Chemtura Corp.
Chemtura CORP (Form: 10-Q, Received: 11/05/2010 13:51:35)


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
 
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________________   to  ____________________

(Commission File Number)   1-15339

CHEMTURA CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
52-2183153
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification Number)
   
1818 Market Street, Suite 3700, Philadelphia, Pennsylvania
199 Benson Road, Middlebury, Connecticut
19103
06749
(Address of principal executive offices)
(Zip Code)

(203) 573 - 2000
(Registrant's telephone number,
 including area code)
 
(Former name, former address and former fiscal year, if changed from last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         x Yes    ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
¨ Yes    ¨ No                    

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 definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
¨
Yes
 
x
No

The number of shares of common stock outstanding as of the latest practicable date is as follows:
Class
 
Number of shares outstanding
at September 30, 2010
Common Stock - $.01 par value
 
242,935,715

 

 
 
CHEMTURA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
FORM 10-Q
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2010

 
INDEX
PAGE
     
PART I.
FINANCIAL INFORMATION
 
     
  Item 1.
Financial Statements
 
     
 
Consolidated Statements of Operations (Unaudited) – Quarters and nine months ended September 30, 2010 and 2009
2
     
 
Consolidated Balance Sheets – September 30, 2010 (Unaudited) and December 31, 2009
3
     
 
Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine months ended September 30, 2010 and 2009
4
     
 
Notes to Consolidated Financial Statements (Unaudited)
5
     
  Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
47
     
  Item 3.
Quantitative and Qualitative Disclosures About Market Risk
64
     
  Item 4.
Controls and Procedures
65
     
PART II.
OTHER INFORMATION
 
     
  Item 1.
Legal Proceedings
66
     
  Item 1A.
Risk Factors
66
     
  Item 6.
Exhibits
68
     
 
Signatures
69
 
 
1

 

PART I. 
FINANCIAL INFORMATION
ITEM 1. 
Financial Statements

CHEMTURA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Consolidated Statements of Operations (Unaudited)
Quarters and Nine months ended September 30, 2010 and 2009
 ( In millions , except per share data )

   
Quarters   ended   September   30,
   
Nine   months   ended   September   30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net sales
  $ 710     $ 609     $ 2,080     $ 1,702  
                                 
Cost of goods sold
    550       450       1,587       1,289  
Selling, general and administrative
    85       77       232       216  
Depreciation and amortization
    40       41       134       122  
Research and development
    11       10       31       26  
Facility closures, severance and related costs
    (2 )     -       1       3  
Antitrust costs
    -       -       -       10  
Gain on sale of business
    (2 )     -       (2 )     -  
Impairment of long-lived assets
    -       -       -       37  
Changes in estimates related to expected allowable claims
    (40 )     -       33       -  
Equity income
    (1 )     -       (3 )     -  
                                 
Operating profit (loss)
    69       31       67       (1 )
Interest expense (a)
    (35 )     (18 )     (164 )     (53 )
Loss on early extinguishment of debt
    -       -       (13 )     -  
Other income (expense), net
    8       8       (2 )     (11 )
Reorganization items, net
    (33 )     (20 )     (80 )     (66 )
                                 
Earnings (loss) from continuing operations before income taxes
    9       1       (192 )     (131 )
Income tax benefit (provision)
    2       9       (14 )     (1 )
                                 
Earnings (loss) from continuing operations
    11       10       (206 )     (132 )
Earnings (loss) from discontinued operations, net of tax
    -       2       (1 )     (67 )
Loss on sale of discontinued operations, net of tax
    (3 )     (4 )     (12 )     (4 )
                                 
Net earnings (loss)
    8       8       (219 )     (203 )
                                 
Less: net loss (earnings) attributable to non-controlling interests
    1       -       -       (1 )
                                 
Net earnings (loss) attributable to Chemtura Corporation
  $ 9     $ 8       (219 )     (204 )
                                 
Basic and diluted per share information - attributable to Chemtura Corporation:
                               
Earnings (loss) from continuing operations, net of tax
  $ 0.05     $ 0.04     $ (0.85 )   $ (0.54 )
Earnings (loss) from discontinued operations, net of tax
    -       0.01       -       (0.28 )
Loss on sale of discontinued operations, net of tax
    (0.01 )     (0.02 )     (0.05 )     (0.02 )
Net earnings (loss) attributable to Chemtura Corporation
  $ 0.04     $ 0.03     $ (0.90 )   $ (0.84 )
                                 
Weighted average shares outstanding - Basic and Diluted
    242.9       242.9       242.9       242.9  
                                 
Amounts attribuable to Chemtura Corporation common shareholders:
                               
Earnings (loss) from continuing operations, net of tax
  $ 12     $ 10     $ (206 )   $ (133 )
Earnings (loss) from discontinued operations, net of tax
    -       2       (1 )     (67 )
Loss on sale of discontinued operations, net of tax
    (3 )     (4 )     (12 )     (4 )
Net earnings (loss) attributable to Chemtura Corporation
  $ 9     $ 8     $ (219 )   $ (204 )

(a)
During the nine months ended September 30, 2010, $129 million of contractual interest expense was recorded relating to interest obligations on unsecured claims for the period from March 18, 2009 through September 30, 2010 that are now probable to be paid based on the plan of reorganization filed during the second quarter of 2010.  Included in this amount is contractual interest expense of $20 million for the quarter ended September 30, 2009 and $43 million for the nine months ended September 30, 2009.  Contractual interest expense of $21 million was recorded in the quarter ended September 30, 2010.

See accompanying notes to Consolidated Financial Statements.

 
2

 

CHEMTURA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Consolidated Balance Sheets
September 30, 2010 (Unaudited) and December 31, 2009
( In millions , except per share data )

   
September 30,
   
December 31,
 
   
2010
   
2009
 
 
 
(unaudited)
       
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 263     $ 236  
Accounts receivable
    496       442  
Inventories
    533       489  
Other current assets
    281       227  
Assets of discontinued operations
    -       85  
Total current assets
    1,573       1,479  
                 
NON-CURRENT ASSETS
               
Restricted cash
    758       -  
Property, plant and equipment
    690       750  
Goodwill
    233       235  
Intangible assets, net
    441       474  
Other assets
    189       180  
                 
    $ 3,884     $ 3,118  
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
               
                 
CURRENT LIABILITIES
               
Short-term borrowings
  $ 302     $ 252  
Accounts payable
    173       126  
Accrued expenses
    231       178  
Income taxes payable
    24       5  
Liabilities of discontinued operations
    -       37  
Total current liabilities
    730       598  
                 
NON-CURRENT LIABILITIES
               
Long-term debt
    748       3  
Pension and post-retirement health care liabilities
    144       151  
Other liabilities
    206       197  
Total liabilities not subject to compromise
    1,828       949  
                 
LIABILITIES SUBJECT TO COMPROMISE
    2,101       1,997  
                 
STOCKHOLDERS' (DEFICIT) EQUITY
               
Common stock - $0.01 par value
               
Authorized - 500.0 shares
               
Issued - 254.4 shares
    3       3  
Additional paid-in capital
    3,040       3,039  
Accumulated deficit
    (2,701 )     (2,482 )
Accumulated other comprehensive loss
    (230 )     (234 )
Treasury stock at cost - 11.5 shares
    (167 )     (167 )
Total Chemtura Corporation stockholders' (deficit) equity
    (55 )     159  
                 
Non-controlling interest
    10       13  
Total stockholders' (deficit) equity
    (45 )     172  
                 
    $ 3,884     $ 3,118  

See accompanying notes to Consolidated Financial Statements.

 
3

 

CHEMTURA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2010 and 2009
( In millions )

   
Nine months ended September 30,
 
Increase (decrease) in cash
 
2010
   
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss attributable to Chemtura Corporation
  $ (219 )   $ (204 )
Adjustments to reconcile net loss attributable to Chemtura
               
Corporation to net cash provided by operating activities:
               
Gain on sale of business
    (2 )     -  
Loss on sale of discontinued operations
    12       4  
Impairment of long-lived assets
    2       97  
Loss on early extinguishment of debt
    13       -  
Depreciation and amortization
    134       132  
Stock-based compensation expense
    1       2  
Reorganization items, net
    (7 )     24  
Changes in estimates related to expected allowable claims
    33       -  
Contractual post-petition interest expense
    129       -  
Equity income
    (3 )     -  
Changes in assets and liabilities, net of assets acquired
               
and liabilities assumed:
               
Accounts receivable
    (80 )     40  
Impact of accounts receivable facilities
    -       (103 )
Inventories
    (39 )     97  
Accounts payable
    39       11  
Pension and post-retirement health care liabilities
    (9 )     (7 )
Liabilities subject to compromise
    (3 )     (27 )
Other
    40       (40 )
Net cash provided by operating activities
    41       26  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net proceeds from divestments
    26       3  
Payments for acquisitions, net of cash acquired
    -       (5 )
Capital expenditures
    (62 )     (23 )
Net cash used in investing activities
    (36 )     (25 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from Senior Notes
    452       -  
Proceeds from Term Loan
    292       -  
Restricted cash from Senior Notes and Term Loan deposited in escrow
    (758 )     -  
Proceeds from Amended DIP Credit Facility
    299       -  
(Payments on) proceeds from DIP Credit Facility
    (250 )     250  
Proceeds from (payments on) 2007 Credit Facility, net
    17       (44 )
Payments on long term borrowings
    -       (18 )
Payments on short term borrowings, net
    -       (2 )
Payments for debt issuance and refinancing costs
    (31 )     (30 )
Net cash provided by financing activities
    21       156  
                 
CASH AND CASH EQUIVALENTS
               
Effect of exchange rates on cash and cash equivalents
    1       3  
Change in cash and cash equivalents
    27       160  
Cash and cash equivalents at beginning of period
    236       68  
Cash and cash equivalents at end of period
  $ 263     $ 228  

See accompanying notes to Consolidated Financial Statements.

 
4

 

CHEMTURA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1) NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS

Nature of Operations

Chemtura Corporation, together with its consolidated subsidiaries (the “Company” or “Chemtura”), is dedicated to delivering innovative, application-focused specialty chemical and consumer product offerings.  Chemtura’s principal executive offices are located in Philadelphia, Pennsylvania and Middlebury, Connecticut.  Chemtura operates in a wide variety of end-use industries, including automotive, transportation, construction, packaging, agriculture, lubricants, plastics for durable and non-durable goods, electronics, and pool and spa chemicals.

Chemtura is the successor to Crompton & Knowles Corporation (“Crompton & Knowles”), which was incorporated in Massachusetts in 1900 and engaged in the manufacture and sale of specialty chemicals beginning in 1954.  Crompton & Knowles traces its roots to the Crompton Loom Works incorporated in the 1840s.  Chemtura expanded its specialty chemical business through acquisitions in the United States and Europe, including the 1996 acquisition of Uniroyal Chemical Company, Inc. (“Uniroyal”), the 1999 merger with Witco Corporation (“Witco”) and the 2005 acquisition of Great Lakes Chemical Corporation.

Liquidity and Bankruptcy Proceedings

The Company entered 2009 with significantly constrained liquidity.  The fourth quarter of 2008 saw an unprecedented reduction in orders for the Company’s products as the global recession deepened and customers saw or anticipated reductions in demand in the industries they served.  The impact was more pronounced on those business segments that served cyclically exposed industries.  As a result, the Company’s sales and overall financial performance deteriorated resulting in the Company’s non-compliance as of December 31, 2008 with the two financial maintenance covenants under its Amended and Restated Credit Agreement, dated as of July 31, 2007 (the “2007 Credit Facility”).  On December 30, 2008, the Company obtained a 90-day waiver of compliance with these covenants from the lenders under the 2007 Credit Facility.

The Company’s liquidity was further constrained in the fourth quarter of 2008 by changes in the availability under its accounts receivable financing facilities in the United States and Europe.  The eligibility criteria and reserve requirements under the Company’s prior U.S. accounts receivable facility (the “U.S. Facility”) tightened in the fourth quarter of 2008 following a credit rating downgrade, significantly reducing the value of accounts receivable that could be sold under the U.S. Facility compared with the third quarter of 2008.  Additionally, the availability and access to the Company’s European accounts receivable financing facility (the “European Facility”) was restricted in late December 2008 due to the Company’s financial performance, which resulted in the Company’s inability to sell additional receivables under the European Facility.

The crisis in the credit markets compounded the liquidity challenges faced by the Company.  Under normal market conditions, the Company believed it would have been able to refinance its $370 million notes maturing on July 15, 2009 (the “2009 Notes”) in the debt capital markets.  However, with the deterioration of the credit market in the late summer of 2008 combined with the Company’s deteriorating financial performance, the Company did not believe it would be able to refinance the 2009 Notes on commercially reasonable terms, if at all.  As a result, the Company sought to refinance the 2009 Notes through the sale of one of its businesses.

On January 23, 2009, a special-purpose subsidiary of the Company entered into a new three-year U.S. accounts receivable financing facility (the “2009 U.S. Facility”) that restored most of the liquidity that the Company had available to it under the prior U.S. accounts receivable facility before the fourth quarter of 2008 events described above.  However, despite good faith discussions, the Company was unable to agree to terms under which it could resume the sale of accounts receivable under its European Facility during the first quarter of 2009.  The balance of accounts receivable previously sold under the facility continued to decline, offsetting much of the benefit to liquidity gained by the new 2009 U.S. Facility.  During the third quarter of 2009, with no agreement to restart the European Facility, the remaining balance of the accounts receivable previously sold under the facility were settled and the European Facility was terminated.

 
5

 

January 2009 saw no improvement in customer demand from the depressed levels in December 2008 and some business segments experienced further deterioration.  Although February and March of 2009 saw incremental improvement in net sales compared to January 2009, overall business conditions remained difficult as sales declined by 42% in the first quarter of 2009 compared to the first quarter of 2008.  As awareness grew of the Company’s constrained liquidity and deteriorating financial performance, suppliers began restricting trade credit and, as a result, liquidity dwindled further.  Despite moderate cash generation through inventory reductions and restrictions on discretionary expenditures, the Company’s trade credit continued to tighten, resulting in unprecedented restrictions on its ability to procure raw materials.

In January and February of 2009, the Company was in the midst of the asset sale process with the objective of closing a transaction prior to the July 15, 2009 maturity of the 2009 Notes.  Potential buyers conducted due diligence and worked towards submitting their final offers on several of the Company’s businesses.  However, with the continuing recession and speculation about the financial condition of the Company, potential buyers became progressively more cautious.  Certain potential buyers expressed concern about the Company’s ability to perform its obligations under a sale agreement.  They increased their due diligence requirements or decided not to proceed with a transaction.  In March 2009, the Company concluded that although there were potential buyers of its businesses, a sale was unlikely to be closed in sufficient time to offset the continued deterioration in liquidity or at a value that would provide sufficient liquidity to both operate the business and meet the Company’s impending debt maturities.

By March 2009, dwindling liquidity and growing restrictions on available trade credit resulted in production stoppages as raw materials could not be purchased on a timely basis.  At the same time, the Company concluded that it was improbable that it could resume sales of accounts receivable under its European Facility or complete the sale of a business in sufficient time to provide the immediate liquidity it needed to operate.  Absent such an infusion of liquidity, the Company would likely experience increased production stoppages or sustained limitations on its business operations that ultimately would have a detrimental effect on the value of the Company’s business as a whole.  Specifically, the inability to maintain and stabilize its business operations would result in depleted inventories, missed supply obligations and damaged customer relationships.

On March 18, 2009 (the “Petition Date”), Chemtura and 26 of its U.S. affiliates (collectively the “U.S. Debtors”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).

On August 8, 2010, Chemtura Canada Co/Cie (“Chemtura Canada”) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code and on August 11, 2010, Chemtura Canada commenced ancillary recognition proceedings under Part IV of the Companies’ Creditors Arrangement Act (the “CCAA”) in the Ontario Superior Court of Justice, located in Ontario, Canada (the “Canadian Court” and such proceedings, the “Canadian Case”).  The U.S. Debtors along with Chemtura Canada (collectively the “Debtors”) requested the Bankruptcy Court enter an order jointly administering Chemtura Canada’s Chapter 11 case with the domestic Chapter 11 cases under lead case number 09-11233 (REG) and appoint Chemtura Canada as the “foreign representative” for the purposes of the Canadian Case.  Such orders were granted on August 9, 2010.  On August 11, the Canadian Court entered an order recognizing the Chapter 11 cases as a “foreign proceedings” under the CCAA.

The Debtors own substantially all of the Company’s U.S. and Canadian assets.  The Debtors consist of Chemtura and the following subsidiaries:

· A&M Cleaning Products LLC
· CNK Chemical Realty Corporation
· ISCI, Inc.
· Aqua Clear Industries, LLC
· Crompton Colors Incorporated
· Kem Manufacturing Corporation
· ASEPSIS, Inc.
· Crompton Holding Corporation
· Laurel Industries Holdings, Inc.
· ASCK, Inc.
· Crompton Monochem, Inc.
· Monochem, Inc.
· BioLab, Inc.
· GLCC Laurel, LLC
· Naugatuck Treatment Company
· BioLab Company Store, LLC
· Great Lakes Chemical Corporation
· Recreational Water Products, Inc.
· Biolab Franchise Company, LLC
· Great Lakes Chemical Global, Inc.
· Uniroyal Chemical Company Limited
· BioLab Textile Additives, LLC
· GT Seed Treatment, Inc.
· Weber City Road LLC
· Chemtura Canada Co./Cie
· HomeCare Labs, Inc
· WRL of Indiana, Inc.

The principal U.S. assets and business operations of the Debtors are owned by Chemtura, BioLab, Inc. and Great Lakes Chemical Corporation.

 
6

 

On April 29, 2009, Raymond E. Dombrowski, Jr. was appointed Chief Restructuring Officer.  In connection with this appointment, the Company entered into an agreement with Alvarez & Marsal North America, LLC (“A&M”) to compensate A&M for Mr. Dombrowski’s services as Chief Restructuring Officer on a monthly basis at a rate of $150 thousand per month and incentive compensation in the amount of $3 million payable upon the earlier of (a) the consummation of a Chapter 11 plan of reorganization or (b) the sale, transfer, or other disposition of all or a substantial portion of the assets or equity of the Company.  Mr. Dombrowski is independently compensated pursuant to arrangements with A&M, a financial advisory and consulting firm specializing in corporate restructuring.  Mr. Dombrowski will not receive any compensation directly from the Company and will not participate in any of the Company’s employee benefit plans. 

The Chapter 11 cases were filed to gain liquidity for continuing operations while the Debtors restructure their balance sheets to allow the Company to continue as a viable going concern.  While the Company believes it will be able to achieve these objectives through the Chapter 11 reorganization process and while the Debtors have proposed and achieved confirmation of a plan of reorganization that restructures their balance sheets, there can be no certainty that the Debtors will be successful in doing so.

Under Chapter 11 of the Bankruptcy Code, the Debtors are operating their businesses as a debtor-in-possession (“DIP”) under the protection of the Bankruptcy Court from their pre-filing creditors and claimants.  Since the filing, all orders of the Bankruptcy Court sufficient to enable the Debtors to conduct normal business activities, including “first day” motions and the interim and final approval of the DIP Credit Facility and amendments thereto, have been entered by the Bankruptcy Court.  During the Chapter 11 cases, all transactions outside the ordinary course of business require the prior approval of the Bankruptcy Court.

On March 20, 2009, the Bankruptcy Court approved the U.S. Debtors’ “first day” motions.  Specifically, the Bankruptcy Court granted the U.S. Debtors, among other things, interim approval to access $190 million of their $400 million DIP Credit Facility, approval to pay outstanding employee wages, health benefits, and certain other employee obligations and authority to continue to honor their current customer policies and programs, in order to ensure the reorganization process will not adversely impact their customers.  On April 29, 2009, the Bankruptcy Court entered a final order providing full access to the $400 million DIP Credit Facility.  The Bankruptcy Court also approved Amendment No. 1 to the DIP Credit Facility, which provided for, among other things: (i) an increase in the outstanding amount of inter-company loans the U.S. Debtors could make to the non-debtor foreign subsidiaries of the Company from $8 million to $40 million; (ii) a reduction in the required level of borrowing availability under the minimum availability covenant; and (iii) the elimination of the requirement to pay additional interest expense if a specified level of accounts receivable financing was not available to the Company’s European subsidiaries.

On July 13, 2009, the Company and the parties to the DIP Credit Facility entered into Amendment No. 2 to the DIP Credit Facility subject to approvals by the Bankruptcy Court and the Company’s Board of Directors which approvals were obtained on July 14 and July 15, 2009, respectively.  Amendment No. 2 amended the DIP Credit Facility to provide for, among other things, an option by the Company to extend the maturity of the DIP Credit Facility for two consecutive three month periods subject to the satisfaction of certain conditions.  Prior to Amendment No. 2, the DIP Credit Facility matured on the earliest of 364 days (from the Petition Date), the effective date of a Plan or the date of termination in whole of the Commitments (as defined in the DIP Credit Facility).

As a consequence of the Chapter 11 cases, substantially all pre-petition litigation and claims against the Debtors have been stayed.  Accordingly, no party may take any action to collect pre-petition claims or to pursue litigation arising as a result of pre-petition acts or omissions except pursuant to an order of the Bankruptcy Court.

On August 21, 2009, the Bankruptcy Court established October 30, 2009 as the deadline for the filing of proofs of claim against the U.S. Debtors (the “Bar Date”).  Under certain limited circumstances, some creditors may be permitted to file proofs of claim after the Bar Date.  Accordingly, it is possible that not all potential proofs of claim were filed as of the filing of this Quarterly Report.

The Debtors have received approximately 15,500 proofs of claim covering a broad array of areas.  Approximately 8,100 proofs of claim have been asserted in “unliquidated” amounts or contain an unliquidated component that are treated as being asserted in “unliquidated” amounts.  Excluding proofs of claim in “unliquidated” amounts, the aggregate amount of proofs of claim filed totaled approximately $23.9 billion.  See Note 21 - Legal Proceedings and Contingencies for a discussion of the proofs of claim filed against the Debtors.

 
7

 

The Company has reviewed and evaluated the factual and legal basis of the proofs of claim filed against the Debtors.  Based upon the Company’s review and evaluation, a significant number of proofs of claim are duplicative and/or legally or factually without merit.  As to those claims with which the Company disagrees, the Company has filed or intends to file objections with the Bankruptcy Court before the effective date of the Debtors’ plan of reorganization (the “Plan”).  However, there can be no assurance that certain of these claims will not be allowed in the full amount asserted.  If the Debtors’ Plan becomes effective, all claims as to which an objection has been filed will, to the extent later allowed by court order, be satisfied from one of several claims reserves that will be established on the effective date of the Debtors’ Plan.  See Note 4 - Liabilities Subject to Compromise and Reorganization Items, Net.

Further, while the Debtors believe they have insurance to cover certain asserted claims, there can be no assurance that material uninsured obligations will not be allowed as claims in the Chapter 11 cases.  Because of the substantial number of asserted contested claims, as to which review and analysis is ongoing, and because the Debtors’ Plan, which establishes claims reserves and specifies how and to whom the reserved value will be distributed, has not yet become effective, there is no assurance as to the ultimate value of claims that will be allowed in these Chapter 11 cases, nor is there any assurance as to the ultimate recoveries for the Debtors’ stakeholders.  The differences between amounts recorded by the Debtors and proofs of claim filed by the creditors will continue to be investigated and resolved through the claims reconciliation process.

The Company has recognized certain charges related to expected allowed claims.  As the Company completes the process of resolving the proofs of claim, appropriate adjustments to the Company’s Consolidated Financial Statements will be made.  Adjustments may also result from actions of the Bankruptcy Court, settlement negotiations, rejection of executory contracts and real property leases, determination as to the value of any collateral securing claims and other events.  Any such adjustments could be material to the Company’s results of operations and financial position in any given period.  For additional information on liabilities subject to compromise, see Note 4 - Liabilities Subject to Compromise and Reorganization Items, Net.

On January 15, 2010 the Company entered into Amendment No. 3 of the DIP Credit Facility that provided for, among other things, the consent of the Company’s DIP lenders to the sale of the polyvinyl chloride (“PVC”) additives business.

On February 9, 2010, the Bankruptcy Court granted interim approval of an Amended and Restated Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “Amended DIP Credit Facility”) by and among the Debtors, Citibank N.A. and the other lenders party thereto.  The Amended DIP Credit Facility provides for a first priority and priming secured revolving and term loan credit commitment of up to an aggregate of $450 million.  The proceeds of the loans and other financial accommodations incurred under the Amended DIP Credit Facility were used, among other things, to refinance the obligations outstanding under the DIP Credit Facility and provide working capital for general corporate purposes.  The Amended DIP Credit Facility provided interest rate reductions and the avoidance of the extension fees that would have been payable under the DIP Credit Facility in February and May 2010.  The Amended DIP Credit Facility closed on February 12, 2010 with the drawing of a $300 million term loan.  On February 18, 2010, the Bankruptcy Court granted final approval providing full access to the Amended DIP Credit Facility.  The Amended DIP Credit Facility matures on the earliest of 364 days after the closing, the effective date of a plan or reorganization or the date of termination in whole of the Commitments (as defined in the Amended DIP Credit Facility).

On June 17, 2010, the Debtors filed a proposed joint plan of reorganization and related disclosure statement with the Bankruptcy Court and on July 9, 2010, July 20, 2010, August 5, 2010, September 14, 2010, September 20, 2010 and October 29, 2010 the Debtors filed revised versions of the plan of reorganization (the “Plan”) and disclosure statement (the “Disclosure Statement”) with the Bankruptcy Court.  The Plan organizes claims against the Debtors into classes according to their relative priority and certain other criteria.  For each class, the Plan describes (a) the underlying claim or interest, (b) the recovery available to the holders of claims or interests in that class under the Plan, (c) whether the class is “impaired” under the Plan, meaning that each holder will receive less than the full value on account of its claim or interest or that the rights of holders under law will be altered in some way (such as receiving stock instead of holding a claim) and (d) the form of consideration (e.g., cash, stock or a combination thereof), if any, that such holders will receive on account of their respective claims or interests.  Distributions to creditors under the Plan generally will include a combination of common shares in the capital of the reorganized Company authorized pursuant to the Plan (“New Common Stock”), cash, reinstatement or such other treatment as agreed between the Debtors and the applicable creditor.  Certain creditors were eligible to elect, when voting on the Plan, to receive their recovery in the form of the maximum available amount of cash or the maximum available amount of New Common Stock.  Holders of interests in the Company, based upon their vote as a class to reject the Plan, will receive their pro rata share of value available for distribution, if any, after all allowed claims have been paid in full and disputed claims reserves as well as certain other reserves have been established in accordance with the terms of the Plan.  Holders of interests in the Company may also be entitled to supplemental distributions if amounts reserved on account of disputed claims exceed the value of claims that are ultimately allowed.  All New Common Stock distributed under the Plan to holders of claims and, if applicable, interests shall be subject to dilution by certain Company incentive plans.

 
8

 

On June 17, 2010, contemporaneously with the filing of the Plan, the Debtors filed a motion seeking authority to enter into a Plan Support Agreement (the “PSA”) with their official committee of unsecured creditors (the “Creditors' Committee”), certain members of the ad hoc bondholders' committee (the “Ad Hoc Bondholders’ Committee”) and certain other debt holders, which provides for such parties to support and vote in favor of the Plan as long as their votes have been solicited in accordance with the requirements of the Bankruptcy Code.  The PSA also contemplates that the Debtors will use reasonable best efforts to obtain Bankruptcy Court approval of the Disclosure Statement and confirmation of the Plan, a global settlement among the parties, and payment of the reasonable and documented and necessary out-of-pocket fees and expenses incurred by the Ad Hoc Bondholders' Committee of up to $7 million.  Before the hearing on the PSA motion, the parties entered into two amendments to the PSA.  The Bankruptcy Court approved the Debtors’ entry into the amended PSA on August 9, 2010.  Finally, on October 15, 2010 and October 29, 2010, the parties entered into a third and fourth amendment to the PSA, respectively.

On July 9, 2010, the Equity Committee also filed a motion to terminate the exclusivity period, during which only the Debtors may file a Chapter 11 plan of reorganization and solicit acceptances.  On July 21, 2010, the Bankruptcy Court ruled against the July 9, 2010 Equity Committee motion to terminate the exclusivity period, allowing the Debtors until November 17, 2010 to solicit acceptance of the Debtors’ Plan.  The Plan will become effective only if the conditions to its effectiveness as determined at confirmation have been met including the execution of exit financing.

On July 27, 2010, the Company entered into Amendment No. 1 of the Amended DIP Credit Facility that provided for, among other things, the consent of the Company’s DIP lenders to (a) file a voluntary Chapter 11 petition for Chemtura Canada without resulting in a default of the Amended DIP Credit Facility and without requiring that Chemtura Canada be added as a guarantor under the Amended DIP Credit Facility; (b) make certain intercompany advances to Chemtura Canada and allow Chemtura Canada to pay intercompany obligations to Crompton Financial Holdings, (c) sell the Company’s natural sodium sulfonates and oxidized petrolatums business, (d) settle claims against BioLab, Inc. and Great Lakes Chemical Company relating to a fire that occurred at BioLab, Inc.’s warehouse in Conyers, Georgia and (e) settle claims arising under the asset purchase agreement between Chemtura Corporation and PMC Biogenix, Inc. pursuant to which the Company sold its oleochemicals business and certain related assets to PMC Biogenix, Inc.

The filing of Chemtura Canada under the CCAA is designed only to address the claims resulting, directly or indirectly, from alleged injury from exposure to diacetyl, acetoin and/or acetaldehyde, including all claims for indemnification or contribution relating to alleged injury from exposure to diacetyl, acetoin and/or acetaldehyde (the “Diacetyl Claims”).  As provided for in the Plan and as described in the Disclosure Statement, all holders of claims against and interests in Chemtura Canada other than holders of Diacetyl Claims will be left “unimpaired” or otherwise unaffected by Chemtura Canada’s reorganization proceedings.  The Company expects that Chemtura Canada will emerge from Chapter 11 contemporaneously with the U.S. Debtors.  There can be no assurance that the Plan, or any other plan of reorganization, will be implemented successfully.

On July 30, 2010, the Company filed a motion with the Bankruptcy Court to approve the Company’s entering into certain exit financing documentation and a second amendment to the Amended DIP Credit Facility (the “Second Amendment”), which motion was granted at a hearing on August 9, 2010.  The Court authorization permitted the Company to enter into certain financing transactions.

On August 5, 2010, the Bankruptcy Court entered orders approving the adequacy of the Disclosure Statement and approving the procedures for the Debtors to solicit and tabulate the votes on the Plan.  The Debtors began solicitation on the Plan on August 6, 2010, and the deadline for holders of claims and interests to vote on the Plan was September 9, 2010.

On September 2, 2010, the Debtors filed a Plan supplement (the “Plan Supplement”) with the Bankruptcy Court, as contemplated by the Plan, and the Debtors subsequently filed certain supplements and amendments to the Plan Supplement.  The Plan Supplement includes, among other things, certain information concerning the composition of the new board of directors, the form of a new certificate of incorporation and new by-laws, exit financing agreements and a description of assumed and rejected executory contracts.

 
9

 

The Debtors filed voting certifications and reports of their Court-appointed Voting and Claims Agent, Kurtzman Carson Consultants LLC, and Securities Voting Agent, Epiq Bankruptcy Solutions LLC, on September 13 and September 14, 2010 (together, the “Voting Certifications”). As evidenced by the Voting Certifications, all voting classes voted to accept the Plan except equity holders.  The Plan will become effective only if conditions to its effectiveness as determined at confirmation have been met including the execution of exit financing.  The Plan confirmation hearing began on September 16, 2010 and concluded on September 22, 2010, following which the Bankruptcy Court took the issues related to confirmation under submission.  The Bankruptcy Court issued a bench decision on confirmation on October 21, 2010 stating that the Plan would be confirmed.  On November 3, 2010, the Bankruptcy Court entered a written order confirming the Plan (the “Confirmation Order”).  The Confirmation Order provides a waiver of the ordinary stay of effectiveness under applicable bankruptcy law, such that the Confirmation Order will become effective at 12:00 noon on November 8, 2010 unless otherwise stayed by separate court order.  A request for recognition of the Confirmation Order was filed in the Canadian Court in order to fulfill a condition of effectiveness of the Plan so that Chemtura Canada can emerge from its proceedings at the same time as the U.S. Debtors.  The request was granted by order entered on November 3, 2010.  The Debtors expect to emerge from Chapter 11 as soon as practicable.  There can be no assurance that the Plan will be implemented successfully.

On August 11, 2010, the Company entered into a commitment letter with various lenders for a $275 million senior asset-based revolving credit facility.  The Company has negotiated definitive agreements relating to this facility and will enter into the facility upon the effectiveness of the Plan.

On August 27, 2010, the Company completed a private placement offering of $455 million in aggregate principal amount of 7.875% senior notes due 2018 (the “Senior Notes”) at an issue price of 99.269% and entered into a senior secured term facility credit agreement (the “Term Loan”) with Bank of America, N.A., as administrative agent and other lenders party thereto, for an aggregate principal amount of $295 million with an original issue discount of 1%.  The Senior Notes and Term Loan are a part of the exit financing package pursuant to the Plan.  For additional information on the Senior Notes and Term Loan, see Note 12 - Debt.

Continuation of the Company as a going concern is contingent upon, among other things, the Company’s and/or Debtors’ ability (i) to comply with the terms and conditions of the Amended DIP Credit Facility and, upon emergence from Chapter 11, the exit credit facilities described above; (ii) to return to profitability; (iii) to generate sufficient cash flow from operations; and (iv) the implementation of the provisions of the Plan upon its effectiveness.  The Consolidated Financial Statements do not reflect any adjustments relating to recording the actions contemplated under the Plan upon its effectiveness.

In addition, as part of the Company’s emergence from Chapter 11, the Company may be required to adopt fresh start accounting in a future period.  Based upon the current Plan, the Debtors would not qualify for fresh-start accounting.  However, if fresh start accounting were applicable, the Company’s assets and liabilities will be recorded at fair value as of the fresh start reporting date.  The fair value of the Company’s assets and liabilities as of such fresh start reporting date may differ materially from the recorded values of assets and liabilities on the Company’s Consolidated Balance Sheets.  Further, if fresh start accounting is required, the financial results of the Company after the application of fresh start accounting may not be comparable to historical trends.

2) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

The information in the foregoing Consolidated Financial Statements for the quarters and nine months ended September 30, 2010 and 2009 is unaudited but reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods presented.  All such adjustments are of a normal recurring nature, except as otherwise disclosed in the accompanying notes to the Consolidated Financial Statements.

The Consolidated Financial Statements include the accounts of Chemtura and the wholly-owned and majority-owned subsidiaries that it controls.  Other affiliates in which the Company has a 20% to 50% ownership interest or a non-controlling majority interest are accounted for in accordance with the equity method.  Other investments in which the Company has less than 20% ownership are recorded at cost.  All significant intercompany balances and transactions have been eliminated in consolidation.

 
10

 

The Consolidated Financial Statements have been prepared in accordance with Accounting Standards Codification (“ASC”) Section 852-10-45, Reorganizations - Other Presentation Matters (“ASC 852-10-45”).  ASC 852-10-45 does not ordinarily affect or change the application of U.S. generally accepted accounting principles (“GAAP”).  However, it does require the Company to distinguish transactions and events that are directly associated with the reorganization in connection with the Chapter 11 cases from the ongoing operations of the business.  Expenses incurred and settlement impacts due to the Chapter 11 cases are reported separately as reorganization items, net on the Consolidated Statements of Operations for the quarters and nine months ended September 30, 2010 and 2009.  Interest expense related to pre-petition indebtedness has been reported only to the extent that it will be paid during the pendency of the Chapter 11 cases or is permitted by Bankruptcy Court approval or is expected to be an allowed claim.  The pre-petition liabilities subject to compromise are disclosed separately on the September 30, 2010 and December 31, 2009 Consolidated Balance Sheets.  These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for a lesser amount.  They do not include certain liabilities that are only incurred upon the effectiveness of the Plan.  The expected allowed claims require management to estimate the likely claim amount that will be allowed by the Bankruptcy Court prior to its ruling on the individual claims.  These estimates are based on, among other things, reviews of claimants’ supporting material, obligations to mitigate such claims, and assessments by management.  The Company expects that its estimates, although based on the best available information, will change as the claims are resolved by the Bankruptcy Court.

The Consolidated Financial Statements have been prepared in conformity with GAAP, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

Certain reclassifications have been made to the prior period financial information to conform to the current period presentation.  The interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2009, as amended.  The consolidated results of operations for the quarter and nine months ended September 30, 2010 are not necessarily indicative of the results expected for the full year.

Accounting Policies and Other Items

Cash and cash equivalents include bank term deposits with original maturities of three months or less.  Included in cash and cash equivalents in the Company's Consolidated Balance Sheets at both September 30, 2010 and December 31, 2009 is $1 million of restricted cash that is required to be on deposit to support certain letters of credit and performance guarantees, the majority of which will be settled within one year.  Restricted cash related to the exit financing activities of $758 million has been excluded from cash and cash equivalents in the Company’s Consolidated Balance Sheet as of September 30, 2010 and are separately classified within non-current assets until such time that the Escrow Release (as defined in Note 12 – Debt) occurs.

Included in accounts receivable are allowances for doubtful accounts of $31 million and $32 million, as of September 30, 2010 and December 31, 2009, respectively.

During the nine months ended September 30, 2010 and 2009, the Company made interest payments of approximately $22 million and $36 million, respectively.  During the nine months ended September 30, 2010 and 2009, the Company made payments for income taxes (net of refunds) of $5 million and $26 million, respectively.

Accounting Developments

In June 2009, the FASB issued guidance now codified as ASC Topic 810, Consolidation (“ASC 810”), which amends certain guidance for determining whether an entity is a variable interest entity (“VIE”).  ASC 810 requires an enterprise to perform an analysis to determine whether the Company’s variable interests give it a controlling financial interest in a VIE.  A company would be required to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance.  In addition, ASC 810 requires ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE.  The standard is effective for financial statements for interim or annual reporting periods that begin after November 15, 2009.  Earlier application is prohibited.  The Company has adopted the provisions of ASC 810 effective as of January 1, 2010 and its adoption did not have a material impact on its results of operations, financial condition or its disclosures.

 
11

 

3) DEBTOR CONDENSED COMBINED FINANCIAL STATEMENTS

Condensed Combined Financial Statements for the Debtors as of September 30, 2010 and December 31, 2009 and for the quarters and nine months ended September 30, 2010 and 2009 are presented below.  Chemtura Canada has been included in these Condensed Combined Financial Statements for all periods presented.  These Condensed Combined Financial Statements include investments in subsidiaries carried under the equity method.

Chemtura Corporation and Subsidiaries in Reorganization
Condensed Combined Statements of Operations
(Debtor-in-Possession)
 ( In millions )

   
Quarters ended September 30,
   
Nine months ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net sales
  $ 618     $ 527     $ 1,841     $ 1,461  
                                 
Cost of goods sold
    506       423       1,519       1,211  
Selling, general and administrative
    52       49       139       139  
Depreciation and amortization
    30       30       103       85  
Research and development
    7       6       20       17  
Facility closures, severance and related
    -       -       1       1  
Antitrust costs
    -       -       -       9  
Gain on sale of business
    (2 )     -       (2 )     -  
Changes in estimates related to expected allowable claims
    (40 )     -       33       -  
                                 
Operating profit (loss)
    65       19       28       (1 )
                                 
Interest expense
    (36 )     (19 )     (169 )     (68 )
Loss on early extinguishment of debt
    -       -       (13 )     -  
Other (expense) income, net
    (17 )     (2 )     1       (18 )
Reorganization items, net
    (33 )     (20 )     (80 )     (66 )
Equity in net earnings (loss) of subsidiaries
    23       22       20       (5 )
                                 
Earning (loss) before income taxes
    2       -       (213 )     (158 )
Income tax benefit
    7       6       1       9  
                                 
Earnings (loss) from continuing operations
    9       6       (212 )     (149 )
Earnings (loss) from discontinued operations, net of tax
    -       2       2       (55 )
Loss on sale of discontinued operations, net of tax
    -       -       (9 )     -  
                                 
Net earnings (loss) attributable to Chemtura Corporation
  $ 9     $ 8     $ (219 )   $ (204 )
 
 
12

 

Chemtura Corporation and Subsidiaries in Reorganization
Condensed Combined Balance Sheet
(Debtor-in-Possession)
 ( In millions )

   
September 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current assets
  $ 805     $ 743  
Restricted cash
    758       -  
Intercompany receivables
    490       760  
Investments in subsidiaries
    1,867       1,645  
Property, plant and equipment
    439       481  
Goodwill
    161       161  
Other assets
    393       407  
Total assets
  $ 4,913     $ 4,197  
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
               
Current liabilities
  $ 540     $ 418  
Intercompany payables
    31       53  
Other long-term liabilities
    856       111  
Total liabilities not subject to compromise
    1,427       582  
Liabilities subject to compromise (a)
    3,531       3,443  
Total stockholders' (deficit) equity
    (45 )     172  
Total liabilities and stockholders' (deficit) equity
  $ 4,913     $ 4,197  

 
(a)
Includes inter-company payables of $1,430 million as of September 30, 2010 and $1,446 million as of December 31, 2009.
 
 
13

 

Chemtura Corporation and Subsidiaries in Reorganization
Condensed Combined Statement of Cash Flows
(Debtor-in-Possession)
 ( In millions )

   
Nine months ended September 30,
 
   
2010
   
2009
 
Increase (decrease) to cash
           
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (219 )   $ (204 )
Adjustments to reconcile net loss
               
to net cash provided by (used in) operating activities:
               
Gain on sale of business
    (2 )     -  
Loss on sale of discontinued operations
    9       -  
Impairment of long-lived assets
    1       49  
Loss on early extinguishment of debt
    13       -  
Depreciation and amortization
    103       92  
Stock-based compensation expense
    1       2  
Reorganization items, net
    (7 )     24  
Changes in estimates related to expected allowable claims
    33       -  
Contractual post-petition interest expense
    129       -  
Changes in assets and liabilities, net
    (35 )     (46 )
Net cash provided by (used in) operating activities
    26       (83 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net proceeds from divestments
    26       3  
Payments for acquisitions, net of cash acquired
    -       (5 )
Capital expenditures
    (44 )     (18 )
Net cash used in investing activities
    (18 )     (20 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from Senior Notes
    452       -  
Proceeds from Term Loan
    292       -  
Restricted cash from Senior Notes and Term Loan deposited in escrow
    (758 )     -  
Proceeds from Amended DIP Credit Facility
    299       -  
(Payments on) proceeds from DIP Credit Facility
    (250 )     250  
Proceeds from (payments on) 2007 Credit Facility, net
    17       (44 )
Payments on long term borrowings
    -       (18 )
Payments for debt issuance and refinancing costs
    (31 )     (30 )
Net cash provided by financing activities
    21       158  
                 
CASH AND CASH EQUIVALENTS
               
Change in cash and cash equivalents
    29       55  
Cash and cash equivalents at beginning of period
    82       22  
Cash and cash equivalents at end of period
  $ 111     $ 77  
 
4) LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET

As a consequence of the Chapter 11 cases, substantially all claims and litigations against the Debtors in existence prior to the filing of the petitions for relief or relating to acts or omissions prior to the filing of the petitions for relief are stayed.  These estimated claims are reflected in the Consolidated Balance Sheet as liabilities subject to compromise as of September 30, 2010 and December 31, 2009.  These amounts represent the Company’s estimate of known or potential pre-petition liabilities that either have resulted in an allowed claim or are probable of resulting in an allowed claim against the Debtors in connection with the Chapter 11 cases.  Claims that have not yet become an allowed claim are recorded at the estimated amount of the allowed claim which may be different from the amount for which the liability will be settled.  Such claims remain subject to future adjustments.  Adjustments may result from actions of the Bankruptcy Court, negotiations, rejection or acceptance of executory contracts and real property leases, determination as to the value of any collateral securing claims, proofs of claim or other events.

 
14

 

The Bankruptcy Court established October 30, 2009 as the Bar Date for filing proofs of claim against the U.S. Debtors.  The Debtors have received approximately 15,500 proofs of claim covering a broad array of areas.  The Company has completed its initial evaluation of the amounts asserted in and the factual and legal basis of the proofs of claim filed against the Debtors and has either filed objections to each claim with which the Debtors disagree or such objections will be filed before the effective date of the Plan.

Pursuant to the Plan, and by orders of the Bankruptcy Court dated September 24, 2010, October 19, 2010 and October 29, 2010, on or before the effective date of the Plan, the Debtors will establish the Diacetyl Reserve, the Environmental Reserve and the Disputed Claims Reserve on account of disputed claims as of the effective date of the Plan.  The Diacetyl Reserve was approved by the Bankruptcy Court in the amount of $7 million, comprised of separate segregated reserves, and has since been reduced as settlement agreements have been approved by the Bankruptcy Court.  The Environmental Reserve was approved by the Bankruptcy Court in the amount of $38 million, a portion of which is further segregated into certain separate reserves established to account for settlements that are pending Bankruptcy Court approval, and has since been reduced as settlement agreements have been approved by the Bankruptcy Court.  The Disputed Claims Reserve was approved by the Bankruptcy Court in the amount of $42 million, plus additional segregated individual reserves for certain creditors' claims in the aggregate amount of $30 million.  If the Plan becomes effective, all claims as to which an objection has been filed will be satisfied from one of the above-mentioned claims reserves.

Pursuant to the Plan and the October 29, 2010 order approving the Disputed Claims Reserve, holders of interests in the Company may also be entitled to supplemental distributions if amounts reserved on account of disputed claims exceed the value of claims that are ultimately allowed.  Holders of interests will be entitled to a portion of any excess value held in specified segregated reserves within the Disputed Claims Reserve following the resolution of the claims for which the segregated reserves are held.  Holders of interests will also be entitled to all excess value held in the Disputed Claims Reserve after all disputed claims are either disallowed or allowed and satisfied from the Disputed Claims Reserve.  If authorized by the Bankruptcy Court, holders of interests may also be entitled to interim distributions from the Disputed Claims Reserve if the Bankruptcy Court determines that the amount held in the reserve may be reduced before all disputed claims have been allowed or disallowed.

See Note - 21 Legal Proceedings and Contingencies for further discussion of the Company’s Chapter 11 claims assessment process.

The amounts of liabilities subject to compromise consist of the following:

   
As of
   
As of
 
(In millions)
 
September 30, 2010
   
December 31, 2009
 
6.875% Notes due 2016 (a)
  $ 500     $ 500  
7% Notes due July 2009 (a)
    370       370  
6.875% Debentures due 2026 (a)
    150       150  
2007 Credit Facility (a)
    169       152  
Other borrowings
    -       3  
Total debt subject to compromise
    1,189       1,175  
                 
Pension and post-retirement health care liabilities
    375       405  
Accounts payable
    116       130  
Environmental reserves
    86       42  
Litigation reserves
    119       127  
Unrecognized tax benefits and other taxes
    51       79  
Accrued interest expense (d)
    135       7  
Other miscellaneous liabilities
    30       32  
Total liabilities subject to compromise
  $ 2,101     $ 1,997  

Reorganization items are presented separately in the Consolidated Statements of Operations on a net basis and represent items realized or incurred by the Company as a direct result of the Chapter 11 cases.

 
15

 

The reorganization items, net recorded in the Consolidated Statements of Operations consists of the following:

   
Quarters ended September 30,
   
Nine months ended September 30,
 
(In millions)
 
2010
   
2009
   
2010
   
2009
 
Professional fees
  $ 40     $ 17     $ 83     $ 40  
Write-off debt discounts and premiums (a)
    -       -       -       24  
Write-off debt issuance costs (a)
    -       -       -       7  
Write-off deferred charges related to termination of
                               
U.S. accounts receivable facility
    -       -       -       4  
Rejections or terminations of contracts (b)
    -       2       2       2  
Severance - closure of manufacturing plants and warehouses (b)
    3       1       3       1  
Claim settlements (c)
    (10 )     -       (8 )     (12 )
                                 
Total reorganization items, net
  $ 33     $ 20     $ 80     $ 66  

 
(a)
The carrying value of pre-petition debt has been adjusted to its respective face value as this represents the expected allowable claim in the Chapter 11 cases.  As a result, unamortized debt issuance costs, discounts and premiums were charged to reorganization items, net on the Consolidated Statements of Operations in the first quarter of 2009.
(b)
Represents charges for cost savings initiatives for which Bankruptcy Court approval has been obtained.  For additional information see Note 20 – Restructuring Activities.
 
(c)
Represents the difference between the settlement amount of certain pre-petition obligations and the corresponding carrying value of the recorded liabilities.
(d)
As a result of the estimated claim recoveries reflected in the Plan filed during the second quarter of 2010, the Company determined that it was probable that obligations for interest on unsecured claims would ultimately be paid.  As such, interest that had not previously been recorded since the Petition Date was recorded in the second quarter of 2010.  The amount of post-petition interest recorded during the nine months ended September 30, 2010 was $129 million which represents the cumulative amount of interest accruing from the Petition Date through September 30, 2010.

5) COMPREHENSIVE INCOME (LOSS)

An analysis of the Company’s comprehensive loss follows:

   
Quarters ended September 30,
   
Nine months ended September 30,
 
(In millions)
 
2010
   
2009
   
2010
   
2009
 
Net earnings (loss)
  $ 8     $ 8     $ (219 )   $ (203 )
Other comprehensive income (loss), (net of tax):
                               
Foreign currency translation adjustments
    59       15       (24 )     53  
Unrecognized pension and other post-retirement benefit costs
    (1 )     2       29       6  
                                 
Comprehensive income (loss)
    66       25       (214 )     (144 )
Comprehensive (loss) income attributable to the non-controlling interest
    -       -       (1 )     1  
Comprehensive income (loss) attributable to Chemtura Corporation
  $ 66     $ 25     $ (215 )   $ (143 )

The components of accumulated other comprehensive loss, net of tax at September 30, 2010 and December 31, 2009, are as follows:
   
September 30,
   
December 31,
 
(In millions)
 
2010
   
2009
 
Foreign currency translation adjustment
  $ 89     $ 114  
Unrecognized pension and other post-retirement benefit costs
    (319 )     (348 )
                 
Accumulated other comprehensive loss
  $ (230 )   $ (234 )

Reclassifications from other comprehensive loss to earnings related to the Company’s natural gas price swap contracts aggregated to a pre-tax loss of less than $1 million for the quarter ended September 30, 2009 and a $1 million pre-tax loss during the nine months ended September 30, 2009.  All price swap contracts have matured as of December 31, 2009.

 
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6) DIVESTITURES

PVC Additives Business

On April 30, 2010, the Company completed the sale of its PVC additives business to Galata Chemicals LLC (formerly known as Artek Aterian Holding Company, LLC) and its sponsors, Aterian Investment Partners Distressed Opportunities, LP and Artek Surfin Chemicals Ltd. (collectively, “Galata”) for net proceeds of $38 million which includes a working capital adjustment that has been finalized and the settlement payments are anticipated to be received during the fourth quarter of 2010.  The net assets sold consisted of accounts receivable of $47 million, inventory of $42 million, other current assets of $6 million, other assets of $1 million, pension and other post-retirement health care liabilities of $25 million, accounts payable of $3 million and other accrued liabilities of $1 million.  A pre-tax loss of approximately $13 million was recorded on the sale after the elimination of $16 million of accumulated other comprehensive income resulting from the liquidation of a foreign subsidiary as part of the transaction.

The PVC additives business, which was formerly a reporting unit within the Industrial Engineered Products segment, is reported as a discontinued operation in the accompanying Consolidated Financial Statements as the Company will not have significant continuing cash flows or continuing involvement in the operations of the disposed business.  The results of operations for this business have been removed from the results of continuing operations for all periods presented.  The assets and liabilities of discontinued operations have been reclassified and are segregated in the Consolidated Balance Sheets.  The assets of discontinued operations as of December 31, 2009 included accounts receivable of $29 million, inventory of $51 million, other current assets of $3 million and other assets of $2 million.  The liabilities of discontinued operations as of December 31, 2009 included accounts payable of $2 million, accrued expenses of $6 million, pension and post-retirement health care liabilities of $28 million and other liabilities of $1 million.

As discussed in Note 9 – Asset Impairments, the PVC additives business recorded an impairment charge of $60 million during the quarter ended June 30, 2009.  Loss from discontinued operations for all periods presented consists of the following:

   
Quarters ended September 30,
   
Nine months ended September 30,
 
(In millions)
 
2010
   
2009
   
2010
   
2009
 
                         
Net sales
  $ -     $ 72     $ 96     $ 183  
                                 
Pre-tax earnings (loss) from discontinued operations
  $ -     $ 3     $ (1 )   $ (70 )
Income tax (provision) benefit
    -       (1 )     -       3  
Earnings (loss) from discontinued operations
  $ -     $ 2     $ (1 )   $ (67 )

Sodium Sulfonate Businesses

On July 30, 2010, the Company completed the sale of its natural sodium sulfonates and oxidized petrolatum businesses to Sonneborn Holding, LLC for net proceeds of $5 million which includes a working capital adjustment that is subject to finalization.  The sale included certain assets, the Company’s 50% interest in a European joint venture, the assumption of certain liabilities and the mutual release of obligations between the parties.  The net assets sold consisted of accounts receivable of $3 million, other current assets of $7 million, property, plant and equipment, net of $2 million, environmental liabilities of $3 million and other liabilities of $6 million.  A pre-tax gain of approximately $2 million was recorded on the sale.

7) SALE OF ACCOUNTS RECEIVABLE

On January 23, 2009, the Company entered into the 2009 U.S. Facility with up to $150 million of capacity and a three-year term with certain lenders under its 2007 Credit Facility.  Lenders who participated reduced their commitments to the 2007 Credit Facility pro-rata to their commitments to purchase U.S. eligible accounts receivable under the 2009 U.S. Facility.

Under the 2009 U.S. Facility, certain subsidiaries of the Company sold their accounts receivable to a special purpose entity (“SPE”) that was created for the purpose of acquiring such receivables and selling an undivided interest therein to certain purchasers.  In accordance with the receivables purchase agreements, the purchasers were granted an undivided ownership interest in the accounts receivable owned by the SPE.  The amount of such undivided ownership interest will vary based on the level of eligible accounts receivable as defined in the agreement.  In addition, the purchasers retained a security interest in all the receivables owned by the SPE.

 
17

 
 
The 2009 U.S. Facility was terminated on March 23, 2009 as a condition of the Debtors entering into the DIP Credit Facility.  All accounts receivable was sold back by the purchasers and the SPE to their original selling entity using proceeds of $117 million from the DIP Credit Facility.

Certain of the Company’s European subsidiaries maintained a separate European Facility to sell up to approximately $244 million (€175 million) of the eligible accounts receivable directly to a purchaser.  This facility terminated during the third quarter of 2009 and there were no outstanding accounts receivable that had been sold as of June 30, 2009.  The availability and access to the European Facility was restricted by the purchaser in late December 2008 in light of the Company’s financial performance.  As a result, the Company was unable to sell additional accounts receivable under this program during the first and second quarters of 2009.  Despite good faith discussions, the Company was unable to conclude an agreement to resume sales of accounts receivable under the European Facility either prior to the Chapter 11 filing or thereafter.  During the third quarter of 2009, with no agreement to restart the European Facility, the remaining balance of the accounts receivable previously sold under this facility was settled and the facility was terminated.

The costs associated with these facilities of $2 million for the nine months ended September 30, 2009 are included in other expense, net in the Consolidated Statements of Operations.

Following the termination of the 2009 U.S. Facility, deferred financing costs of approximately $4 million related to this facility were charged to reorganization items, net in the Consolidated Statements of Operations during the first quarter of 2009.

8) INVENTORIES

Components of inventories are as follows:

   
September 30,
   
December 31,
 
(In millions)
 
2010
   
2009
 
Finished goods
  $ 318     $ 319  
Work in process
    42       41  
Raw materials and supplies
    173       129  
    $ 533     $ 489  

Included in the above net inventory balances are inventory obsolescence reserves of approximately $29 million and $32 million at September 30, 2010 and December 31, 2009, respectively.

9) ASSET IMPAIRMENTS

The Company reviewed the recoverability of the long-lived assets of its segments in accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC 360”).  The Company evaluates the recoverability of the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  The Company realizes that events and changes in circumstances can be more frequent in the course of a U.S. bankruptcy process.  Under such circumstances, the Company assesses whether the projected undiscounted cash flows of its businesses are sufficient to recover the existing unamortized carrying value of its long-lived assets. If the undiscounted projected cash flows are not sufficient, the Company calculates the impairment amount by several methodologies, including discounting the projected cash flows using its weighted average cost of capital and valuation estimates from third parties.  The amount of the impairment is written-off against earnings in the period in which the impairment has been determined.

In the second quarter of 2009, the Company experienced continued year-over-year revenue reductions from the impact of the global recession in the electronic, building and construction industries.  In addition, the Consumer Performance Products segment revenues were impacted by cooler and wetter than normal weather in the northeastern and mid-western regions of the United States.  Based on this factor, the Company reviewed the recoverability of the long-lived assets of its segments.

For PVC additives, which is reported as a discontinued operation, the carrying value of the long-lived assets were in excess of the undiscounted cash flows.  As a result, the Company recorded a pretax impairment charge of $60 million to write-down the value of property, plant and equipment, net by $48 million and intangible assets, net by $12 million as of June 30, 2009.  The $60 million charge is included within loss from discontinued operations, net of tax in the Consolidated Statements of Operations for the nine months ended September 30, 2009.

 
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Due to the factors cited above, the Company also concluded it was appropriate to perform a goodwill impairment review as of June 30, 2009.  The Company used the updated projections in their long-range plan to compute estimated fair values of its reporting units.  These projections indicated that the estimated fair value of the Consumer Performance Products reporting unit was less than its carrying value.  Based on the Company’s preliminary analysis, an estimated goodwill impairment charge of $37 million was recorded for this reporting unit in the second quarter of 2009 (representing the remaining goodwill in this reporting unit).  Due to the complexity of the analysis which involves completion of fair value analyses and the resolution of certain significant assumptions, the Company finalized this goodwill impairment charge in the third quarter of 2009 and no change to the estimated charge was required.  See Note 11 – Goodwill and Intangible Assets for further information.

The impact of these two impairments totaled $97 million in the nine months ended September 30, 2009.

10 ) PROPERTY, PLANT AND EQUIPMENT

   
September 30,
   
December 31,
 
(In millions)
 
2010
   
2009
 
Land and improvements
  $ 79     $ 80  
Buildings and improvements
    232       236  
Machinery and equipment
    1,164       1,156  
Information systems equipment
    218       218  
Furniture, fixtures and other
    30       30  
Construction in progress
    68       54  
      1,791       1,774  
Less accumulated depreciation
    1,101       1,024  
    $ 690     $ 750  

Depreciation expense from continuing operations was $31 million for the quarters ended September 30, 2010 and 2009 and $107 million and $94 million for the nine months ended September 30, 2010 and 2009, respectively.  Depreciation expense from continuing operations includes accelerated depreciation of certain fixed assets associated with the Company’s restructuring programs and divestment activities of $5 million and $2 million for the quarters ended September 30, 2010 and 2009, respectively, and $26 million and $4 million for the nine months ended September 30, 2010 and 2009, respectively.

11) GOODWILL AND INTANGIBLE ASSETS

Goodwill by reportable segment is as follows:

   
Industrial
             
   
Performance
   
Chemtura
       
(In millions)
 
Products
   
AgroSolutions TM
   
Total
 
                   
Goodwill at December 31, 2009
  $ 268       57     $ 325  
Accumulated impairments at December 31, 2009
    (90 )     -       (90 )
Net Goodwill at December 31, 2009
    178       57       235  
                         
Impact of foreign currency translation
    (2 )     -       (2 )
                         
Goodwill at September 30, 2010
    266       57       323  
Accumulated impairments at September 30, 2010
    (90 )     -       (90 )
Net Goodwill at September 30, 2010
  $ 176       57     $ 233  

 
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The Company has elected to perform its annual goodwill impairment procedures for all of its reporting units in accordance with ASC Subtopic 350-20, Intangibles – Goodwill and Other - Goodwill (“ASC 350-20”) as of July 31, or sooner, if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  The Company estimates the fair value of its reporting units utilizing income and market approaches through the application of discounted cash flow and market comparable methods (Level 3 inputs as described in Note 18 – Financial Instruments and Fair Value Measurements).  The assessment is required to be performed in two steps: step one to test for a potential impairment of goodwill and, if potential impairments are identified, step two to measure the impairment loss through a full fair value allocation of the assets and liabilities of the reporting unit utilizing the acquisition method of accounting.
 
The Company concluded that no goodwill impairment existed in any of its reporting units based on the annual reviews as of July 31, 2010 and 2009.  However during the annual review as of July 31, 2010, the Company identified risks inherent in Chemtura AgroSolutions TM forecasts given the recent performance of this reporting unit which has been below expectations.  If the operating profit for each year within the longer-term forecasts was assumed to be approximately 15% lower, the carrying value of the Chemtura AgroSolutions TM   reporting unit would be equivalent to the estimated fair value and the Company would then determine whether recognition of a goodwill impairment charge would be required.

The Company continually monitors and evaluates business and competitive conditions that affect its operations and reflects the impact of these factors in its financial projections.  If permanent or sustained changes in business or competitive conditions occur, they can lead to revised projections that could potentially give rise to impairment charges.

During the quarter ended March 31, 2009, there was continued weakness in the global financial markets, resulting in additional decreases in the valuation of public companies and restricted availability of capital.  Additionally, the Company’s stock price continued to decrease due to constrained liquidity, deteriorating financial performance and the Debtors filing of a petition for relief under Chapter 11 of the Bankruptcy Code.  These events were of sufficient magnitude to the Company to conclude it was appropriate to perform a goodwill impairment review as of March 31, 2009.  The Company used its own estimates of the effects of the macroeconomic changes on the markets it serves to develop an updated view of its projections.  Those updated projections have been used to compute updated estimated fair values of its reporting units.  Based on these estimated fair values used to test goodwill for impairment in accordance with ASC 350-20, the Company concluded that no impairment existed in any of its reporting units at March 31, 2009.

The financial performance of certain reporting units was negatively impacted versus expectations due to the cold and wet weather conditions during the first half of 2009.  This fact along with the macro economic factors cited above resulted in the Company concluding it was appropriate to perform a goodwill impairment review as of June 30, 2009.  The Company used the updated projections in their long-range plan to compute estimated fair values of its reporting units.  These projections indicated that the estimated fair value of the Consumer Performance Products reporting unit was less than its carrying value.  Based on the Company’s preliminary analysis, an estimated goodwill impairment charge of $37 million was recorded for this reporting unit in the third quarter of 2009 (representing the remaining goodwill in this reporting unit).  Due to the complexity of the analysis which involves completion of fair value analyses and the resolution of certain significant assumptions, the Company finalized this goodwill impairment charge in the third quarter of 2009 and no change to the estimated charge was required.

For the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010, the Company’s consolidated performance was in line with expectations while the performance of the Company’s Chemtura AgroSolutions TM segment (formerly known as Crop Protection Engineered Products) reporting unit was below expectations.  However, the longer-term forecasts for this reporting unit are still sufficient to support its level of goodwill.  As such, the Company concluded that no circumstances exist that would more likely than not reduce the fair value of any of its reporting units below their carrying amount and an interim impairment test was not considered necessary as of March 31, 2010, June 30, 2010 or as of September 30, 2010.

The Company’s intangible assets (excluding goodwill) are comprised of the following:

   
September 30, 2010
   
December 31, 2009
 
(In millions)
 
Gross
Cost
   
Accumulated
Amortization
   
Net
Intangibles
   
Gross
Cost
   
Accumulated
Amortization
   
Net
Intangibles
 
Patents
  $ 127     $ (60 )   $ 67     $ 129     $ (55 )   $ 74  
Trademarks
    266       (60 )     206       271       (54 )     217  
Customer relationships
    148       (42 )     106       151       (38 )     113  
Production rights
    46       (23 )     23       46       (19 )     27  
Other
    74       (35 )     39       76       (33 )     43  
Total
  $ 661     $ (220 )   $ 441     $ 673     $ (199 )   $ 474  

 
20

 

The decrease in gross intangible assets since December 31, 2009 is primarily due to foreign currency translation and write-off of $2 million related to fully amortized intangibles (offset within accumulated amortization).

Amortization expense from continuing operations related to intangible assets amounted to $10 million for the quarters ended September 30, 2010 and 2009, respectively and $28 million for the nine months ended September 30, 2010 and 2009.

12) DEBT

The Company’s debt is comprised of the following:

(In millions )
 
September 30, 2010
   
December 31, 2009
 
             
6.875% Notes due 2016 (a)
  $ 500     $ 500  
7.875% Senior Notes due 2018
    452       -  
7% Notes due July 2009 (a)
    370       370  
Amended DIP Credit Facility
    299       -  
Term Loan due 2016
    292       -  
2007 Credit Facility (a)
    169       152  
6.875% Debentures due 2026 (a)
    150       150  
DIP Credit Facility
    -       250  
Other borrowings (b)
    7       8  
Total Debt
    2,239       1,430  
                 
Less: Short-term borrowings
    (302 )     (252 )
Liabilities subject to compromise
    (1,189 )     (1,175 )
                 
Total Long-Term Debt
  $ 748     $ 3  

(a)
Outstanding balance is classified as liabilities subject to compromise on the Consolidated Balance Sheets at September 30, 2010 and December 31, 2009.
(b)
$3 million of other borrowings is classified as liabilities subject to compromise on the Consolidated Balance Sheets at December 31, 2009.

In March 2009, the carrying value of pre-petition debt was adjusted to its respective face value as this represented the expected allowable claim in the Chapter 11 cases.  As a result, discounts and premiums of $24 million were charged to reorganization items, net on the Consolidated Statements of Operations in the first quarter of 2009.

Exit Financing Facilities

On August 27, 2010, the Company completed a private placement offering under Rule 144A of $455 million aggregate principal amount of 7.875% senior notes due 2018 (the “Senior Notes”) at an issue price of 99.269%.  Further it entered into a senior secured term facility credit agreement (the “Term Loan”) with Bank of America, N.A., as administrative agent, and other lenders party thereto for an aggregate principal amount of $295 million with an original issue discount of 1%.  The Senior Notes and Term Loan are a part of the exit financing package pursuant to the Plan.

At any time prior to September 1, 2014, the Company may redeem some or all of the Senior Notes at a redemption price equal to 100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest up to, but excluding, the redemption date.  The Company may also redeem some or all of the Senior Notes at any time on or after September 1, 2014, with the redemption prices being, prior to September 1, 2015, 103.938% of the principal amount, on or after September 1, 2015 and prior to September 1, 2016, 101.969% of the principal amount and thereafter 100% plus any accrued and unpaid interest to the redemption date.  In addition, prior to September 1, 2013, the Company may redeem up to 35% of the Senior Notes from the proceeds of certain equity offerings.  If the Company experiences specific kinds of changes in control, the Company must offer to repurchase all or part of the Senior Notes.  The redemption price (subject to limitations as described in the indenture) is equal to accrued and unpaid interest on the date of redemption plus the redemption price as set forth above.

The obligations of the Company under the Senior Notes will be guaranteed by certain of the Company’s U.S. subsidiaries upon the date of Escrow Release (defined below).

 
21

 

The Company’s Senior Notes contain covenants that limit the Company’s ability to enter into certain transactions, such as incurring additional indebtedness, creating liens, paying dividends, and entering into acquisitions, dispositions and joint ventures.  The covenant requirements under the Senior Notes will only become effective upon the  date of the Escrow Release (defined below); however, to the extent the Company or any restricted subsidiary has incurred debt, made any restricted payments, consummated any asset sale or otherwise taken any action or engaged in any activities during the period beginning on August 27, 2010 and ending on the escrow release date, such actions and activities shall be treated and classified under the indenture as if the indenture and the covenants set forth therein had applied to the Company and the restricted subsidiaries during such period.

The Senior Notes are subject to certain events of default, including, among others, payment defaults and breaches of representations and warranties (such as non-compliance with covenants and the existence of a material adverse effect (as defined in the agreement)).

The net proceeds of the Senior Notes offering were deposited by the Company into a segregated escrow account, pursuant to the Senior Notes Escrow Agreement dated as of August 27, 2010, together with cash sufficient to fund a Special Mandatory Redemption (as defined below).  These proceeds are invested in a money market account and any interest income thereon accrues to the Company.  Chemtura granted the Trustee, for the benefit of the holders of the Senior Notes, a continuing security interest in, and lien on, the funds deposited into escrow to secure the obligations under the Senior Notes indenture.  Upon satisfaction of the escrow conditions, including confirmation of the Plan, the funds deposited into escrow will be released (the “Escrow Release”).  Following the Escrow Release, Chemtura intends to use the net proceeds to make payments contemplated under the Plan and to fund Chemtura’s emergence from Chapter 11.

The escrow conditions include, among others: the confirmation of the Plan and satisfaction of all conditions precedent to effectiveness of the Plan; certain other conditions precedent regarding Chemtura’s subsidiaries, assets and cash expenditures; the absence of any continuing default or event of default under the Senior Notes indenture; the satisfaction of all other conditions precedent for the release of funds under the Term Loan (as described below) and for closing the senior asset based revolving credit facility to be entered into as part of the exit financing facilities described under the Plan; and the execution of a guarantee by each future guarantor as defined by and in accordance with the Senior Notes indenture.  The Senior Notes indenture provides that if the escrow conditions are not satisfied by October 26, 2010 (subject to two 30-day extensions) (the “Escrow End Date”), the funds deposited into escrow will be used to redeem the Senior Notes (the “Special Mandatory Redemption”) at a price equal to the sum of 101% of the issue price of the Senior Notes plus accrued and unpaid interest including accrual of original issue discount up to, but excluding, the date of the Special Mandatory Redemption.  As of October 20, 2010, Chemtura extended the Escrow End Date to November 25, 2010.  If necessary, Chemtura may extend the Escrow End Date until December 25, 2010.

In connection with the Senior Notes, the Company also entered into a Registration Rights Agreement whereby the Company agreed to use commercially reasonable efforts (i) to file, as soon as reasonably practicable after the filing of the Company’s Form 10-K for the year ended December 31, 2010, an exchange offer registration statement with the SEC; (ii) to cause such exchange offer registration statement to become effective, (iii) to consummate a registered offer to exchange the Senior Notes for new exchange notes having terms substantially identical in all material respects to the Senior Notes (except that the new exchange notes will not contain terms with respect to Additional Interest or transfer restrictions) pursuant to such exchange offer registration statement on or prior to the date that is 365 days after the Escrow Release date and (iv) under certain circumstances, to file a shelf registration statement with respect to resales of the Senior Notes.  If Chemtura does not consummate the exchange offer (or the shelf registration statement ceases to be effective or usable, if applicable) as provided in the Registration Rights Agreement, it will be required to pay additional interest with respect to the Senior Notes (“Additional Interest”), in an amount beginning at 0.25% per annum and increasing at 90-day intervals up to a maximum amount of 1.00%, until all registration defaults have been cured.

Borrowings under the Term Loan bear interest at a rate per annum equal to, at the Company’s election, (i) 3.0% plus the Base Rate (defined as the higher of (a) the Federal Funds rate plus 0.5%; (b) Bank of America’s published prime rate; and (c) the Eurodollar Rate plus 1%) or (ii) 4% plus the Eurodollar Rate (defined as the higher of (a) 1.5% and (b) the current LIBOR rate adjusted for reserve requirements).

The Term Loan is secured by a first priority lien on the Company’s U.S. tangible and intangible assets (excluding accounts receivable, inventory, deposit accounts and certain other related assets) including, without limitation, real property, equipment and intellectual property together with a pledge of the equity interests of the first tier subsidiaries of the Company and the guarantors of the Term Loan, and a second priority lien on substantially all of the Company’s U.S. accounts receivable and inventory.

 
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The Company may, at its option, prepay the outstanding aggregate principal amount on the Term Loan advances in whole or ratably in part along with accrued and unpaid interest on the date of the prepayment.  If the prepayment is made prior to the first anniversary of the closing date of the agreement, the Company will pay an additional premium of 1% of the aggregate principal amount of prepaid advances.

The obligations of the Company as borrower under the Term Loan will be guaranteed by certain of the Company’s U.S. subsidiaries upon the date of the Escrow Release.

The Term Loan contains covenants that limit the Company and its subsidiaries’ ability to enter into certain transactions, such as creating liens, incurring additional indebtedness or repaying certain indebtedness, making investments, paying dividends, and entering into acquisitions, dispositions and joint ventures.

Additionally, the Term Loan requires the Company to meet certain quarterly financial covenants including a maximum Secured Leverage Ratio (as defined in the agreement) of 2.5:1.0 and a minimum Consolidated Interest Coverage Ratio (as defined in the agreement) of 3.0:1.0.  The covenant requirements under the Term Loan only become effective upon the effectiveness of the Plan.

The Term Loan is subject to certain events of default, including, among others, payment defaults and breaches of representations and warranties (such as non-compliance with covenants and the existence of a material adverse effect (as defined in the agreement)).

In accordance with the Term Loan facility agreement, the proceeds of the Term Loan were funded into a segregated escrow account, pursuant to the escrow agreement dated as of August 27, 2010 (the “Term Loan Escrow Agreement”), among Chemtura, the Administrative Agent and the Escrow Agent, together with a deposit by Chemtura of an additional amount sufficient to fund the interest expected to accrue on the Term Loan for the period from August 27, 2010 to the Escrow End Date and the amount of the arrangers’ fees and expenses, to be held in the escrow account until the date that (i) certain escrow release conditions agreed upon are satisfied including the effectiveness of the Plan or (ii) in the event the Company concludes that the escrow release conditions cannot be met or the end of the escrow period (as extended),a special mandatory prepayment is required. The escrow release conditions are set forth in the Term Loan Escrow Agreement and the Term Loan facility agreement.  Escrow funds will be released to effect a special mandatory prepayment to the Lenders under the Term Loan facility agreement (in an amount equal to the sum of 100% of the principal amount of the Term Loan less the original issue discount with respect thereto plus accrued and unpaid interest on the outstanding principal amount of the Term Loan) if the escrow conditions are not satisfied by the Escrow End Date (which can be extended under the Term Loan escrow agreement on substantially the same terms as the Senior Notes Escrow Agreement). Amounts remaining in the escrow account after making such special mandatory prepayment will be released to Chemtura.

On August 11, 2010, the Company entered into a commitment letter with various lenders for a $275 million senior asset-based revolving credit facility.  The Company has negotiated definitive agreements relating to this facility and expects to enter into the facility upon the effectiveness of the Plan.

On September 27, 2010, the Company entered into Amendment No. 1 to the Term Loan which deletes the requirement that intercompany loans be subordinated, as the requirement was inconsistent with the provisions for prepayment of other debt which expressly permitted prepayments of intra-group debt.  The amendment also clarified, among other things, language permitting payments and dispositions made pursuant to the Plan.

Debtor-in-Possession Credit Facility

On March 18, 2009, the Debtors entered into a $400 million senior secured DIP Credit Facility arranged by Citigroup Global Markets Inc. with Citibank, N.A. as Administrative Agent, subject to approval by the Bankruptcy Court.  On March 20, 2009, the Bankruptcy Court entered an interim order approving the Debtors access to $190 million of the DIP Credit Facility in the form of a $165 million term loan and a $25 million revolving credit facility.  The DIP Credit Facility closed on March 23, 2009 with the drawing of the $165 million term loan.  The initial proceeds were used to fund the termination of the 2009 U.S. Facility, pay fees and expenses associated with the transaction and fund business operations.

The DIP Credit Facility was comprised of the following:  (i) a $250 million non-amortizing term loan; (ii) a $64 million revolving credit facility; and (iii) an $86 million revolving credit facility representing the “roll-up” of certain outstanding secured amounts owed to lenders under the prior 2007 Credit Facility who have commitments under the DIP Credit Facility.  In addition, a sub-facility for letters of credit (“Letters of Credit”) in an aggregate amount of $50 million was available under the unused commitments of the revolving credit facilities.

 
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The Bankruptcy Court entered a final order providing full access to the $400 million DIP Credit Facility on April 29, 2009.  On May 4, 2009, the Company used $85 million of the $250 million term loan and used the proceeds together with cash on hand to fund the $86 million “roll up” of certain outstanding secured amounts owed to certain lenders under the 2007 Credit Facility as approved by the final order.

On February 9, 2010, the Bankruptcy Court gave interim approval of the Amended DIP Credit Facility by and among the Debtors, Citibank N.A. and the other lenders party thereto (collectively the “Loan Syndicate”).  The Amended DIP Credit Facility replaced the DIP Credit Facility.  The Amended DIP Credit Facility provides for a first priority and priming secured revolving and term loan credit commitment of up to an aggregate of $450 million comprising a $300 million term loan and a $150 million revolving credit facility.  The Amended DIP Credit Facility matures on the earliest of 364 days after the closing, the effective date of a plan of reorganization or the date of termination in whole of the Commitments (as defined in the credit agreement governing the Amended DIP Credit Facility).  The proceeds of the term loan under the Amended DIP Credit Facility were used to, among other things, refinance the obligations outstanding under the previous DIP Credit Facility and provide working capital for general corporate purposes.  The Amended DIP Credit Facility provided a reduction in the Company’s financing costs through reductions in interest spread and avoidance of the extension fees payable under the DIP Credit Facility in February and May 2010.  The Amended DIP Credit Facility closed on February 12, 2010 with the drawing of the $300 million term loan.  On February 9, 2010, the Bankruptcy Court entered an order approving full access to the Amended DIP Credit Facility, which order became final by its terms on February 18, 2010.

The Amended DIP Credit Facility resulted in a substantial modification for certain lenders within the Loan Syndicate given the reduction in their commitments as compared to the DIP Credit Facility.  Accordingly, the Company recognized a $13 million charge for the nine months ended September 30, 2010 for the early extinguishment of debt resulting from the write-off of deferred financing costs and the incurrence of fees payable to lenders under the DIP Credit Facility.  The Company also incurred $5 million of debt issuance costs related to the Amended DIP Credit Facility for the nine months ended September 30, 2010.

The Amended DIP Credit Facility is secured, subject to a carve-out as set forth in the Amended DIP Credit Facility (the “Carve-Out”), for professional fees and expenses (as well as other fees and expenses customarily subject to such Carve-Out), by a super-priority lien on substantially all of the Company's U.S. assets, including (i) cash; (ii) accounts receivable; (iii) inventory; (iv) machinery, plant and equipment; (v) intellectual property; (vi) pledges of the equity of first tier subsidiaries; and (vii) pledges of debt and other instruments.  Availability of credit is equal to (i) the lesser of (a) the Borrowing Base (as defined below) and (b) the effective commitments under the Amended DIP Credit Facility minus (ii) the aggregate amount of the DIP Loans and any undrawn or unreimbursed Letters of Credit.  The Borrowing Base is the sum of (i) 80% of the Debtors’ eligible accounts receivable, plus (ii) the lesser of (a) 85% of the net orderly liquidation value percentage (as defined in the Amended DIP Credit Facility) of the Debtors’ eligible inventory and (b) 75% of the cost of the Debtors’ eligible inventory, plus (iii) $275 million, less certain reserves determined in the discretion of the Administrative Agent to preserve and protect the value of the collateral.  As of September 30, 2010, extensions of credit outstanding under the Amended DIP Credit Facility consisted of the $299 million term loan (net of an original issue discount of $1 million) and letters of credit of $24 million.

On July 27, 2010, the Company entered into Amendment No. 1 of the Amended DIP Credit Facility that provided for, among other things, the consent of the Company’s DIP lenders to (a) file a voluntary Chapter 11 petition for Chemtura Canada Co./Cie (“Chemtura Canada”) without resulting in a default of the Amended DIP Credit Facility and without requiring that Chemtura Canada be added as a guarantor under the Amended DIP Credit Facility; (b) make certain intercompany advances to Chemtura Canada and allow Chemtura Canada to pay intercompany obligations to Crompton Financial Holdings, (c) sell the Company’s natural sodium sulfonates and oxidized petrolatums business, (d) settle claims against BioLab, Inc. and Great Lakes Chemical Company relating to a fire that occurred at BioLab, Inc.’s warehouse in Conyers, Georgia and (e) settle claims arising under the asset purchase agreement between Chemtura Corporation and PMC Biogenix, Inc. pursuant to which the Company sold its oleochemicals business and certain related assets to PMC Biogenix, Inc.

 
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Borrowings under the DIP Credit Facility term loans and the $64 million revolving credit facility bore interest at a rate per annum equal to, at the Company’s election, (i) 6.5% plus the Base Rate (defined as the higher of (a) 4%; (b) Citibank N.A.’s published rate; or (c) the Federal Funds rate plus 0.5%) or (ii) 7.5% plus the Eurodollar Rate (defined as the higher of (a) 3% or (b) the current LIBOR rate adjusted for reserve requirements).  Borrowings under the DIP Credit Facility $86 million revolving credit facility bore interest at a rate per annum equal to, at the Company’s election, (i) 2.5% plus the Base Rate or (ii) 3.5% plus the Eurodollar Rate.  Additionally, the Company was obligated to pay an unused commitment fee of 1.5% per annum on the average daily unused portion of the revolving credit facilities and a letter of credit fee on the average daily balance of the maximum daily amount available to be drawn under Letters of Credit equal to the applicable margin above the Eurodollar Rate applicable for borrowings under the applicable revolving credit facility.  Certain fees were payable to the lenders upon the reduction or termination of the commitment and upon the substantial consummation of a plan of reorganization as described more fully in the DIP Credit Facility including an exit fee payable to the Lenders of 2% of “roll-up” commitments and 3% of all other commitments.  These fees, which amounted to $11 million, were paid upon the funding of the term loan under the Amended DIP Credit Facility.

Borrowings under the Amended DIP Credit Facility term loan bear interest at a rate per annum equal to, at our election, (i) 3.0% plus the Base Rate (defined as the higher of (a) 3%; (b) Citibank N.A.’s published rate; and (c) the Federal Funds rate plus 0.5%) or (ii) 4.0% plus the Eurodollar Rate (defined as the higher of (a) 2% and (b) the current LIBOR rate adjusted for reserve requirements).  Borrowings under the Amended DIP Credit Facility’s $150 million revolving credit facility bear interest at a rate per annum equal to, at our election, (i) 3.25% plus the Base Rate or (ii) 4.25% plus the Eurodollar Rate.  Additionally, the Company pays an unused commitment fee of 1.0% per annum on the average daily unused portion of the revolving credit facilities and a letter of credit fee on the average daily balance of the maximum daily amount available to be drawn under Letters of Credit equal to the applicable margin above the Eurodollar Rate applicable for borrowings under the revolving credit facility.

The obligations of the Company as borrower under the Amended DIP Credit Facility are guaranteed by the Company’s U.S. subsidiaries who are Debtors in the Chapter 11 cases, which, together with the Company own substantially all of the Company’s U.S. assets.  The obligations must also be guaranteed by each of the Company’s subsidiaries that become party to the Chapter 11 cases, subject to specified exceptions.

The Amended DIP Credit Facility requires the Company to meet certain financial covenants including the following: (a) minimum cumulative monthly earnings before interest, taxes, and depreciation (“EBITDA”), after certain adjustments, on a consolidated basis; (b) a maximum variance of the weekly cumulative cash flows of the Debtors, compared to an agreed upon forecast; (c) minimum borrowing availability of $20 million; and (d) maximum quarterly capital expenditures.  In addition, the Amended DIP Credit Facility, as did the DIP Credit Facility, contains covenants which, among other things, limit the incurrence of additional debt, issuance of guarantees, liens, investments, disposition of assets, dividends, certain payments, mergers, change of business, transactions with affiliates, prepayments of debt, repurchases of stock and redemptions of certain other indebtedness and other matters customarily restricted in such agreements.  As of September 30, 2010, the Company was in compliance with the covenant requirements of the Amended DIP Credit Facility.

The Amended DIP Credit Facility contains events of default, including, among others, payment defaults and breaches of representations and warranties (such as non-compliance with covenants and the existence of a material adverse effect (as defined in the agreement)).

Other Debt Obligations

The Chapter 11 filing constituted an event of default under, or otherwise triggered repayment obligations with respect to, several of the debt instruments and agreements relating to direct and indirect financial obligations of the Debtors as of the Petition Date (collectively “Pre-petition Debt”).  All obligations under the Pre-petition Debt have become automatically and immediately due and payable.  The Debtors believe that any efforts to enforce the payment obligations under the Pre-petition Debt have been stayed as a result of the Chapter 11 cases.  Accordingly, interest accruals and payments for the unsecured Pre-petition Debt had ceased as of the Petition Date.  As a result of the estimated claim recoveries reflected in the Plan filed during the second quarter of 2010, the Company determined that it was probable that obligations for interest on unsecured claims would ultimately be paid.  As such, interest that had not previously been recorded since the Petition Date was recorded in the second quarter of 2010.  The amount of post-petition interest recorded during the nine months ended September 30, 2010 was $129 million which represents the cumulative amount of interest for unsecured claims (including unsecured debt) accruing from the Petition Date through September 30, 2010.  The amount of post-petition interest recorded during the quarter ended September 30, 2010 was $21 million.

 
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The Company has not recorded disputed claim amounts for “make-whole” payments being sought for the $500 million of 6.875% Notes Due 2016 (“2016 Notes”) and for “no-call” payments being sought for the $150 million 6.875% Debentures due 2026 (“2026 Debentures”).  While the Plan incorporates a settlement of these claim amounts for $70 million, this settlement will be recorded upon the Plan becoming effective and related debt being settled.

The Pre-petition Debt as of September 30, 2010 consisted of $500 million 2016 Notes, $370 million of 7% Notes due July 15, 2009 (“2009 Notes”), $150 million 2026 Debentures (together with the 2016 Notes, the 2009 Notes and the 2026 Debentures, the “Notes”) and $169 million due 2010 under the 2007 Credit Facility.  Pursuant to the final order of the Bankruptcy Court approving the DIP Credit Facility, the Debtors have acknowledged the pre-petition secured indebtedness associated with the 2007 Credit Facility to be no less than $139 million (now $53 million after the “roll-up” in connection with the Company’s entry into the DIP Credit Facility).

The 2007 Credit Facility is guaranteed by certain U.S. subsidiaries of the Company (the “Domestic Subsidiary Guarantors”).  Pursuant to a 2007 Credit Facility covenant, the Company and the Domestic Subsidiary Guarantors were, in June of 2007, required to provide a security interest in the equity of their first tier subsidiaries (limited to 66% of the voting stock of first-tier foreign subsidiaries).  Under the terms of the indentures for the Notes, the Company was required to provide security for the Notes on an equal and ratable basis if (and for so long as) the principal amount of secured debt exceeds certain thresholds related to the Company’s assets.  The thresholds vary under each of the indentures.  In order to avoid having the Notes become equally and ratably secured with the 2007 Credit Facility obligations, the lenders agreed to limit the amount secured by the pledged equity to the maximum amount that would not require the Notes to become equally and ratably secured (the “Maximum Amount”).  In connection with the amendment and waiver agreement dated December 30, 2008, the Company and the Domestic Subsidiary Guarantors entered into a Second Amended and Restated Pledge and Security Agreement.  In addition to the prior pledge of equity granted to secure the 2007 Credit Facility obligations, the Company and the Domestic Subsidiary Guarantors granted a security interest in their inventory.  The value of this security interest continues to be limited to the Maximum Amount.

Borrowings under the 2007 Credit Facility at September 30, 2010 were $169 million.  During the nine months ended September 30, 2010, borrowings under the 2007 Credit Facility increased by $17 million following the drawing of certain letters of credit issued under the 2007 Credit Facility.

The Company has standby letters of credit and guarantees with various financial institutions.  At September 30, 2010, the Company had $32 million of outstanding letters of credit and guarantees primarily related to liabilities for environmental remediation, vendor deposits, insurance obligations and European value added tax obligations.  Under the Amended DIP Credit Facility letter of credit sub-facility $24 million of letters of credit were issued.  The Company also had $15 million of third party guarantees at September 30, 2010 for which it has reserved $2 million at September 30, 2010, which represents the probability weighted fair value of these guarantees.

13) INCOME TAXES

The Company reported an income tax benefit from continuing operations of $2 million and a $9 million benefit for the quarters ended September 30, 2010 and 2009, respectively and income tax provision of $14 million and $1 million for the nine months ended September 30, 2010 and 2009, respectively.  The Company has established a valuation allowance against the tax benefits associated with the Company’s current year to date U.S. net operating loss.  The Company will continue to adjust its tax provision through the establishment of non-cash valuation allowances until U.S. operations are more-likely than not able to generate income in future periods.

The Company has net liabilities related to unrecognized tax benefits of $48 million at September 30, 2010 and $76 million at December 31, 2009.

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense.  Accrued interest and penalties are included within the related liability captions in the Consolidated Balance Sheet. 

Since the timing of resolutions and/or closure of audits is uncertain, it is difficult to predict with certainty the range of reasonably possible significant increases or decreases in the liability for unrecognized tax benefits that may occur within the next year.  On July 28, 2010, the Company effectively settled an audit with the Internal Revenue Service for tax years 2006-2007.  During the quarter ended September 30, 2010, the Company recorded a decrease in the liability for unrecognized tax benefits, relating to this audit settlement in the amount of $28 million.  This decrease will not have an impact to our effective tax rate, but decreased certain other balance sheet tax asset attributes.  Other taxing authority jurisdictions settlements or expiration of statute of limitations is not expected to be significant.

 
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14) EARNINGS (LOSS) PER COMMON SHARE

The computation of basic earnings (loss) per common share is based on the weighted average number of common shares outstanding.  The computation of diluted earnings (loss) per common share is based on the weighted average number of common and common share equivalents outstanding.  The Company had no outstanding common share equivalents for the quarters ended September 30, 2010 and 2009 and the nine months ended September 30, 2010 and 2009 for purposes of computing diluted earnings (loss) per share.

The weighted average common shares outstanding for the quarters ended September 30, 2010 and 2009 and for the nine months ended September 30, 2010 and 2009 were 242.9 million.

The shares of common stock underlying the Company’s outstanding stock options of 5.4 million and 7.2 million at September 30, 2010 and 2009, respectively, were excluded from the calculation of diluted earnings (loss) per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares as of such dates.  These options could be dilutive if the average share price increases and is greater than the exercise price of these options.  The Company’s performance-based restricted stock units (“RSUs”) of 0.3 million and 0.5 million at September 30, 2010 and 2009, respectively, were also excluded from the calculation of diluted earnings (loss) per share because the specified performance criteria for the vesting of these RSUs had not yet been met.  These RSUs could be dilutive in the future if the specified performance criteria are met.

15) STOCK-BASED COMPENSATION

Stock-based compensation expense, including amounts for RSUs and non-qualified stock options, was insignificant for the quarter and $1 million for nine months ended September 30, 2010, $1 million for the quarter ended September 30, 2009 and $2 million for the nine months ended September 30, 2009.  Stock-based compensation expense was primarily reported in SG&A.

All future issuances of shares of common stock under the Company’s stock-based compensation plans have been suspended as a result of the Chapter 11 cases.  Accordingly, the Company urges that appropriate caution be exercised with respect to existing and future investments in any of the Company’s securities.  Although the shares of the Company’s common stock continue to trade on the Pink Sheets, the trading prices may have little or no relationship to the actual recovery by the holders under any eventual Bankruptcy Court-approved plan of reorganization.  The opportunity for any recovery by holders of the Company’s common stock under the Plan requires that all creditors’ claims must be met in full with interest before value can be attributed to the common stock.  The Plan contemplates that the shares of the Company’s current common stock and unvested RSU’s and all stock options granted under employee stock based compensation plans will be cancelled upon the effectiveness of the Plan.  The Company will issue new common stock upon the effectiveness of the Plan for distribution on account of creditors’ claims and claims of holders of equity interests under the Plan.

The Company uses the Black-Scholes option-pricing model to determine fair value of stock options.  The Company has elected to recognize compensation cost for option awards granted equally over the requisite service period for each separately vesting tranche, as if multiple awards were granted.  The Company did not grant any stock options or RSUs in 2009 or in the nine months ended September 30, 2010.

Total remaining unrecognized compensation costs associated with unvested stock options and RSUs at September 30, 2010 were $1 million, which will be recognized over the weighted average period of less than one year.

Upon the effectiveness of the Plan, the Company will implement the Chemtura Corporation 2010 Long-Term Incentive Plan (the “2010 LTIP”) in the form as filed in the Plan Supplement.  The 2010 LTIP provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, dividend equivalent rights, stock units, bonus stock, performance awards, share awards, restricted stock and RSUs.  No awards can be granted under the 2010 LTIP until the effectiveness of the Plan.  Directors, officers and other employees of the Company and its subsidiaries, as well as others performing services for the Company, are eligible to receive grants under the 2010 LTIP.  The 2010 LTIP will have a share reserve equal to eleven percent (11%) of the Company’s new shares of common stock issued upon the effectiveness of the Plan to creditors and holders of equity interests.

 
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On June 1, 2010, the Organization, Compensation and Governance Committee of the Board of Directors (the “Committee”) adopted the 2010 Emergence Incentive Plan (“2010 EIP”).  The 2010 EIP was established by order of the Bankruptcy Court, dated May 18, 2010.  The 2010 EIP provides the opportunity for participants to earn an award that will be granted upon the later of the effectiveness of the Plan or the measurement of 2010 EBITDA as defined under the 2010 EIP in the form of time-based RSUs and/or stock options, if feasible, and/or in cash.  The form of consideration will be determined in accordance with the associated documents filed with the Plan Supplement.  The number of employees included in the 2010 EIP and the size of the award pool are based upon specific consolidated EBITDA levels achieved in the later of the twelve month period immediately preceding the effectiveness of the Plan or December 31, 2010.  The maximum award pool is in a value of $19 million.  As any award under the 2010 EIP is contingent on the effectiveness of the Plan, no recognition has been provided in these Consolidated Financial Statements.

The Committee and the Bankruptcy Court approved a similar emergence incentive plan in 2009 (the “2009 EIP”).  On June 1, 2010, the Committee also adopted an amendment to the consolidated EBITDA measurement period under the 2009 EIP from twelve months trailing consolidated EBITDA from emergence from Chapter 11 to twelve months trailing consolidated EBITDA ending March 31, 2010 (the “2009 EIP Amendment”).  The 2009 EIP Amendment was established by order of the Bankruptcy Court, dated May 18, 2010.  The award pool for the 2009 EIP is approximately $14 million.  As any award under the 2009 EIP is contingent on the effectiveness of the Plan, no recognition has been provided in these Consolidated Financial Statements.

Upon the effectiveness of the Plan, the Company will implement the Chemtura Corporation EIP Settlement Plan in the form as filed with the Plan Supplement.  Under the EIP Settlement plan, awards will be granted to participants under the Company’s 2009 EIP upon the effectiveness of the Plan and such award will composed of a combination of RSUs and nonqualified stock options, each vesting in three pro-rata equal installments on the date of grant and in March of each of the two years following the date of grant.  Awards under the 2010 EIP will be made upon the achievement of the EBITDA measurement as defined under the 2010 EIP which is anticipated to be in March 2011.  The awards under the 2010 EIP are anticipated to be composed of a combination of RSUs and nonqualified stock options, each vesting in three pro-rata equal installments on the date of grant and on the first and second anniversary of the date of grant.

Upon the effectiveness of the Plan, the Company will implement the Chemtura Corporation 2010 Emergence Award Plan, in the form as filed with the Plan Supplement.  The 2010 Emergence Award Plan provides designated participants with the opportunity to receive an award based upon the Company’s achievement of specified EBITDA goals for the 2011 fiscal year.  Awards granted under the 2010 Emergence Award Plan will be settled in March 2012 upon measurement of the specified EBITDA goals set for in that plan in the form of up to 1 million shares of new common stock to be issued under the 2010 LTIP.

 
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16) PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

Components of the Company’s defined benefit plans net periodic benefit cost for the quarters and nine months ended September 30, 2010 and 2009 are as follows:

   
Defined Benefit Plans
 
   
Qualified
   
International and
   
Post-Retirement
 
   
U.S. Plans
   
Non-Qualified Plans
   
Health Care Plans
 
   
Quarter ended September 30,
   
Quarter ended September 30,
   
Quarter ended September 30,
 
(In millions)
 
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
                                     
Service cost
  $ -     $ -     $ -     $ 1     $ -     $ -  
Interest cost
    12       12       6       5       1       2  
Expected return on plan assets
    (14 )     (14 )     (5 )     (4 )     -       -  
Amortization of prior service cost
    -       -       -       -       (1 )     (1 )
Amortization of actuarial losses
    2       2       1       -       1       1  
                                                 
Net periodic benefit cost
  $ -     $ -     $ 2     $ 2     $ 1     $ 2  

   
Defined Benefit Plans
 
   
Qualified
   
International and
   
Post-Retirement
 
   
U.S. Plans
   
Non-Qualified Plans
   
Health Care Plans
 
   
Nine months ended September 30,
   
Nine months ended September 30,
   
Nine months ended September 30,
 
(In millions)
 
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
                                     
Service cost
  $ -     $ -     $ 2     $ 2     $ -     $ -  
Interest cost
    36       36       17       16       5       7  
Expected return on plan assets
    (42 )     (42 )     (14 )     (12 )     -       -  
Amortization of prior service cost
    -       -       -       -       (3 )     (2 )
Amortization of actuarial losses
    6       7       1       -       2       1  
Net periodic benefit cost
  $ -     $ 1     $ 6     $ 6     $ 4     $ 6  

The Company contributed less than $1 million in discretionary payments to its U.S. qualified plans but did not make any discretionary contributions to its U.S. non-qualified pension plans during the nine months ended 2010.  The Company contributed $6 million to its international pension plans for the nine months ended September 30, 2010.  Contributions to post-retirement health care plans for the nine months ended September 30, 2010 were $10 million.

Liabilities subject to compromise as of September 30, 2010 and December 31, 2009 include $375 million and $405 million respectively, related to all of the U.S. pension and post-retirement health care plans.

During 2009, the Bankruptcy Court authorized the Company to modify certain benefits under their sponsored post-retirement health care plans.  During March 2010, certain participants of these plans were notified of the amendments to their benefits.  As a result of these amendments, the Company recognized a $23 million decrease in their U.S. post-retirement health care plan obligations which is classified within liabilities subject to compromise.  The offset to this liability decrease was reflected within accumulated other comprehensive loss.

On November 18, 2009, the Bankruptcy Court entered an order (the “2009 OPEB Order”) approving, in part, the Company’s motion (the “2009 OPEB Motion”) requesting authorization to modify certain post-retirement welfare benefits (the “OPEB Benefits”) under the Company’s post-retirement welfare benefit plans (the “OPEB Plans”), including the OPEB Benefits of certain Uniroyal salaried retirees (the “Uniroyal Salaried Retirees”). On April 5, 2010, the Bankruptcy Court entered an order denying the Uniroyal Salaried Retirees’ motion to reconsider the 2009 OPEB Order based, among other things, on the Uniroyal Salaried Retirees’ failure to file a timely objection to the 2009 OPEB Motion. On April 8, 2010, the Uniroyal Salaried Retirees appealed the Bankruptcy Court's April 5, 2010 order and on April 14, 2010, sought a stay pending their appeal (the “Stay”) of the 2009 OPEB Order as to the Company’s right to modify their OPEB Benefits. On April 21, 2010, the Bankruptcy Court ordered the Company not to modify the Uniroyal Salaried Retirees’ OPEB Benefits, pending a hearing and decision as to the Stay. After consulting with the official committees of unsecured creditors and equity security holders, the Company requested that the Bankruptcy Court, rather than having a hearing to determine whether or not the Uniroyal Salaried Retirees filed a timely objection to the 2009 OPEB Motion, have a hearing instead to decide as a matter of law, whether the Company has the right to modify the OPEB Benefits of the Uniroyal Salaried Retirees, as requested in the 2009 OPEB Motion.  The Bankruptcy Court is scheduled to hear oral arguments on this issue on December 7, 2010.

 
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In addition, on January 6, 2010, the Bankruptcy Court heard arguments regarding whether the Company had the right to modify the OPEB Benefits, as requested in the 2009 OPEB Motion, with respect to certain retirees who were represented by the United Steelworkers, or one of its predecessor unions, while employed by the Company (the “USW Retirees”) and as to whom the Bankruptcy Court did not rule as part of the 2009 OPEB Order. The Bankruptcy Court determined that it could not, without an evidentiary hearing, rule on the 2009 OPEB Motion as it relates to the USW Retirees.  After extensive negotiations with the USW Retirees, the Debtors reached consensual resolution with respect to modification of their OPEB Benefits, eliminating the need for an evidentiary hearing.  On September 17, 2010, the Bankruptcy Court approved the settlement and authorized the Debtors to modify certain benefits under their sponsored post-retirement health care plans.  The Company will reflect this modification to our liabilities upon the effective communication to the impacted participants which is expected during the fourth quarter of 2010.

Liabilities of discontinued operations as of December 31, 2009 include $28 million for pension liabilities that were assumed by the buyer upon the completion of the divestiture of the PVC additives business on April 30, 2010.

17) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company’s activities expose its earnings, cash flows and financial condition to a variety of market risks, including the effects of changes in foreign currency exchange rates, interest rates and energy prices.  The Company maintains a risk management strategy that may utilize derivative instruments to mitigate risk against foreign currency movements and to manage energy price volatility.  In accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”), the Company recognizes in accumulated other comprehensive loss (“AOCL”) any changes in the fair value of all derivatives designated as cash flow hedging instruments.  The Company does not enter into derivative instruments for trading or speculative purposes.

The Company used price swap contracts as cash flow hedges to convert a portion of its forecasted natural gas purchases from variable price to fixed price purchases.  In the fourth quarter of 2007, the Company ceased the purchase of additional price swap contracts as a cash flow hedge of forecasted natural gas purchases and established fixed price contracts with physical delivery with its natural gas vendor.  The existing price swap contracts matured through December 31, 2009.  These contracts were designated as hedges of a portion of the Company’s forecasted natural gas purchases and these contracts involve the exchange of payments over the life of the contracts without an exchange of the notional amount upon which the payments are based.  The differential paid or received as natural gas prices change is reported in AOCL.  These amounts are subsequently reclassified into COGS when the related inventory is sold.  A loss of $1 million was reclassified from AOCL into COGS for the nine months ended September 30, 2009.  All remaining contracts have been terminated by the counterparties due to the Company’s Chapter 11 cases and have been classified as liabilities subject to compromise.  As of the termination date, the contracts were deemed to be effective and the Company maintained hedge accounting through the contracts maturity given that the forecasted hedge transactions are probable.  At September 30, 2010 and December 31, 2009, the Company had no outstanding price swaps.

The Company has exposure to changes in foreign currency exchange rates resulting from transactions entered into by the Company and its foreign subsidiaries in currencies other than their functional currency (primarily trade payables and receivables).  The Company is also exposed to currency risk on intercompany transactions (including intercompany loans).  The Company manages these transactional currency risks on a consolidated basis, which allows it to net its exposure.  The Company has traditionally purchased foreign currency forward contracts, primarily denominated in Euros, British Pound Sterling, Canadian dollars, Mexican pesos, and Australian dollars to manage its transaction exposure.  These contracts are generally recognized in other income (expense), net to offset the impact of valuing recorded foreign currency trade payables, receivables and intercompany transactions.  The Company has not designated these derivatives as hedges, although it believes these instruments reduce the Company’s exposure to foreign currency risk.  However, as a result of the changes in the Company’s financial condition, it no longer has financing arrangements that provide for the capacity to purchase foreign currency forward contracts or hedging instruments to continue its prior practice.  As a result, the Company’s ability to mitigate changes in foreign currency exchange rates resulting from transactions was limited beginning in the first quarter of 2009.  The Company recognized a net loss on these derivatives of $26 million for the nine months ended September 30, 2009, which was offset by gains of $10 million for the nine months ended September 30, 2009, respectively, relating to the underlying transactions.

 
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18) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial Instruments

The carrying amounts for cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities, excluding liabilities subject to compromise, approximate their fair value because of the short-term maturities of these instruments.  The fair value of debt is based primarily on quoted market values.