As filed with the U.S. Securities and Exchange Commission on June 28, 2010

Registration No. 333-166009

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Amendment No. 2

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Arizona Chemical Ltd.

(Exact name of registrant as specified in its charter)

 

4600 Touchton Road East

Building 100

Suite 1500

Jacksonville, Florida 32246

(800) 526-5294

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

          

Pamela J. Simmons

4600 Touchton Road East

Building 100

Suite 1500

Jacksonville, Florida 32246

(800) 526-5294

 

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

 

Copies to:

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date hereof.

 

 

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

 

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.  o

 

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

 

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.  o

 

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

 

(Do not check if a smaller reporting company)

 

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

 

 

Subject to Completion. Dated June 28, 2010

 

           Shares

 

 

Arizona Chemical Ltd.

 

Common Shares

 

This is an initial public offering of common shares of Arizona Chemical Ltd., or Arizona Chemical. The company is offering           of the shares to be sold in the offering. The selling shareholder identified in this prospectus is offering an additional           shares. The shares to be sold by the company and the selling stockholder will be sold to the underwriters identified in this prospectus. Arizona Chemical will not receive any of the proceeds from the sale of the shares being sold by the selling shareholder.

 

Prior to this offering, there has been no public market for the common shares. It is currently estimated that the initial public offering price per share will be between $      and $      . Arizona Chemical intends to apply to list the common shares on the New York Stock Exchange under the symbol “ARZ”.

 

See “Risk Factors” on page 16 to read about factors you should consider before buying common shares.

 

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

 

 

To the extent that the underwriters sell more than           common shares, the underwriters have the option to purchase up to an additional           shares from the selling shareholder at the initial price offered to the public less the underwriting discount. Arizona Chemical will not receive any of the proceeds from the common shares sold by the selling shareholder pursuant to the underwriters’ option to purchase additional shares.

 

The underwriters expect to deliver the shares against payment in New York, New York on          , 2010.

 

Goldman, Sachs & Co.

 

Prospectus dated          , 2010

 

TABLE OF CONTENTS

 

Prospectus

 

 

Through and including          , 2010 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

This prospectus will be filed with the Registrar of Companies in Bermuda in accordance with Bermuda law. In accepting this prospectus for filing, the Registrar of Companies in Bermuda does not accept any responsibility for our financial soundness or the correctness of any of the statements made or opinions expressed in this prospectus.

MARKET AND INDUSTRY DATA

 

We use market data, industry forecasts and projections throughout this prospectus. We have obtained portions of this information from market research prepared by Arthur D. Little Benelux S.A./N.V., which we refer to as “ADL”, in a market study that ADL has prepared for us at our expense in connection with this offering. In addition, we have obtained portions of this information from other publicly available industry publications. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and there is no assurance that any of the projected amounts will be achieved. We believe that the surveys and market research performed by others, including ADL, are reliable. While we are not aware of any misstatements regarding the industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors”.

 

PROSPECTUS SUMMARY

	•	Adhesives.  We are a leading global supplier of tackifiers to the adhesives industry as measured by sales and the world’s largest producer of tackifier resins from renewable resources in terms of volume.
	•	Inks.  We are a major supplier of ink resins to many of the world’s leading printing ink companies for use in publication and packaging inks.
	•	Tires and Rubber.  We are a leading supplier of resins and additives from renewable resources to the global tires and rubber industry as measured by sales.

	•	Roads and Construction.  We are a major supplier of resins for use in roadmarking, and we believe there are future opportunities to supply fatty acids and tackifier resins for bitumen applications in the roofing and paving sub-markets.
	•	Consumer Products.  We sell a diverse range of specialty materials used in the formulation of consumer products for the personal care, home care, industrial cleaning and food ingredients sub-markets.
	•	Renewable Energy.  We are the largest global producer of tall oil pitch, a second generation, cellulosic biofuel used in municipal heating and industrial power generation, as measured by volume. Further, our TOFA can also be used as a raw material in the manufacture of biodiesel.
	•	Chemical Intermediates.  Our TOR, TOFA, dimer acid and DTO chemical intermediates are sold into a diverse range of markets, including, among others, paints and coatings, lubricants, fuel additives, mining and oilfield, paper chemicals and polymers.

	•	naturally-derived resins used in adhesives, inks and roadmarking applications;
	•	naturally-derived tackifier resins used in hot melt packaging and bookbinding adhesives;
	•	naturally-derived tread enhancement resins for passenger car tires; and
	•	pine-based, non genetically-modified sterols used in food ingredient and nutrient applications through our joint venture, Arboris, LLC.

	•	adhesive tackifiers designed to enable the use of a higher amount of recycled content in packaging materials;
	•	high solid adhesive dispersions for labels and tapes that allow for higher coating speeds and that lower process energy costs;
	•	heat stable rheology, or HSR, ink resins that reduce formulation complexity for ink manufacturers while improving press performance;
	•	tire tread resins that promote wet grip, fuel economy and tire life;
	•	fuel lubricity improvers that ensure low sulfur targets for diesel fuel can be met; and
	•	emulsions and clear gels for skin and sun care applications.

																		Combined
		Three Months				Three Months				Year Ended				Year Ended				Year Ended
		Ended				Ended				December 31,				December 31,				December 31,
		March 31, 2010				March 31, 2009				2009				2008				2007
										(dollars in thousands)								(Non-GAAP)
Net income (loss)		$	9,997			$	(2,357	)		$	12,098			$	(26,599	)		$	(23,605	)
Gross margins			20.6	%			8.1	%			15.7	%			13.3	%			11.7	%
Adjusted EBITDA			27,378				11,043				93,859				92,723				66,898
Adjusted EBITDA margins			13.8	%			6.2	%			12.2	%			9.3	%			7.8	%

Issuer		Arizona Chemical Ltd.
Common shares offered by the issuer		common shares.
Common shares offered by the selling shareholder		common shares.
Common shares		Immediately following the consummation of this offering, we will have     million common shares outstanding.
Use of proceeds		Assuming we sell the shares for a per share price equal to $      , the midpoint of the price range set forth on the cover page of this prospectus, will receive net proceeds from this offering of approximately $      million after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering to make an approximately $12 million distribution to our parent entity, AZ Chem Investments Partners LP, and to pay transaction-related expenses of $     million. We intend to use the remaining net proceeds to repay $      million of indebtedness under our First Lien Credit Agreement, representing 75% of the remaining net proceeds, and to repay $      million of indebtedness outstanding under our Second Lien Credit Agreement, representing 25% of the remaining net proceeds. We will not receive any proceeds from the sale of our common shares by the selling shareholder.
Dividend policy		Other than the distribution we are making to AZ Chem Investments Partners LP out of the proceeds of this offering, we do not anticipate paying any cash dividends on our common shares for the foreseeable future. We intend to retain all available funds and any future earnings to reduce debt and fund the development and growth of our business.
NYSE Symbol		“ARZ”.
Risk factors		For a discussion of risks relating to our company, our business and an investment in our common shares, see “Risk Factors” and all other information set forth in this prospectus before investing in our common shares.
		Unless we specifically state otherwise, all information in this prospectus assumes no exercise by the underwriters of their option to purchase an additional          shares.

		Successor				Successor				Successor				Successor				Combined				Successor				Predecessor
																		(Non-GAAP)
		Three				Three																March 1,				January 1,
		Months				Months				Year				Year				Year				2007				2007
		Ended				Ended				Ended				Ended				Ended				through				through
		March 31,				March 31,				December 31,				December 31,				December 31,				December 31,				February 28,
		2010				2009				2009				2008				2007				2007				2007
		(dollars in thousands, except per share data)
Net sales		$	198,051			$	177,934			$	767,465			$	1,001,988			$	855,867			$	723,797			$	132,070
Cost of goods sold			157,333				163,445				646,986				868,536				755,415				642,341				113,074
Gross profit			40,718				14,489				120,479				133,452				100,452				81,456				18,996
Selling, general and administrative			25,673				15,464				78,200				91,936				99,583				86,684				12,899
Unrealized foreign currency exchange (gains) losses(1)			(4,836	)			367				(9,347	)			20,304				—				—				—
Restructuring and impairment(2)			2,047				1,035				26,395				15,513				114				114				—
Other operating income(3)			—				(2,043	)			(5,537	)			—				—				—				—
Operating income (loss)			17,834				(334	)			30,768				5,699				755				(5,342	)			6,097
Interest (expense) income, net			(3,870	)			(4,560	)			(16,546	)			(29,523	)			(28,657	)			(28,775	)			118
Loss on interest rate swaps, net			(709	)			(600	)			(2,541	)			(9,311	)			(2,275	)			(2,275	)			—
Other income(4)			623				2,151				3,635				1,879				—				—				—
Income (loss) before income tax expense (benefit)			13,878				(3,343	)			15,316				(31,256	)			(30,177	)			(36,392	)			6,215
Income tax expense (benefit)			3,885				(836	)			3,831				(4,277	)			(6,299	)			(8,913	)			2,614
Equity in earnings of affiliate(5)			4				150				613				380				273				189				84
Net income (loss)		$	9,997			$	(2,357	)		$	12,098			$	(26,599	)		$	(23,605	)		$	(27,290	)		$	3,685
Earnings per share(6):
Basic and diluted		$	9,997			$	(2,357	)		$	12,098			$	(26,599	)						$	(27,290	)
Weighted average common shares outstanding:
Basic and diluted			1,000				1,000				1,000				1,000								1,000

		As of March 31, 2010
						As Adjusted for
		Actual				the Offering(7)
		(dollars in thousands)
Cash and cash equivalents		$	43,057			$
Total assets			630,275
Total debt			331,645
Total shareholder’s equity			101,495

		Successor				Successor				Successor				Successor				Combined				Successor				Predecessor
																		(Non-GAAP)
		Three				Three
		Months				Months																March 1,				January 1,
		Ended				Ended				Year Ended				Year Ended				Year Ended				2007 through				2007 through
		March 31,				March 31,				December 31,				December 31,				December 31,				December 31,				February 28,
		2010				2009				2009				2008				2007				2007				2007
		(dollars in thousands)
Gross margin(8)			20.6	%			8.1	%			15.7	%			13.3	%			11.7	%			11.3	%			14.4	%
Depreciation(8)		$	6,599			$	6,872			$	29,781			$	23,311			$	23,790			$	19,693			$	4,097
Amortization			2,444				2,565				10,834				10,899				9,445				9,120				325
Adjusted EBITDA(9)			27,378				11,043				93,859				92,723				66,898				54,874				12,024
Adjusted EBITDA margin			13.8	%			6.2	%			12.2	%			9.3	%			7.8	%			7.6	%			9.1	%
Free cash flow(10)		$	(5,424	)		$	1,845			$	81,803			$	(13,452	)		$	8,446			$	25,132			$	(16,686	)
Net cash provided by (used in) operating activities			2,507				11,100				117,325				20,841				32,934				45,022				(12,088	)
Net cash used in investing activities			(7,931	)			(18,027	)			(44,294	)			(34,293	)			(501,929	)			(497,331	)			(4,598	)
Net cash provided by (used in) financing activities			2,202				(1,220	)			(63,771	)			12,768				498,843				488,547				10,296

(1)		Unrealized foreign currency exchange losses (gains) is primarily related to translation changes in the balance of the Euro-denominated debt under our First Lien Credit Agreement. This is further described in Note 11 of our consolidated financial statements and Note 8 of our unaudited condensed consolidated financial statements appearing at the end of this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
		The following table presents unrealized and realized foreign exchange losses (gains) included in our consolidated statement of operations.

		Successor				Successor				Successor				Successor				Combined				Successor				Predecessor
																		(Non-GAAP)
		Three				Three
		Months				Months																March 1,				January 1,
		Ended				Ended				Year Ended				Year Ended				Year Ended				2007 through				2007 through
		March 31,				March 31,				December 31,				December 31,				December 31,				December 31,				February 28,
		2010				2009				2009				2008				2007				2007				2007
		(dollars in thousands)
Unrealized translation related foreign currency exchange (gains) losses		$	(4,836	)		$	367			$	(9,347	)		$	20,304			$	—			$	—			$	—
Realized transaction related foreign currency exchange (gains) losses — selling, general and administrative			(107	)			(1,883	)			214				234				(261	)			238				(499	)
Realized transaction related foreign currency exchange (gains) losses — cost of goods sold			(205	)			37				154				65				20				3				17

(2)		Restructuring and impairment includes pre-tax restructuring charges primarily related to manufacturing facility closures and employee terminations as part of our cost reduction initiatives. This is further described in Note 9 of our consolidated financial statements and Note 7 of our unaudited condensed consolidated financial statements appearing at the end of this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

		The following table presents details of our restructuring and impairment charges included in our consolidated statement of operations.

		Successor				Successor				Successor				Successor				Combined				Successor				Predecessor
																		(Non-GAAP)
		Three				Three
		Months				Months																March 1,				January 1,
		Ended				Ended				Year Ended				Year Ended				Year Ended				2007 through				2007 through
		March 31,				March 31,				December 31,				December 31,				December 31,				December 31,				February 28,
		2010				2009				2009				2008				2007				2007				2007
		(dollars in thousands)
Port St. Joe, Florida		$	—			$	—			$	5,822			$	—			$	—			$	—			$	—
Gersthofen, Germany			108				—				1,251				—				—				—				—
Valdosta, Georgia			97				—				874				—				—				—				—
U.K. facilities			—				—				339				5,369				—				—				—
Niort, France			648				—				—				1,972				—				—				—
Dover, Ohio			—				3				—				635				—				—				—
Pensacola, Florida			—				—				—				534				114				114				—
Sandarne, Sweden			1,194				—				—				—				—				—				—
Impairment			—				1,032				18,109				7,003				—				—				—
Total		$	2,047			$	1,035			$	26,395			$	15,513			$	114			$	114			$	—

(3)		Other operating income of $5.5 million recorded in 2009 included $4.9 million of insurance proceeds related to a fire at our Oulu, Finland manufacturing facility and a gain of $0.7 million on the sale of capital assets realized as a result of the closure of our Bedlington, U.K. manufacturing facility.
(4)		In 2009, other income included a gain on our acquisition of Abieta of $2.1 million and a gain on settlement with International Paper of $1.3 million, whereas in 2008, other income included a gain of $1.9 million on the extinguishment of a portion of our debt. All of these items were excluded from the calculation of Adjusted EBITDA. In the three months ended March 31, 2010, other income primarily related to insurance proceeds relating to a fire at our Sandarne, Sweden manufacturing facility.
(5)		Equity in earnings of affiliate relates to our 10% investment in Arboris, LLC, which was formed in 2002 and is accounted for under the equity method of accounting as we have the ability to exercise significant influence. Our share of the earnings from operations in this investment is recorded in our statement of operations. This is further described in Note 3 of our consolidated financial statements appearing at the end of this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
(6)		Prior to the Acquisition, we were an operating division of International Paper. As a result, the capital structure of our predecessor did not include common stock or other forms of equity shares. Accordingly, earnings per share is not available for periods prior to March 1, 2007. Additionally, the information presented regarding earnings per share and weighted average common shares outstanding is that of Arizona Chem Sweden Holdings AB on an actual basis. The earnings per share of Arizona Chemical Ltd. on an as adjusted basis after giving effect to the Reorganization for the three months ended March 31, 2010 and 2009, the years ended December 31, 2009 and 2008 and the ten month period ended December 31, 2007 would have been $     , $     , $     , $     , and $     , respectively, assuming           common shares outstanding.
(7)		Reflects on an adjusted basis the sale of           of our common shares in this offering at an assumed initial public offering price of $      per share (the midpoint of the price range set forth on the cover page of this prospectus), and the application of the estimated net proceeds from this offering as described under “Use of Proceeds”, and assumes this offering had been consummated on March 31, 2010.
(8)		Included in these amounts in 2009 is accelerated depreciation associated with the closure of our Port St. Joe facility in the amount of $1.6 million. Accelerated depreciation had a negative impact on our gross margins of 1.3% in 2009.
(9)		Adjusted EBITDA represents net income before interest, taxes, depreciation, and amortization and is adjusted for various items as defined in our credit agreements. Adjusted EBITDA presented in the predecessor period was calculated on the same basis as Adjusted EBITDA

		presented in the successor periods pursuant to our credit agreements. Under the terms of our credit agreements, we use Adjusted EBITDA to calculate our maximum leverage ratio and our minimum interest coverage ratio covenants. See “— Adjusted EBITDA” below.
(10)		Free cash flow represents net cash provided by operating activities, less purchases of property, plant and equipment, software spending and proceeds from disposals of property, plant and equipment. See “ — Free Cash Flow” below.

		Successor				Successor				Successor				Successor				Combined				Successor				Predecessor
																		(Non-GAAP)				March 1,				January 1,
		Three months				Three months				Year Ended				Year Ended				Year Ended				2007 through				2007 through
		ended March 31,				ended March 31,				December 31,				December 31,				December 31,				December 31,				February 28,
		2010				2009				2009				2008				2007				2007				2007(4)
		(dollars in thousands)
Net income (loss)		$	9,997			$	(2,357	)		$	12,098			$	(26,599	)		$	(23,605	)		$	(27,290	)		$	3,685
Interest expense (income), net			3,870				4,560				16,546				29,523				28,657				28,775				(118	)
Income tax expense (benefit)			3,885				(836	)			3,831				(4,277	)			(6,299	)			(8,913	)			2,614
Depreciation and amortization			9,043				9,437				40,615				34,210				33,235				28,813				4,422
EBITDA			26,795				10,804				73,090				32,857				31,988				21,385				10,603
Unrealized foreign currency exchange (gains) losses			(4,836	)			367				(9,347	)			20,304				—				—				—
Restructuring and impairment			2,047				1,035				26,395				15,513				114				114				—
Loss on interest rate swaps, net			709				600				2,541				9,311				2,275				2,275				—
Equity in earnings of affiliate			(4	)			(150	)			(613	)			(380	)			(273	)			(189	)			(84	)
Transaction costs(1)			—				—				—				1,316				10,271				10,271				—
Management fees (2)			495				351				1,538				1,990				1,295				1,295				—
Transition costs(3)			—				—				—				2,984				6,667				6,575				92
Gain on Abieta acquisition			—				(2,151	)			(2,151	)			—				—				—				—
Gain on settlement with International Paper			—				—				(1,316	)			—				—				—				—
Selling, general and administrative severance			—				—				—				3,121				2,235				2,235				—
Third-party advisor fees			2,135				—				—				1,573				—				—				—
Consulting services			—				—				—				3,794				7,616				7,616				—
Gain on debt extinguishment			—				—				—				(1,901	)			—				—				—
Other items			37				187				3,722				2,241				4,710				3,297				1,413
Adjusted EBITDA		$	27,378			$	11,043			$	93,859			$	92,723			$	66,898			$	54,874			$	12,024

(1)		Transaction costs were related to the Acquisition. These costs included legal, tax, IT, professional fees and Rhône Capital transaction fees.
(2)		Management fees are paid to Rhône Group L.L.C., an affiliate of Rhône Capital, for corporate-level support activities provided to us. These management fees will no longer be paid following the completion of the offering.
(3)		Transition costs included fees paid to International Paper in connection with the Acquisition under the transition services agreement (governing interim services provided by International Paper), IT consulting fees, costs for infrastructure build-out (such as IT and phone systems, treasury function setup, HR/payroll) and the cost of a carve-out audit, among other items.
(4)		Adjusted EBITDA presented in the predecessor period was calculated on the same basis as Adjusted EBITDA presented in the successor periods pursuant to our credit agreements.

		Successor				Successor				Successor				Successor				Combined				Successor				Predecessor
																		(Non-GAAP)				March 1, 2007				January 1, 2007
		Three months				Three months				Year Ended				Year Ended				Year Ended				through				through
		ended March 31,				ended March 31,				December 31,				December 31,				December 31,				December 31,				February 28,
		2010				2009				2009				2008				2007				2007				2007
		(dollars in thousands)
Net cash provided by (used in) operating activities		$	2,507			$	11,100			$	117,325			$	20,841			$	32,934			$	45,022			$	(12,088	)
Less:
Purchases of property, plant and equipment			(4,866	)			(6,677	)			(22,993	)			(34,719	)			(22,846	)			(18,248	)			(4,598	)
Software spending			(3,761	)			(3,268	)			(13,404	)			(142	)			(1,642	)			(1,642	)			—
Proceeds from disposals of property, plant and equipment			—				690				875				212				—				—				—
Other			696				—				—				356				—				—				—
Free cash flow		$	(5,424	)		$	1,845			$	81,803			$	(13,452	)		$	8,446			$	25,132			$	(16,686	)
Net cash (used in) provided by investing activities			(7,931	)			(18,027	)			(44,294	)			(34,293	)			(501,929	)			(497,331	)			(4,598	)
Net cash provided by (used in) financing activities			2,202				(1,220	)			(63,771	)			12,768				498,843				488,547				10,296

 

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

 

General Business Risks

 

Conditions in the Global Economy and Capital Markets May Adversely Affect Our Results of Operations, Financial Condition and Cash Flows.

 

Our products are sold in markets that are sensitive to changes in general economic conditions. Downturns in general economic conditions can cause fluctuations in demand for our products, product prices, volumes and margins. A decline in the demand for our products or a shift to lower margin products due to deteriorating economic conditions would adversely affect sales of our products and our profitability and could also result in impairments of certain of our assets.

 

Our business and operating results have been and will continue to be affected by the global recession, including the turbulence in the credit markets, dislocations in the real estate markets, fluctuating commodity prices, volatile exchange rates and other challenges currently affecting the global economy and our customers. If the current global recession continues for a significant period of time or further deteriorates, our results of operations, financial condition and cash flows would be materially adversely affected.

 

Demand for Many of Our Products is Cyclical, and We May Experience Prolonged Depressed Market Conditions for Our Products, Which Would Decrease Our Net Sales and Operating Margins.

 

Many of our products are ultimately used in end markets which are cyclical in nature, such as housing, automotive, printed media, road construction and oil and natural gas drilling. We primarily sell our products to other manufacturers who use our products as intermediates and performance modifiers. The housing market directly affects demand for our products through the demand for oil-based paints, as well as flooring and construction adhesives. The automotive market affects demand for tires, metal working fluids, automotive adhesives in new automobile construction and after-market parts such as air filters. The printed media market, such as advertising and magazine publication, is subject to consumer and discretionary spending trends, while the road construction market is dependent on government spending, which affects sales of our products used in road safety striping. Certain of our products are used in oil and natural gas drilling applications, the demand for which is dependent on the overall energy markets. Any adverse development that negatively affects any or all of these industries could cause a material decrease in our net sales and operating margins.

 

Our Business is Subject to Seasonality That May Affect Our Quarterly Operating Results and Impact the Market Price of Our Common Shares.

 

Seasonal changes and weather conditions typically affect the inks and roadmarking end-use markets. For example, the demand for our ink products is typically highest in the third quarter of the year due to increased demand for holiday catalog printing. Demand for roadmarking products is typically higher during the warm weather months and can be affected by adverse weather conditions during those periods. Because seasonal weather patterns are difficult to predict, we cannot accurately estimate fluctuations in our quarterly sales in the roadmarking market in any given year. If reduced demand in the inks and roadmarking markets cause our operating results to fall below the periodic expectations of financial analysts or investors, the market price of our common shares may decline.

We Generally do not have Long-Term Contracts with Our Customers, and the Loss of Customers Could Adversely Affect Our Sales and Profitability.

 

Our five largest customers accounted for approximately 20% of our net sales in 2009. With some exceptions, our business is based primarily upon individual sales orders with our customers. As such, our customers could cease buying our products from us at any time, for any reason, with little or no recourse. If a major customer or multiple smaller customers elected not to purchase products from us, our business prospects, financial condition and results of operations would be materially adversely affected.

 

We have Recorded a Significant Amount of Identifiable Intangible Assets, But We May Never Realize the Full Value of Those Assets.

 

Intangible assets are recorded at fair value on the date of acquisition and, in accordance with GAAP, will be reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products and services sold by our business, and a variety of other factors. The amount of any impairment must be expensed immediately as a charge to our results of operations. Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets. Any future determination of impairment of our intangible assets would have an adverse effect on our financial condition and results of operations.

 

International Paper and Other Third Parties Provide Operating and Other Services to Us Under Agreements that are Important to Our Business. The Failure of Any of These Parties to Perform Their Obligations, or the Termination of These Agreements, Would Adversely Affect Our Operations.

 

The operation of certain of our facilities is dependent on services provided by third parties. For example, we have contracts with International Paper pursuant to which International Paper provides our Savannah, Georgia facility with waste water treatment and certain other services. Additionally, Bay County, Florida provides our Panama City facility with waste water treatment services. Bay County is currently considering selling the waste water treatment facility used to treat our waste water to a private company, and we cannot assure you that we will be able to have our waste water treated by this facility in the future. In the event that International Paper, Bay County or another third party fails to provide services to our facilities, we may be required to obtain these services from other third parties at an increased cost or to expend capital to provide these services ourselves. The expenses associated with obtaining or providing these services, as well as any interruption in our operations as a result of the failure of the third party to provide a particular service, may be significant and may adversely affect our results of operations.

 

Additionally, although we own our Savannah, Georgia facilities, our BLS acidulation facility is located on real property leased from International Paper pursuant to a long-term lease agreement, and this property is surrounded by the International Paper mill. In the event we were to have a dispute with International Paper regarding the terms of our lease agreement or we were otherwise unable to fully access or utilize this portion of our Savannah facility, we could incur higher costs associated with freight to divert BLS to other locations within our acidulation network. Long-term outages would require the expenditure of capital for additional acidulation equipment.

 

Acquisitions and Joint Ventures that We Pursue May Present Unforeseen Integration Obstacles and Costs, Increase Our Leverage and Negatively Impact Our Performance.

 

We intend to selectively pursue acquisitions of, and joint ventures with, related businesses as one element of our growth strategy. There can be no assurance that we will decide to pursue acquisitions or joint ventures or whether we will be successful in completing any such transaction. If

such transactions are consummated, the risks described below, and the risks associated with our business generally, may be increased. These transactions may require us to assume or incur additional debt financing, resulting in additional leverage and a complex debt structure. We may pursue acquisitions of a significantly larger scale than in the past.

 

The expense incurred in consummating acquisitions or our failure to integrate acquired businesses successfully into our existing businesses could negatively impact our results of operations. 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 and management resources that would otherwise be available for the ongoing development or expansion of existing operations. Additional risks associated with our acquisition and joint venture strategy include:

 

 

Our Business Could be Materially and Adversely Affected if We Encounter Problems in the Operation of a New SAP Financial System that has Replaced Our Prior Systems.

 

We are highly dependent on our information systems infrastructure in order to process orders, track inventory, ship products in a timely manner, prepare invoices to our customers, generate financial reports and otherwise carry on our business in the ordinary course. We recently implemented a new global enterprise resource planning, or ERP, system that we have licensed from SAP AG. The new ERP system is designed to integrate all of our data and processes, including supply chain, inventory and accounting, into a unified system. We expect the implementation to be completed in phases during the first half of 2010. The transition to a new ERP system involves numerous risks, including difficulties in integrating the system with our current operations, potential delay in the processing of customer orders for shipment of products, diversion of management’s attention away from normal daily business operations, increased demand on our operations support personnel, initial dependence on unfamiliar systems while training personnel in its use, increased operating expenses resulting from training, conversion and transition support activities and difficulties in accurately reporting our financial results on a timely basis. If we experience significant problems with the implementation of this system, the resulting disruption could adversely affect our business, sales, results of operations and financial condition.

 

Risks Related to Raw Materials

 

We are Highly Dependent On Our Key Raw Materials and Lack of Access to Adequate Supplies of Our Key Raw Materials Would Adversely Affect Our Results of Operations.

 

The availability of raw materials is essential to our business. Our manufacturing process relies on three key raw materials: crude tall oil, or CTO, crude sulfate turpentine, or CST and, to a lesser extent, D-limonene. CTO and CST accounted for approximately 68% and 64% of our raw material purchases for the three months ended March 31, 2010 and the year ended December 31, 2009,

respectively. We have entered into long-term supply agreements with International Paper pursuant to which we agreed to buy, and International Paper agreed to sell, all of International Paper’s CTO and CST output in the United States. We also have the option to acquire CTO and CST produced at future International Paper paper mills worldwide. We satisfied 20% and 27% of our global CTO and CST purchases pursuant to these agreements for the three months ended March 31, 2010 and the year ended December 31, 2009, respectively. We also maintain agreements with others to supply our raw material needs.

 

CTO and CST are co-products of the kraft pulping process. As a result, the supply of CTO and CST is based on the demand for the paper products produced by our suppliers, not on the demand for CTO or CST. Accordingly, the global supply of CTO and CST is inherently constrained by the volume of kraft pulp processing and neither International Paper nor our other suppliers are required to supply us with a minimum, or floor, amount of CTO or CST. In addition, substantially all of the global CTO and CST supply is consumed by the producers of CTO and CST or sold pursuant to long-term supply agreements, and CTO and CST are not generally available on the open market. Furthermore, weather conditions in the Southeastern United States, northern Europe and other regions where pine trees are grown have in the past, and may in the future, affect the availability and quality of pine trees used in the kraft pulping process and, therefore, the available supply of CTO and CST. For example, in 2005, a wind storm caused a significant amount of damage to the forests in Sweden. The trees that were felled during the storm were processed by the pulp mills over an extended period of time, which reduced the quantity of CTO and CST yielded from the kraft pulping process in 2005 and 2006. Accordingly, there can be no assurance that CTO and CST will be available in quantities necessary for us to operate our business.

 

If any of our suppliers fails to meet its obligations under our supply agreements or is otherwise unable to provide us with an adequate supply of our raw materials and we are unable to obtain raw materials from other suppliers, we would be unable to produce the quantity of products that we have historically produced and our results of operations would be adversely affected.

 

Additionally, we have in the past had disagreements with International Paper, our largest supplier, regarding the terms of our CTO and CST supply agreements. Although we believe we have resolved these disputes to the satisfaction of all parties, there can be no assurance that we will not have disputes with International Paper or another supplier of our raw materials in the future.

 

The European Union’s Directive on the Promotion of the Use of Energy from Renewable Resources and Similar Legislation in the United States May Incentivize the Use of CTO and CST as Alternative Fuels.

 

In December 2008, the European Parliament and the Council of the European Union passed a directive on the promotion of the use of energy from renewable sources, which established a 20% European Community-wide target for energy consumed from renewable sources relative to the Community’s gross final consumption of energy, as well as a 10% target for energy consumed from renewable sources in the transport sector. In order to reach these targets, the directive established mandatory targets for each Member State and requires each Member State to adopt a national renewable energy action plan by June 2010 setting forth measures to achieve its mandatory targets.

 

The directive established sustainability criteria for alternative fuels that must be satisfied in order for the consumption of a fuel to count toward a Member State’s national targets. Although we are engaged in discussions with the European Parliament, the European Commission and various Member States regarding the appropriate status and treatment of CTO and CST under the directive and national renewable energy action plans, CTO and CST currently satisfy the sustainability criteria.

 

If a Member State’s national renewable energy action plan incentivizes the consumption of CTO or CST (or their precursor chemicals) as alternative fuels, demand for CTO and CST may increase. We are aware of at least one company, SunPine AB, located in Pitéa, Sweden, that is in the process of completing a new manufacturing facility for the production of biodiesel from CTO at least in part in reliance on possible incentives under the directive. This biodiesel manufacturing project, or other

similar future projects elsewhere, will increase the demand for the raw materials that our business currently depends on.

 

In addition to these developments in the European Union, various pieces of legislation regarding the use of alternative fuels have been introduced in the United States Congress. While this legislation is in its early stages, final legislation may incentivize the use of CTO and CST as alternative fuels in the United States.

 

Because the supply of CTO and CST is inherently constrained by the volume of paper pulp processing, any diversion of CTO and CST (or their precursor chemicals) for use as alternative fuels would reduce the available supply of CTO and CST. If this diversion were substantial, it could cause prices for CTO and CST to increase materially, place us at a competitive disadvantage relative to our competitors who rely on different primary raw materials, adversely affect our results of operations and threaten our ability to operate our business.

 

Fluctuations in Costs of Our Raw Materials Could Adversely Affect Our Results of Operations.

 

Our results of operations are directly affected by the cost of our raw materials, particularly CTO and CST. Raw materials accounted for approximately 60% of our costs of goods sold in 2009, and, accordingly, our gross profit and margins could be adversely affected by changes in the cost of these raw materials if we are unable to pass the increases on to our customers.

 

CTO and CST, in addition to their ability to be distilled into higher value chemicals, can be burned as alternative fuels. Some paper mills have historically burned CTO to meet their energy needs rather than sell the CTO they produce to third parties. Additionally, because of its inherent fuel properties, we compete for CTO with energy companies and biodiesel manufacturers, as well as other pine chemical companies. As discussed above, certain countries have proposed incentivizing the use of CTO and CST as alternative fuels, which would cause prices for CTO and CST to increase and place us at a competitive disadvantage relative to companies that utilize CTO and CST as an energy source. This could also result in a decrease in available supply of CTO and CST.

 

Furthermore, the cost of CTO is driven by energy prices generally, in addition to supply/demand balance and product quality, which means that the cost of CTO can fluctuate in accordance with capacity additions or reductions or significant facility operating reductions within the CTO market as well as the broader energy industry.

 

We cannot assure you that we will be able to pass raw material price increases through to our customers, and any price increase that we cannot pass on to our customers will adversely affect our results of operations.

 

Increases in Energy Costs Could have an Adverse Effect on Our Results of Operations.

 

Energy purchases constituted approximately 9% and 8% of our cost of goods sold for the three months ended March 31, 2010 and the year ended December 31, 2009, respectively. Increases in energy costs, unless passed on to our customers, would adversely affect our results of operations. In addition, rising energy costs may increase our raw material costs. If energy prices increase significantly, our business or results of operations may be adversely affected. In addition, rising energy costs negatively impact our customers and the demand for our products. These risks will be heightened if our customers or production facilities are in locations experiencing severe energy shortages.

 

Risks Related to Our Indebtedness

 

Our Substantial Indebtedness Could Adversely Affect Our Ability to Raise Additional Capital to Fund Our Operations, Limit Our Ability to React to Changes in the Economy or Our Industry and Prevent Us From Fulfilling Our Obligations Under Our Existing or Future Indebtedness.

 

We have substantial indebtedness. As of March 31, 2010, our total consolidated indebtedness was $331.6 million, including $327.4 million outstanding under our credit agreements. As of March 31,

2010, on an as adjusted basis after giving effect to this offering and the use of the proceeds therefrom (assuming that we sell the shares for a per share price of $     , the midpoint of the price range set forth on the cover page of this prospectus), we would have had $      million of outstanding indebtedness, including $      million under our First Lien Credit Agreement and $      million outstanding under our Second Lien Credit Agreement. In fiscal 2010, on an as adjusted basis, after giving effect to this offering and the use of the proceeds therefrom, our cash debt service is expected to be approximately $      million (including $      million of short term debt maturities) based on interest rates as of          , 2010, of which $      million represents principal and $      million represents interest.

 

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

 

 

Our ability to make scheduled payments on our debt obligations and to repay our debt obligations as they come due depends on our financial condition and operating performance as well as general financial, business and market conditions and other factors that are beyond our control. There can be no assurances that our business will generate sufficient cash flow from operations or that we will be able to borrow additional funds to satisfy our debt service obligations and other liquidity needs.

 

The Terms of Our Existing Indebtedness May Restrict Our Current and Future Operations.

 

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

 

 

 

In addition, our credit agreements require us to achieve certain financial results and maintain compliance with specified financial ratios, which become more restrictive over time. A failure to comply with these covenants could result in an event of default under our credit agreements. In the event of any default under our credit agreements, the lenders thereunder may:

 

 

See “Description of Our Indebtedness”.

 

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 credit agreements, are or will be at variable rates of interest and expose us to interest rate risk. See “Description of Our Indebtedness”. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same. Assuming the amount of variable rate indebtedness remains the same, after giving effect to the offering and the use of the proceeds therefrom, an increase of 1% in the interest rates payable on our variable rate indebtedness would increase our 2010 estimated debt service requirements by approximately $      million.

 

Despite Our Substantial Indebtedness, We May Still be Able to Incur Significantly More Debt, Which Could Intensify the Risks Relating to Our Indebtedness Described Above.

 

The terms of the instruments governing our indebtedness restrict, but do not prohibit, our ability to incur substantial additional indebtedness in the future. As of March 31, 2010, on an as adjusted basis, after giving effect to this offering and the use of proceeds therefrom, we would have had $60.0 million available for additional borrowing under the revolving credit facility under our First Lien Credit Agreement, and the covenants under our credit agreements would allow us to borrow a significant amount of additional indebtedness. The more leveraged we become, the more we, and in turn our security holders, become exposed to the risks described above under “— Our Substantial Indebtedness Could Adversely Affect Our Ability to Raise Additional Capital to Fund Our Operations, Limit Our Ability to React to Changes in the Economy or Our Industry and Prevent Us From Fulfilling Our Obligations Under Our Existing or Future Indebtedness”.

 

Risks Related to Environmental and Safety Matters

 

Compliance with Extensive Environmental, and/or Health and Safety Regulations Could Be Costly, Subject Us to Liability for Fines or Damages, and/or Require Us to Modify Our Operations or Products.

 

Our operations are subject to extensive environmental, health and safety, or EHS, laws and regulations at national, international and local levels in each jurisdiction where we operate. Such laws and regulations include those governing the discharge of pollutants into the air and water, the use, management and disposal of hazardous materials and wastes, the investigation and cleanup of contamination, exposure to chemicals and other hazards, the control of resin dust and occupational health and safety. We have incurred, and will continue to incur, operating costs and capital expenditures to comply with these laws and regulations. In 2009, we incurred capital expenditures of

$1.3 million for EHS improvements, and we expect to incur capital expenditures of $2.7 million for EHS improvements in 2010. Future developments, including the enactment of new or more stringent laws or regulations could require us to make additional unplanned environmental expenditures.

 

Violations of these laws and regulations or the permits required for our operations could result in restrictions on our operating activities or the imposition of substantial fines, penalties, civil or criminal proceedings, third-party property damage claims (including natural resource damages claims), personal injury claims, reputational harm, cleanup costs or obligations or other losses or costs.

 

Compliance with EHS laws generally increases the cost of production, including registration and approval requirements, the costs of transportation and storage of raw materials and finished products, as well as the costs of the storage and disposal of wastes, and such costs could have a material adverse effect on our results of operations. Furthermore, environmental laws are subject to change and have tended to become stricter over time. In particular, regulatory efforts to address climate change and greenhouse gas emissions could affect our cost of production, the availability of raw feedstock or product sales. Such changes in environmental laws or their interpretation, or the enactment of new environmental laws, could result in materially increased capital expenditures and compliance costs.

 

Regulation of Exposure to Certain Process Chemicals Could Require Material Expenditures or Changes in Our Operations.

 

Certain regulations applicable to our operations, including the Occupational Safety and Health Act and the Toxic Substances Control Act in the United States and the Registration, Evaluation and Authorization of Chemicals, or REACH, directive in Europe, prescribe limits restricting exposure to a number of chemicals used in our operations, including formaldehyde and nonylphenol, a raw material used in our Niort, France facility in the manufacture of phenolic ink resins. Future studies on the health effects of chemicals used in our operations, including nonylphenol and bisphenol A, which is used in our rosin-based ink resins, may result in additional regulation or new requirements in the United States, Europe and elsewhere which further restrict or prohibit the use of, and exposure to, these chemicals. Additional regulation of or requirements for these or other chemicals could require us to change our operations, and these changes could affect the quality or types of products we manufacture and materially increase our costs.

 

We May be Subject to Cleanup Obligations, Lawsuits and Other Claims Arising Out of Environmental Contamination or Personal Injuries Associated with Chemical Manufacturing.

 

Many of our facilities have environmental contamination. The investigation and remediation of contamination at our facilities, including the discovery of contamination arising from historical industrial operations at our current and former properties, or at other properties impacted by our operations or to which our wastes were sent for disposal, may expose us to cleanup obligations and other damages which could be costly and may adversely affect our financial condition and results of operations. Under various environmental laws in the United States and other countries where we operate, a current or prior owner or operator of a facility may be liable for the entire cost of remediation of contamination at the facility or at locations where wastes were sent for disposal, in many cases without regard to whether the owner or operator knew of, or caused, the contamination.

 

For example, we are aware of soil and groundwater contamination at our Sandarne, Sweden facility, as well as costs that we will need to incur in connection with the closure of a landfill at a former Stora Enso site in Sandarne. Though we do not presently expect the costs associated with these matters to be material, it is possible that future unexpected costs associated with these or any other investigations and remediations could adversely affect our financial condition and results of operations.

 

We face the risk that individuals could seek damages for personal injury due to exposure to chemicals at our facilities or elsewhere, or to chemicals or wastes otherwise owned, controlled or

disposed of by us. We may be subject to claims with respect to workplace exposure, workers’ compensation, claims by neighbors or others alleging personal injury or property damage in connection with our operations or waste disposal. The costs to resolve such claims could be material.

 

Chemical Manufacturing is Inherently Hazardous, Which Could Result in Accidents that Disrupt Our Operations or Expose Us to Significant Losses or Liabilities.

 

The hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes are inherent in our operations and the operations of other occupants with whom we share manufacturing sites. These hazards could lead to an interruption or suspension of operations and have an adverse effect on the productivity and profitability of a particular manufacturing facility or on the Company as a whole. These potential risks include, but are not limited to:

 

 

These hazards may result in personal injury and loss of life, damage to property and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal penalties or fines, expenses for remediation and damage claims brought by governmental entities or third parties. The loss or shutdown of operations over an extended period of time at any of our major operating facilities could have a material adverse effect on our financial condition and results of operations. For example, in April 2008, a fire occurred in the refinery portion of our Oulu, Finland facility due to the failure of a hot oil pump, and in September 2009 a fire occurred at our Sandarne, Sweden facility as the result of welding work being performed by an outside contractor. While the fire at our Sandarne facility had a limited impact on our production or ability to service our customers, the Oulu fire required us to shut down that facility for approximately one month, resulted in property damage of €1.2 million and caused us to incur a business interruption expense €4.1 million, including a €2.6 million loss of profits resulting from lost sales.

 

In order to mitigate these potential losses and liabilities, we maintain property, business interruption and casualty insurance of the types and in the amounts that we believe are customary for the industry, and the majority of the damage and loss resulting from the fire at our Oulu facility was covered by our insurance. However, we are not fully insured against all potential hazards incidental to our business, and we may not recover the full amount of a loss or liability under the terms of our insurance policies.

 

Legal and Regulatory Risks

 

Regulatory and Statutory Changes Applicable to Us or Our Customers Could Adversely Affect Our Financial Condition and Results of Operations.

 

We and many of the applications for the products in the end-use markets in which we sell our products are regulated by various national and local rules, laws and regulations. Changes in any of these areas could result in additional compliance costs, seizures, confiscations, recall or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products. For

example, changes in environmental regulations restricting the use of sterols could cause a decline in sales to producers of that product.

 

We are Subject to Customs, International Trade, Export Control, Antitrust, Zoning and Occupancy and Labor and Employment Laws That Could Require Us to Modify Our Current Business Practices and Incur Increased Costs.

 

We are subject to numerous regulations, including customs and international trade laws, export control, antitrust laws and zoning and occupancy laws that regulate manufacturers generally and/or govern the importation, promotion and sale of our products, the operation of factories and warehouse facilities and our relationship with our customers, suppliers and competitors. If these regulations were to change or were violated by our management, employees, suppliers, buying agents or trading companies, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our products and hurt our business and negatively impact results of operations.

 

Similarly, these laws affect the availability and pricing of our raw materials and competing products. For example, we benefit from certain trade protections, including anti-dumping protection. If we were to lose these protections, our results of operations could be adversely affected. Changes in these laws or regulations may increase the cost of our raw materials or lower the cost of a competing product, which could hurt our business and negatively impact results of operations.

 

Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effects on our operations. We may be required to make significant expenditures or modify our business practices to comply with existing or future laws and regulations, which may increase our costs and materially limit our ability to operate our business.

 

Due to the Nature of Our Business and Products, We May Be Liable for Damages Arising Out of Product Liability Claims.

 

The sale of our products involves the risk of product liability claims. For example, some of the chemicals or substances that are used in our businesses, including alkyl phenols such as bisphenol A and nonylphenol, and flammable solvents such as toluene, xylene and alcohols, as well as rosin, formaldehyde and resin dust, have been identified as having potentially harmful health effects.

 

In addition, we may be liable for damages based on product liability claims brought against our customers in our end-use markets. Many of our products provide critical performance attributes to our customers’ products that are ultimately sold to consumers who could potentially bring product liability suits in which we could be named as a defendant. If a person were to bring a product liability suit against one of our customers, this customer may attempt to seek contribution from us. A person may also bring a product liability claim directly against us. A successful product liability claim or series of claims against us in excess of our insurance coverage limits, for which we are not otherwise indemnified, could have a material adverse effect on our financial condition or results of operations. While we endeavor to protect ourselves from such claims and exposures in our contractual negotiations, there can be no assurance that our efforts in this regard will ultimately protect us from any such claims.

 

Risks Related to Worldwide Operations

 

Our Substantial Worldwide Operations Subject Us to Risks not Faced by Competitors that are Based in or that Operate Solely in the United States, Including Legislative, Judicial, Economic, Political, Regulatory, Labor and Tax Conditions.

 

We are a Bermuda company with a significant portion of our manufacturing operations located outside the United States. In 2009, our net sales outside the United States represented approximately

59% of our total net sales and included sales to more than 80 countries. In addition, we have production facilities located in Sandarne, Sweden, Oulu, Finland, Chester-le-Street, United Kingdom, Niort, France and Gersthofen, Germany. Accordingly, our business is subject to the differing legal, political, social and regulatory requirements and economic conditions specific to the countries or regions in which we operate, which could materially adversely affect our financial performance. Risks inherent in world-wide operations include, but are not limited to, the following:

 

 

A portion of our outstanding debt under our First Lien Credit Agreement is denominated in Euros, and a portion of this debt is attributable to Arizona Chemical AB, whose functional currency is the Swedish Kronor. Accordingly, fluctuations in the exchange rate of the Swedish Kronor to the Euro expose us to both realized and unrealized foreign currency losses. For example, in 2008, we recognized an unrealized loss of $20.3 million due to a stronger Euro against the Swedish Kronor, and in 2009, we recognized $9.3 million and $0.4 million of unrealized gain and realized loss, respectively. For the three months ended March 31, 2010, we recognized $4.8 million and $0.3 million of unrealized gain and realized gain, respectively.

 

Our overall success as a global business depends, in part, upon our ability to succeed in differing legal, regulatory, economic, social, tax 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. Our growth strategy includes expansion into new and existing international markets, and we expect that our operations outside the United States will account for a larger portion of our revenue and profitability in the future. As a result, each of the foregoing risks is likely to take on increased significance.

 

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 the three months ended March 31, 2010 and the year ended December 31, 2009, our net

sales recorded in currencies other than U.S. dollars represented approximately 51% of our total net sales. Accordingly, our results of operations are recorded in the relevant local currency and then translated to U.S. dollars, our functional currency, 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 records revenues. While we do not currently hedge our exchange rate exposures, we may do so in the future. However, any hedging transactions we enter into may not be effective or could result in foreign exchange hedging loss. The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted.

 

Given the volatility of exchange rates, we may not be able to effectively manage our currency transaction and/or translation risks, and any volatility in currency exchange rates may have an adverse effect on our financial condition, cash flows and profitability. We operate our business in countries that historically have been and may continue to be susceptible to recessions or currency devaluation, including Mexico and Turkey. In addition, as we expand our business in emerging markets, particularly China and Russia, the uncertain regulatory environment relating to currency policy in these countries could have a negative impact on our operations there.

 

Risks Related to Competition

 

We Face Competition From Other Chemical Companies, Which Could Force Us to Lower Our Prices, Thereby Adversely Affecting Our Business, Operating Margins, Financial Condition, Cash Flows and Profitability.

 

The markets in which we operate are highly competitive, and this competition could harm our business, operating margins, financial condition, cash flows and profitability. Our competitors include major international producers as well as smaller regional competitors. 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 Substitute Products 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 our products. In particular, hydrocarbon and gum-based resins compete with tall oil-based resins in the adhesives and inks markets, and animal and vegetable-based fatty acids compete with TOFA. We have in certain cases been subject to pricing pressure from Chinese manufacturers of gum rosins, and our hydrocarbon competitors have introduced metallocene-based products that compete directly with many of our adhesive tackifiers. Considerable growth in these substitutes for our products could adversely affect our market share, net sales and results of operations.

 

We face substantial risk that certain events, such as new product development by our competitors, changing customer needs, production advances for competing products, price changes in raw materials, our failure to secure patents or the expiration of patents, could result in declining demand for our products as our customers switch to substitute products or undertake manufacturing of such products on their own. If we are unable to develop and produce or market our products to effectively compete against our competitors, our results of operations may materially suffer.

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 may not be able to continue to develop new products, re-engineer our existing products successfully or bring our products to market in a timely manner. 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.

 

In addition, our customers may introduce new generations of their own products or require new technological and increased performance specifications that would require us to develop customized products. Innovation or other changes in our customers’ product performance requirements may also adversely affect the demand for our products. Our future growth will depend on our ability to gauge the direction of the commercial and technological progress in all key end-use markets, and upon our ability to successfully develop, manufacture and market products in such changing end-use markets. If we fail to keep pace with evolving technological innovations or fail to modify our products in response to our customers’ needs, then our business, financial condition and results of operations could be adversely affected as a result of reduced sales of our products.

 

Pricing Pressures by Our Customers and Increased Competition May Adversely Affect Our Results of Operations.

 

We have in the past experienced pricing pressure from customers in certain of the markets in which we compete, particularly chemical intermediates and inks. While we are directing our business away from producing low-margin products such as those sold as chemical intermediates and those sold into the inks market, we currently derive a significant portion of our revenues from sales of these chemicals and will continue to do so for the foreseeable future. Accordingly, pricing pressure on these products may reduce our profitability and adversely affect our results of operations.

 

Risks Related to Intellectual Property

 

Our Business Relies on Intellectual Property and Other Proprietary Information and Our Failure to Protect Our Rights Could Harm Our Competitive Advantages with Respect to the Manufacturing of Some of Our Products.

 

Our success depends to a significant degree upon our ability to protect and preserve our intellectual property and other proprietary information of our business. However, we may be unable to prevent third parties from using our intellectual property and other proprietary information without our authorization or from independently developing intellectual property and other proprietary information that is similar to ours, particularly in countries where the laws do not protect our proprietary rights to the same degree as in the United States. Others’ use of our intellectual property and other proprietary information could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our business. If it becomes necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.

 

As a result of developing products and markets with selected customers, we have six patent families that are jointly-held with certain of our customers. These patents are in the areas of tackifiers for adhesives and specialty polyamides for fragrance formulations. At the time of such product and/or market development, we entered into written agreements with these customers that limit the rights of each party with respect to jointly developed inventions and inventions made with the confidential information of the other party. These written agreements were made in exchange for exclusive licenses or supply agreements, for limited times. The risks of such joint-development agreements include the risk that our partner will breach its obligations under the agreement. For example our partner might breach the agreement and begin making products that we develop or enter into similar development agreements with our competitors. In the event that our customer exploits a jointly-held patent or breaches its obligations under a joint-development agreement, our business could be

materially adversely affected. Another risk is that title to intellectual property that is managed by an agreement may become clouded. For example, we or our partner may fail to document a change in patent ownership that occurs when certain conditions of an agreement are met. Unclear title or undocumented changes in title make it more difficult to license or sell such a patent.

 

Any of our patents or patent applications may not provide us with any competitive advantage and may be challenged by third parties. Our competitors also may attempt to design around our patents or copy or otherwise obtain and use our intellectual property and other proprietary information. Moreover, our competitors may already hold or have applied for patents in the United States or abroad that, if enforced or issued, could possibly prevail over our patent rights or otherwise limit our ability to manufacture or sell one or more of our products in the United States or abroad. From time to time, we oppose the issuance of patent applications in the United States and other jurisdictions that we consider overbroad or otherwise invalid to avoid the risk of being sued for patent infringement. With respect to our pending patent applications, we may not be successful in securing patents for these claims. Our failure to secure these patents may limit our ability to protect inventions that these applications were intended to cover. The expiration of a patent can result in increased competition with consequent erosion of profit margins.

 

In addition, it is our policy to enter into confidentiality agreements when appropriate with our employees and third parties to protect our unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets and know-how, but our confidentiality agreements could be breached or 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, manufacturing expertise and know-how. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition. In addition, others may obtain knowledge of our trade secrets and know-how through independent development or other access by legal means. Failure to obtain or maintain unpatented know-how and trade secret protection could adversely affect our competitive position.

 

We have registered and applied for certain service marks and trademarks, and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. The applicable governmental authorities may not approve our pending applications. A failure to obtain trademark registrations in the countries in which we operate could limit our ability to obtain and retain our trademarks and impede our marketing efforts in those jurisdictions. Moreover, third parties may seek to oppose our applications or otherwise challenge the resulting registrations. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands.

 

The failure of our patents, trademarks or confidentiality agreements to protect our intellectual property and other proprietary information, including our processes, apparatuses, technology, trade secrets, trade names and proprietary manufacturing expertise, methods and compounds, could have a material adverse effect on our competitive advantages over other producers.

 

Our Products May Infringe the Intellectual Property Rights of Others, Which May Cause Us to Incur Unexpected Costs or Prevent Us from Selling Our Products.

 

Many of our competitors have a substantial amount of intellectual property that we must continually monitor to avoid infringement. Although it is our policy and intention not to infringe valid patents, we cannot guarantee that our processes and products do not and will not infringe issued patents (whether present or future) or other intellectual property rights belonging to others, including, without limitation, situations in which our products, processes or technologies may be covered by patent applications filed by other parties. From time to time, we oppose patent applications that we consider overbroad or otherwise invalid in order to maintain the necessary freedom to operate fully in our various business lines without

the risk of being sued for patent infringement. If, however, patents are subsequently issued on any such applications by other parties, or if patents belonging to others already exist that cover our products, processes or technologies, we could, possibly, be liable for infringement or have to take other remedial or curative actions to continue our manufacturing and sales activities with respect to one or more products. We may also be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us or our licensees in connection with their use of our products. Intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert our management’s attention from operating our business. If we were to discover that our processes, technologies or products infringe the valid intellectual property rights of others, we might need to obtain licenses from these parties or substantially re-engineer our products in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. Moreover, if we are sued for infringement and lose, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products.

 

Risks Related to Employment Matters

 

Our Future Success Depends on Our Ability to Retain Our Key Employees.

 

We are dependent on the services of our management team to remain competitive in our industry. This team includes Cornelis Verhaar, our President and Chief Executive Officer, Frederic Jung, our Vice President and Chief Financial Officer, Gary Reed, our Vice President and General Manager — North America, Juhani Tuovinen, our Vice President and General Manager — Europe, David Cowfer, our Vice President, Human Resources and Corporate Communications, and Dick Stuyfzand, our Vice President and General Counsel.

 

The loss of any member of our senior management team would have an adverse effect on us, and although we maintain employment agreements with several members of our senior management, we cannot assure you that we will be able to retain our management team or that members of our management team will not compete against us in the future.

 

We May Be Required to Expend Greater Time and Expenses Than Anticipated or Than Other Companies Expend 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 March 31, 2010, approximately 54% of our 671 employees in the United States were unionized and are covered by collective bargaining agreements. In Europe, nearly all of our employees are represented by local workers councils and/or unions. 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, the workers’ councils that represent most of our employees in Europe must approve any changes in conditions of employment, including salaries and benefits. 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.

 

In addition, changes in United States federal, state and local minimum wage laws and other laws, including those in foreign countries, relating to employee benefits could cause us to incur additional wage and benefits costs, which could negatively impact our profitability.

We Operate Under Collective Bargaining Agreements with Several Unions, and We May Experience Labor Unrest and Work Stoppages.

 

We operate under collective bargaining arrangements with several unions in our U.S. and non-U.S. facilities. Although we believe relations with our unions are generally satisfactory, we cannot be certain that they will remain satisfactory. Accordingly, we cannot assure you that we will not encounter strikes or other types of conflicts with labor unions or our personnel or that such labor disputes will not have an adverse effect on us.

 

Significant Changes in Pension Fund Investment Performance or Assumptions Relating to Pension Costs May Increase the Valuation of Pension Obligations, Alter the Funded Status of Pension Plans and Increase Our Pension Costs.

 

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

 

Our Pension Plans are Currently Underfunded and We May have to Make Significant Cash Payments to the Plans, Reducing the Cash Available for Our Business.

 

We sponsor various pension plans worldwide that are underfunded and require significant cash payments. For example, in 2009, we contributed $4.5 million to our pension plans and, in 2008, we contributed $2.7 million to our pension plans. We are expected to contribute at least $4.1 million to our pension plans in 2010. We may also opt to make additional voluntary contributions to various pension plans worldwide in 2010. Additionally, if the performance of the assets in our pension plans does not meet our expectations, or if other actuarial assumptions are modified, our contributions for those years could be even higher than we expect. For example, the combined asset value of funded pension plans worldwide was $47.6 million as of December 31, 2009. We expect to earn a 5.9% investment return on our pension assets. In the event actual investment returns are 1% lower than expected for one year, we expect our long-term cash requirements to increase by $0.5 million. If our cash flow from operations is insufficient to fund our worldwide pension liability, we may be forced to reduce or delay capital expenditures, seek additional capital or seek to restructure or refinance our indebtedness.

 

As of March 31, 2010, our worldwide pension plans were underfunded by $14.2 million (based on the actuarial assumptions consistent with GAAP). Our U.S. pension plan is subject to the Employee Retirement Income Security Act of 1974, or ERISA, and our benefit plans in other countries are also subject to laws governing the funding of retirement benefits. The applicable authorities in the countries in which we operate (including, in the United States, the Pension Benefit Guaranty Corporation under ERISA) have the authority to terminate an underfunded pension plan under certain circumstances, which may require us to incur a liability equal to the entire amount of the underfunding for that plan.

Risks Related to Financial Reporting

 

Our Management and Independent Registered Public Accounting Firm in the Past Determined that There have Been Material Weaknesses and Significant Deficiencies in Our Internal Controls Over Financial Reporting. If We Fail to Maintain an Effective System of Internal Controls Over Financial Reporting, We May not be Able to Accurately Report Our Financial Results.

 

During their audit of our financial statements as of and for the ten months ended December 31, 2007, our independent registered public accounting firm identified certain reportable conditions that constituted a material weakness in the internal controls over financial reporting process. These conditions included a failure by our corporate finance and accounting function to thoroughly review our consolidated financial statements, a lack of active monitoring and oversight by our corporate finance and accounting function of our European accounting function and the inability of our corporate finance and accounting function to complete the timely closing of the financial accounting books and records and prepare our 2007 financial statements. We remedied these conditions in 2008.

 

In addition, during their audit of our financial statements as of and for the year ended December 31, 2008 and the ten months ended December 31, 2007, our independent registered public accounting firm identified certain conditions that constituted significant deficiencies in our internal controls over financial reporting, including a significant deficiency relating to our statement of cash flows in 2008 and significant deficiencies regarding our assessment of fraud risk, journal entries, accounting policy and internal control documentation, plant accounting, income taxes and reconciliation review in 2007.

 

Our audit committee and management team agreed with the matters identified as the material weakness and significant deficiencies. Failure to maintain an effective system of internal controls over financial reporting could have a material adverse effect on our business, financial condition, results of operations and our ability to accurately report our financial results.

 

If We Are Unable to Implement the Requirements of Section 404 of the Sarbanes-Oxley Act in a Timely Manner, or if We Conclude Our Internal Controls are not Effective in Other Areas, We May Be Subject to Sanctions or Investigation by Regulatory Authorities and Incur Additional Compliance Costs and the Financial Markets May React Negatively.

 

We are currently performing the system and process evaluation of our internal controls 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, which we refer to as Section 404. The requirements of Section 404 will initially apply to us in connection with the filing of our second annual report after becoming subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). In connection with our preliminary evaluation, we have identified areas of internal controls that may need improvement, such as internal controls related to the segregation of duties, system access and user security profiles, operating policies and procedures. We plan to begin the testing necessary to permit the management certification and auditor attestation required to comply with Section 404 in 2011. As we complete the evaluation and testing required by Section 404, we may identify conditions that may be categorized as significant deficiencies or material weaknesses in the future.

 

As of March 31, 2010, we have incurred $0.1 million in professional fees in connection with our initial implementation of the systems and internal control documentation required pursuant to Section 404.

 

If we are not able to implement the requirements of Section 404 in a timely manner, management will 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 Securities and Exchange Commission (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. In addition, we may

be required to incur additional costs in improving our internal control system and/or the hiring of additional personnel. Any such action could adversely affect our results of operations.

 

Risks Related to Our Common Shares and this Offering

 

We are Controlled by Rhône Capital, Whose Interests in Our Business May Be Different From Yours.

 

After the completion of this offering, Rhône Capital will exercise control over more than 50% of our outstanding common shares. As a result, Rhône Capital will, subject to applicable law, be able to control the composition of our Board of Directors and therefore will be able to control actions to be taken by us and our Board of Directors, including amendments to our memorandum of association and certain provisions of our bye-laws, the approval of significant corporate transactions such as the amalgamation, discontinuance, voluntary liquidation or sale of our company or our assets, as well as the issuance of additional shares, alteration of our share capital, the implementation of share repurchase programs, and the issuance of dividends.

 

Additionally, Rhône Capital and its affiliates are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. They 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.

 

As a “Controlled Company”, We Will be Exempt From Certain NYSE Governance Requirements.

 

Because Rhône Capital and its affiliates will control more than 50% of our voting power after giving effect to this offering, we will be considered a “controlled company” for the purposes of the NYSE listing requirements. As such, we will be exempt from the NYSE corporate governance requirements that our board of directors, our compensation committee and our nominating and corporate governance committee meet the standard of independence established by those corporate governance requirements. As a result, our Board of Directors and those committees will have more directors that would not meet the NYSE independence standards than they would if those standards were to apply. The NYSE independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors.

 

There is no Existing Public Market for Our Common Shares, and We Do Not Know if One Will Develop, Which Could Impede Your Ability to Sell Your Shares and Depress the Market Price of Our Common Shares.

 

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

 

The Market Price of Our Common Shares May be Volatile, Which Could Cause the Value of Your Investment to Decline.

 

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

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

 

 

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

 

Future Sales or the Possibility or Perception of Future Sales of a Substantial Amount of Our Common Shares Could Adversely Affect the Market Price of Our Common Shares.

 

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

 

Upon consummation of this offering, there will be           common shares outstanding. All common shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”). Of the remaining common shares outstanding,           will be restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject to applicable volume, manner of sale, holding period and other limitations of Rule 144. We and certain of our shareholders have agreed to a “lock-up”, pursuant to which neither we nor they will sell any shares without the prior consent of Goldman, Sachs & Co. for 180 days after the date of this prospectus, subject to certain exceptions and extension under certain circumstances. Following the expiration of the applicable lock-up period, all these common

shares will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144.

 

Any common shares reserved for future issuance under our 2010 Long-Term Incentive Plan could also become eligible for sale in the public market to the extent permitted by the provisions of the various vesting agreements and Rule 144 under the Securities Act.

 

In addition, the Rhône Funds, International Paper and the MIVs will have certain registration rights with respect to the common shares that they will retain following this offering. See “Shares Eligible for Future Sale” for a discussion of the common shares that may be sold into the public market in the future, and “Certain Relationships and Related Party Transactions — Shareholders Agreement” for a discussion of registration rights.

 

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

 

We do not Expect to Pay Any Dividends for the Foreseeable Future.

 

Other than the distribution we are making to AZ Chem Investments Partners LP out of the proceeds of this offering, we do not anticipate paying any dividends to our shareholders for the foreseeable future. In addition, because we are a holding company, our ability to pay dividends depends on our receipt of cash dividends and distributions from our subsidiaries. The terms of our credit agreements substantially restrict our ability and the ability of our subsidiaries to pay dividends. Accordingly, investors must be prepared to rely on sales of their common shares after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common shares. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend upon our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law or the SEC and other factors our board deems relevant.

 

Arizona Chemical Ltd. is a Holding Company that does not Conduct Any Business Operations of its Own, and it Depends on the Performance of its Subsidiaries and Their Ability to Pay Dividends and Make Distributions to it.

 

Arizona Chemical Ltd. is a holding company that does not conduct any business operations of its own. Arizona Chemical Ltd.’s principal asset is the equity securities of Arizona Chemical Luxembourg S.à.r.l. which will, upon completion of this offering, through its subsidiary Arizona Chem Sweden Holdings AB, own operating subsidiaries. As a result, the issuer is dependent upon cash dividends and distributions or other transfers from its subsidiaries to make dividend payments on its common shares and to meet its other obligations. The ability of the issuer’s subsidiaries to pay dividends and make other payments to the issuer will depend on their operating results and may be restricted by, among other things, applicable corporate, tax and other laws and regulations, agreements entered into by the subsidiaries, such as our credit agreements and any agreement governing any future indebtedness the issuer or its subsidiaries may incur.

 

In addition, because Arizona Chemical Ltd. is a holding company, your claims as shareholders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of its subsidiaries, including obligations under existing and future indebtedness. Accordingly, in the event of the issuer’s dissolution, bankruptcy, liquidation or reorganization, the issuer’s assets and the assets of its subsidiaries will be available for distribution to our shareholders only after all of the issuer’s liabilities and the liabilities of its subsidiaries have been paid in full. The

issuer would not be able to make distributions to its shareholders until after the payment in full of the claims of the creditors of its subsidiaries.

 

If Securities or Industry Analysts do not Publish Research or Publish Inaccurate or Unfavorable Research About Our Business, Our Share Price and Trading Volume Could Decline.

 

The trading market for our common shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common shares would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our common shares or publishes inaccurate or unfavorable research about our business, our share price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common shares could decrease, which could cause our share price and trading volume to decline.

 

Through its Affiliates, One of the Underwriters for this Offering is Also a Creditor of Our Outstanding Indebtedness, and Therefore has Interests in this Offering Beyond Customary Underwriting Discounts and Commissions.

 

Certain affiliates of Goldman, Sachs & Co. are lenders under our credit agreements, and we expect to use portions of the net proceeds of this offering to repay indebtedness outstanding under our credit agreements. As a result, such affiliates of Goldman, Sachs & Co. may receive portions of the proceeds of this offering and have interests beyond customary underwriting discounts and commissions.

 

For more information on the use of the proceeds of this offering, see “Use of Proceeds” and “Underwriting”.

 

You will Experience Immediate and Substantial Dilution as a Result of this Offering and May Experience Additional Dilution in the Future.

 

The initial public offering price of the common shares is substantially higher than the net tangible book value per outstanding common share. As a result, you would experience immediate and substantial dilution of $      per common share, based on an assumed offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus. For additional information, see “Dilution”.

 

Risks Related to Holding Shares in a Bermuda Company

 

We are Incorporated in Bermuda, and a Significant Portion of Our Assets are Located Outside the United States. As a Result, it may not be Possible for Shareholders to Enforce Civil Liability Provisions of the United States Federal or State Securities Laws.

 

We are incorporated under the laws of Bermuda, and a significant portion of our assets are located outside the United States. It may not be possible to enforce court judgments obtained in the United States against us in Bermuda, or in countries other than the United States where we have assets, based on the civil liability provisions of the federal or state securities laws of the United States. In addition, there is some doubt as to whether the courts of Bermuda and other countries would recognize or enforce judgments of United States courts obtained against us or our directors or officers based on the civil liabilities provisions of the federal or state securities laws of the United States or would hear actions against us or those persons based on those laws. We have been advised by our legal advisors in Bermuda that the United States and Bermuda do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not based solely on United States federal or state

securities laws, would not automatically be enforceable in Bermuda. Similarly, those judgments may not be enforceable in countries other than the United States where we have assets.

 

We May Issue Preference Shares and Our Bye-Laws and Bermuda Law May Discourage Takeovers, Which Could Affect the Rights of Holders of Our Common Shares.

 

Following this offering, our board of directors will have the authority to issue up to     preference shares without any further vote or action by the shareholders, in accordance with the provisions of our bye-laws. Since the preference shares could be issued with liquidation, dividend and other rights superior to those of the common shares, the rights of the holders of common shares will be subject to, and may be adversely affected by, the rights of the holders of any such preference shares. The issuance of preference shares could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting shares. Further, the provisions of our bye-laws, including a staggered board of directors and the provision related to the ability of shareholders to remove directors only for cause, and of Bermuda law could have the effect of delaying or preventing a change in control of us. See “Description of Share Capital”.

 

Bermuda Law Differs from the Laws in Effect in the United States and May Afford Less Protection to Shareholders.

 

Our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction of the United States. As a Bermuda company, we are governed by the Companies Act, 1981 (as amended), or the “Companies Act”. The Companies Act differs in some material respects from laws generally applicable to United States corporations and shareholders, including the provisions relating to interested directors, mergers, amalgamations and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. See “Description of Share Capital — Delaware Law”, “Certain Relationships and Related Party Transactions — Director and Officer Indemnification” and “Description of Share Capital — Indemnification of Directors and Officers”.

 

Under Bermuda law, the duties of directors and officers of a company are generally owed to the company only. Shareholders of Bermuda companies generally do not have rights to take action against directors or officers of the company, and may only do so in limited circumstances.

 

In addition, our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on its behalf, against any of its officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.

 

We May Become Subject to Bermuda Taxes After March 28, 2016, Which May have a Material Adverse Effect on Our Financial Condition and Operating Results and Your Investment Could be Adversely Affected.

 

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, has given us an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or any of our operations, shares, debentures or other obligations, except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property leased by us in Bermuda. See “Material Bermuda and U.S. Federal Income Tax Considerations”. This assurance by the Bermuda Minister of Finance expires on March 28, 2016. Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016. If the Bermuda Government imposed significant taxes on our business, our earnings could decline significantly.

If you Acquire More Than 10% of Our Outstanding Shares, CFC Rules May Apply to you.

 

Rhône Capital has informed us that it intends to take the position that Arizona Chemical Ltd. and certain of its foreign subsidiaries are controlled foreign corporations (“CFCs”) for United States federal income tax purposes. Each “United States shareholder” of a CFC that directly or indirectly owns shares in the CFC on the last day of the CFC’s taxable year must generally include in its gross income for United States federal income tax purposes its pro rata share of the CFC’s “subpart F income”, even if the subpart F income is not distributed. For these purposes, any U.S. person who owns, directly, indirectly through foreign persons, or constructively (under applicable constructive ownership rules of the Code) 10% or more of the total combined voting power of all classes of shares of a foreign corporation will be considered to be a “United States shareholder” of the corporation.

 

From Time to Time, Certain Taxing Authorities and International Organizations, Including the U.S. Government and the Organization for Economic Cooperation and Development, or the OECD, have Considered Taking Steps that Would Result in an Increase in Our Taxes, and They May Take Such Steps in the Future.

 

A number of taxing authorities have from time to time considered imposing measures that would increase the amount of taxes we would be required to pay. Such authorities could implement changes in the applicable tax laws and regulations in order to subject Bermuda companies like us to additional taxes. In addition, the OECD has published reports and launched a global dialogue among member and non-member countries as to whether to impose measures to counteract the effects of tax havens and preferential tax regimes in countries around the world. While the OECD regards Bermuda as a jurisdiction that has substantially complied with internationally agreed tax standards, and as such has listed Bermuda on its “white list”, we are not able to predict whether any changes will be made to this classification or the consequences of any such change.

 

We are not able to predict what developments with respect to applicable tax laws may occur or, if they do occur, what impact they may have on us. U.S. and international taxing authorities could subject us to additional taxation at any time, which would reduce our income and could adversely affect our profitability and the market value of our shares.

 

Some of the statements made under the headings “Summary”, “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our audited consolidated financial statements and related notes thereto and elsewhere in this prospectus contain forward-looking statements that reflect our plans, beliefs, expectations and current views with respect to, among other things, future events and financial performance. Forward-looking statements are often characterized by the use of words such as “believes”, “estimates”, “expects”, “projects”, “may”, “intends”, “plans” or “anticipates”, or by discussions of strategy, plans or intentions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to:

 

 

These statements are based upon current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update publicly any of them in light of new information or future events.

 

You should carefully consider the “Risk Factors” and subsequent public statements, or reports filed with or furnished to the SEC, before making any investment decision with respect to our securities. If any of these trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

 

We estimate that the net proceeds to us from our sale of           common shares in this offering will be $      million, after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering. This assumes an initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus. We intend to use the net proceeds of this offering to make an approximately $12 million distribution to AZ Chem Investments Partners LP, our parent entity, which it will use to redeem certain preferred equity interests the Rhône Funds received as consideration for their contribution of $9.5 million of our second lien indebtedness to us in the second half of 2008 (the approximately $12 million payment representing the equivalent of principal and accrued interest on such contribution) and to pay transaction-related expenses of $      million. We will also use the net proceeds to pay Rhône Group L.L.C. a fee of €5.0 million in connection with the amendment of a management agreement under which Rhône Group L.L.C. provides us with certain services. See “Related Party Transactions — Purchase and Contribution of Indebtedness” and “Related Party Transactions — Management Agreement”. We intend to use the remaining net proceeds to repay $      million of borrowings under our First Lien Credit Agreement, representing 75% of the remaining net proceeds, and to repay $      million of borrowings under our Second Lien Credit Agreement, representing 25% of the remaining net proceeds.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $      million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us.

 

As of March 31, 2010, our total indebtedness outstanding was $331.6 million, including $327.4 million of borrowings outstanding under our credit agreements. The principal amounts of our term loans under our First Lien Credit Agreement amortize in quarterly installments of 1/4 of 1% of the outstanding principal amount and the remaining outstanding principal amount matures on February 28, 2013. The term loans under our Second Lien Credit Agreement mature on February 28, 2014. Borrowings under our credit agreements bear interest at variable rates. As of March 31, 2010, the weighted average interest rate under our First Lien Credit Agreement was 2.52% and the weighted average interest rate under our Second Lien Credit Agreement was 5.75%, in each case before giving effect to our interest rate swaps. See “Description of Our Indebtedness”.

 

We will not receive any proceeds from the sale of shares by the selling shareholder.

 

Other than the distribution we are making to AZ Chem Investments Partners LP out of the proceeds of this offering, we do not anticipate paying any cash dividends on our common shares for the foreseeable future. We intend to retain all available funds and any future earnings to reduce debt and fund the development and growth of our business.

 

Any future determination to pay dividends will be at the discretion of our board of directors and will take into account:

 

 

The following table sets forth (1) the capitalization of Arizona Chem Sweden Holdings AB as of March 31, 2010 on an actual basis and (2) the capitalization of Arizona Chemical Ltd. as of March 31, 2010 on an as adjusted basis after giving effect to the Reorganization and to reflect the receipt and use by us of the estimated net proceeds from the sale of common shares in this offering as described under the heading “Use of Proceeds”.

 

This table should be read in conjunction with “Use of Proceeds”, “Selected Historical Consolidated Financial Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

 

 

 

If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per share and the as adjusted net tangible book value per common share after this offering. Our historical net tangible book value as of March 31, 2010 was $(7.8) million, or approximately $      per share (assuming      common shares outstanding after the Reorganization). Net tangible book value per share represents the amount of shareholder’s equity less the net book value of intangible assets, divided by the number of common shares outstanding at that date.

 

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of common shares in this offering and the as adjusted net tangible book value per common share immediately after completion of this offering. After giving effect to (1) the Reorganization and (2) our sale of common shares in this offering at an assumed initial public offering price of $      per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and offering expenses, our as adjusted net tangible book value as of March 31, 2010 would have been $      per share. This amount represents an immediate increase in net tangible book value of $      per share to existing shareholders and an immediate dilution in net tangible book value of $      per share to purchasers of common shares in this offering, as illustrated in the following table.

 

 

A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $      million, dilution per share to new investors by approximately $     and net tangible book value attributable to this offering by $     per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table summarizes, as of March 31, 2010, on the as adjusted basis described above, the differences between existing shareholders and new investors with respect to the number of common shares purchased from us, the total consideration paid and the average price per common share paid by existing shareholders, after giving effect to the issuance of our common shares in this offering at an assumed initial public offering price of $      per share (the midpoint of the range on the cover page of this prospectus), before deducting the estimated underwriting discounts and commissions and offering expenses.

 

If the underwriters exercise their option to purchase additional shares in full, the number of common shares held by existing shareholders will decrease to           , or          percent, of the total number of our common shares outstanding after this offering, and the number of common shares held by new investors will increase to          , or           percent, of the total number of our common shares outstanding after this offering.

 

A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease, as applicable, total consideration paid by new investors to us in this offering by $      million and the average price per share paid by new investors by $1.00, assuming the number of shares of common stock offered by us, set forth on the cover of this prospectus, remains the same.

 

The following tables present selected historical consolidated statements of operations, balance sheet and other data for the periods presented and should only be read in conjunction with our audited consolidated financial statements and the related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which are included elsewhere in this prospectus.

 

We were acquired on February 28, 2007 by Rhône Capital in a business combination accounted for under the purchase method of accounting. The historical selected consolidated financial data as of December 31, 2009, 2008 and 2007, the years ended December 31, 2009 and 2008, and for the period March 1, 2007 to December 31, 2007 have been derived from our successor audited historical consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated financial and operating data for the period January 1, 2007 to February 28, 2007, which is included elsewhere in this prospectus, and the selected historical consolidated financial and operating data as of and for the years ended December 31, 2006 and 2005, which is not included in this prospectus, have been derived from the audited historical consolidated financial statements of our predecessor period. The selected consolidated financial data for the three months ended March 31, 2010 and 2009 and as of March 31, 2010, have been derived from our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus. The unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, that management considers necessary for the fair presentation of the unaudited condensed consolidated financial information set forth in those statements. Results of operations for the interim periods are not necessarily indicative of the results that might be expected for any other interim period or for an entire year.

 

As a result of the Acquisition, our assets and liabilities were adjusted to their estimated fair values. In addition, our consolidated statements of operations data for the successor period include interest expense resulting from indebtedness incurred to finance the Acquisition and depreciation and amortization of fair value adjustments to property, plant and equipment and intangible assets related to the Acquisition. Therefore, our successor period financial data generally is not comparable to our predecessor period financial data.

 

Consolidated Statements of Operations Data