Amendment No.1 to Form S-4
Table of Contents

As filed with the Securities and Exchange Commission on December 27, 2005

Registration No. 333-122826


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

AMENDMENT NO. 1

to Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

HEXION U.S. FINANCE CORP.

(Exact name of registrant as specified in 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 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)

 


 

Mark S. Antonvich, 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:

William B. Kuesel, Esq.

O’Melveny & Myers LLP

7 Times Square

New York, New York 10036

(212) 326-2000

 


 

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

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box:  ¨

 

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

 

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

 

CALCULATION OF REGISTRATION FEE


Title of each Class of

Securities to be Registered

 

Amount

to be

Registered

 

Proposed Maximum
Offering Price

Per Note

  Proposed Maximum
Aggregate
Offering Price(1)
  Amount of
Registration Fee(2)

Second-Priority Senior Secured Floating Rate Notes Due 2010

  $150,000,000   100%   $150,000,000   $17,655.00

Guarantees of Second-Priority Senior Secured Floating Rate Notes Due 2010

             

                (3)

9% Second-Priority Senior Secured Notes Due 2014

  $325,000,000   100%   $325,000,000   $38,252.50

Guarantees of 9% Second-Priority Senior Secured Notes Due 2014

                              (3)

(1) The registration fee has been calculated pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended. The proposed maximum offering price is estimated solely for purpose of calculating the registration fee.
(2) Amount of $30,567.50 previously paid. Remainder of registration fee offset against the registration fee of $25,340.00 previously paid by Hexion Specialty Chemicals, Inc., our parent, in connection with Registration Statement on Form S-1 (No. 333-115266) filed on May 7, 2004 and withdrawn by Hexion Specialty Chemicals, Inc. on August 31, 2004 pursuant to Rule 457(p) of the Securities Act of 1933.
(3) Pursuant to Rule 457(n), no additional registration fee is payable with respect to the guarantees.

 

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.



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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

Hexion Specialty Chemicals, Inc.

  New Jersey  

180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

  13-0511250

BDS Two, Inc.

  Delaware  

Plaza 273, Suite 211

56 West Main Street

Newark, Delaware 19702

(302) 737-6466

  52-1752422

Borden Chemical Investments, Inc.

  Delaware  

Plaza 273, Suite 211

56 West Main Street

Newark, Delaware 19702

(302) 737-6466

  51-0370359

Borden Chemical Foundry, Inc.

  Delaware  

180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

  31-1766429

HSC Capital Corporation

  Delaware  

1600 Smith St., 24th Floor

Houston, TX 77002

(832) 366-2300

  76-0660306

Lawter International Inc. 

  Delaware  

1600 Smith St., 24th Floor

Houston, TX 77002

(832) 366-2300

  36-1370818

Borden Chemical International, Inc. 

  Delaware  

56 West Main St.,

Newark, DE 19702

(302) 737-6466

  20-2833048

Bakelite North America Holding Company

 

 

Delaware

 

 

180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

 

 

36-4209280

Bakelite Epoxy Polymers Corporation

 

 

Delaware

 

 

180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

 

 

26-0051749

Oilfield Technology Group, Inc. 

  Delaware  

15115 Park Row, Ste. 110

Houston, TX 77084

(218) 646-2800

  20-2873694

Hexion CI Holding Company (China) LLC

  Delaware  

180 E. Broad St.,

Columbus, OH 43215

(614) 225-4000

  20-3907441


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

 

Subject to completion, dated December 27, 2005

 

PROSPECTUS

 

LOGO

 

Offer to Exchange

 

$150,000,000 aggregate principal amount of the Registrants’ Second-Priority Senior Secured Floating Rate Notes Due 2010, which have been registered under the Securities Act of 1933 for $150,000,000 aggregate principal amount of the Registrants’ outstanding Second-Priority Senior Secured Floating Rate Notes Due 2010.

 

$325,000,000 aggregate principal amount of the Registrants’ 9% Second-Priority Senior Secured Notes Due 2014, which have been registered under the Securities Act of 1933 for $325,000,000 aggregate principal amount of the Registrants’ 9% Second-Priority Senior Secured Notes Due 2014.

 

We hereby offer, upon the terms and subject to the conditions set forth in this prospectus and the accompanying letter of transmittal (which together constitute the “exchange offer”), to exchange up to (i) $150,000,000 aggregate principal amount of our registered Second-Priority Senior Secured Floating Rate Notes Due 2010, which we refer to as the exchange floating rate notes, for a like principal amount of our outstanding Second-Priority Senior Secured Floating Rate Notes Due 2010, which we refer to as the old floating rate notes and (ii) $325,000,000 aggregate principal amount of our registered 9% Second-Priority Senior Secured Notes Due 2014, which we refer to as our exchange fixed rate notes, for a like principal amount of our outstanding 9% Second-Priority Senior Secured Notes Due 2014, which we refer to as our old fixed rate notes. We refer to the old floating rate notes and the old fixed rate notes collectively as the old notes. We refer to the exchange floating rate notes and the exchange fixed rate notes collectively as the exchange notes. We refer to the old notes and the exchange notes collectively as the notes. The terms of the exchange notes are identical to the terms of the old notes in all material respects, except for the elimination of some transfer restrictions, registration rights and additional interest provisions relating to the old notes.

 

We will exchange any and all old notes that are validly tendered and not validly withdrawn prior to 5:00 p.m., New York City time, on                     , 2006, unless extended.

 

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

 

Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. The letter of transmittal states that by so acknowledging and delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for old notes where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of 180 days after the consummation of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”

 

See “ Risk Factors” beginning on page 24 of this prospectus for a discussion of certain risks that you should consider before participating in this exchange offer.

 

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                     , 2005.


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TABLE OF CONTENTS

 

     Page

SERVICE OF PROCESS AND ENFORCEABILITY OF CIVIL LIABILITIES

   ii

CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS

   iii

EXCHANGE RATE DATA

   iv

MARKET AND INDUSTRY DATA AND FORECASTS

   v

PROSPECTUS SUMMARY

   1

RISK FACTORS

   24

THE EXCHANGE OFFER

   46

USE OF PROCEEDS

   56

CAPITALIZATION

   57

UNAUDITED PRO FORMA FINANCIAL INFORMATION

   58

SELECTED HISTORICAL FINANCIAL AND OTHER INFORMATION

   65

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   67
     Page

BUSINESS

   103

MANAGEMENT

   125

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   137

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

   139

DESCRIPTION OF SENIOR SECURED CREDIT FACILITIES AND OTHER INDEBTEDNESS

   149

DESCRIPTION OF THE NOTES

   160

CERTAIN TAX CONSEQUENCES

   228

PLAN OF DISTRIBUTION

   230

LEGAL MATTERS

   231

EXPERTS

   231

WHERE YOU CAN FIND MORE INFORMATION

   232

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

 


 

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.

 

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. 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.

 

Until                     , 2005 (90 days after the date of this prospectus), all dealers effecting transactions in the exchange notes, whether or not participating in the exchange offer, may be required to deliver a prospectus.

 

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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 Scotia Finance, ULC’s assets, which consist of advances to Hexion 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 exchange 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. We have been advised by our Canadian counsel that there is doubt as to the enforceability in Canada against Hexion Nova Scotia Finance, ULC or against its directors, officers and experts who are not residents of the United States, in original actions or in actions for enforcement of judgments of courts of the United States, of liabilities predicated solely upon U.S. federal securities laws.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

    industry trends;

 

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

 

    raw material costs and availability;

 

    restrictions contained in our debt agreements;

 

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

 

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

 

    increased competition in the markets in which we operate;

 

    changes in demand for our products;

 

    the loss of any of our major customers;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    the loss of our intellectual property rights;

 

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    availability, terms and deployment of capital; and

 

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

 

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

 

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. On December 20, 2005, the inverse of the noon buying rate was Cdn$1.00 equals US$0.8523.

 

Year Ended


   Average(1)

   High

   Low

   Period End

December 31, 2004

   0.7702    0.8493    0.7158    0.8310

December 31, 2003

   0.7186    0.7738    0.6349    0.7738

December 31, 2002

   0.6368    0.6619    0.6200    0.6329

December 31, 2001

   0.6444    0.6697    0.6241    0.6279

December 31, 2000

   0.6725    0.6969    0.6410    0.6669

Month Ended


   Average(2)

   High

   Low

   Period End

November 30, 2005

   0.8463    0.8579    0.8361    0.8569

(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 for all days during the applicable period.

 

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 United States would likely be in the local currency.

 

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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 internal analysis and estimates. The global thermoset resins market is approximately $34 billion in annual sales. We based our market estimates on the $19 billion market for the product areas of the global thermoset resins market upon which we focus.

 

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

 

Except as may otherwise be noted in this prospectus, all financial and other data for the year ended December 31, 2004 and the nine months ended September 30, 2004 and 2005 presented herein give pro forma effect to the Transactions (as defined in “Prospectus Summary—Hexion Specialty Chemicals, Inc.—The Prior and Current Transactions”) as if they each had occurred on January 1, 2004, and all financial and other data as of September 30, 2005 presented herein already reflect the Transactions.

 

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PROSPECTUS SUMMARY

 

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

 

Overview

 

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

 

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

 

Our products are used in thousands of applications and are sold into diverse markets, such as forest products, architectural and industrial paints, packaging, consumer products and automotive coatings, as well as higher growth markets, such as composites, UV cured coatings and electrical laminates. As of September 30, 2005, we had 86 production and distribution sites globally, and produce many of our key products locally in North America, Latin America, Europe and Asia. Through our worldwide network of strategically located production facilities, we serve more than 5,000 customers in 96 countries. Our global customers include leading companies in their respective industries, such as 3M, BASF, Bayer, DuPont, GE, Halliburton, Honeywell, Owens Corning, PPG Industries, Sumitomo, Sun Chemicals, Valspar and Weyerhaeuser.

 

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Hexion was formed on May 31, 2005 through the combination of Borden Chemical (including Bakelite), Resolution Performance and Resolution Specialty. We believe the consolidation of these entities will provide us with significant opportunities for growth through global product line management, as well as considerable opportunities to increase operational efficiencies, reduce fixed costs, optimize manufacturing assets and improve the efficiency of capital spending. In 2004 and for the nine months ended September 30, 2005, on a pro forma basis, we generated pro forma net sales of $4.1 billion and $3.6 billion, respectively. In 2004, 51% of our net sales were derived from sales to North America, 32% to Western Europe and 17% to Asia-Pacific, Latin America, Eastern Europe and other emerging markets. As of September 30, 2005, we had $2.4 billion principal amount of outstanding indebtedness and $0.2 billion of cash and equivalents.

 

Our Business

 

As of the closing of the Combinations on May 31, 2005, our thermosets are used in two primary applications: Adhesive & Structural and Coating. The table below illustrates each group’s net sales to external customers for the year ended December 31, 2004, as well as each group’s major product lines, major industry sectors served, major end-use markets and key differentiating characteristics.

 

   

Adhesive & Structural


 

Coating


2004 Pro Forma Net Sales

  $2.9 billion   $1.2 billion

Major Products

 

•   Formaldehyde based resins and intermediates

•   Epoxy resins and intermediates

•   Composite resins

•   Phenolic encapsulated substrates

•   Molding compounds

 

•   Epoxy resins

•   Polyester resins

•   Alkyd resins

•   Acrylic resins

•   Ink resins and additives

•   Versatic acids and derivatives

Major Industry Sectors Served

 

•   Wood products and furniture

•   Transportation and industrial

•   Electrical equipment and appliances

•   Electronic products

•   Oil and gas field support

•   Marine and recreational (boats, RVs)

•   Chemical manufacturing

 

•   Home building and maintenance

•   Transportation and industrial

•   Electrical equipment and appliances

•   Furniture

•   Printing

•   Chemical manufacturing

Major End-Use Markets

 

•   Plywood, particleboard, OSB, MDF

•   Carbon and glass fiber composites

•   Automotive friction materials

•   Furniture

•   Construction

•   Electrical laminates

•   Foundry

•   Oil and gas field proppants

 

•   Decorative paints

•   Auto coatings

•   Marine and industrial coatings

•   Construction and maintenance coatings

•   Printing inks

•   Specialty coatings

Key Characteristics of Resins

 

•   Strength

•   Adhesion

•   Resistance (heat, water, electricity)

 

•   Durability

•   Gloss and color retention

•   Resistance (water, UV, corrosion, temperature)

•   Strength

 

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Adhesive & Structural

 

Our Adhesive & Structural group is a leading global supplier of thermosets used in adhesive and structural applications. These products are used in a variety of end-markets including residential, commercial and industrial construction and repair/remodeling, furniture manufacture, automotive, oil and gas, chemicals and electronics. In 2004, our Adhesive & Structural group contributed approximately $2.9 billion to our net sales ($1.2 billion from our formaldehyde and forest product resins line and $1.7 billion from our epoxy and phenolic resins line). Our key products in the Adhesive & Structural group include:

 

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

 

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

 

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

 

    Phenolic Encapsulated Substrates. We are a leading producer of phenolic encapsulated sand and ceramic substrates used in oil field services and foundry applications. Our highly specialized compounds are designed to perform under extreme conditions, such as intense heat, high-stress and corrosive environments. In the oil field services industry we have a 45% global market share in resin encapsulated proppants, which are used to enhance oil and gas recovery rates and extend well life. We are also the leading producer by volume of foundry resins in North America with a 44% market share. Our foundry resin systems are used by major automotive and industrial companies for precision casting.

 

    Molding Compounds. We are the leading producer of molding compounds in Europe, with an estimated market share of 69%. We formulate and produce a wide range of phenolic, polyester and epoxy compounds used to manufacture components requiring heat stability, electrical insulation, fire resistance and durability.

 

Coating

 

We are a leading supplier of resins used in surface coating applications. Our coating products are used by customers in a variety of end-markets including architectural coatings, civil engineering, electronics, automotive and a wide variety of applications in the industrial and consumer markets. In 2004, our Coating group contributed approximately $1.2 billion to our net sales. Our key products in the Coating group include:

 

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

 

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    Polyester Resins. We are a leading supplier of polyester coatings resins in North America with a market share of 10% and are also a major producer in Europe with a powder coatings market share of 10%. We provide custom polyester resins, both liquid and powder, to customers for use in industrial coatings requiring specific properties such as gloss and color retention, resistance to corrosion and flexibility. Polyester coatings are typically used in transportation, automotive, machinery, appliances and metal office furniture.

 

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

 

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

 

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

 

    Versatic Acids and Derivatives. We are the world’s largest producer of versatic acids and derivatives, with a market share of 74%. Versatic acids and derivatives are specialty monomers which provide significant performance advantages to finished coatings, including superior adhesion, flexibility, ease of application and other high performance characteristics. Applications for versatic acids include decorative, automotive and protective coatings as well as other uses, such as pharmaceuticals and personal care products.

 

Competitive Strengths

 

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

 

World’s Largest Thermoset Resins Producer. We are the world’s largest producer of thermoset resins with leading positions across various end-markets and geographies. Our global scale and breadth of product line provide us with significant advantages over many of our competitors. We are first or second in market position by volume in our key product areas, which collectively represent more than 75% of our 2004 net sales.

 

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

 

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

 

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Low Cost Position. Our low cost manufacturing position is the result of our 86 production and distribution sites strategically located throughout the world and our selectively integrated supply position in critical intermediate materials. Our ability to internally produce key raw materials provides us a significant cost advantage over our competitors. Furthermore, our large market position and scale in each of our key product markets provides us with significant purchasing and manufacturing efficiencies.

 

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

 

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

 

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

 

Strategy

 

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

 

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

 

Develop and Market New Products. We will continue to expand our product offerings through internal innovation, joint research and development initiatives with our customers and research partnership formations. In 2004, on a pro forma basis, we incurred approximately $65 million in research and development expenses, which represented approximately 2% of our pro forma net sales during that period.

 

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

 

Increase Margins Through Focus on Operational Excellence. We believe that through the combination of four stand-alone global resin companies, there will be opportunities to extract substantial cost savings in the near future. Management is currently targeting $250 million in synergies from the Current Transactions, of which $125 million of annual net cost savings have been specifically identified. Management has developed detailed implementation plans to achieve the $125 million of cost savings. We expect that approximately 60% of the $125 million near term cost savings will be achieved by the end of 2006 with the remainder expected to be achieved in the following year. We expect to incur a one-time cost of $75 million during the next two years in connection with implementing these synergies. Management has specifically identified a number of areas for savings and is actively pursuing key components of this strategy.

 

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

 

Risk Factors

 

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

 

The Prior and Current Transactions

 

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

 

The Borden Transaction. On August 12, 2004, BHI Investment, LLC, an affiliate of Apollo acquired all of the outstanding capital stock of Borden Holdings, Inc., for a total consideration of approximately $1.2 billion, including debt assumed (the “Borden Acquisition”). In addition, as part of the Borden Acquisition, all of the outstanding capital stock of Borden Chemical held by management was redeemed or otherwise cancelled. Immediately following the acquisition, BHI Investment, LLC reorganized the existing corporate structure so that Borden Chemical became directly owned by Hexion LLC (formerly known as BHI Acquisition LLC), a subsidiary of BHI Investment, LLC, and reorganized the ownership of Borden Chemical’s foreign subsidiaries. The acquisition of Borden Holdings, Inc. and the payment of transaction fees and expenses were financed by the net proceeds of the offerings by the Issuers of the old notes, and with certain equity contributions from Apollo. The Borden Acquisition, the related offering of the old notes and the related transactions are collectively referred to in this prospectus as (the “Borden Transaction”).

 

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

 

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

 

The Bakelite Transaction. On April 29, 2005, a subsidiary of Borden Chemical acquired Bakelite (the “Bakelite Acquisition”). Upon the consummation of the Bakelite Acquisition, Bakelite became an indirect, wholly-owned subsidiary of Hexion Specialty Chemicals Canada, Inc. (“Hexion Canada”). The Bakelite Acquisition was

 

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financed through a combination of available cash and borrowings under a bridge loan facility, which was refinanced with the proceeds of our second-priority senior secured floating rate notes issued on May 20, 2005 (the “New Floating Rate Notes”) and borrowings under our new senior secured credit facilities (collectively, the “Bakelite Financing”). The Bakelite Acquisition, the repayment or assumption of certain of Bakelite’s debt in connection therewith and the Bakelite Financing are collectively referred to in this prospectus as the “Bakelite Transaction.”

 

We refer to the Borden Transaction, the Resolution Performance Transaction and the Resolution Specialty Transaction collectively as the “Prior Transactions.” We refer to the borrowings under our new senior secured credit facilities, the issuance of our Series A Preferred Stock and the application of the net proceeds therefrom to repay existing debt and pay a dividend on our common stock as described elsewhere in this prospectus, collectively, as the “Financings.” We refer to the old notes, the New Floating Rate Notes and the exchange notes as the “Second-Priority Senior Secured Notes.” We refer to the Combinations, the Financings and the Bakelite Transaction as the “Current Transactions.” We refer to the Prior Transactions and the Current Transactions, as the “Transactions.”

 

Ownership Structure

 

Hexion U.S. Finance Corp. is a Delaware corporation, which was incorporated on July 14, 2004. Hexion Nova Scotia Finance, ULC is a Nova Scotia unlimited liability company, which was organized on July 20, 2004. Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC are both direct, wholly owned subsidiaries of Hexion. Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC have no independent operations other than acting as finance companies for Hexion. The notes co-issued by Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC are guaranteed by Hexion. Certain of Hexion’s non-operating domestic subsidiaries are also guarantors of the notes.

 

The following chart summarizes our corporate structure:

 

LOGO

 

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

 

RECENT DEVELOPMENTS

 

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

 

On November 25, 2005, we agreed to acquire the global ink and adhesive resins business of Akzo Nobel. The business produces resins used to manufacture inks for commercial printing and packaging, digital inks for laser and photocopying printing, and pressure sensitive adhesives used in tape and labeling applications. The business generated 2004 sales of approximately €166 million, and includes 10 manufacturing facilities in Europe, North America, Argentina, Asia and New Zealand. Closing will occur upon the successful completion of normal governmental reviews and consultations with employee work’s councils. The acquisition will be funded through a combination of available cash and existing credit lines.

 

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

 

On November 3, 2005, we agreed to acquire the decorative coatings and adhesives business unit of The Rhodia Group. The Rhodia business had 2004 sales of approximately €150 million, with 8 manufacturing facilities in Europe, Australia and Thailand. Closing will occur upon successful completion of normal governmental reviews and satisfaction of the other closing conditions. The acquisition will be funded through a combination of available cash and existing credit lines.

 

Proposed Initial Public Offering

 

We have filed a registration statement on Form S-1 in connection with the separate initial public offering of our common stock and our convertible perpetual preferred stock (the “IPO”). Our registration statement on Form S-1 is not yet effective and no shares of common stock or convertible perpetual preferred stock will be sold by us pursuant to such registration statement until such registration statement is declared effective. This prospectus is not an offer to sell shares of our common stock or convertible perpetual preferred stock and is not soliciting an offer to buy these securities.

 

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Our Equity Sponsor

 

Apollo, our principal equity sponsor, is an affiliate of Apollo Management, L.P. Apollo Management, L.P. was founded in 1990 and is among the most active and successful private investment firms in the United States in terms of both number of investment transactions completed and aggregate dollars invested. Since its inception, Apollo Management, L.P. and affiliates have managed in excess of $14 billion in equity capital, in a wide variety of industries, both domestically and internationally. Companies owned or controlled by Apollo Management, L.P. and affiliates or in which Apollo Management L.P. and affiliates has a significant equity investment include, among others, AMC Entertainment, Inc., Educate, Inc., General Nutrition Centers, Inc., Nalco Company and UAP Holding Corp.

 

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Summary of the Terms of the Exchange Offer

 

In connection with the closing of the Borden Transaction, we entered into a registration rights agreement with the initial purchasers of the old notes. Under the agreement, we agreed to deliver to you this prospectus and to consummate the exchange offer by June 8, 2005. Since we did not consummate the exchange offer by June 8, 2005 we have incurred additional interest expense pursuant to the registration rights agreement in the aggregate amount of approximately $1 million as of December 20, 2005. You are entitled to exchange in the exchange offer your old notes for exchange notes which are identical in all material respects to the old notes except that:

 

    the exchange notes have been registered under the Securities Act and will be freely tradable by persons who are not affiliated with us;

 

    the exchange notes are not entitled to registration rights which are applicable to the old notes under the registration rights agreement; and

 

    our obligation to pay additional interest on the old notes if the exchange offer is not consummated by June 8, 2005 does not apply to the exchange notes.

 

The exchange offer

 

Floating Rate Notes

We are offering to exchange up to $150,000,000 aggregate principal amount of our registered Second-Priority Senior Secured Floating Rate Notes Due 2010, for a like principal amount of our Second-Priority Senior Secured Floating Rate Notes Due 2010, which were issued on August 12, 2004. Old floating rate notes may be exchanged only in integral multiples of $1,000.

 

Fixed Rate Notes

We are offering to exchange up to $325,000,000 aggregate principal amount of our registered 9% Second-Priority Senior Secured Notes Due 2014, for a like principal amount of our 9% Second-Priority Senior Secured Notes Due 2014, which were issued on August 12, 2004. Old fixed rate notes may be exchanged only in integral multiples of $1,000.

 

Resales

Based on an interpretation by the staff of the SEC set forth in no-action letters issued to third parties, we believe that the exchange notes issued pursuant to the exchange offer in exchange for old notes may be offered for resale, resold and otherwise transferred by you (unless you are our “affiliate” within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that you:

 

    are acquiring the exchange notes in the ordinary course of business; and

 

    have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person or entity, including any of our affiliates, to participate in, a distribution of the exchange notes.

 

 

In addition, each participating broker-dealer that receives exchange notes for its own account pursuant to the exchange offer in exchange for old notes that were acquired as a result of market-making or other trading activity must also acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. For more information, see “Plan of distribution.”

 

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Any holder of old notes, including any broker-dealer, who

 

    is our affiliate,

 

    does not acquire the exchange notes in the ordinary course of its business, or

 

    tenders in the exchange offer with the intention to participate, or for the purpose of participating, in a distribution of exchange notes,

 

 

cannot rely on the position of the staff of the Commission expressed in Exxon Capital Holdings Corporation, Morgan Stanley & Co., Incorporated or similar no-action letters and, in the absence of an exemption, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale of the exchange notes.

 

Expiration date; Withdrawal of tenders

The exchange offer will expire at 5:00 p.m., New York City time, on                     , 2006, or such later date and time to which we extend it. We do not currently intend to extend the expiration date. A tender of old notes pursuant to the exchange offer may be withdrawn at any time prior to the expiration date. Any old notes not accepted for exchange for any reason will be returned without expense to the tendering holder promptly after the expiration or termination of the exchange offer.

 

Conditions to the exchange offer

The exchange offer is subject to customary conditions, some of which we may waive. For more information, see “The Exchange Offer—Certain Conditions to the Exchange Offer.”

 

Procedures for tendering old notes

If you wish to accept the exchange offer, you must complete, sign and date the accompanying letter of transmittal, or a copy of the letter of transmittal, according to the instructions contained in this prospectus and the letter of transmittal. You must also mail or otherwise deliver the letter of transmittal, or the copy, together with the old notes and any other required documents, to the exchange agent at the address set forth on the cover of the letter of transmittal. If you hold old notes through The Depository Trust Company (“DTC”) and wish to participate in the exchange offer, you must comply with the Automated Tender Offer Program procedures of DTC, by which you will agree to be bound by the letter of transmittal.

 

 

By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things:

 

    any exchange notes that you receive will be acquired in the ordinary course of your business;

 

    you have no arrangement or understanding with any person or entity, including any of our affiliates, to participate in the distribution of the exchange notes;

 

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    if you are a broker-dealer that will receive exchange notes for your own account in exchange for old notes that were acquired as a result of market-making activities, that you will deliver a prospectus, as required by law, in connection with any resale of the exchange notes; and

 

    you are not our “affiliate” as defined in Rule 405 under the Securities Act, or, if you are an affiliate, you will comply with any applicable registration and prospectus delivery requirements of the Securities Act.

 

Guaranteed delivery procedures

If you wish to tender your old notes and your old notes are not immediately available or you cannot deliver your old notes, the letter of transmittal or any other documents required by the letter of transmittal or comply with the applicable procedures under DTC’s Automated Tender Offer Program prior to the expiration date, you must tender your old notes according to the guaranteed delivery procedures set forth in this prospectus under “The Exchange Offer—Guaranteed Delivery Procedures.”

 

Effect on holders of old notes

As a result of the making of, and upon acceptance for exchange of all validly tendered old notes pursuant to the terms of, the exchange offer, we will have fulfilled a covenant contained in the registration rights agreement and, accordingly, we will not be obligated to pay additional interest as described in the registration rights agreement. If you are a holder of old notes and do not tender your old notes in the exchange offer, you will continue to hold such old notes and you will be entitled to all the rights and limitations applicable to the old notes in the indenture, except for any rights under the registration rights agreement that by their terms terminate upon the consummation of the exchange offer.

 

Consequences of failure to exchange

All untendered old notes will continue to be subject to the restrictions on transfer provided for in the old notes and in the indenture. In general, the old notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the old notes under the Securities Act.

 

Certain tax consequences

The exchange of old notes for exchange notes in the exchange offer should not be a taxable event for U.S. federal income tax purposes. For more information, see “Certain Tax Consequences.”

 

Use of proceeds

We will not receive any cash proceeds from the issuance of the exchange notes in the exchange offer.

 

Exchange agent

Wilmington Trust Company is the exchange agent for the exchange offer. The address and telephone number of the exchange agent are set forth in the section captioned “The Exchange Offer—Exchange Agent.”

 

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Summary of the Terms of the Exchange Notes

 

The following summary highlights all material information contained elsewhere in this prospectus but does not contain all the information that you should consider before participating in the exchange offer. 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.

 

Exchange Notes Offered

 

Floating Rate Notes

$150,000,000 aggregate principal amount of Second-Priority Senior Secured Floating Rate Notes Due 2010.

 

Fixed Rate Notes

$325,000,000 aggregate principal amount of 9% Second-Priority Senior Secured Notes Due 2014.

 

Maturity Date

 

Floating Rate Notes

The floating rate notes mature on July 15, 2010.

 

Fixed Rate Notes

The fixed rate notes mature on July 15, 2014.

 

Interest

 

Floating Rate Notes

The floating rate notes bear interest at a floating rate based on the London Interbank Rate payable quarterly in arrears, on January 15, April 15, July 15 and October 15 of each year.

 

Fixed Rate Notes

The fixed rate notes bear interest at a rate per annum equal to 9%, payable semi-annually in arrears, on January 15 and July 15 of each year.

 

Guarantees

The exchange notes, like the old notes, will be guaranteed, jointly and severally, on a senior secured basis, by Hexion and certain of its existing and future domestic subsidiaries that guarantee our obligations under our new senior secured credit facilities. See “Description of the Notes—Guarantees.”

 

Ranking

The exchange notes, like the old notes, and the guarantees will be senior secured obligations. The exchange notes, like the old notes, and the guarantees will rank:

 

    equally with all of our and our guarantors’ existing and future senior indebtedness, including debt under our new senior secured credit facilities and the guarantees thereof;

 

    junior in priority as to collateral with respect to our and our guarantors’ obligations under our new senior secured credit facilities and any other future obligations secured by a first-priority lien on the collateral; and

 

    senior to all of our and our guarantors’ existing and future subordinated indebtedness.

 

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The exchange notes will also be effectively junior to the liabilities of the non-guarantor subsidiaries, which includes HAI.

 

As of September 30, 2005:

 

    Hexion and its subsidiaries had approximately $2.4 billion aggregate principal amount of senior indebtedness (including the notes and the guarantees) outstanding;

 

    Hexion’s non-guarantor subsidiaries, including HAI, had approximately $357 million of total indebtedness, excluding intercompany liabilities of non-guarantor subsidiaries.

 

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

 

Optional Redemption

 

Floating Rate Notes

We may redeem some or all of the floating rate notes at any time on or after July 15, 2006 at the respective redemption prices described in this prospectus, plus accrued and unpaid interest to the date of redemption.

 

In addition, on or before July 15, 2006, we may redeem up to 35% of the aggregate principal amount of the floating rate notes with the net proceeds of certain equity offerings.

 

We may also redeem all but not part of the floating rate notes if there are specified changes in the tax laws at a redemption price equal to 100% of the aggregate principal amount of the floating rate notes, plus accrued and unpaid interest to the date of redemption. See “Description of the Notes—Redemption for Changes in Withholding Taxes.”

 

Fixed Rate Notes

We may redeem some or all of the fixed rate notes at any time prior to July 15, 2009 at a price equal to 100% of the principal amount thereof, plus the make-whole premium described in this prospectus, plus accrued and unpaid interest to the date of redemption.

 

We may redeem some or all of the fixed rate notes at any time on or after July 15, 2009 at the respective redemption prices described in this prospectus, plus accrued and unpaid interest to the date of redemption.

 

In addition, on or before July 15, 2007, we may redeem up to 35% of the aggregate principal amount of the fixed rate notes with the net proceeds of certain equity offerings.

 

We may also redeem all but not part of the fixed rate notes if there are specified changes in the tax laws at a redemption price equal to 100% of the aggregate principal amount of the fixed rate notes, plus accrued

 

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and unpaid interest to the date of redemption. See “Description of the Notes—Redemption for Changes in Withholding Taxes.”

 

Change of Control

If Hexion experiences a change of control, we are required to make an offer to repurchase the exchange notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase.

 

Collateral

The exchange notes, like the old notes, and the guarantees will be secured by second-priority liens on:

 

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

 

    all of the capital stock of certain direct subsidiaries of Hexion and each subsidiary guarantor, 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.

 

Notwithstanding the foregoing, the initial collateral securing the exchange notes shall not include (A) any real estate or Principal Property (as such term is defined in the indentures governing 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 and (C) any assets which, if included in the collateral, would require our existing debentures to be ratably secured with the exchange notes pursuant to the terms of the indentures for such existing debentures (sometimes referred to in this prospectus as “excluded collateral”).

 

Intercreditor Agreement

Pursuant to an amended and restated intercreditor agreement, the liens securing the notes, the New Floating Rate Notes and our 9 1/2% senior second secured notes due 2010 will be expressly second in priority to all liens that secure our new senior secured credit facilities, our 8% senior secured notes due 2009 and future indebtedness permitted to be incurred and secured by a first-priority lien in accordance with the terms of the indentures governing the notes and the New Floating Rate Notes. Pursuant to the amended and restated intercreditor agreement, the second-priority liens securing the notes and the other obligations secured by such second-priority liens may not be enforced at any time when the obligations secured by the first-priority lien are outstanding, subject to certain limited exceptions. Any release of all first-priority liens upon any collateral approved by holders of the first-priority liens shall also release the second-priority liens securing the notes and other obligations secured by such second-priority liens on the same collateral, subject to certain exceptions. The holders of the first-priority liens will receive all proceeds from any realization on the collateral until the obligations secured by the first-priority liens are paid in full. See “Description of the Notes—Security for the Notes.”

 

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Restrictive Covenants

The indenture governing the exchange notes contains covenants that, among other things, limit the ability of Hexion and certain of its subsidiaries, to:

 

    incur or guarantee additional indebtedness or issue preferred stock;

 

    grant liens on assets;

 

    pay dividends or make distributions to Hexion’s stockholders;

 

    repurchase or redeem capital stock or subordinated indebtedness;

 

    make investments or acquisitions;

 

    enter into sale/leaseback transactions;

 

    incur restrictions on the ability of Hexion’s subsidiaries to pay dividends or to make other payments to Hexion;

 

    enter into transactions with Hexion’s affiliates;

 

    merge or consolidate with other companies or transfer all or substantially all of Hexion’s 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.”

 

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Summary Historical and Pro Forma Financial and Other Data

 

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

 

The following table summarizes certain historical and pro forma financial and other data for Hexion. The summary historical and pro forma financial and other data for Hexion as of December 31, 2003 and 2004, and for the years ended December 31, 2002, 2003 and 2004 have been derived from the audited consolidated financial statements of Hexion, included elsewhere in this prospectus. The summary historical and pro forma financial and other data for Hexion as of and for the nine months ended September 30, 2005, and the pro forma financial and other data for Hexion for the nine months ended September 30, 2004 have been derived from the unaudited consolidated financial statements of Hexion, included elsewhere in this prospectus, and include all adjustments that management considers necessary for a fair presentation of our financial position and results of operations as of the date and for the period indicated. Historical results for the nine months ended September 30, 2004 have not been included in this Summary Historical and Pro Forma Financial and Other Data as they only reflect the results of operations of Borden Chemical and Resolution Specialty for part of this period and are not considered to be indicative of the performance of Hexion. Results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the entire year. The financial data of Hexion for the year ended December 31, 2004 and the nine months ended September 30, 2005 include:

 

    the results of operations of Resolution Performance for the year ended December 31, 2004 and the nine months ended September 30, 2005, which reflect purchase accounting adjustments from the date of acquisition of Resolution Performance by Apollo on November 14, 2000;

 

    the results of operations of Borden Chemical for the period from August 12, 2004 to December 31, 2004 and the nine months ended September 30, 2005, on a historical basis (because Borden Chemical is a public reporting registrant as a result of public debt that was outstanding prior to the Borden Transaction and which debt remains outstanding, Borden Chemical has elected to present its financial statements from the date of its acquisition by Apollo on the historical basis of accounting permitted under the SEC’s public debt exemptions);

 

    the results of operations of Resolution Specialty for the period from August 2, 2004 to December 31, 2004 and the nine months ended September 30, 2005, which reflect purchase accounting adjustments from the date of acquisition of Resolution Specialty by Apollo on August 2, 2004; and

 

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

 

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

 

The summary unaudited pro forma financial data of Hexion gives effect, in the manner described under “Unaudited Pro Forma Financial Information,” to the Transactions. Our unaudited pro forma statements of operations for the year ended December 31, 2004 and the nine months ended September 30, 2004 and 2005 give pro forma effect to the Transactions (other than the Resolution Performance Transaction), as if they had each occurred on January 1, 2004 as described under “Unaudited Pro Forma Financial Information.” We have included pro forma data related to EBITDA and transaction related costs, impairments and unusual items included in EBITDA for the last twelve months ended September 30, 2005 (the “LTM Period”) as we are required to measure compliance with the financial covenants in certain of our indentures based on Adjusted EBITDA for the most recent four quarter period.

 

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

 

The unaudited pro forma financial data for the year ended December 31, 2004, for the nine months ended September 30, 2004 and 2005 and for the LTM Period is presented for informational purposes only, and does not purport to represent what our results of operations would actually have been if the transactions had occurred on the dates indicated, nor does it purport to project our results of operations or financial condition that we may achieve in the future.

 

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

 

    Historical

   

Pro Forma


 
   

Year ended

December 31,


   

Nine Months
Ended

September 30,

2005


    Year Ended
December 31,
2004


   

Nine Months
Ended

September 30,


 
    2002

    2003

    2004

        2004

    2005

 
    (dollars in millions)  

Statement of Operations

                                                       

Net sales (1)

  $ 740     $ 782     $ 2,019     $ 3,317     $ 4,105     $ 2,983     $ 3,564  

Cost of sales

    601       714       1,785       2,831       3,569       2,603       3,030  
   


 


 


 


 


 


 


Gross profit

    139       68       234       486       536       380       534  
   


 


 


 


 


 


 


Selling, general & administrative expense

    82       81       163       290       388       299       317  

Transaction related costs

    —         —         56       34       65       56       34  

Impairments

    —         13       2       —         86       76       —    

Other operating expense (income)

    16       (3 )     4       (4 )     19       14       (3 )
   


 


 


 


 


 


 


Operating income (loss)

    41       (23 )     9       166       (22 )     (65 )     186  
   


 


 


 


 


 


 


Interest expense

    65       77       118       152       221       166       166  

Write-off of deferred financing fees

    —         —         —         17       —         —         —    

Other non-operating expense

    —         —         4       14       6       2       14  
   


 


 


 


 


 


 


Loss from continuing operations before income tax and minority interest

    (24 )     (100 )     (113 )     (17 )     (249 )     (233 )     6  

Income tax (benefit) expense

    (10 )     (37 )     —         43       129       127       55  
   


 


 


 


 


 


 


Loss from continuing operations before minority interest

    (14 )     (63 )     (113 )     (60 )     (378 )     (360 )     (49 )

Minority interest in net (loss) income of consolidated subsidiaries

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


 


 


 


 


 


 


Loss from continuing operations

    (11 )     (50 )     (105 )     (63 )     (379 )     (361 )     (53 )

Loss from discontinued operations

    —         —         —         10       —         —         —    
   


 


 


 


 


 


 


Net loss

  $ (11 )   $ (50 )   $ (105 )   $ (73 )   $ (379 )   $ (361 )   $ (53 )
   


 


 


 


 


 


 


Dividends on Series A Preferred Stock

    —         —         —         18       51       38       43  
   


 


 


 


 


 


 


Net loss available to common shareholders

  $ (11 )   $ (50 )   $ (105 )   $ (91 )   $ (430 )   $ (399 )   $ (96 )
   


 


 


 


 


 


 


Cash Flow Data

                                                       

Cash flows from (used in) operating activities

  $ 64     $ (43 )   $ (32 )   $ 103       —         —         —    

Cash flows (used in) from investing activities

    (45 )     7       (20 )     (294 )     —         —         —    

Cash flows (used in) from financing activities

    (21 )     80       148       209       —         —         —    

Depreciation and amortization (2)

    47       58       86       111     $ 149     $ 110     $ 121  

Capital expenditures

    48       18       57       63       122       81       69  

 

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Table of Contents
     Historical

    Pro Forma

    

Year ended

December 31,


   

Nine Months
Ended

September 30,

2005


    Year Ended
December 31,
2004


  

Nine Months
Ended

September 30,


   LTM
Period


     2002

    

2003

    

2004

 

        

2004

    

2005

  
     (dollars in millions)

Other Financial Data

                                                       

EBITDA (3)

   —        —        —         —       $ 120    $ 42    $ 289    $ 367

Transaction related costs and non-cash charges included in EBITDA (4)

   —        —        —         —         151      134      54      71

Unusual items included in EBITDA (5)

   —        —        —         —         89      82      25      32

Balance Sheet Data (at end of period)

                                                       

Cash and equivalents

   —      $ 49    $ 152     $ 164       —        —        —        —  

Working capital (6)

   —        177      433       535       —        —        —        —  

Total assets

   —        1,191      2,696       3,197       —        —        —        —  

Total debt

   —        683      1,850       2,367       —        —        —        —  

Total liabilities and minority interest

   —        1,039      3,005       3,712       —        —        —        —  

Redeemable preferred stock

   —        —        —         352       —        —        —        —  

Total common stock and other shareholders’ equity (deficit)

   —        152      (309 )     (867 )     —        —        —        —  

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

 

     Year Ended
December 31, 2004


 
    
     (dollars in millions)  

Resolution Performance—For the year ended December 31, 2004

   $ 996  

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

     702  

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

     325  

Eliminations

     (4 )
    


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

   $ 2,019  
    


 

(2) Depreciation and amortization included in the pro forma statements of operations for the year ended December 31, 2004 and for the nine months ended September 30, 2004 and 2005 is comprised of:

 

     Year Ended
December 31, 2004


   

Nine Months Ended

September 30,


 
       2004

    2005

 
     (dollars in millions)  

Hexion—For the year ended December 31, 2004 and for the nine months ended September 30, 2004 and 2005

   $ 86     $ 54     $ 111  

Borden—For the period from January 1, 2004 to August 11, 2004

     30       30       —    

Resolution Specialty—For the period from January 1, 2004 to August 1, 2004

     4       4       —    

Bakelite—For the year ended December 31, 2004, for the nine months ended September 30, 2004 and for the period from January 1, 2005 to April 29, 2005

     33       25       11  

Total pro forma adjustment

     (4 )     (3 )     (1 )
    


 


 


Total pro forma depreciation and amortization expense for the year ended December 31, 2004 and for the nine months ended September 30, 2004 and 2005

   $ 149     $ 110     $ 121  
    


 


 


 

(3)

EBITDA is defined as net loss before interest, taxes, depreciation and amortization and is used by management as a performance measure for certain performance-based cash bonus plans and measuring triggering events of certain performance-based stock options. We have presented EBITDA on a pro forma basis since management plans on using EBITDA as a benchmark for developing its ongoing performance measures for its cash bonus plans and certain performance-based stock option plans. We feel that pro forma EBITDA is more representative of the performance of our future operations since it gives effect to our combined company whereas historical EBITDA gives effect to our acquisitions only as of the date we acquired such entity. We also believe that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. EBITDA is

 

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Table of Contents
 

not a recognized term under GAAP, should not be viewed in isolation and does not purport to be an alternative to net loss as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. There are material limitations associated with making the adjustments to our earnings to calculate EBITDA and using this non-GAAP financial measure as compared to the most directly comparable U.S. GAAP financial measures. For instance, EBITDA does not include:

 

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

 

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

 

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

 

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

 

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

 

     Pro Forma

 
    

Year Ended

December 31, 2004


   

Nine Months Ended

September 30,


    LTM
Period


 
       2004

    2005

   
     (dollars in millions)  

Pro forma net loss

   $ (379 )   $ (361 )   $ (53 )   $ (71 )

Pro forma interest expense, net

     221       166       166       221  

Pro forma income tax expense

     129       127       55       57  

Pro forma depreciation and amortization

     149       110       121       160  
    


 


 


 


Pro forma EBITDA

   $ 120     $ 42     $ 289     $ 367  
    


 


 


 


 

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

 

     Pro Forma

    

Year Ended

December 31, 2004


  

Nine Months Ended

September 30,


   LTM
Period


        2004

   2005

  
     (dollars in millions)

Transaction related costs (a)

   $ 65    $ 56    $ 34    $ 43

Non-cash charges (b)

     86      78      20      28
    

  

  

  

     $ 151    $ 134    $ 54    $ 71
    

  

  

  


                           
  (a) 2004 amounts represent costs related to the Borden Transaction and certain expenses related to terminated acquisition activities. 2005 amounts are costs related to the Current Transactions.
  (b) Represents impairments of fixed assets, goodwill and intangible assets and non-cash stock compensation.

 

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

 

     Pro Forma

    

Year Ended

December 31, 2004


  

Nine Months Ended

September 30,


  

LTM

Period


        2004

   2005

  
     (dollars in millions)

Legacy legal costs (a)

   $ 11    $ 11    $    $

Legacy corporate expenses, net (b)

     30      28      2      4

Plant closure and employee costs (c)

     13      12      4      5

Business realignment expenses (d)

     29      27           2

Business interruption and other (e)

     6      4      19      21
    

  

  

  

Unusual items

   $ 89    $ 82    $ 25    $ 32
    

  

  

  


                           
  (a) Legacy legal costs relate to legal proceedings primarily involving divested businesses of Borden Chemical.

 

  (b) Corporate allocations of $38 and transition service fees of $4 charged to Resolution Specialty by its former parent in excess of estimated incremental costs to replace such services of $12 in 2004.

 

  (c) Plant closure and non-recurring severance and other one time benefits paid to employees.

 

  (d) Business realignment expenditures included in EBITDA for Hexion relate to the excess of historical costs over current business staffing levels, contractual commitments and current plant footprint and are comprised of:

 

     Year Ended
December 31, 2004


  

LTM Period


     (dollars in millions)

Employee related costs

   $ 17    $ 2

Non-employee related costs

     12     
    

  

     $ 29    $ 2
    

  

 

Employee related costs of $17 and $2 are comprised of (i) historical salaries and benefits of employees terminated in 2004 at Resolution Specialty, Borden Chemical and Bakelite and (ii) the excess cost of employee benefit programs prior to the revision of such plans in 2004 at Resolution Specialty and Borden Chemical.

 

Non-employee related costs of $12 are comprised primarily of (i) the excess distribution expense reflected in Resolution Specialty’s predecessor’s income statement reduced in 2004 at the time of the Resolution Specialty Transaction as a result of new agreements with vendors and (ii) costs related to closed sites included in the Resolution Specialty predecessor financial statements which were not acquired by Resolution Specialty.

 

  (e) For the year ended December 31, 2004 amounts represent incremental expenses incurred as a result of a mechanical failure at a Brazilian formaldehyde plant. Hexion was reimbursed for this amount under its insurance policies in the second quarter of 2005 and management fees. In 2005, the amount includes mark to market losses of an exchange rate hedge relating to the Bakelite Acquisition of $11 and integration costs of $5 and management fees.

 

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

 

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Table of Contents

Senior Secured Credit Facilities

 

In connection with the closing of the Combinations on May 31, 2005, we entered into $775 of new senior secured credit facilities. Our new senior secured credit facilities provide for a six-year $225 revolving credit facility, subject to an earlier maturity date, under certain circumstances. In addition, our new senior secured credit facilities provide for a seven-year $500 term loan facility and a $50 synthetic letter of credit facility, each subject to an earlier maturity date, under certain circumstances. Upon entering into these senior secured credit facilities, we repaid $164 of indebtedness, which represented all amounts outstanding under the previously outstanding credit facilities of Borden Chemical, Resolution Performance and Resolution Specialty, and $250, which represented all amounts outstanding under our bridge loan facility. In addition, we repaid $53 of Resolution Specialty Senior Subordinated Notes. As of September 30, 2005, we had $2,367 principal amount of outstanding indebtedness, including amounts outstanding under the new senior secured credit facilities. See “Description of Certain Indebtedness—First-Priority Lien Obligations—Senior Secured Credit Facilities.”

 

Covenant Compliance

 

Certain covenants contained in the credit agreement governing our new senior secured credit facilities and the indentures governing the 8% Senior Secured Notes, 9 1/2% Senior Second Secured Notes and Second-Priority Senior Secured Notes (i) require the maintenance of defined Adjusted EBITDA to Fixed Charges and senior secured debt to Adjusted EBITDA ratios and (ii) restrict our ability to take certain actions such as incur additional debt or make acquisitions if we are unable to meet these ratios. The most restrictive of these covenants, the covenants to incur additional indebtedness and the ability to make future acquisitions, require an Adjusted EBITDA to Fixed Charges ratio (measured on a trailing four-quarter basis) of 2.25:1. Failure to comply with these covenants can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.

 

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

 

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

 

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Table of Contents
     Pro Forma

    

Year Ended

December 31,

2004


  

LTM

Period


       
     (dollars in millions)

Pro Forma EBITDA (1)

   $ 120    $ 367

Transaction related costs and non-cash charges (1)

     151      71

Unusual items (1)

     89      32

Effect of acquisitions (2)

     4      1

Synergies from Current Transactions (3)

     125      111
    

  

Pro Forma Adjusted EBITDA(4)

   $ 489    $ 582
    

  

Pro Forma Fixed Charges

   $ 212    $ 212
    

  

Ratio of Adjusted EBITDA to Fixed Charges

     2.31      2.75
    

  


  (1) See footnotes (3) - (5) on pages 19-21 for more information on EBITDA, transaction related costs and non-cash charges and unusual items.

 

  (2) Represents the full year Adjusted EBITDA impact of a specialty coatings product line in the versatics market, acquired in November 2004 by Resolution Specialty.

 

  (3) Represents $125 in estimated annual net cost synergies resulting from the Current Transactions. We expect that approximately 60% of the $125 near term cost savings will be achieved by the end of 2006 with the remainder expected to be achieved in the following year. In the first nine months of 2005, we realized $14 of the $125 of net cost synergies. We expect to incur a one-time cost of $75 during the next two years in connection with implementing these synergies. These estimated synergies include cost savings from rationalization of manufacturing facilities, removal of duplicative corporate and administrative functions, alignment of benefit plans and raw material purchasing initiatives. The estimated synergies by category are as follows:

 

     Year Ended
December 31,
2004


   LTM
Period


       

Rationalization of manufacturing facilities

   $ 42    $ 40

Overhead synergies

     20      18

Raw material savings

     63      53
    

  

     $ 125    $ 111
    

  

  (4) We are required to have an Adjusted EBITDA to Fixed Charges ratio of greater than 2.25 to 1.0 to incur additional indebtedness under certain of our indentures. As of September 30, 2005, we were able to satisfy this covenant and incur additional indebtedness under our indentures.

 

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Table of Contents

RISK FACTORS

 

Investing in the exchange notes in this exchange offer involves a high degree of risk. You should carefully consider the risks described below before participating in the exchange offer. 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

 

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from making debt service payments on the notes.

 

We are a highly leveraged company. As of September 30, 2005, we had $2.4 billion of outstanding indebtedness. In fiscal 2006, our cash debt service is expected to be approximately $212 million based on current interest rates (excluding $26 million related to the maturity of current debt obligations and $13 million of Series A Preferred Stock accretion for one quarter), of which $149 million represents debt service on fixed-rate obligations. Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt depends on a range of economic, competitive and business factors, many of which are outside our control. Our business may not generate sufficient cash flow from operations to meet our debt service and other obligations, and currently anticipated cost savings and operating improvements may not be realized on schedule, or at all. If we are unable to meet our expenses and debt service obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We may not be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity.

 

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

 

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

 

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

 

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

 

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

 

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

 

    the debt service requirements of our other indebtedness could make it more difficult for us to make payments on the notes;

 

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

 

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

 

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

 

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

 

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Table of Contents

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

 

Certain of our indebtedness, including indebtedness under our floating rate notes and borrowings under our new senior secured credit facilities, are at variable rates of interest and expose us to interest rate risk. See “Description of Certain Indebtedness.” If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same. An increase of 1.0% in the interest rates payable on our variable rate indebtedness would increase our fiscal 2005 estimated debt service requirements by approximately $9 million. Accordingly, an increase in interest rates from current levels could cause our annual debt-service obligations to increase significantly.

 

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

 

The terms of the indentures governing our notes, our new senior secured credit facilities and the instruments governing our other indebtedness and Series A Preferred Stock contain restrictions on our ability to incur additional indebtedness. These restrictions are subject to a number of important qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could be substantial. Accordingly, we could incur significant additional indebtedness in the future. As of September 30, 2005, we had $221 million available for additional borrowing under our new senior secured credit facilities, including the subfacility for letters of credit, and the covenants under our debt agreements would allow us to borrow a significant amount of additional indebtedness. The more we become leveraged, the more we, and in turn our securityholders, become exposed to the risks described above under “—Our substantial indebtedness could impair our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from fulfilling our obligations under our existing or future indebtedness.”

 

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes.

 

Our earnings were insufficient to cover our fixed charges by $89 million, $106 million and $39 million in 2003, 2004 and for the nine months ended September 30, 2005, respectively. Our ability to make payments on our indebtedness, including the notes, depends on our ability to generate cash in the future. Our cash debt service for 2006, is expected to be approximately $212 million based on current interest rates (excluding $26 million related to the maturity of current debt obligations and $13 million of Series A Preferred Stock accretion for one quarter). Accordingly, we will have to generate significant cash flows from operations to meet our debt service requirements. If we do not generate sufficient cash flow to meet our debt service and working capital requirements, we may need to seek additional financing or sell assets. This may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Without this financing, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances. Furthermore, Apollo and its affiliates have no continuing obligation to provide us with debt or equity financing.

 

Our new senior secured credit facilities, the indenture governing the notes and the instruments governing our other indebtedness and preferred stock, limit our ability to sell assets and also restrict the use of proceeds from that sale. Moreover, our new senior secured credit facilities and certain other obligations are secured on a first-priority basis by certain of our assets, and the notes and certain other obligations are secured on a second-priority basis by substantially the same assets, other than assets of our foreign subsidiaries. We may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations, including our obligations on the notes. Furthermore, a substantial portion of our assets are, and may continue to be, intangible assets. Therefore, it may be difficult for us to pay you in the event of an acceleration of the notes.

 

There may not be sufficient collateral to pay all or any of the notes.

 

Indebtedness under our new senior secured credit facilities, the interest rate protection and other hedging agreements and the overdraft facility permitted thereunder and our 8% senior secured notes due 2009, (referred

 

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to in these Risk Factors as the “First-Priority Lien Obligations”) are secured by a first-priority lien on substantially all tangible and intangible assets of Hexion and each subsidiary guarantor, except for certain excluded collateral (such as our Principal Properties). The notes, the New Floating Rate Notes and our 9 1/2% senior second secured notes due 2010 are secured by a second-priority lien on only a portion of the assets that secure the First-Priority Lien Obligations. 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, the New Floating Rate Notes or our 9 1/2% senior second secured notes due 2010, which are secured on an equal and ratable basis.

 

At September 30, 2005, we had outstanding $2.4 billion of senior indebtedness (including the notes and guarantees), and $662 million of First-Priority Lien Obligations, including $499 million of secured indebtedness under our new senior secured credit facilities. At September 30, 2005, borrowings of $221 million were unused and available under our new senior secured credit facilities, all of which would constitute First-Priority Lien Obligations if drawn. In addition to borrowings under our new senior secured credit facilities, the indenture governing the notes, the New Floating Rate Notes and the instrument governing our preferred stock allow a significant amount of other indebtedness and other obligations to be secured by a lien on the collateral securing the notes on a first-priority basis, and an unlimited amount of indebtedness secured by a lien on such collateral 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, the New Floating Rate Notes and the instrument governing our preferred stock. Any additional obligations secured by a lien on the collateral securing the notes (whether senior to or equal with the second-priority 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 new senior secured credit facilities, the indenture governing the notes and the agreements governing our other indebtedness, most of which is permitted to be a First-Priority Lien Obligation. 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 old 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 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.

 

Additional indebtedness was secured by the collateral securing the notes upon consummation of the Combinations.

 

Upon consummation of the Combinations, the holders of the notes share equally and ratably in the collateral with the holders of our other indebtedness secured by a second-priority lien, including $200 million of 9 1/2% senior second secured notes previously issued by Resolution Performance and the New Floating Rate Notes.

 

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Although some of the collateral securing the notes previously issued by Resolution Performance will be added as collateral to secure the Second-Priority Senior Secured Notes, there can be no assurance that the collateral securing the notes will be sufficient to pay all or any of the amounts due on the notes and our other secured indebtedness, including the notes previously issued by Resolution Performance and the New Floating Rate Notes. At September 30, 2005, we had outstanding $2.4 billion of senior indebtedness (including the notes and the guarantees), and $662 million of First-Priority Lien Obligations, including $499 million of secured indebtedness under our new senior secured credit facilities. At September 30, 2005, borrowings of $221 million were unused and available under our new senior secured credit facilities, all of which would constitute First-Priority Lien Obligations if drawn.

 

Our new senior secured credit facilities and our 8% senior secured notes constitute First-Priority Lien Obligations under the indenture governing 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.

 

Holders of notes will not control decisions regarding collateral.

 

The holders of the First-Priority Lien Obligations control substantially all matters related to the collateral securing the First-Priority Lien Obligations, our 9 1/2% senior second secured notes due 2010 and the Second-Priority Senior Secured 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 second-priority 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 second-priority 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 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 second-priority 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 second-priority 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 Hexion Canada) with the SEC. As a result of any such release, the notes could be secured by less collateral than our first-priority indebtedness and the other indebtedness secured on a second-priority basis to the extent such liens are not required to be similarly released.

 

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 Hexion Canada) would be required by the rules of the

 

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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 second-priority 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, as a result of any such release, the notes could be secured by less collateral than our first-priority indebtedness and the other indebtedness secured on a second-priority basis to the extent such liens are not required to be similarly released.

 

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

 

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

 

A significant portion of Hexion’s assets are owned, and a significant percentage of Hexion’s net sales are earned, by its direct and indirect subsidiaries. Therefore, Hexion’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 Hexion by its subsidiaries will be contingent upon the earnings of those subsidiaries.

 

Hexion’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 our subsidiaries are subject to contractual limitations on their ability to pay dividends or otherwise distribute money to Hexion. If Hexion’s subsidiaries do not pay out dividends or make other distributions to Hexion, Hexion may not have sufficient cash to fulfill its obligations with respect to 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 Hexion’s subsidiaries that are not the Issuers or guarantors of the notes. 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 Hexion or the Issuers.

 

The notes are not guaranteed by any of Hexion’s non-U.S. subsidiaries. Our foreign 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 Hexion 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.

 

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

 

The proceeds from the sale of the notes were applied to satisfy the purchase price in the Borden Transaction payable to Borden Chemical’s shareholders. Hexion and certain of its existing domestic subsidiaries guaranteed the notes and certain of its future domestic subsidiaries may guarantee the notes. In addition, the guarantees are

 

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secured by certain collateral owned by the related guarantor. If any issuer or any guarantor becomes a debtor in a case under the United States 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.

 

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

 

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

 

    incur or guarantee additional debt;

 

    pay dividends and make other distributions to our shareholders;

 

    create or incur certain liens;

 

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    make certain loans, acquisitions, capital expenditures or investments;

 

    engage in sales of assets and subsidiary stock;

 

    enter into sale/leaseback transactions;

 

    enter into transactions with affiliates;

 

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

 

    make capital expenditures.

 

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

 

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

 

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

 

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

 

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

 

    prevent us from making payments on the Series A Preferred Stock.

 

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

 

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 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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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. There can be no assurance that the trustee or the collateral agent will monitor, or that we will inform the trustee or the 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. Such failure 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.

 

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

 

Specific kinds of change of control events of Hexion 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 of such change of control event. Similar change of control offer requirements are applicable to notes including the original notes issued under certain of our other indentures. The Issuers will be dependent on Hexion and its subsidiaries for the funds necessary to cure the events of default caused by such change of control event. Hexion 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 new 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 new senior secured credit facilities and our other indebtedness, but may not be able to do so. See “Description of the Notes—Change of Control.”

 

If you do not properly tender your old notes, you will continue to hold unregistered old notes and be subject to the same limitations on your ability to transfer old notes.

 

We will only issue exchange notes in exchange for old notes that are timely received by the exchange agent together with all required documents, including a properly completed and signed letter of transmittal. Therefore, you should allow sufficient time to ensure timely delivery of the old notes and you should carefully follow the instructions on how to tender your old notes. Neither we nor the exchange agent are required to tell you of any defects or irregularities with respect to your tender of the old notes. If you are eligible to participate in the exchange offer and do not tender your old notes or if we do not accept your old notes because you did not tender your old notes properly, then, after we consummate the exchange offer, you will continue to hold old notes that are subject to the existing transfer restrictions and will no longer have any registration rights or be entitled to any additional interest with respect to the old notes. In addition:

 

    if you tender your old notes for the purpose of participating in a distribution of the exchange notes, you will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes; and

 

    if you are a broker-dealer that receives exchange notes for your own account in exchange for old notes that you acquired as a result of market-making activities or any other trading activities, you will be required to acknowledge that you will deliver a prospectus in connection with any resale of those exchange notes.

 

We have agreed that, for a period of 180 days after the exchange offer is consummated, we will make this prospectus available to any broker-dealer for use in connection with any resales of the exchange notes.

 

After the exchange offer is consummated, if you continue to hold any old notes, you may have difficulty selling them because there will be fewer old notes outstanding.

 

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An active trading market may not develop for the exchange notes, in which case the trading market liquidity and the market price quoted for the exchange notes could be adversely affected.

 

The exchange notes are a new issue of securities with no established trading market and will not be listed on any securities exchange or automated dealer quotation system. The liquidity of the trading market in the exchange notes, and the market price quoted for the exchange notes, may be adversely affected by changes in the overall market for high yield securities and by changes in our financial performance or prospects or in the prospects for companies in our industry generally. As a result, you cannot be sure that an active trading market will develop for the exchange notes. In addition, if a large amount of old notes are not tendered or are tendered improperly, the limited amount of exchange notes that would be issued and outstanding after we consummate the exchange offer would reduce liquidity and could lower the market price of those exchange notes.

 

Risks Relating to Our Business

 

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

 

We may not be successful integrating Borden Chemical, Resolution Performance, Resolution Specialty and Bakelite, and the combined company may not perform as we expect or achieve the net cost savings we anticipate. A significant element of our business strategy is the improvement of our operating efficiencies and a reduction of our operating costs. Management is currently targeting $250 million in synergies from the Current Transactions of which $125 million of cost savings have been specifically identified by our management. We anticipate a one-time cost of $75 million in connection with implementing such cost savings. A variety of factors could cause us not to achieve the benefits of the cost savings plan, or could result in harm to our business. For example, certain of our European operations utilize IT systems with limited systems support. In the event we are not able to integrate these systems with our more advanced IT systems, our ability to efficiently operate in certain European countries could be diminished. In addition, although we are continuing to assess the impact of Hurricanes Katrina and Rita on our business, they, along with future hurricanes and natural disasters, may affect our ability to achieve our cost savings plan in the near term. Additional factors include:

 

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

 

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

 

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

 

    our inability to optimize manufacturing processes between the companies;

 

    our inability to obtain lower raw material prices;

 

    our inability to utilize new geographic distribution channels;

 

    our inability to reduce corporate and administrative expenses; and

 

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

 

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

 

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

 

The process of integrating the operations of Borden Chemical, Resolution Performance, Resolution Specialty and Bakelite may require a disproportionate amount of resources and management attention. Our future operations and cash flows will depend largely upon our ability to operate Hexion efficiently, achieve the strategic

 

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operating objectives for our business and realize significant cost savings and synergies. Our management team may encounter unforeseen difficulties in managing the integration of our four businesses. In order to successfully combine and operate our businesses, our management team will need to focus on realizing anticipated synergies and cost savings on a timely basis while maintaining the efficiency of our operations. Any substantial diversion of management attention or difficulties in operating the combined business could affect our sales and ability to achieve operational, financial and strategic objectives. For example, Bakelite’s original system of financial reporting was designed to comply with German GAAP, consistent with the GAAP applied in the financial statements of its former parent, and the records of its subsidiaries were kept in other local GAAP and then consolidated into its former parent’s financial statements. The conversion of Bakelite’s system of financial reporting from German and local GAAP to US GAAP is a complex process and has required substantial management resources in order to prepare the financial statements included in this prospectus. In the future, we expect to devote substantial management attention in order to implement financial reporting and other systems that will permit Bakelite to timely report its results on a US GAAP basis for inclusion in our consolidated financial statements. In addition, we anticipate the necessity to devote substantial management resources to continue the preparation of Resolution Performance’s and Resolution Specialty’s financial statements in a manner consistent with SEC rules and regulations.

 

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

 

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

 

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

 

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

 

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

 

Many of our products are used in industries that are cyclical in nature, such as the new home construction, automotive, oil and gas, chemicals and electronics industries. We sell our products to manufacturers in those

 

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industries who incorporate them into their own products. Sales to the construction industry are driven by trends in commercial and residential construction, housing starts and trends in residential repair and remodeling. Consumer confidence, mortgage rates and income levels play a significant role in driving demand in the residential construction, repair and remodeling sector. A drop in consumer confidence or an increase in mortgage rates or unemployment could cause a slowdown in the construction industry, and in particular the residential construction, repair and remodeling industry. These and other similar adverse developments could cause a material decrease in our net sales and operating margins.

 

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

 

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

 

Our manufacturing operations depend upon obtaining adequate supplies of our raw materials on a timely basis. The loss of a key source of supply or a delay in shipments could have an adverse effect on our business. In addition, several of our feedstocks at various facilities are transported through a pipeline from one supplier. If we were unable to receive these feedstock through these pipeline arrangements, we may not be able to obtain them from other suppliers at competitive prices or in a timely manner. During the past three years, the prices of these materials have been volatile. We are exposed to price risks associated with these raw material purchases. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates, cost components of raw materials and worldwide price levels. In addition, although we are continuing to assess the impact of Hurricanes Katrina and Rita on the availability and prices of our raw materials, we may be subject to increasing raw material prices and fuel surcharges due to hurricanes and other natural disasters and the associated damage to our suppliers. During the third quarter of 2005, approximately $10 million in incremental expenses associated with the hurricanes negatively impacted our results. We believe our fourth quarter 2005 operating results will continue to be negatively impacted by incremental expenses of approximately $10 to $20 million. Our ability to manufacture products depends on our ability to obtain an adequate supply of raw materials in a timely manner. Furthermore, if the cost of raw materials increases significantly and we are unable to offset the increased costs with higher selling prices, our profitability will decline. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Although certain of our contracts include competitive price clauses that allow us to buy outside the contract if market pricing falls below contract pricing and other contracts have minimum-maximum monthly volume commitments that allow us to take advantage of spot pricing, we may not be able to purchase raw materials at market price. In addition, some of our customer contracts include selling price provisions that are indexed to publicly available indices for these commodity raw materials; however, we may not be able to immediately pass on raw material price increases to our customers, if at all. Due to differences in timing of the pricing mechanism trigger points between our sales and purchase contracts, there is often a “lead-lag” impact during which margins are negatively impacted for the short term in periods of rising raw material prices and positively impacted in periods of falling raw material prices. Raw material prices may not decrease from currently high levels or, if they do, we may not be able to capitalize on any such reductions in a timely manner, if at all.

 

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

 

Natural gas is essential in our manufacturing processes, and its cost can vary widely and unpredictably. Our energy costs represented approximately 4% of our total cost of sales in 2004. Energy costs have risen significantly over the past several years due to the increase in the cost of oil and natural gas and the recent shortages of energy in various states, including those caused by Hurricanes Katrina and Rita. Our operating

 

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expenses increased in 2005 and will continue to increase if these costs continue to rise or do not return to historical levels. Rising energy costs may also increase our raw material costs. If we cannot pass these costs through to our customers, our profitability may decline. In addition, rising energy costs also negatively impact our customers and the demand for our products. These risks will be exacerbated if our customers or production facilities are in locations experiencing severe energy shortages.

 

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

 

Our operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials and are subject to extensive environmental laws and regulations at the national, state, local and international level. Such environmental laws and regulations include those governing the discharge of pollutants into the air and water, the management and disposal of hazardous materials and wastes, the cleanup of contaminated sites and occupational health and safety. We have incurred, and will continue to incur, significant costs and capital expenditures in complying with these laws and regulations. In 2004, we incurred $16 million in capital expenditures to comply with environmental laws and regulations, and for other environmental improvements. In addition, violations of environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subjected to substantial fines, penalties, criminal proceedings, third party property damage or personal injury claims or other costs. In addition, future developments or increasingly stringent regulation could require us to make additional unforeseen environmental expenditures. For example, the Louisville Metro Air Pollution control district has proposed new regulations that, if promulgated in their current form, could result in increased costs at our Louisville, Kentucky facility. In addition, potential air compliance issues at the Louisville facility could adversely affect our ability to achieve operational synergies in a timely fashion.

 

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

 

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

 

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

 

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

 

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

 

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processes and facilities. As our facilities grow, we may become subject to additional regulation or higher compliance standards. We are also subject to ongoing reviews of our products and manufacturing processes. For example, formaldehyde is an extensively regulated chemical, which various public health agencies continue to evaluate. The International Agency for Research on Cancer, or IARC, has recently reclassified formaldehyde as “carcinogenic to humans,” a higher classification than previous IARC evaluations, based principally on a study conducted by the National Cancer Institute (NCI) linking formaldehyde exposure to nasopharyngeal cancer, a rare form of cancer in humans. IARC also concluded that there was strong but not sufficient evidence for a finding of a causal association between leukemia and occupational exposure to formaldehyde, although IARC could not identify a mechanism for leukemia induction. IARC’s monograph reporting this decision has not yet been published. It is possible that this reclassification will lead to further federal and state governmental review of existing regulations and may result in additional costly requirements. In addition, BPA, which is used as an intermediate at our Deer Park and Pernis manufacturing facilities and is also sold directly to third parties, is currently under evaluation as an “endocrine disrupter.” Endocrine disrupters are chemicals that have been alleged to interact with the endocrine systems of humans and wildlife and disrupt normal processes. Pursuant to EU regulation 793/93/EC, BPA producers are currently conducting an extensive toxicology testing program of the chemical. In addition, new legislation in Europe will take effect in 2005 and require that risk labels be used for BPA indicating “possible risk of impaired fertility.” In addition, the California legislature is considering a law that would prohibit the use of BPA in products intended for young children. In the event that BPA is further regulated, additional operating costs would likely be incurred to meet more stringent regulation of the chemical.

 

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

 

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

 

We are dependent on the continued operation of our 86 production and distribution facilities. These facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, and environmental hazards, such as spills, discharges or releases of toxic or hazardous substances and gases, storage tank leaks and

 

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

 

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

 

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

 

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

 

We have significant manufacturing operations outside the United States. In 2004, our net sales outside the United States represented approximately 57% of our total sales. We have 49 production and distribution facilities

 

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

 

    difficulty in enforcing agreements through foreign legal systems;

 

    foreign customers may have longer payment cycles;

 

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

 

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

 

    increased costs of transportation or shipping;

 

    risk of nationalization of private enterprises;

 

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

 

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

 

    difficulty with staffing and managing widespread operations; and

 

    required compliance with a variety of foreign laws and regulations.

 

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

 

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

 

We conduct our business and incur costs in the local currency of most countries in which we operate. In 2004, our net sales outside the United States represented approximately 57% of our total sales. Accordingly, our results of operations are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our financial statements. Changes in exchange rates between those foreign currencies and the U.S. dollar will affect our net sales, cost of sales and operating margins and could result in exchange losses. In addition to currency translation risks, we incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it receives revenues. In an effort to mitigate the impact of exchange rate fluctuations we engage in exchange rate hedging activities. However, the hedging transactions we enter into may not be effective or could result in foreign exchange hedging loss. The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted. Given the volatility of exchange rates, we may not be able to effectively manage our currency transaction and/or translation risks, and any volatility in currency exchange rates may have an adverse effect on our financial condition, cash flows and profitability. Our currency translation risk will intensify as a result of Borden Chemical’s acquisition of Bakelite, all of whose material operations are outside the United States and generally transacted in foreign currencies.

 

We operate our business in countries that historically have been and may continue to be susceptible to recessions or currency devaluation, including Brazil and Malaysia. In addition, as we expand our business in

 

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emerging markets, particularly China and Russia, the uncertain regulatory environment relating to currency policy in these countries could have a negative impact on our operations there.

 

Failure to develop new products will make us less competitive.

 

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

 

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

 

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

 

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

 

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

 

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

 

We have made acquisitions of related businesses, and entered into joint ventures in the recent past and intend to selectively pursue acquisitions of, and joint ventures with, related businesses as one element of our growth

 

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strategy. We are evaluating several potential tuck-in acquisitions and are in various stages of due diligence and negotiations with respect thereto. These transactions may not be consummated in the foreseeable future, if at all, and we may not consummate significant acquisitions in the future. We may, in the future, pursue acquisitions of a significantly larger scale than in the past. If such acquisitions are consummated, the risk factors we describe below, and for our business generally, may be intensified.

 

Our ability to implement our growth strategy is limited by covenants in our senior secured credit facilities and indentures, our financial resources, including available cash and borrowing capacity, and our ability to integrate or identify appropriate acquisition and joint venture candidates. Moreover, acquisitions of businesses may require us to assume or incur additional debt financing, resulting in additional leverage and complex debt structures.

 

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

 

    potential disruption of our ongoing business and distraction of management;

 

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

 

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

 

    coordinating new product and process development;

 

    hiring additional management and other critical personnel; and

 

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

 

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

 

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

 

We are dependent on the services of Craig O. Morrison, our President and Chief Executive Officer, William H. Carter, our Chief Financial Officer and other members of our senior management team, who collectively have 169 years of experience in the chemical and plastics industries, to remain competitive in our industry. The loss of Mr. Morrison or any other member of our senior management team could have an adverse effect on us. There is a risk that we will not be able to retain or replace these key employees. All of our current key employees are subject to employment conditions or arrangements that contain post employment non-competition provisions. However, these arrangements permit the employees to terminate their employment with little or no notice.

 

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

 

As of December 31, 2004, approximately 40% of our employees were unionized or represented by workers’ councils. In addition, some of our employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the United States. Such favorable employment rights require us to expend greater time and expense in making changes to employees’ terms of employment or making staff reductions. For example, most of our employees in Europe are represented by workers’ councils which must approve any changes in conditions of employment, including salaries and benefits. “Protection

 

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against dismissal” claims have been brought by certain of such workers’ councils in connection with Bakelite’s cost-saving initiatives. A significant dispute with our employees may divert management’s attention and otherwise hinder our ability to conduct our business and achieve planned cost savings.

 

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

 

Protection of our proprietary processes, methods and compounds and other technology is important to our business. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights. We rely on patent, trade secret, trademark and copyright law as well as judicial enforcement to protect such technologies. A majority of our patents relate to the development of new products and processes for manufacturing and use thereof and expire at various times between 2005 and 2025. Some of our technologies are not covered by any patent or patent application. In addition, our patents could be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, pending patent applications may not result in an issued patent, or if patents are issued to us, such patents may not provide meaningful protection against competitors or against competitive technologies.

 

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

 

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

 

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

 

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

 

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

 

Our funding policy for pension plans is to accumulate plan assets that, over the long run, will approximate the present value of projected benefit obligations. Our pension cost is materially affected by the discount rate

 

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used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change of the expected rate of return on plan assets. A change in the discount rate would result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following financial years. Similarly, changes in the expected return on plan assets assumption can result in significant changes in the net periodic pension cost of the following financial years.

 

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

 

On April 14, 2005, Borden Chemical notified the Pension Benefit Guaranty Corporation, or PBGC, that Borden Chemical’s defined benefit pension plan (the “Borden Plan”) was underfunded by approximately $104 million on a termination basis. IRS regulations require us to increase our contributions to the Borden Plan to reduce this underfunding. Based on current IRS regulations, we expect that our total minimum funding requirements for the five years ended in 2009 for the Borden Plan will be approximately $60 million. If the performance of the assets in the Borden Plan does not meet our expectations, if the PBGC requires additional contributions to the Borden Plan as a result of the Current Transactions, or if other actuarial assumptions are modified, our contributions for those years could be higher than we expect.

 

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

 

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

 

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 it 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 law. 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.

 

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

 

Apollo beneficially owns approximately 91% of our common stock. In addition, representatives of Apollo have the ability to prevent any transaction that requires the approval of directors. As a result, Apollo has the ability to substantially influence all matters requiring shareholder approval, including the election of our directors and the approval of significant corporate transactions such as mergers, tender offers and the sale of all or substantially all of our assets. The interests of Apollo and its affiliates could conflict with or differ from your interests as a holder of our notes. For example, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination which you may otherwise view favorably. Apollo may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. A sale of a substantial number of shares of stock in the future by funds affiliated with our equity sponsor could cause our stock price to decline in the future.

 

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

 

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

 

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

 

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

 

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

 

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

 

Following the proposed IPO, assuming the IPO occurs, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating/corporate governance and compensation committees consist entirely of independent directors. Accordingly, our board of directors oversight may not be as effective as companies that are subject to all of the New York Stock Exchange corporate governance requirements.

 

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

 

In the past, some of our internal controls over financial reporting have not been effective. Accordingly, following the Combinations, we have been evaluating, under the supervision and with the participation of our Disclosure Committee and management, the effectiveness of the design and operation of our internal disclosure

 

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controls and procedures over financial reporting in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC thereunder, which we refer to as Section 404. Prior to the Combinations, Borden Chemical and Resolution Performance had performed the system and process evaluation in an effort to comply with management certification and auditor attestation requirements of Section 404. However, prior to the Combinations Bakelite and Resolution Specialty were not required to meet these regulations. In the course of our ongoing Section 404 evaluation, we have identified areas of internal controls that need improvement for the former Bakelite and Resolution Specialty businesses, including the closing and consolidation procedures, and, in the case of Bakelite, procedures surrounding the conversion of the financial statements from local and German GAAP to US GAAP, and have enhanced processes and controls to try to address these issues.

 

As of December 31, 2004, Resolution Performance evaluated the effectiveness of the design and operation of its “disclosure controls and procedures” (“Disclosure Controls”). This evaluation (“Controls Evaluation”) was done under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of Resolution Performance. Based upon the Controls Evaluation, Resolution Performance concluded that Resolution Performance’s Disclosure Controls were not effective as of December 31, 2004 at the reasonable assurance level, because of a material weakness regarding the valuation and completeness of Resolution Performance’s deferred income tax assets and liabilities (including the associated valuation allowance) and the income tax provision. Specifically, Resolution Performance did not have effective controls over the preparation and review of the valuation allowance and related deferred tax assets to ensure accuracy and completeness because it did not have accounting personnel with sufficient knowledge of generally accepted accounting principles related to income tax accounting and reporting. In light of this material weakness, Resolution Performance performed additional analysis and other post-closing analytic and recalculation procedures to ensure its consolidated financial statements were prepared in accordance with generally accepted accounting principles. Further, we believe that we have adequately remediated this material weakness and that this material weakness no longer exists within the scope of the larger Hexion entity.

 

As noted above, management has identified areas of internal controls that need improvement for the former Bakelite and Resolution Specialty businesses. For example, Bakelite’s original system of financial reporting was designed to comply with German GAAP; accordingly, Bakelite’s management determined that Bakelite did not have sufficient internal controls and resources relating to the preparation of US GAAP financial statements. In addition, as Resolution Specialty began the process of developing a stand-alone infrastructure, Resolution Specialty’s management determined that Resolution Specialty did not have sufficient internal controls and resources relating to the preparation of US GAAP financial statements. As a result of such determinations, the management of Bakelite and Resolution Specialty utilized additional outside advisors, as appropriate, to assess and to assist with the US GAAP closing and consolidation processes associated with preparing the financial statements included herein, including the conversion of local and German GAAP to US GAAP. While we have added additional resources to assist with the US GAAP closing and consolidation processes, for future reporting periods, such closing and consolidation processes may result in delays in reporting our results.

 

In order to improve our internal controls, we have changed and expanded the roles and responsibilities of key personnel and made changes to certain processes related to financial reporting. As part of the integration of Resolution Specialty and Resolution Performance, in the third quarter of 2005, we began the process of consolidating some of the transaction processing and general accounting activities of Resolution Specialty, and Resolution Performance to a lesser extent, into a common shared services transaction processing environment with the Corporate and North American activity related to the former Borden Chemical operation. Once fully implemented, this change to a shared services business model (for certain processes) is intended to further enhance our internal control over financial reporting and our operating efficiencies. We have also expanded the scope of the services of the international accounting firm that provides tax accounting and compliance services and support to include Resolution Performance, Resolution Specialty and Bakelite. Management has also added additional tax personnel to assist current personnel in monitoring the tax reporting process.

 

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

 

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THE EXCHANGE OFFER

 

Purpose and Effect of the Exchange Offer

 

We have entered into a registration rights agreement with the initial purchasers of the old notes, in which we agreed to file a registration statement relating to an offer to exchange the old notes for exchange notes. The registration statement of which this prospectus forms a part was filed in compliance with this obligation. We also agreed to use our commercially reasonable efforts to file the registration statement with the SEC and to cause it to become effective under the Securities Act. In addition, we agreed to use our commercially reasonable efforts to cause the exchange offer to be consummated on or before June 8, 2005. However, since the exchange offer was not consummated on or before June 8, 2005 we have incurred additional interest expense in the aggregate amount of approximately $1 million as of December 20, 2005. The exchange notes will have terms substantially identical to the old notes except that the exchange notes will not contain terms with respect to transfer restrictions and registration rights and additional interest payable for the failure to consummate the exchange offer by June 8, 2005. Old notes in an aggregate principal amount of $475,000,000 were issued on August 12, 2004.

 

Under the circumstances set forth below, we will use our commercially reasonable efforts to cause the SEC to declare effective a shelf registration statement with respect to the resale of the old notes and to keep the shelf registration statement effective for up to two years after the effective date of the shelf registration statement. These circumstances include:

 

    the exchange offer is not permitted by applicable law or SEC policy;

 

    prior to the consummation of the exchange offer, existing SEC interpretations are changed such that the debt securities received by the Holders in the exchange offer would not be transferable without restriction under the Securities Act;

 

    the exchange offer has not been consummated on or before June 8, 2005;

 

    if any initial purchaser so requests on or prior to the 60th day after consummation of the registered exchange offer with respect to the old notes not eligible to be exchanged for the exchange notes and held by it following the consummation of the exchange offer; or

 

    if any holder that participates in the exchange offer does not receive freely transferable exchange notes in exchange for tendered old notes and so requests on or prior to the 60th day after the consummation of the registered exchange offer.

 

Each holder of old notes that wishes to exchange such old notes for transferable exchange notes in the exchange offer will be required to make the following representations:

 

    any exchange notes to be received by it will be acquired in the ordinary course of its business;

 

    it has no arrangement or understanding with any person or entity, including any of our affiliates, to participate in the distribution (within the meaning of Securities Act) of the exchange notes in violation of the Securities Act;

 

    it is not our “affiliate,” as defined in Rule 405 under the Securities Act, or, if it is an affiliate, that it will comply with applicable registration and prospectus delivery requirements of the Securities Act; and

 

    if such holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, the distribution of the exchange notes and if such holder is a broker-dealer, that it will receive exchange notes for its own account in exchange for old notes that were acquired as a result of market-making activities or other trading activities and such holder will acknowledge that it will deliver a prospectus in connection with any resale of such old notes.

 

In addition, each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”

 

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Resale of Exchange Notes

 

Based on interpretations of the SEC staff set forth in no action letters issued to unrelated third parties, we believe that exchange notes issued in the exchange offer in exchange for old notes may be offered for resale, resold and otherwise transferred by any exchange note holder without compliance with the registration and prospectus delivery provisions of the Securities Act, if:

 

    such holder is not an “affiliate” of ours within the meaning of Rule 405 under the Securities Act;

 

    such exchange notes are acquired in the ordinary course of the holder’s business; and

 

    the holder does not intend to participate in the distribution of such exchange notes.

 

Any holder who tenders in the exchange offer with the intention of participating in any manner in a distribution of the exchange notes:

 

    cannot rely on the position of the staff of the SEC set forth in “Exxon Capital Holdings Corporation” or similar interpretive letters; and

 

    must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.

 

If, as stated above, a holder cannot rely on the position of the staff of the SEC set forth in “Exxon Capital Holdings Corporation” or similar interpretive letters, any effective registration statement used in connection with a secondary resale transaction must contain the selling security holder information required by Item 507 of Regulation S-K under the Securities Act.

 

This prospectus may be used for an offer to resell, for the resale or for other retransfer of exchange notes only as specifically set forth in this prospectus. With regard to broker-dealers, only broker-dealers that acquired the old notes as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. Please read the section captioned “Plan of distribution” for more details regarding these procedures for the transfer of exchange notes. We have agreed that, for a period of 180 days after the exchange offer is consummated, we will make this prospectus available to any broker-dealer for use in connection with any resale of the exchange notes.

 

Terms of the Exchange Offer

 

Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept for exchange any old notes properly tendered and not withdrawn prior to the expiration date. We will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of old notes surrendered under the exchange offer. Old notes may be tendered only in integral multiples of $1,000.

 

The form and terms of the exchange notes will be substantially identical to the form and terms of the old notes except the exchange notes will be registered under the Securities Act, will not bear legends restricting their transfer and will not provide for any additional interest upon our failure to fulfill our obligations under the registration rights agreement to file, and cause to become effective, a registration statement. The exchange notes will evidence the same debt as the old notes. The exchange Second-Priority Senior Secured Floating Rate Notes Due 2010 will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the outstanding Second-Priority Senior Secured Floating Rate Notes Due 2010. The exchange 9% Second-Priority Senior Secured Notes Due 2014 will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the outstanding 9% Second-Priority Senior Secured Notes Due 2014. Consequently, in each case, each series of notes will be treated as a single class of debt securities under the applicable indenture.

 

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The exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered for exchange.

 

As of the date of this prospectus, $475,000,000 aggregate principal amount of the old notes are outstanding. This prospectus and the letter of transmittal are being sent to all registered holders of old notes. There will be no fixed record date for determining registered holders of old notes entitled to participate in the exchange offer.

 

We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations of the SEC. Old notes that are not tendered for exchange in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits such holders have under the indenture relating to the old notes.

 

We will be deemed to have accepted for exchange properly tendered old notes when we have given oral or written notice of the acceptance to the exchange agent. The exchange agent will act as agent for the tendering holders for the purposes of receiving the exchange notes from us and delivering exchange notes to such holders. Subject to the terms of the registration rights agreements, we expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions specified below under the caption “—Certain Conditions to the Exchange Offer.”

 

Holders who tender old notes in the exchange offer will not be required to pay brokerage commissions or fees, or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old notes. We will pay all charges and expenses, other than those transfer taxes described below, in connection with the exchange offer. It is important that you read the section labeled “—Fees and Expenses” below for more details regarding fees and expenses incurred in the exchange offer.

 

Expiration date; Extensions; Amendments

 

The exchange offer will expire at 5:00 p.m., New York City time on                     , 2006, unless we extend it in our sole discretion.

 

In order to extend the exchange offer, we will notify the exchange agent orally or in writing of any extension. We will notify in writing or by public announcement the registered holders of old notes of the extension no later than 9:00 a.m., New York City time, on the business day after the previously scheduled expiration date.

 

We reserve the right, in our sole discretion:

 

    to delay accepting for exchange any old notes;

 

    to extend the exchange offer or to terminate the exchange offer and to refuse to accept old notes not previously accepted if any of the conditions set forth below under “—Certain Conditions to the Exchange Offer” have not been satisfied, by giving oral or written notice of such delay, extension or termination to the exchange agent; or

 

    subject to the terms of the registration rights agreement, to amend the terms of the exchange offer in any manner.

 

Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice or public announcement thereof to the registered holders of old notes. If we amend the exchange offer in a manner that we determine to constitute a material change, we will promptly disclose such amendment in a manner reasonably calculated to inform the holders of old notes of such amendment. If we terminate this exchange offer as provided in this prospectus before accepting any old notes for

 

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exchange or if we amend the terms of this exchange offer in a manner that constitutes a fundamental change in the information set forth in the registration statement of which this prospectus forms a part, we will promptly file a post-effective amendment to the registration statement of which this prospectus forms a part. In addition, we will in all events comply with our obligation to make prompt payment for all old notes properly tendered and accepted for exchange in the exchange offer.

 

Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, we shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by issuing a timely press release to a financial news service.

 

Certain Conditions to the Exchange Offer

 

Despite any other term of the exchange offer, we will not be required to accept for exchange, or exchange any exchange notes for, any old notes, and we may terminate the exchange offer as provided in this prospectus before accepting any old notes for exchange if in our reasonable judgment:

 

    the exchange notes to be received will not be tradable by the holder without restriction under the Securities Act or the Exchange Act, and without material restrictions under the blue sky or securities laws of substantially all of the states of the United States;

 

    the exchange offer, or the making of any exchange by a holder of old notes, would violate applicable law or any applicable interpretation of the staff of the SEC; or

 

    any action or proceeding has been instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer that, in our judgment, would reasonably be expected to impair our ability to proceed with the exchange offer.

 

In addition, we will not be obligated to accept for exchange the old notes of any holder that has not made:

 

    the representations described under “—Purpose and Effect of the Exchange Offer”, “—Procedures for Tendering” and “Plan of Distribution”, and

 

    such other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to us an appropriate form for registration of the exchange notes under the Securities Act.

 

We expressly reserve the right, at any time or at various times on or prior to the scheduled expiration date of the exchange offer, to extend the period of time during which the exchange offer is open. Consequently, we may delay acceptance of any old notes by giving oral or written notice of such extension to the registered holders of the old notes. During any such extensions, all old notes previously tendered will remain subject to the exchange offer, and we may accept them for exchange unless they have been previously withdrawn. We will return any old notes that we do not accept for exchange for any reason without expense to their tendering holder promptly after the expiration or termination of the exchange offer.

 

We expressly reserve the right to amend or terminate the exchange offer on or prior to the scheduled expiration date of the exchange offer, and to reject for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions of the exchange offer specified above. We will give oral or written notice or public announcement of any extension, amendment, non-acceptance or termination to the registered holders of the old notes as promptly as practicable. In the case of any extension, such notice will be issued no later than 9:00 a.m., New York City time, on the business day after the previously scheduled expiration date.

 

These conditions are for our sole benefit and we may, in our sole discretion, assert them regardless of the circumstances that may give rise to them or waive them in whole or in part at any or at various times except that

 

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all conditions to the exchange offer must be satisfied or waived by us prior to the expiration of the exchange offer. If we fail at any time to exercise any of the foregoing rights, that failure will not constitute a waiver of such right. Each such right will be deemed an ongoing right that we may assert at any time or at various times prior to the expiration of the exchange offer.

 

In addition, we will not accept for exchange any old notes tendered, and will not issue exchange notes in exchange for any such old notes, if at such time any stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939, as amended.

 

Procedures for Tendering

 

Only a holder of old notes may tender such old notes in the exchange offer. To tender in the exchange offer, a holder must:

 

    complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal; have the signature on the letter of transmittal guaranteed if the letter of transmittal so requires; and mail or deliver such letter of transmittal or facsimile to the exchange agent prior to the expiration date; or

 

    comply with DTC’s Automated Tender Offer Program procedures described below.

 

In addition, either:

 

    the exchange agent must receive old notes along with the letter of transmittal; or

 

    the exchange agent must receive, prior to the expiration date, a timely confirmation of book-entry transfer of such old notes into the exchange agent’s account at DTC according to the procedures for book-entry transfer described below or a properly transmitted agent’s message; or

 

    the holder must comply with the guaranteed delivery procedures described below.

 

To be tendered effectively, the exchange agent must receive any physical delivery of the letter of transmittal and other required documents at the address set forth below under “—Exchange Agent” prior to the expiration date.

 

The tender by a holder that is not withdrawn prior to the expiration date will constitute an agreement between such holder and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal.

 

The method of delivery of old notes, the letter of transmittal and all other required documents to the exchange agent is at the holder’s election and risk. Rather than mail these items, we recommend that holders use an overnight or hand delivery service. In all cases, holders should allow sufficient time to assure delivery to the exchange agent before the expiration date. Holders should not send us the letter of transmittal or old notes. Holders may request their respective brokers, dealers, commercial banks, trust companies or other nominees to effect the above transactions for them.

 

Any beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct it to tender on the owners’ behalf. If such beneficial owner wishes to tender on its own behalf, it must, prior to completing and executing the letter of transmittal and delivering its old notes, either:

 

    make appropriate arrangements to register ownership of the old notes in such owner’s name; or

 

    obtain a properly completed bond power from the registered holder of old notes.

 

The transfer of registered ownership may take considerable time and may not be completed prior to the expiration date.

 

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Signatures on a letter of transmittal or a notice of withdrawal described below must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or another “eligible institution” within the meaning of Rule 17Ad-15 under the Exchange Act, unless the old notes tendered pursuant thereto are tendered:

 

    by a registered holder who has not completed the box entitled “Special Issuance Instructions” or “Special Delivery Instructions” on the letter of transmittal; or

 

    for the account of an eligible institution.

 

If the letter of transmittal is signed by a person other than the registered holder of any old notes listed on the old notes, such old notes must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder’s name appears on the old notes and an eligible institution must guarantee the signature on the bond power.

 

If the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing. Unless waived by us, they should also submit evidence satisfactory to us of their authority to deliver the letter of transmittal.

 

The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC’s system may use DTC’s Automated Tender Offer Program to tender. Participants in the program may, instead of physically completing and signing the letter of transmittal and delivering it to the exchange agent, transmit their acceptance of the exchange offer electronically. They may do so by causing DTC to transfer the old notes to the exchange agent in accordance with its procedures for transfer. DTC will then send an agent’s message to the exchange agent. The term “agent’s message” means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, to the effect that:

 

    DTC has received an express acknowledgment from a participant in its Automated Tender Offer Program that is tendering old notes that are the subject of such book-entry confirmation;

 

    such participant has received and agrees to be bound by the terms of the letter of transmittal (or, in the case of an agent’s message relating to guaranteed delivery, that such participant has received and agrees to be bound by the applicable notice of guaranteed delivery); and

 

    the agreement may be enforced against such participant.

 

We will determine in our sole discretion all questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered old notes and withdrawal of tendered old notes. Our determination will be final and binding. We reserve the absolute right to reject any old notes not properly tendered or any old notes the acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of the exchange offer (including the instructions in the letter of transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within such time as we shall determine. Although we intend to notify holders of defects or irregularities with respect to tenders of old notes, neither we, the exchange agent nor any other person will incur any liability for failure to give such notification. Tenders of old notes will not be deemed made until such defects or irregularities have been cured or waived. Any old notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned to the exchange agent without cost to the tendering holder, unless otherwise provided in the letter of transmittal, promptly following the expiration date.

 

In all cases, we will issue exchange notes for old notes that we have accepted for exchange under the exchange offer only after the exchange agent timely receives:

 

    old notes or a timely book-entry confirmation of such old notes into the exchange agent’s account at DTC; and

 

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    a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent’s message.

 

By signing the letter of transmittal, each tendering holder of old notes will represent that, among other things:

 

    any exchange notes that the holder receives will be acquired in the ordinary course of its business;

 

    the holder has no arrangement or understanding with any person or entity, including any of our affiliates, to participate in the distribution of the exchange notes;

 

    if the holder is not a broker-dealer, that it is not engaged in and does not intend to engage in the distribution of the exchange notes;

 

    if the holder is a broker-dealer that will receive exchange notes for its own account in exchange for old notes that were acquired as a result of market-making activities, that it will deliver a prospectus, as required by law, in connection with any resale of such exchange notes; and

 

    the holder is not our “affiliate”, as defined in Rule 405 of the Securities Act, or, if it is an affiliate, that it will comply with applicable registration and prospectus delivery requirements of the Securities Act.

 

In addition, each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”

 

Book-Entry Transfer

 

The exchange agent will make a request to establish an account with respect to the old notes at DTC for purposes of the exchange offer promptly after the date of this prospectus; and any financial institution participating in DTC’s system may make book-entry delivery of old notes by causing DTC to transfer such old notes into the exchange agent’s account at DTC in accordance with DTC’s procedures for transfer. Holders of old notes who are unable to deliver confirmation of the book-entry tender of their old notes into the exchange agent’s account at DTC or all other documents of transmittal to the exchange agent on or prior to the expiration date must tender their old notes according to the guaranteed delivery procedures described below.

 

Guaranteed Delivery Procedures

 

Holders wishing to tender their old notes but whose old notes are not immediately available or who cannot deliver their old notes, the letter of transmittal or any other required documents to the exchange agent or comply with the applicable procedures under DTC’s Automated Tender Offer Program prior to the expiration date may tender if:

 

    the tender is made through an eligible institution;

 

    prior to the expiration date, the exchange agent receives from such eligible institution either a properly completed and duly executed notice of guaranteed delivery by facsimile transmission, mail or hand delivery or a properly transmitted agent’s message and notice of guaranteed delivery:

 

    setting forth the name and address of the holder, the registered number(s) of such old notes and the principal amount of old notes tendered;

 

    stating that the tender is being made thereby; and

 

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    guaranteeing that, within three (3) New York Stock Exchange trading days after the expiration date, the letter of transmittal or facsimile thereof together with the old notes or a book-entry confirmation, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent; and

 

    the exchange agent receives such properly completed and executed letter of transmittal or facsimile thereof, as well as all tendered old notes in proper form for transfer or a book-entry confirmation, and all other documents required by the letter of transmittal, within three (3) New York Stock Exchange trading days after the expiration date.

 

Upon request to the exchange agent, a notice of guaranteed delivery will be sent to holders who wish to tender their old notes according to the guaranteed delivery procedures set forth above.

 

Withdrawal of Tenders

 

Except as otherwise provided in this prospectus, holders of old notes may withdraw their tenders at any time prior to the expiration date.

 

For a withdrawal to be effective:

 

    the exchange agent must receive a written notice of withdrawal, which notice may be by telegram, telex, facsimile transmission or letter, at one of the addresses set forth below under “—Exchange Agent”; or

 

    holders must comply with the appropriate procedures of DTC’s Automated Tender Offer Program system.

 

Any such notice of withdrawal must:

 

    specify the name of the person who tendered the old notes to be withdrawn;

 

    identify the old notes to be withdrawn, including the principal amount of such old notes; and

 

    where certificates for old notes have been transmitted, specify the name in which such old notes were registered, if different from that of the withdrawing holder.

 

If certificates for old notes have been delivered or otherwise identified to the exchange agent, then, prior to the release of such certificates, the withdrawing holder must also submit:

 

    the serial numbers of the particular certificates to be withdrawn; and

 

    a signed notice of withdrawal with signatures guaranteed by an eligible institution unless such holder is an eligible institution.

 

If old notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of such facility. We will determine all questions as to the validity, form and eligibility, including time of receipt, of such notices, and our determination shall be final and binding on all parties. We will deem any old notes so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer. Any old notes that have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder (or, in the case of old notes tendered by book-entry transfer into the exchange agent’s account at DTC according to the procedures described above, such old notes will be credited to an account maintained with DTC for old notes) promptly after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn old notes may be retendered by following one of the procedures described under “—Procedures for Tendering” above at any time prior to the expiration date.

 

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Exchange agent

 

Wilmington Trust Company has been appointed as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for the notice of guaranteed delivery to the exchange agent addressed as follows:

 

For Delivery by Hand, Overnight Delivery,   By Facsimile Transmission
Registered or Certified Mail:   (for eligible institutions only):
    (302) 636-4139

Wilmington Trust Company

Corporate Capital Markets

1100 North Market Street

Rodney Square North

Wilmington, Delaware 19890-1626

Attention: Alisha Clendaniel

 

To Confirm by Telephone or

for Information Call:

(302) 636-6470

 

DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.

 

Fees and Expenses

 

We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail, however, we may make additional solicitations by telegraph, telephone or in person by our officers and regular employees and those of our affiliates.

 

We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses.

 

Our expenses in connection with the exchange offer include:

 

    SEC registration fees;

 

    fees and expenses of the exchange agent and trustee;

 

    accounting and legal fees and printing costs; and

 

    related fees and expenses.

 

Transfer Taxes

 

We will pay all transfer taxes, if any, applicable to the exchange of old notes under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:

 

    certificates representing old notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of old notes tendered;

 

    tendered old notes are registered in the name of any person other than the person signing the letter of transmittal; or

 

    a transfer tax is imposed for any reason other than the exchange of old notes under the exchange offer.

 

If satisfactory evidence of payment of such taxes is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed to that tendering holder.

 

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Holders who tender their old notes for exchange will not be required to pay any transfer taxes. However, holders who instruct us to register exchange notes in the name of, or request that old notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder will be required to pay any applicable transfer tax.

 

Consequences of Failure to Exchange

 

Holders of old notes who do not exchange their old notes for exchange notes under the exchange offer, including as a result of failing to timely deliver old notes to the exchange agent, together with all required documentation, including a properly completed and signed letter of transmittal, will remain subject to the restrictions on transfer of such old notes:

 

    as set forth in the legend printed on the old notes as a consequence of the issuance of the old notes pursuant to the exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws; and

 

    otherwise as set forth in the offering memorandum distributed in connection with the private offering of the old notes.

 

In addition, you will no longer have any registration rights or be entitled to additional interest with respect to the old notes.

 

In general, you may not offer or sell the old notes unless they are registered under the Securities Act, or if the offer or sale is exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the old notes under the Securities Act. Based on interpretations of the SEC staff, exchange notes issued pursuant to the exchange offer may be offered for resale, resold or otherwise transferred by their holders, other than any such holder that is our “affiliate” within the meaning of Rule 405 under the Securities Act, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holders acquired the exchange notes in the ordinary course of the holders’ business and the holders have no arrangement or understanding with respect to the distribution of the exchange notes to be acquired in the exchange offer. Any holder who tenders in the exchange offer for the purpose of participating in a distribution of the exchange notes:

 

    could not rely on the applicable interpretations of the SEC; and

 

    must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.

 

After the exchange offer is consummated, if you continue to hold any old notes, you may have difficulty selling them because there will be fewer old notes outstanding.

 

Accounting Treatment

 

We will record the exchange notes in our accounting records at the same carrying value as the old notes, as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes in connection with the exchange offer. We will expense the costs of the exchange offer.

 

Other

 

Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. You are urged to consult your financial and tax advisors in making your own decision on what action to take.

 

We may in the future seek to acquire untendered old notes in the open market or privately negotiated transactions, through subsequent exchange offers or otherwise. We have no present plans to acquire any old notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered old notes.

 

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USE OF PROCEEDS

 

We will not receive any cash proceeds from the issuance of the exchange notes. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange old notes in like principal amount, which will be cancelled and as such will not result in any increase in our indebtedness.

 

The net proceeds from the offering of the old notes, after deducting the initial purchasers’ fees and expenses of the offering, was $455.3 million. We used these proceeds and the proceeds from the Sponsors’ equity investment to fund the Borden Transaction and pay related fees and expenses.

 

The following table sets forth the sources and uses of funds in connection with the Borden Transaction.

 

Sources


       

Uses


    

Senior Secured Credit Facility(1)

   $ —      Borden Acquisition Consideration(4)    $ 608.7

Second-Priority Senior Secured Notes

     475.0    Excess Cash      40.7

Assumed Net Debt(2)

     456.1    Repurchases of Existing Debt(5)      61.5

Equity Contribution(3)

     280.0    Assumed Net Debt(2)      456.1
            Transaction Fees and Expenses(6)      44.1
    

       

Total Sources

   $ 1,211.1   

Total Uses

   $ 1,211.1
    

       


(1) As of September 30, 2004, our senior secured credit facility provided for borrowings of up to $175.0 million, subject to availability and less approximately $31.7 million of reserves for letters of credit which were outstanding as of September 30, 2004. In connection with the closing of the Combinations on May 31, 2005, we terminated the Borden Chemical senior secured credit facility and entered into $775 of new senior secured credit facilities. For a discussion of our new senior secured credit facilities see “Description of Senior Secured Credit Facilities and Other Indebtedness—Senior Secured Credit Facilities.”
(2) Assumed Net Debt represents existing debt at June 30, 2004 net of existing cash of $32.2 million at June 30, 2004.
(3) This equity contribution was made to our parent company.
(4) The net proceeds from the Borden Transaction to the shareholders of Borden Holdings at the time of the Borden Acquisition and management was approximately $608.7 million, including fees and other adjustments per the BHI Acquisition stock purchase agreement.
(5) We redeemed our 9 1/4% Debentures due 2019 at a premium equal to approximately $0.9 million, plus accrued and unpaid interest to the redemption date.
(6) Fees and expenses associated with the Borden Transaction, including placement and other financing fees, advisory fees and other transaction costs and professional fees. Approximately $19.7 million was capitalized on the balance sheet as deferred financing fees related to the notes and $2.7 million related to the amended senior secured credit facility.

 

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Table of Contents

CAPITALIZATION

 

The following table sets forth our cash and equivalents and our capitalization as of September 30, 2005 on an actual consolidated basis for Hexion. You should read this table in conjunction with “Selected Historical Financial and Other Information,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all of the financial statements and the related notes included elsewhere in this prospectus.

 

     As of
September 30,
2005


 
     (in millions)  

Cash and equivalents

   $ 164  
    


Debt:

        

Senior credit facilities (including current maturities)

   $ 499  

Senior secured notes

     966  

Senior unsecured debentures

     440  

Senior subordinated notes

     337  

Industrial revenue bonds

     34  

Other debt and capital leases

     45  

Short-term debt

     46  
    


Total debt

     2,367  
    


Preferred Stock:

        

Series A Preferred Stock, par value $0.01 per share, liquidation preference $350 million actual: 60,000,000 shares authorized, 14,000,000 shares issued and outstanding

     352  
    


Common Stock and Other Shareholders’ Deficit:

        

Common stock, par value $0.01 per share: actual 300,000,000 shares authorized, 82,629,906 shares issued and outstanding

     1  

Paid-in capital

     525  

Treasury stock

     (296 )

Accumulated other comprehensive loss

     (39 )

Accumulated deficit

     (1,058 )
    


Total common stock and other shareholders’ deficit

     (867 )
    


Total capitalization

   $ 1,852  
    


 

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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 or unaudited consolidated financial statements of Hexion, appearing elsewhere in this prospectus. The audited consolidated statement of operations of Hexion for the year ended December 31, 2004 includes (1) Resolution Performance for the year ended December 31, 2004; (2) Resolution Specialty for the period from the date of acquisition by Apollo on August 2, 2004 through December 31, 2004; and (3) Borden Chemical for the period from the date of acquisition by Apollo on August 12, 2004 through December 31, 2004. The unaudited consolidated statement of operations of Hexion for the nine months ended September 30, 2005 includes Resolution Performance, Resolution Specialty and Borden Chemical for the nine months ended September 30, 2005 and Bakelite from the date of acquisition by Hexion on April 29, 2005 through September 30, 2005. The unaudited statement of operations of Hexion for the nine months ended September 30, 2004 includes (1) Resolution Performance for the nine months ended September 30, 2004; (2) Resolution Specialty for the period from the date of acquisition by Apollo on August 2, 2004 through September 30, 2004; and (3) Borden Chemical for the period from the date of the acquisition by Apollo on August 12, 2004 through September 30, 2004.

 

The unaudited pro forma statements of operations for the year ended December 31, 2004 and for the nine months ended September 30, 2004 and 2005, give pro forma effect to the Transactions (other than the Resolution Performance Transaction) as if they occurred on January 1, 2004.

 

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

 

The final purchase price allocations are also dependent on whether there are any post-closing adjustments on the finalization of asset and liability valuations. These final valuations will be based on the actual net tangible and intangible assets that existed as of the closing dates of the Bakelite Transaction and the Combinations. The Bakelite share purchase agreement provides for a working capital adjustment to the purchase price that was paid at closing, which has not yet been finalized. Any final adjustment may change the allocations of purchase price, which could affect the fair value assigned to the assets and liabilities and could result in a change to the unaudited pro forma financial information.

 

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

 

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

 

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HEXION SPECIALTY CHEMICALS

 

Unaudited Pro Forma Statement of Operations

For the year ended December 31, 2004

(dollars in millions, except per share data)

 

    Actual

   

Combinations,

Prior
Transactions,
Bakelite
Transaction

and
Financings


       
          Preacquisition

         
               

Resolution

Specialty (2)


               
    Hexion

    Borden (1)

      Bakelite (3)

    Adjustment (4)

    Pro Forma

 

Net sales

  $ 2,019     $ 984     $ 440     $ 699     $ (37 )(a)   $ 4,105  

Cost of sales

    1,785       832       407       593       (48 )(a)     3,569  
   


 


 


 


 


 


Gross profit

    234       152       33       106       11       536  

Selling, general & administrative expense

    163       99       48       82       (4 )(b)     388  

Transaction related costs

    56       9       —         —         —         65  

Impairments

    2       —         64       20       —         86  

Other operating expense

    4       5       7       3       —         19  
   


 


 


 


 


 


Operating income (loss)

    9       39       (86 )     1       15       (22 )
   


 


 


 


 


 


Interest expense

    118       31       5       4       63  (c)     221  

Affiliated interest (income) expense, net

    —         —         —         (1 )       1  (d)     —    

Other non-operating expense

    4       1       1       —         —         6  
   


 


 


 


 


 


(Loss) income from continuing operations before income tax and minority interest

    (113 )     7       (92 )     (2 )     (49 )     (249 )

Income tax expense (benefit)

    —         143       1       1       (16 )(e)     129  
   


 


 


 


 


 


Loss from continuing operations before minority interest

    (113 )     (136 )     (93 )     (3 )     (33 )     (378 )

Minority interest in net income (loss) of consolidated subsidiaries

    (8 )     1       —         —         (f)     1  
   


 


 


 


 


 


Net loss before nonrecurring charges directly attributable to the transaction

  $ (105 )     $(137)       $(93)     $ (3 )     (41 )     (379 )
   


 


 


 


 


 


Dividends on Series A Preferred Stock

                                    51  (g)     51  
                                   


 


Net loss available to common shareholders

                                    (92 )     (430 )
                                   


 


Pro Forma loss per share (5)

                                               

Basic and Diluted

                                          $ (5.20 )

Pro Forma weighted average number of common shares outstanding (5)

                                               

Basic and Diluted

                                            82,629,906  

 

 

See Notes to Unaudited Pro Forma Statements of Operations

 

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HEXION SPECIALTY CHEMICALS

 

Unaudited Pro Forma Statement of Operations

For the nine months ended September 30, 2005

(dollars in millions, except per share data)

 

     Actual

   

Combinations,

Prior
Transactions,
Bakelite
Transaction
and
Financings


       
           Preacquisition

         
     Hexion

    Bakelite (3)

    Adjustment (4)

    Pro Forma

 

Net sales

   $ 3,317     $ 261     $ (14 )(a)   $ 3,564  

Cost of sales

     2,831       229       (30 )(a)     3,030  
    


 


 


 


Gross profit

     486       32       16       534  

Selling, general & administrative expense

     290       30       (3 )(b)     317  

Transaction related costs

     34       —         —         34  

Other operating (income) expense

     (4 )     1       —         (3 )
    


 


 


 


Operating income

     166       1       19       186  
    


 


 


 


Interest expense (income)

     169       2       (5 )(c)     166  

Other non-operating expense

     14       —         —         14  
    


 


 


 


(Loss) income from continuing operations before income tax and minority interest

     (17 )     (1 )     24       6  

Income tax expense

     43       2       10  (e)     55  
    


 


 


 


(Loss) income from continuing operations before minority interest

     (60 )     (3 )     14       (49 )
    


 


 


 


Minority interest in net income of consolidated subsidiaries

     3       —         1  (f)     4  
    


 


 


 


(Loss) income from continuing operations

     (63 )     (3 )     13       (53 )
    


 


 


 


Dividends on Series A Preferred Stock

     18       —         25  (g)     43  
    


 


 


 


Net loss available to common shareholders

   $ (81 )   $ (3 )   $ (12 )   $ (96 )
    


 


 


 


Pro Forma loss per share (5)

                                

Basic and Diluted

                           $ (1.16 )

Pro Forma weighted average number of common shares outstanding (5)

                                

Basic and Diluted

                             82,629,906  

 

See Notes to Unaudited Pro Forma Statements of Operations

 

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HEXION SPECIALTY CHEMICALS

 

Unaudited Pro Forma Statement of Operations

For the nine months ended September 30, 2004

(dollars in millions, except per share data)

 

    Actual

   

Combinations,

Prior
Transactions,
Bakelite
Transaction
and
Financings


       
          Preacquisition

         
               

Resolution

Specialty (2)


               
    Hexion

    Borden (1)

      Bakelite (3)

    Adjustment (4)

    Pro Forma

 

Net sales

  $ 1,081     $ 984     $ 440     $ 505     $ (27 )(a)   $ 2,983  

Cost of sales

    968       832       407       433       (37 )(a)     2,603  
   


 


 


 


 


 


Gross profit

    113       152       33       72       10       380  

Selling, general & administrative expense

    98       99       48       57       (3 )(b)     299  

Transaction related costs

    47       9       —         —         —         56  

Impairments

    —         —         64       12       —         76  

Other operating expense

    —         5       7       2       —         14  
   


 


 


 


 


 


Operating income (loss)

    (32 )     39       (86 )     1       13       (65 )
   


 


 


 


 


 


Interest expense

    73       31       5       3       5 4 (c)     166  

Affiliated interest (income) expense, net

    —         —         —         (1 )     1  (d)     —    

Other non-operating expense

    —         1       1       —         —         2  
   


 


 


 


 


 


(Loss) income from continuing operations before income tax and minority interest

    (105 )     7       (92 )     (1 )     (42 )     (233 )

Income tax (benefit) expense

    (4 )     143       1       —         (13 )(e)     127  
   


 


 


 


 


 


Loss from continuing operations before minority interest

    (101 )     (136 )     (93 )     (1 )     (29 )     (360 )

Minority interest in net income (loss) of consolidated subsidiaries

    (7 )     1       —         —         7  (f)     1  
   


 


 


 


 


 


Net loss before nonrecurring charges directly attributable to the transaction

  $ (94 )     $(137)       $(93)     $ (1 )     (36 )     (361 )
   


 


 


 


 


 


Dividends on Series A Preferred Stock

                                    38  (g)     38  
                                   


 


Net loss available to common shareholders

                                  $ (74 )   $ (399 )
                                   


 


Pro Forma loss per share (5)

                                               

Basic and Diluted

                                          $ (4.83 )

Pro Forma weighted average number of common shares outstanding (5)

                                               

Basic and Diluted

                                            82,629,906  

 

See Notes to Unaudited Pro Forma Statements of Operations

 

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Notes to Unaudited Pro Forma Statements of Operations

 

(1) The Borden Transaction occurred on August 12, 2004. The historical data with respect to Borden Chemical presented in the unaudited pro forma statement of operations for the year ended December 31, 2004 and nine months ended September 30, 2004 relates to the period from January 1, 2004 to August 11, 2004. From August 12, 2004, data with respect to Borden Chemical is included in the Hexion historical data.

 

(2) The Resolution Specialty Transaction occurred on August 2, 2004. The historical data with respect to the Resins, Inks and Monomers Business of Eastman Chemical Company, the predecessor to Resolution Specialty, presented in the unaudited pro forma statement of operations for the year ended December 31, 2004 and nine months ended September 30, 2004 relates to the period from January 1, 2004 to August 1, 2004. From August 2, 2004, data with respect to Resolution Specialty is included in the Hexion historical data.

 

(3) The Bakelite Transaction occurred on April 29, 2005. The historical data with respect to the Resins Business of the Bakelite Group, the predecessor to Bakelite, is presented in the unaudited pro forma statements of operations for the year ended December 31, 2004 and for the nine months ended September 30, 2005 and relates to the fiscal year ended December 31, 2004 and to the period from January 1, 2005 to April 29, 2005. From April 30, 2005, data with respect to Bakelite is included in the Hexion historical data. Historical data for the nine months ended September 30, 2004 relates to the period from January 1, 2004 to September 30, 2004. The historical combined statements of operations of Bakelite for the year ended December 31, 2004 and the nine months ended September 30, 2004 and four months ended April 29, 2005 have been translated into U.S. dollars at the average exchange rate for the related period of 1.2478 and 1.2243 and 1.3053 U.S. dollars to one euro, respectively. It should be noted that such translations should not be construed as representations that the U.S. dollar amounts actually represent such euro amounts, or could have been or will be converted into euros at the rate indicated or at all. The historical combined statements of operations of Bakelite are as follows:

 

 

    

Year ended

December 31,
2004


    

Nine months
ended

September 30,

2004


    

Four months
ended

April 29,

2005


 
          

Net sales

   560      413      200  

Cost of sales

     475        354        176  
    


  


  


Gross profit

     85        59        24  

Selling, general and administrative expense

     66        46        23  

Impairments

     16        10        —    

Other operating expense

     2        2        1  
    


  


  


Operating income

     1        1        —    

Interest expense

     3        3        1  

Affiliated interest expense, net

     (1 )      (1 )      —    
    


  


  


Income (loss) before income tax

     (1 )      (1 )      (1 )

Income tax expense

     1        —          1  
    


  


  


Net income (loss)

   (2 )    (1 )    (2 )
    


  


  


 

To conform the presentation of Bakelite’s statement of operations with Hexion’s for the year ended December 31, 2004, the nine months ended September 30, 2004 and the four months ended April 29, 2005, Bakelite’s distribution expenses of €15, €11 and €6, respectively, have been included in Cost of sales, and marketing expenses of €34, €26 and €12, respectively, have been included in Selling, general and administrative expense.

 

(4) Reflects the following adjustments:

 

  (a)

Elimination of intercompany activity resulted in the reduction of net sales and cost of sales. Additionally, cost of sales reflects the adjustments to depreciation and amortization expense

 

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resulting from fair value adjustments to certain property and equipment and amortizable intangible assets, an adjustment to account for inventory on a first-in-first-out basis for both the pre- and post-acquisition periods of Resolution Specialty and an adjustment to reverse an amount which represents the write-up of inventory that was recorded as part of the purchase price allocations for Resolution Specialty in 2004, Bakelite in 2005 and minority interest exchanges in 2005, and subsequently expensed through cost of sales. These entries are summarized as follows:

 

     Year ended
December 31,
2004


   

Nine months
ended

September 30,


 
       2004

    2005

 

Sales

                        

Elimination of intercompany activity

   $ (37 )   $ (27 )   $ (14 )
    


 


 


Cost of Sales

                        

Elimination of intercompany activity

   $ (38 )   $ (27 )   $ (14 )

Inventory adjustment for first-in-first-out basis

     (1 )     (1 )     —    

Reverse expensing of inventory write-up

     (9 )*     (9 )*     (16 )*
    


 


 


     $ (48 )   $ (37 )   $ (30 )
    


 


 


  * Reflects elimination from cost of sales for the purchase accounting step-up that was expensed during the period for Resolution Performance, Resolution Specialty and Bakelite.

 

  (b) Reflects the elimination of management fees and an adjustment to decrease amortization expense resulting from fair value adjustments to amortizable intangible assets.

 

  (c) Represents the new debt issued and the effect of a full year of interest expense related to the debt outstanding as a result of the Prior Transactions and the Current Transactions:

 

     Year ended
December 31,
2004


    Nine months
ended
September 30,


 
       2004

    2005

 

Second-priority senior secured notes

   $ 43     $ 32     $ 32  

New Floating Rate Notes

     15       11       11  

New senior secured credit facilities

     36       27       27  

Amortization of debt issuance cost and debt premium
or discount

     8       6       6  

Less historical interest

     (39 )     (22 )     (81 )
    


 


 


Net adjustment to interest expense

   $ 63     $ 54     $ (5 )
    


 


 


 

The interest rates in effect at December 20, 2005 were used to compute the pro forma adjustments to interest expense for newly issued variable rate debt, including that issued in the Borden Transaction. Each one-eighth point change in the assumed interest rates would result in a $1 change in annual interest expense.

 

  (d) Affiliated debt and the associated interest income have been eliminated as part of the Bakelite Transaction.

 

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

 

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

 

  (g) Reflects the dividend accrual (including accretion) on the Series A Preferred Stock based on increasing dividend rates in effect for each period and the current LIBOR rate assuming the dividend will be paid by issuing additional shares of Series A Preferred Stock.

 

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(5) Pro forma basic and diluted loss per common share are computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding during the period. Since we had a net loss for the year ended December 31, 2004, and the nine months ended September 30, 2004 and 2005, shares issuable upon the exercise of employee stock options has an antidilutive effect. Therefore, the unaudited pro forma diluted loss per share is the same as the unaudited pro forma basic loss per share.

 

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SELECTED HISTORICAL FINANCIAL AND OTHER INFORMATION

 

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

 

The following table presents selected historical financial and other data of Hexion. The selected historical financial and other data of Hexion as of December 31, 2003 and 2004, and for the years ended December 31, 2002, 2003 and 2004 has been derived from the audited consolidated financial statements of Hexion, included elsewhere in this prospectus. The selected historical financial and other data of Hexion as of and for the nine months ended September 30, 2004 and 2005 have been derived from the unaudited condensed consolidated financial statements of Hexion, included elsewhere in this prospectus and include all adjustments that management considers necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods indicated. Results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the entire year. The financial data of Hexion for the years ended December 31, 2000 and 2001 represent the operating results of Resolution Performance, not included herein, which reflect purchase accounting adjustments following the acquisition of Resolution Performance by Apollo on November 14, 2000. The financial data for Hexion for the year ended December 31, 2004, includes:

 

    the results of operations of Resolution Performance for the full year ended December 31, 2004, which reflect purchase accounting adjustments from the date of acquisition of Resolution Performance by Apollo on November 14, 2000;

 

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

 

    the results of operations of Resolution Specialty for the period from August 2, 2004 to December 31, 2004 which reflect purchase accounting adjustments from the date of acquisition of Resolution Specialty by Apollo on August 2, 2004.

 

The consolidated balance sheet and statement of operations of Hexion as of and for the nine months ended September 30, 2004 and 2005, includes:

 

    the results of operations of Resolution Performance as of and for the nine months ended September 30, 2004 and 2005, which reflect purchase accounting adjustments from the date of acquisition of Resolution Performance by Apollo on November 14, 2000;

 

    the results of operations of Borden Chemical as of and for the nine months ended September 30, 2005 and for the period from the date of acquisition by Apollo on August 12, 2004 through September 30, 2004 on a historical basis (because Borden Chemical is a public reporting registrant as a result of public debt outstanding prior to the Borden Transaction and which debt remains outstanding, Borden Chemical has elected to present its financial statements from the date of its acquisition by Apollo on the historical basis of accounting permitted under the SEC’s public debt exemptions);

 

    the results of operations of Resolution Specialty as of and for the nine months ended September 30, 2005 and for the period from the date of the acquisition by Apollo on August 2, 2004 through September 30, 2004, which reflect purchase accounting adjustments from the date of acquisition of Resolution Specialty by Apollo on August 2, 2004; and

 

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

 

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

 

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Table of Contents
    Predecessor

    Successor

 
    10 months
ended
October 31,
2000


    2 months
ended
December 31,
2000(1)


    Year ended December 31,

    Nine months
ended
September 30,


 
        2001

    2002

    2003

    2004(2)

    2004

    2005(3)

 
          (dollars in millions)              

Statement of Operations:

                                                               

Net sales

  $ 797        $ 152     $ 863     $ 740     $ 782     $ 2,019     $ 1,081     $ 3,317  

Cost of sales

    642       153       695       601       714       1,785       968       2,831  
   


 


 


 


 


 


 


 


Gross profit (loss)

    155       (1 )     168       139       68       234       113       486  
   


 


 


 


 


 


 


 


Selling, general & administrative expense

    75       22       90       82       81       163       98       290  

Transaction related costs

    —         —         —         —         —         56       47       34  

Impairments

    —         —         —         —         13       2       —         —    

Other operating expense (income)

    —         —         —         16       (3 )     4       —         (4 )
   


 


 


 


 


 


 


 


Operating income (loss)

    80       (23 )     78       41       (23 )     9       (32 )     166  
   


 


 


 


 


 


 


 


Interest expense

    —         9       70       65       77       118       73       152  

Write-off of deferred financing fees

    —         —         —         —         —         —         —         17  

Other non-operating expense (income)

    6       (8 )     14       —         —         4       —         14  
   


 


 


 


 


 


 


 


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

    74       (24 )     (6 )     (24 )     (100 )     (113 )     (105 )     (17 )

Income tax expense (benefit)

    27       (17 )     —         (10 )     (37 )     —         (4 )     43  
   


 


 


 


 


 


 


 


Income (loss) from continuing operations before minority interest

    47       (7 )     (6 )     (14 )     (63 )     (113 )     (101 )     (60 )

Minority interest in net income (loss) of consolidated subsidiaries

    —         (1 )     (1 )     (3 )     (13 )     (8 )     (7 )     (3 )
   


 


 


 


 


 


 


 


Income (loss) from continuing operations

    47       (6 )     (5 )     (11 )     (50 )     (105 )     (94 )     (63 )

Loss from discontinued operations

    —         —         —         —         —         —         —         10  
   


 


 


 


 


 


 


 


Net income (loss)

  $ 47     $ (6 )   $ (5 )   $ (11 )   $ (50 )   $ (105 )   $ (94 )   $ (73 )
   


 


 


 


 


 


 


 


Redeemable preferred stock accretion

    —         —         —         —         —         —         —         18  
   


 


 


 


 


 


 


 


Net income (loss) available to common shareholders

  $ 47     $ (6 )   $ (5 )   $ (11 )   $ (50 )   $ (105 )   $ (94 )   $ (91 )
   


 


 


 


 


 


 


 


 

Cash Flow Data:

                                                               

Cash flows from (used in) operating activities

 

                  $ 64     $ (43 )   $ (32 )   $ (77 )   $ 103  

Cash flows (used in) from investing activities

 

                    (45 )     7       (20 )     8       (294 )

Cash flows (used in) from financing activities

 

                    (21 )     80       148       126       209  
 

Balance Sheet Data (at end of period):

 

                                                       

Cash and equivalents

          $ 19     $ 6     $ 5     $ 49     $ 152     $ 107     $ 164  

Working capital(4)

            208       142       99       177       433       380       535  

Total assets

            1,225       1,101       1,179       1,191       2,696       2,486       3,197  

Total long-term debt

            674       581       567       675       1,834       1,805       2,306  

Total net debt(5)

            673