826         10.12         2/14/2005      
10.7‡   Resolution Specialty Materials Inc. 2004 Stock Option Plan      S-1/A         333-124287         10.52         7/15/2005      
10.8‡   Form of Nonqualified Stock Option Agreement for Resolution Specialty Materials Inc. 2004 Stock Option Plan      S-1/A         333-124287         10.53         7/15/2005      
10.9‡   Form of Nonqualified Stock Option Agreement for Resolution Performance Products Inc. 2000 Stock Option Plan      S-1/A         333-124287         10.54         7/15/2005      

 

4


Table of Contents
         Incorporated by Reference

Exhibit
Number

 

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.10‡   Form of Nonqualified Stock Option Agreement for Resolution Performance Products Inc. 2000 Non-Employee Director Stock Option Plan      S-1/A         333-124287         10.55         7/15/2005      
10.11‡   Hexion LLC 2007 Long-Term Incentive Plan dated April 30, 2007      10-Q         001-00071         10.1         8/14/2007      
10.12   Amended and Restated Investor Rights Agreement dated as of May 31, 2005 between Hexion LLC, Hexion Specialty Chemicals, Inc. and the holders that are party thereto      S-1/A         333-124287         10.63         7/15/2005      
10.13   Registration Rights Agreement dated as of May 31, 2005 between Hexion Specialty Chemicals, Inc. and Hexion LLC      S-1/A         333-124287         10.64         7/15/2005      
10.14‡   Amended and Restated Executives’ Supplemental Pension Plan for Hexion Specialty Chemicals, Inc., dated as of September 7, 2005      8-K         001-00071         10         9/12/2005      
10.15   Borden, Inc. Advisory Directors Plan dated 7/1/89      10-K         001-00071         10(viii)         3/1989      
10.16‡   Hexion Specialty Chemicals, Inc. 2009 Leadership Long-Term Cash Incentive Plan      10-K         001-00071         10.21         3/11/2009      
10.17‡   Hexion Specialty Chemicals, Inc. 2009 Incentive Compensation Plan      10-K         001-00071         10.25         3/11/2009      
10.18‡   Hexion Specialty Chemicals, Inc. 2010 Incentive Compensation Plan      10-K         001-00071         10.20         3/9/2010      
10.19‡   Amended and Restated Employment Agreement dated as of August 12, 2004 between Borden Chemical, Inc. and Craig O. Morrison      10-Q         001-00071         10(i)         11/15/2004      
10.20‡   Amended and Restated Employment Agreement dated as of August 12, 2004 between Borden Chemical, Inc. and Joseph P. Bevilaqua      10-Q         001-00071         10(ii)         11/15/2004      
10.21‡   Summary of Terms of Employment between Hexion Specialty Chemicals, Inc. and Joseph P. Bevilaqua dated August 10, 2008      10-K         001-00071         10.23         3/9/2010      
10.22‡   International assignment agreement dated as of November 13, 2008 between Hexion Specialty Chemicals, Inc. and Joseph P. Bevilaqua      10-K         001-00071         10.28         3/11/2009      
10.23‡   Amended and Restated Employment Agreement dated as of August 12, 2004 between Borden Chemical, Inc. and William H. Carter.      10-Q         001-00071         10(iii)         11/15/2004      

 

5


Table of Contents
         Incorporated by Reference

Exhibit
Number

 

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.24‡   Summary of Terms of Employment between Hexion Specialty Chemicals, Inc. and Judith A. Sonnett dated September 21, 2007      10-K         001-00071         10.29         3/9/2010      
10.25**‡   Addition of Terms of Employment between Hexion Specialty Chemicals, Inc. and Dale N. Plante, Supplement to August 2008 Promotional Employment Offer dated as of July 16, 2009      10-K         001-00071         10.27         2/28/2011      
10.26   Master Asset Conveyance and Facility Support Agreement, dated as of December 20, 2002, between Borden Chemical and Borden Chemicals and Plastics Operating Limited Partnership      10-K         001-00071         (10)(xxvi)         3/28/2003      
10.27   Environmental Servitude Agreement, dated as of December 20, 2002, between Borden Chemical and Borden Chemicals and Plastics Operating Limited Partnership      10-K         001-00071         (10)(xxvii)         3/28/2003      
10.28   Intellectual Property Transfer and License Agreement and Contribution Agreement dated as of November 14, 2000 between Shell Oil Company and Shell Epoxy Resins LLC      S-4         333-57170         10.13         3/16/2001      
10.29   Intellectual Property Transfer and License Agreement and Contribution Agreement dated as of November 14, 2000 between Shell Internationale Research Maatschappij B.V. and Shell Epoxy Resins Research B.V      S-4         333-57170         10.14         3/16/2001      
10.30   First Amended and Restated Deer Park Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2000 between Shell Chemical Company, for itself and as agent for Shell Oil Company, and Shell Epoxy Resins LLC      S-4         333-57170         10.19         3/16/2001      
10.31   First Amended and Restated Pernis Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2000 between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell Nederland Raffinaderij B.V.      S-4         333-57170         10.21         3/16/2001      

 

6


Table of Contents
         Incorporated by Reference

Exhibit
Number

 

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.32   First Amended and Restated Pernis Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2000 between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell Nederland Chemie B.V.      S-4         333-57170         10.22         3/16/2001      
10.33†   Second Amended and Restated Norco Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2004 between Shell Chemical L.P. and Resolution Performance Products LLC.      10-K         001-00071         10.45         3/22/2007      
10.34   Deer Park Ground Lease and Grant of Easements dated as of November 1, 2000 between Shell Oil Company and Shell Epoxy Resins LLC      S-4         333-57170         10.23         3/16/2001      
10.35   Norco Ground Lease and Grant of Servitudes dated as of November 1, 2000 between Shell Oil Company and Shell Epoxy Resins LLC      S-4         333-57170         10.24         3/16/2001      
10.36   Amended and Restated Agreement of Sub-Lease (Pernis) dated as of November 1, 2000 between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell Nederland Raffinaderij B.V.      S-4         333-57170         10.25         3/16/2001      
10.37   Amended and Restated Management Consulting Agreement dated as of May 31, 2005 between Borden Chemical, Inc. and Apollo Management V, L.P.      S-1/A         333-124287         10.66         7/15/2005      
10.38   Intercreditor Agreement dated as of November 3, 2006 among Hexion Specialty Chemicals, Inc., Hexion LLC, the subsidiary parties thereto, Wilmington Trust Company as trustee and JPMorgan Chase Bank, N.A. as intercreditor agent      10-Q         001-00071         10.1         11/14/2006      
10.39   Registration Rights Agreement dated as of November 3, 2006 among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance ULC, Hexion Specialty Chemicals, Inc. and subsidiary parties thereto and Credit Suisse Securities (USA) LLC and JPMorgan Securities, Inc. as initial purchasers.      10-Q         001-00071         10.2         11/14/2006      

 

7


Table of Contents
          Incorporated by Reference

Exhibit
Number

  

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.40    Collateral Agreement dated as of November 3, 2006 among Hexion Specialty Chemicals, Inc. and subsidiary parties thereto, and Wilmington Trust Company, as Collateral Agent.      10-K         001-00071         10.57         3/11/2009      
10.41    Second Amended and Restated Collateral Agreement dated as of November 3, 2006 among Hexion LLC, Hexion Specialty Chemicals, Inc. and subsidiary parties thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.      10-K         001-00071         10.58         3/11/2009      
10.42    Second Amended and Restated Credit Agreement with exhibits and schedules dated as of November 3, 2006 among Hexion LLC, Hexion Specialty Chemicals, Inc., Hexion Specialty Chemicals Canada, Inc., Hexion Specialty Chemicals B.V., Hexion Specialty Chemicals UK Limited, Borden Chemical UK Limited, the lenders party thereto and JP Morgan Chase Bank, N.A., as Administrative Agent, Credit Suisse, as Syndication Agent and J.P. Morgan Securities Inc. and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and Joint Bookrunners.      10-Q         001-00071         10.1         8/13/2009      
10.43    Incremental Facility Amendment and Amendment No. 1 with exhibits and schedules to the Second Amended and Restated Credit Agreement dated as of June 15, 2007 among Hexion LLC, Hexion Specialty Chemicals, Inc., Hexion Specialty Chemicals Canada, Inc., Hexion Specialty Chemicals B.V., Hexion Specialty Chemicals UK Limited, Borden Chemical UK Limited, the lenders party thereto and JP Morgan Chase Bank, N.A., as Administrative Agent      10-Q         001-00071         10.2         8/13/2009      
10.44    Second Incremental Facility Amendment with exhibits and schedules to the Second Amended and Restated Credit Agreement dated as of August 7, 2007 among Hexion LLC, Hexion Specialty Chemicals, Inc., Hexion Specialty Chemicals Canada, Inc., Hexion Specialty Chemicals B.V., Hexion Specialty Chemicals UK Limited, Borden Chemical UK Limited, the lenders party thereto and JP Morgan Chase Bank, N.A., as Administrative Agent      10-Q         001-00071         10.3         8/13/2009      

 

8


Table of Contents
         Incorporated by Reference

Exhibit
Number

  

Exhibit Description

  Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.45    Settlement Agreement and Release, dated December 14, 2008, among Huntsman Corporation, Jon M. Huntsman, Peter R. Huntsman, Hexion Specialty Chemicals, Inc., Hexion LLC, Nimbus Merger Sub, Inc., Craig O. Morrison, Leon Black, Joshua J. Harris and Apollo Global Management, LLC and certain of its affiliates     8-K         001-00071         10.1         12/15/2008      
10.46    Commitment Letter dated as of March 3, 2009 among the Hexion Specialty Chemicals, Inc., Hexion LLC, Euro VI (BC) S.a.r.l., Euro V (BC) S.a.r.l. and AAA Co-Invest VI (EHS-BC) S.a.r.l.     8-K         001-00071         10.1         3/3/2009      
10.47    Credit Agreement with exhibits and schedules dated as of March 3, 2009 among Hexion Specialty Chemicals, Inc., Borden Luxembourg S.a.r.l., Euro V (BC) S.a.r.l., Euro VI (BC) S.a.r.l. and AAA Co-Invest VI (EHS-BC) S.a.r.l.     10-Q         001-00071         10.4         8/13/2009      
10.48    Indemnification Agreement dated as of March 3, 2009 among Apollo Management, L.P. and subsidiary parties thereto, Hexion LLC, Hexion Specialty Chemicals, Inc. and Nimbus Merger Sub Inc.     8-K         001-00071         10.3         3/3/2009      
10.49    Amendment Agreement to Credit Agreement, dated as of January 25, 2010, among Hexion LLC, Hexion Specialty Chemicals, Inc., Hexion Specialty Chemicals Canada, Inc., Hexion Specialty Chemicals B.V., Hexion Specialty Chemicals UK Limited, Borden Chemical UK Limited, the Subsidiary Loan Parties party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent.     8-K/A         001-00071         10.1         2/4/2010      
10.50    Registration Rights Agreement, dated as of January 29, 2010, by and among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Credit Suisse Securities (USA) LLC, as representative of the initial purchasers.     8-K         001-00071         4.3         2/4/2010      
10.51    Third Amended and Restated Credit Agreement, dated as of January 29, 2010, among Hexion LLC, Hexion Specialty Chemicals, Inc., each subsidiary of Hexion Specialty Chemicals, Inc. from time to time party thereto, the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent.     8-K/A         001-00071         10.1         2/4/2010      

 

9


Table of Contents
         Incorporated by Reference

Exhibit
Number

  

Exhibit Description

  Form      File Number      Exhibit      Filing
Date
     Filed
Herewith
10.52    Intercreditor Agreement, dated as of January 29, 2010, by and among JPMorgan Chase Bank, as intercreditor agent, Wilmington Trust FSB, as trustee and collateral agent, Hexion LLC, Hexion Specialty Chemicals, Inc. and certain subsidiaries of Hexion Specialty Chemicals, Inc.     8-K/A         001-00071         10.1         2/4/2010      
10.53    Joinder and Supplement to Intercreditor Agreement, dated as of January 29, 2010, by and among Wilmington Trust FSB, as trustee under the Indenture, JPMorgan Chase Bank, as intercreditor agent, Wilmington Trust Company, as trustee and collateral agent and as second-priority agent, Hexion LLC, Hexion Specialty Chemicals, Inc. and each subsidiary of Hexion Specialty Chemicals, Inc. from time to time party thereto.     8-K         001-00071         10.3         2/4/2010      
10.54    Notes Collateral Agreement dated and effective as of January 29, 2010, among Hexion Specialty Chemicals, Inc., each Subsidiary Party thereto and Wilmington Trust FSB, as collateral
agent.
    8-K         001-00071         10.4         2/4/2010      
10.55    SUPPLEMENT dated as of June 4, 2010, to the U.S. Guarantee Agreement dated as of May 31, 2005, among HEXION LLC, a Delaware limited liability company, HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Domestic Subsidiary Loan Party party thereto and JPMORGAN CHASE BANK, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”) for the Lenders (as defined therein).     8-K         001-00071         10.1         6/9/2010      
10.56    SUPPLEMENT dated as of June 4, 2010, to the Foreign Guarantee Agreement dated as of May 31, 2005, among HEXION LLC, a Delaware limited liability company, HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Foreign Subsidiary Loan Party party thereto and JPMORGAN CHASE BANK, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”) for the Lenders (as defined therein).     8-K         001-00071         10.2         6/9/2010      

 

10


Table of Contents
         Incorporated by Reference

Exhibit
Number

  

Exhibit Description

  Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.57    SUPPLEMENT dated as of June 4, 2010, to the Third Amended and Restated Collateral Agreement dated as of January 29, 2010, among HEXION LLC, a Delaware limited liability company, HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Subsidiary Party party thereto and JPMORGAN CHASE BANK, N.A., as Applicable First Lien Representative (in such capacity, the “Applicable First Lien Representative”) for the Secured Parties (as defined therein).     8-K        

 

001-00071

 

  

 

     10.3         6/9/2010      
10.58    SUPPLEMENT dated as of June 4, 2010, to the Collateral Agreement dated as of January 29, 2010, among HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Subsidiary Party party thereto and WILMINGTON TRUST FSB, as Collateral Agent (in such capacity, the “Collateral Agent”) for the Secured Parties (as defined therein).     8-K         001-00071         10.4         6/9/2010      
10.59    SUPPLEMENT dated as of June 4, 2010, to the Collateral Agreement dated as of November 3, 2006, among HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Subsidiary Party party thereto and WILMINGTON TRUST COMPANY, as Collateral Agent (in such capacity, the “Collateral Agent”) for the Secured Parties (as defined therein).     8-K         001-00071         10.5         6/9/2010      
10.60    Registration Rights Agreement dated as of November 5, 2010 among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance ULC, the Company and subsidiary parties thereto and Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., UBS Securities LLC, Deutsche Bank Securities Inc, Goldman, Sachs & Co., BMO Capital Markets Corp and JPMorgan Securities LLC as initial purchasers.     8-K         001-00071         4.2         11/12/2010      
10.61    Third Joinder and Supplement to Intercreditor Agreement, dated as of November 5, 2010, by and among JPMorgan Chase Bank, as intercreditor agent, Wilmington Trust Company, as trustee and collateral agent, Hexion LLC, the Company and certain of its subsidiaries.     8-K         001-00071         10.1         11/12/2010      
10.62    Joinder and Supplement to Collateral Agreement dated November 5, 2010 among the Company and subsidiary parties thereto, and Wilmington Trust Company, as trustee and collateral agent.     8-K         001-00071         10.2         11/12/2010      

 

11


Table of Contents
         Incorporated by Reference

Exhibit
Number

 

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
10.63   Supplement, dated as of December 15, 2010 to the Foreign Guarantee Agreement, dated as of May 31, 2005 among Momentive Specialty Chemicals Holdings LLC, Momentive Specialty Chemicals Inc., each Foreign Subsidiary Loan Party party thereto and JP Morgan Chase Bank, as administrative agent for the Lenders.      8-K         001-00071         10.1         12/15/2010      
10.64   Shared Services agreement, dated as of October 1, 2010, by and among Hexion Specialty Chemicals, Inc. and Momentive Performance Materials Inc., and the other Persons party thereto      10-K         001-00071         10.68         2/28/2011      
10.65   Purchase and Sale Agreement, dated November 30, 2010, by and between Momentive Specialty Chemicals Inc. and Harima Chemicals, Inc.      8-K         001-00071         2.01         2/4/2011      
10.66‡   Momentive Performance Materials Holdings LLC 2011 Equity Incentive Plan      S-4         333-172943         10.69         3/18/2011      
10.67‡   Form of Restricted Deferred Unit Award Agreement of Momentive Performance Materials Holdings LLC      S-4         333-172943         10.70         3/18/2011      
10.68‡   Form of Unit Option Agreement of Momentive Performance Materials Holdings LLC      S-4         333-172943         10.71         3/18/2011      
10.69‡   Form of Director Unit Option Agreement of Momentive Performance Materials Holdings LLC      S-4         333-172943         10.72         3/18/2011      
10.70‡   Management Investor Rights Agreement, dated as of February 23, 2011 by and among Momentive Performance Materials Holdings LLC and the Holders      S-4         333-172943         10.73         3/18/2011      
10.71   Amended and Restated Shared Services Agreement dated March 17, 2011 by and among Momentive Performance Materials Inc., its subsidiaries and Momentive Specialty Chemicals Inc.      8-K         001-00071         10.1         3/17/2011      
10.72   Master Confidentiality Agreement and Joint Development Agreement entered into on March 17, 2011 by and between Momentive Performance Materials Inc. and Momentive Specialty Chemicals Inc.      8-K         001-00071         10.2         3/17/2011      
10.73‡   Momentive Performance Materials Holdings LLC 2011 Incentive Compensation Plan      10-Q         001-00071         10.1         5/13/2011      

 

12


Table of Contents
         Incorporated by Reference  

Exhibit
Number

 

Exhibit Description

   Form      File Number      Exhibit      Filing Date      Filed
Herewith
 
10.74   Amendment Two to Second Amended and Restated Norco Site Services, Utilities, Materials and Facilities Agreement dated January 1, 2011 between Shell Chemical L.P. and Momentive Specialty Chemicals Inc.      10-Q         001-00071         10.2         5/13/2011      
10.75   Third Incremental Facility Amendment, dated as of May 18, 2011, by and among Momentive Specialty Chemicals Inc., the other borrowers named therein, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent.      8-K         001-00071         10.1         5/23/2011      
12.1   Statement regarding Computation of Ratios                  X   
18.1   Letter from PricewaterhouseCoopers, dated February 28, 2011 regarding preferability of a change in accounting principle      10-K         001-00071         18.1         2/28/2011      
21.1   List of Subsidiaries of Momentive Specialty Chemicals Inc.      S-4         333-172943         21.1         3/18/2011      
23.1   Consent of PricewaterhouseCoopers LLP, an independent registered public accounting firm                  X   
23.2*   Consent of Paul, Weiss, Rifkind, Wharton & Garrison LLP (included in Exhibit 5.1)               
23.3*   Consent of Connell Foley LLP (included in Exhibit 5.2)               
23.4*   Consent of Stewart McKelvey (included in Exhibit 5.3)               
24.1   Powers of Attorney of the Directors and Officers of the Registrants (included in signature pages)                  X   
25.1   Form T-1 (Wilmington Trust Company)                  X   

 

* To be filed by amendment.
** Exhibit itself is labeled as 10.70.
The schedules and exhibits to these agreements are omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrants agree to furnish supplementally to the SEC, upon request, a copy of any omitted schedule or exhibit.
Represents a management contract or compensatory plan or arrangement.

 

13