UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
| X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the fiscal year ended December 31, 2007 | |
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the transition period from _______________________________ to ______________________ | |
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| | Commission file number 001-13255 |
SOLUTIA INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) | | 43-1781797
(I.R.S. Employer Identification No.) |
| 575 Maryville Centre Drive, P.O. Box 66760, St. Louis, Missouri | 63166-6760 |
| (Address of principal executive offices) | (Zip Code) |
| Registrant's telephone number, including area code: (314) 674-1000 |
| |
| Securities registered pursuant to Section 12(b) of the Act: |
Title of each class None | | Name of each exchange on which registered None |
Securities registered pursuant to section 12(g) of the Act:
Title of each class
$.01 par value Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [ X ] No
Indicate by check mark if the registrant is required to file reports pursuant to Section 13 or 15(d) of the Act. [ ] Yes [ X ] No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the registrant’s common stock held by non-affiliates, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2007, based upon the value of the last sales price of these shares as quoted on the OTC Bulletin Board, was approximately $35.5 million.
Note.—If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 104,459,578 shares of common stock, $.01 par value, outstanding as of the close of business on January 31, 2008.
Explanatory Note
This Amendment No. 1 to Form 10-K for the year ended December 31, 2007 (this "Amendment"), originally filed with the Securities and Exchange Commission on February 27, 2008 (the "Original Filing") is being filed to incorporate the consolidated financial statements of Siratsa LLC (previously known as Astaris LLC), our 50/50 joint venture with FMC Corporation, for the three year period ended December 31, 2007 as required by Rule 3-09 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (“SEC”) relating to the form and content of financial statements filed with the SEC.
This Amendment No. 1 to Annual Report on Form 10-K is also being filed to amend the following typographical errors:
Item 1. BUSINESS
Company Overview
The second paragraph is amended by changing the dates from “April 1977” and “September 1977” to “April 1997” and “September 1997”, respectively.
Item 1A. RISK FACTORS
“The Applicability of Numerous Environmental Laws to Our Manufacturing Facilities Could Cause Us to Incur Material Costs and Liabilities.”
The third paragraph is amended by changing the natural resource trustees’ estimate of the value of the natural resource damages from “between $66 million and $604 million” to “between $366 million and $604 million”.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings in Our Bankruptcy Case
JPMorgan Adversary Proceeding
The second paragraph is amended by changing the amount of the 2027/2037 Notes from “$300” to “$300 million”.
Item 6. SELECTED FINANCIAL DATA
Footnote (5) is amended by changing the amount of the write-off of debt issuance costs in 2006 from “$6 million” to “$4 million”.
Footnote (6) is amended by changing the amount of the increase in valuation allowances in 2007 from “$66 million” to “$70 million”.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Officers
The title “President, Integrated Nylon” should be added to the first column of the listing for Jonathon P. Wright.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are being filed with this Amendment.
Except as expressly stated herein, no changes have been made to the Original Filing. Except as expressly stated herein, this Amendment does not update any of the disclosures contained in the Original Filing to reflect any events that occurred after the date of the Original Filing. The filing of this Amendment shall not be deemed an admission that the Original Filing, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.
PART I
ITEM 1. BUSINESS
Company Overview
We are a global manufacturer and marketer of a variety of high-performance chemical and engineered materials that are used in a broad range of consumer and industrial applications. We maintain a global infrastructure consisting of 29 manufacturing facilities, 8 technical centers and over 30 sales offices globally, including 20 facilities in the United States. We employ approximately 6,000 individuals around the world.
We were formed in April 1997 by Pharmacia Corporation (“Pharmacia”), which was then known as Monsanto Company (“Old Monsanto”) to hold and operate substantially all of the assets, and assume all of the liabilities of Old Monsanto’s historical chemicals business. Pharmacia spun us off to Pharmacia’s shareholders and we became an independent company in September 1997 (the “Solutia Spinoff”). Pharmacia subsequently formed a new company, Monsanto Company, (“Monsanto”) to hold its agricultural and seed businesses and then spun Monsanto off to its shareholders as well.
Chapter 11 Proceedings
On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries (the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Chapter 11 Cases") in the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The cases were consolidated for the purpose of joint administration and were assigned case number 03-17949 (PCB). Our subsidiaries outside the United States were not included in the Chapter 11 filing. The filing was made to restructure our balance sheet, to streamline operations and to reduce costs, in order to allow us to emerge from Chapter 11 as a viable going concern. The filing also was made to obtain relief from the negative financial impact of liabilities for litigation, environmental remediation and certain post-retirement benefits (the "Legacy Liabilities") and liabilities under operating contracts, all of which were assumed at the time of the Solutia Spinoff. These factors, combined with the weakened state of the chemical manufacturing sector, general economic conditions and continuing high, volatile energy and crude oil costs were an obstacle to our financial stability and success.
Under Chapter 11, we are operating our businesses as a debtor-in-possession ("DIP") under court protection from creditors and claimants. Since the Chapter 11 filing, orders sufficient to enable us to conduct normal business activities, including the approval of our DIP financing, have been entered by the Bankruptcy Court. While we are subject to Chapter 11, all transactions not in the ordinary course of business require the prior approval of the Bankruptcy Court.
On January 16, 2004, pursuant to authorization from the Bankruptcy Court, we entered into a DIP credit facility. This DIP credit facility has subsequently been amended from time to time, with Bankruptcy Court approval. The DIP credit facility, as amended, consists of: (a) a $975 million fully-drawn term loan; and (b) a $250 million borrowing-based revolving credit facility, which includes a $150 million letter of credit subfacility. The DIP credit facility matures on March 31, 2008.
On October 15, 2007, we filed our Fifth Amended Joint Plan of Reorganization (the “Plan”) and the related Fifth Amended Disclosure Statement (the “Disclosure Statement”) with the Bankruptcy Court. The Disclosure Statement was approved by the Bankruptcy Court on October 19, 2007. The Plan is based on a comprehensive settlement reached with all of the major constituents in our bankruptcy case which includes the following parties: Monsanto, noteholders controlling at least $300 million in principal amount of the 2027/2037 notes, the Official Committee of General Unsecured Creditors, the Official Committee of Equity Security Holders and the Ad Hoc Trade Committee.
The Disclosure Statement contains a description of the events that led up to the Debtors’ bankruptcy filing, the actions the Debtors’ have taken to improve their financial situation while in bankruptcy, a current
description of the Debtors’ businesses and a summary of the classification and treatment of allowed claims and equity interests under the Plan. The Disclosure Statement was sent to our creditors and equity interest holders who approved the Plan. On November 29, 2007 the Bankruptcy Court entered an order confirming the Plan. We plan to declare the Plan effective and emerge from Chapter 11 on February 28, 2008.
Set forth below is a brief description of certain terms of the Plan and are qualified in their entirety by reference to the Plan and Disclosure Statement.
Under the Plan, we will emerge from bankruptcy as an independent publicly-held company. The Plan provides for a re-allocation of our Legacy Liabilities with Monsanto, and an underlying settlement with the Official Committee of Retirees, the terms of which are set forth in the Monsanto Settlement Agreement and the Retiree Settlement Agreement, which have been filed with the Bankruptcy Court.
The Plan contemplates the completion of two rights offerings to raise new equity capital: (1) $250 million of new common stock will be sold to the noteholders and general unsecured creditors (“Creditor Rights Offering”) and (2) $175 million or 17 percent of new common stock will be sold pursuant to another rights offering to holders of at least 11 shares of common stock (“Equity Rights Offering”). A group of our creditors has committed to backstop the Creditor Rights Offering. The $250 million generated as a result of the Creditor Rights Offering will be used as follows: $175 million will be set aside in a Voluntary Employees’ Beneficiary Association (VEBA) Retiree Trust to fund the retiree welfare benefits for those pre-spin retirees who receive these benefits from us; and we will use $75 million to pay for other Legacy Liabilities being retained by the Company. The $175 million generated as a result of the Equity Rights Offering will be paid to Monsanto in connection with the settlement of its claims. Any portion of the 17 percent of the new common stock that is not purchased by current equity holders will be distributed to Monsanto.
Under the Plan, current equity holders that own at least 175 shares of our common stock will receive their pro rata share of 1 percent of the new common stock and current equity holders that own at least 11 shares of our common stock will receive additional rights as described above. Additionally, current equity security holders will have the following rights: i) holders who own at least 24 shares of our common stock will receive their pro rata share of five-year warrants to purchase 7.5 percent of the new common stock; and ii) holders who own at least 107 shares of our common stock will receive the right to participate in a buy out for cash of general unsecured claims of less than $100 thousand but more than $2.5 thousand for an amount equal to 52.35 percent of the allowed amount of such claims, subject to election of each general unsecured creditor to sell their claim.
Expected distributions to be provided creditors and equity holders are set forth in the Plan and Disclosure Statement which have been filed with the Securities & Exchange Commission as exhibits to Form 8-K, dated October 22, 2007.
On November 21, 2007, the Bankruptcy Court entered its Order approving our entry into the Exit Financing Facility Commitment Letter dated October 25, 2007 by and between Solutia, Citigroup Global Markets Inc., Goldman Sachs Credit Partners L.P. and Deutsche Bank Securities Inc. (collectively, “the Lenders”). Under the Exit Financing Facility Commitment Letter and subject to the conditions contained therein, the Lenders were to provide us with $2.0 billion in financing (collectively, the “Exit Financing Facility”), including (a) a $400 million senior secured asset-based revolving credit facility. (b) a $1.2 billion senior secured term loan facility and (c) if we are unable to issue $400 million senior unsecured notes by the closing of the Exit Financing Facility, a $400 million senior unsecured bridge facility.
On January 22, 2008, the Lenders informed us they were refusing to provide the exit funding, asserting that there has been an adverse change in the markets since entering into the commitment. We disagreed with their assertion and, on February 6, 2008, we filed a complaint in the Bankruptcy Court seeking a court order requiring the Lenders to meet their commitment and fund our exit from bankruptcy. Trial on this matter began, February 21, 2008. On February 25, 2008 and before the trial concluded, we reached an agreement with our Lenders on the terms of a revised exit financing package, subject to Bankruptcy Court approval. The Bankruptcy Court approved the revised exit financing package on February 26, 2008 finding that the revisions are substantially consistent with the order confirming our Plan. Accordingly, we are currently scheduled to
emerge from Chapter 11 on February 28, 2008. In the event the Lenders do not fund the exit financing for any other reason, it is not certain that we can extend our DIP credit facility and, if we can extend it, at what cost.
General Development of Business
In May 2007 we purchased the 50% of Flexsys that we did not own from our joint venture partner Azko Nobel N.V. for approximately $213 million. The purchase was simultaneous with Flexsys’ purchase of Azko Nobel’s CRYSTEX® manufacturing operations in Japan for $25 million. Flexsys manufactures more than 50 different products which are classified into two main product groups: vulcanizing agents, principally insoluble sulfur and rubber chemicals.
Also, in May 2007 we sold DEQUEST®, our water treatment phosphates business (“Dequest”) to Thermphos Trading GmbH. Thermphos purchased the assets and assumed certain of the liabilities of Dequest for $67 million, subject to a working capital adjustment. As part of the sale, we and Thermphos entered into a ten year lease and operating agreement under which we will continue to operate the Dequest production facility for Thermphos at our plant in Newport, Wales, United Kingdom.
In September 2007 we announced the opening of our new plant in Suzhou, China, a manufacturing site for our SAFLEX® business.
In November 2007, CPFilms purchased certain assets of Acquired Technology, Inc. which provides technology to help grow and develop CPFilms’ broad product portfolio while immediately adding sales volume in the aftermarket window film business.
Segments; Principal Products
Our reportable segments are:
| | · | Performance Products; and |
The tabular and narrative information contained in Note 24 to the accompanying consolidated financial statements appearing on pages 104-106 is incorporated by reference into this section.
Performance Products
Rubber Chemicals. We purchased the 50% of Flexsys that we did not own in May 2007 from our joint venture partner, Akzo Nobel. These chemicals help cure and protect rubber, impart desirable properties to cured rubber, increase durability, and lengthen product life. Flexsys products play an important role in the manufacture of tires and other rubber products such as belts, hoses, seals and footwear.
Flexsys manufactures more than 50 different products which are classified into two main product groups: vulcanizing agents, principally insoluble sulfur, and rubber chemicals. Insoluble sulfur is a key vulcanizing agent manufactured predominantly for the tire industry. Flexsys is the world's leading supplier of insoluble sulfur and markets under the trade name of CRYSTEX®. Flexsys has three product groups within rubber chemicals: antidegradants, accelerators, and other rubber chemicals.
Flexsys products are manufactured at 15 facilities worldwide: eight in Europe, three in North America, two in South America and two in Asia. Flexsys has eight offices and a sales force of approximately 20 employees plus a worldwide network of agents and distributors.
CPFilms. CPFilms is a films business which adds functionality to glass. Our CPFilms business manufactures and sells special custom coated window films under four brands:
• VISTA®;
• GILA®; and
• FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS®.
CPFilms also manufactures various films for use in tapes, automotive badging, optical and colored filters, shades, packaging, computer touch screens, electroluminescent displays, and cathode ray tube and flat-panel monitors.
CPFilms operates facilities in Martinsville, Virginia; Canoga Park, California; and Runcorn, U.K.
Other Performance Products. SAFLEX® is the world's largest producer of PVB (Polyvinyl Butyral) sheet, a plastic interlayer used in the manufacture of laminated glass for automotive and architectural applications. In addition to PVB sheet, which is mostly marketed under the SAFLEX® brand, we manufacture specialty intermediate PVB resin products sold under the BUTVAR® brand, optical grade PVB resin and plasticizer.
PVB is a specialty resin used in the production of laminated safety glass sheet, an adhesive interlayer with high tensile strength, impact resistance, transparency and elasticity that make it particularly useful in the production of safety glass. Laminated safety glass is predominately produced with PVB sheet and is legislated in all industrialized countries for automobile windshields. Developing countries also use laminated safety glass in automotive windshields though it is not formally legislated. Approximately 45% of sales to the automotive sector are for aftermarket replacement windows. Architectural laminated safety glass is widely used in the construction of modern office buildings, airports, and residential homes. Other applications for PVB resin include non-sheet applications such as wash primers and other surface coatings, specialty adhesive formulations, and inks.
The SAFLEX® business operates facilities in Antwerp, Belgium; Ghent, Belgium; Newport, Wales (U.K.); Santo Toribio, Mexico; Sao Jose dos Campos, Brazil; Singapore; Springfield, Massachusetts; and Trenton, Michigan.
The Specialty Products business represents a unique set of niche businesses serving a diverse set of markets and end users in the aerospace, manufacturing and industrial end markets.
The principal product lines of the Specialty Products business are as follows:
HEAT TRANSFER FLUIDS –THERMINOL® heat transfer fluids used for indirect heating or cooling of chemical processes in various types of industrial equipment and in solar energy power systems. The fluids provide enhanced pumping characteristics because they remain thermally stable at high and low temperatures.
AVIATION FLUIDS – SKYDROL® brand aviation hydraulic fluids and SKYKLEEN® brand of aviation solvents supplied across the aviation industry. The SKYRDROL® line includes fire-resistant hydraulic fluids, which are used in more than half of the world's commercial aircraft.
PLASTIC PRODUCTS - a variety of products including entrance matting and automotive spray suppression flaps sold under the brands ASTROTURF®, CLEAN MACHINE® and CLEAR PASS™.
Heat transfer fluids are manufactured in Anniston, Alabama; Alvin, Texas (Chocolate Bayou); Newport, Wales (U.K.); and Sao Jose dos Campos, Brazil. Aviation Fluids are manufactured in Anniston, Alabama. Plastic products are manufactured in Ghent, Belgium and St. Louis, Missouri.
Principal Products
| | | | | | | | |
| | | | | | | | Major End-Use Applications |
| CONSTRUCTION AND HOME FURNISHINGS | SAFLEX® LLUMAR® VISTA® GILA® | Laminated window glass Professional window films Retail window films | | DuPont Kuraray Sekisui 3M Madico | Butyraldehyde Ethanol Polyvinyl alcohol Vinyl acetate monomer Polyester film | Ghent, Belgium Martinsville, VA Springfield, MA Santo Toribio, Mexico Runcorn, U.K. | | Products to increase the safety, security, sound attenuation, energy efficiency and ultraviolet protection of architectural glass for residential and commercial structures; after-market films for solar control, security and safety |
| | ASTROTURF® CLEAN MACHINE® | Artificial turf for non-athletic use Door mats | | Sanddud Baltplast Time Packaging | Polyethylene | Ghent, Belgium St. Louis, MO | | Entrance, matting |
| RUBBER CHEMICALS | CRYSTEX® SANTOFLEX® | Insoluble Sulfur Antidegradant | | Lanxess Chemtura Shikoku Oriental Carbon Chemicals Limited (India) | Benzene derivatives Ketones Sulfur CS2 Napthenic processing oil | Antwerp, Belgium Itupeva, Brazil Kashima, Japan Monogahela, PA Lemoyne, AL Nienburg, Germany Kuantan, Malaysia Sauget, IL Sete, FR Termoli, Italy Wrexham, U.K. | | Products critical to the manufacture of finished rubber as they increase the productivity of the manufacturing process and the quality of the end product with improved resilience, strength and resistance to wear and tear. Primary application is in the production of tires. |
| VEHICLES | SAFLEX® LLUMAR® VISTA® GILA® | Laminated window glass Professional window films Retail window films | | DuPont Sekisui Bekaert Johnson Laminating Garware | Butyraldehyde Ethanol Polyvinyl alcohol Vinyl acetate monomer Polyester film | Ghent, Belgium Martinsville, VA Santo Toribio, Mexico Springfield, MA Trenton, MI Runcorn, U.K. | | Products to increase the safety, security, sound attenuation and ultraviolet protection of automotive glass and give vehicles a custom appearance |
| | | | | | | | | |
| | CLEAR PASS™ | Spray suppression | | Fichet Wegu Austi Ex-Spray | Polyethylene | Ghent, Belgium | | Spray suppression systems for trucks |
| INDUSTRIAL APPLICATIONS & ELECTRONICS | Metalized films Sputtered films Deep-dyed films | Release liners | | 3M ATI Intellicoat Mitsubishi | Polyester film | Martinsville, VA Runcorn, U.K. | | Window films, tapes, automotive badging, optical and colored filters, shades, reprographics, and packaging uses |
| | Performance films Conductive and anti- reflective coated films | | Bekaert OCLI Southwall | Polyester film Induim tin Precious metals | Canoga Park, CA Martinsville, VA Runcorn, U.K. | | Computer touch-screens, electroluminescent displays for hand-held electronics and watches, and cathode ray tube and LCD monitors |
| CAPITAL EQUIPMENT | THERMINOL® | Heat transfer fluids | | Dow | Benzene Phenol | Alvin, TX Anniston, AL Newport, U.K. | | Heat transfer fluids for a wide variety of manufacturing and refining uses |
| AVIATION & TRANSPORTATION | SKYDROL® SKYKLEEN® | Aviation hydraulic fluids Aviation solvents | | ExxonMobil | Phosphate esters | Anniston, AL | | Hydraulic fluids for commercial aircraft, and environmentally friendly solvents for aviation maintenance |
| (1) | Major plants are comprised of those facilities at which each of the identified major products conclude their respective manufacturing processes. The major products may pass through other of our plants prior to the final sale to customers. |
Integrated Nylon
Integrated Nylon consists of nylon plastics, fiber and intermediate chemical products used in construction, automotive, consumer and industrial applications.
Integrated Nylon comprises an integrated family of nylon products, as follows:
| | · | Our VYDYNE® nylon molding resins, ASCEND® nylon polymers and nylon industrial fibers, which are sold into the automotive, engineered thermoplastic, apparel, textile, commercial and industrial markets in products such as knit clothing, dental floss, tires, airbags, molded automotive parts, conveyor belts, cooking bags, food packaging and camping gear. |
| | · | Our nylon carpet staple and nylon bulk continuous filament which are sold under the WEAR-DATED® brand for residential carpet and the ULTRON® brand for commercial carpet, as well as under private labels for the residential, commercial and industrial markets. |
| | · | Our chemical intermediates, including adipic acid, hexamethylenediamine and acrylonitrile are used internally as feedstock for fiber and resins production and are also sold on the merchant market for use in nylon and acrylic fiber, nylon and ABS plastic, synthetic resins, synthetic lubricants, paper chemicals, herbicides and plasticizers. |
The Integrated Nylon segment operates facilities in Alvin, Texas (Chocolate Bayou); Decatur, Alabama; Foley, Alabama; Greenwood, South Carolina; and Pensacola, Florida.
Principal Products
| | | | | | |
| | | | | | Major End-Use Applications |
| CONSTRUCTION AND HOME FURNISHINGS | WEAR-DATED® ULTRON® ASCEND® | Nylon carpet staple Nylon bulk continuous filament Nylon polymer | Invista Shaw Industries Rhodia | Adipic acid Hexamethylene-diamine | Foley, AL Greenwood, SC Cantonment, FL | Residential and commercial carpeting and non-woven reinforcement and linings |
| PERSONAL PRODUCTS | ASCEND® | Nylon polymer | Invista Rhodia Radici | Adipic acid Hexamethylene-diamine | Greenwood, SC Cantonment, FL | Knit apparel, half-hose, active wear, apparel, dental floss, and intimate apparel |
| VEHICLES | VYDYNE® ASCEND® | Nylon filaments and molding agents Nylon polymer | Acordis BASF DuPont Invista Rhodia | Adipic acid Hexamethylene-diamine | | Tires, airbags, automotive interior and exterior, and under-the-hood molded parts |
| INDUSTRIAL APPLICATIONS | ASCEND® Industrial nylon fiber | Nylon polymer | Kordsa Invista Shenma | Propylene Natural gas Cyclohexane Ammonia | Decatur, AL Greenwood, SC Cantonment, FL | Conveyer belts, nylon film cooking bags, specialized food packaging, sewing thread, backpacks, cots, tents |
| INTERMEDIATE CHEMICALS | Adipic acid Hexamethylene-diamine Acrylonitrile | | Asahi Chemical Invista Rhodia BASF Ineos | Propylene Natural gas Cyclohexane Ammonia | Alvin, TX Decatur, AL Cantonment, FL | Nylon and acrylic fiber, nylon and SBA plastics, synthetic resins, synthetic lubricants, paper chemicals, plasticizers |
| (1) | Major plants are comprised of those facilities at which each of the identified major products conclude their respective manufacturing processes. The major products may pass through other of our plants prior to the final sale to customers. |
Sale of Products
We sell our products directly to end users in various industries, principally by using our own sales force, and, to a lesser extent, by using distributors.
Our marketing and distribution practices do not result in unusual working capital requirements on a consolidated basis. We maintain inventories of finished goods, goods in process and raw materials to meet customer requirements and our scheduled production. In general, we do not manufacture our products against a backlog of firm orders; we schedule production to meet the level of incoming orders and the projections of future demand. However, in the Performance Products segment, a large portion of sales for 2007 were pursuant to volume commitments. We do not have material contracts with the government of the United States or any state, local or foreign government. In 2007, no single customer or customer group accounted for 10 percent or more of our net sales.
Our second and third quarters are typically stronger than our first and fourth quarters because sales of carpet and window films are stronger in the spring and fall.
Competition
The global markets in which our businesses operate are highly competitive. We expect competition from other manufacturers of the same products and from manufacturers of different products designed for the same uses as our products to continue in both U.S. and international markets. Depending on the product involved, we encounter various types of competition, including price, delivery, service, performance, product innovation, product recognition and quality. Overall, we regard our principal product groups as competitive with many other products of other producers and believe that we are an important producer of many of these product groups. For additional information regarding competition in specific markets, see the charts under "Segments: Principal Products" above.
Raw Materials and Energy Resources
We buy large amounts of commodity raw materials and energy resources, including propylene, cyclohexane, benzene, vinyl acetate, polyvinyl alcohol, 2-ethyl hexanol and natural gas. We typically buy major requirements for key raw materials pursuant to contracts with average contractual periods of one to four years. We obtain certain important raw materials from a few major suppliers. In general, in those cases where we have limited sources of raw materials, we have developed contingency plans to the extent practicable to minimize the effect of any interruption or reduction in supply. However, we also purchase raw materials from some single source suppliers in the industry and in the event of an interruption or reduction in supply, might not be able to mitigate any negative effects.
While temporary shortages of raw materials and energy resources may occasionally occur, these items are generally sufficiently available to cover our current and projected requirements. However, their continuing availability and price may be affected by unscheduled plant interruptions and domestic and world market conditions, political conditions and governmental regulatory actions. Due to the significant quantity of some of these raw materials and energy resources that we use, a minor shift in the underlying prices for these items can result in a significant impact on our consolidated financial position and results of operations.
Intellectual Property
We own a large number of patents that relate to a wide variety of products and processes and have pending a substantial number of patent applications. We also own and utilize across our business segments a significant amount of valuable technical and commercial information that is highly proprietary and maintained as trade secrets. In addition, we are licensed under a small number of patents owned by others. We own a considerable number of established trademarks in many countries as well as related internet domain names under which we market our products. This intellectual property in the aggregate is of material importance to our operations and to our various business segments.
Research and Development
Research and development constitute an important part of our activities. Our expenses for research and development amounted to $37 million in both 2007 and 2006 and $40 million in 2005, or about 1.3 percent of sales on average. We focus our expenditures for research and development on process improvements and selected product development.
Our research and development programs in the Performance Products segment include new products and processes for the window glazing and specialty chemicals markets. A new acoustic safety interlayer and a new heat transfer fluid have been commercialized. A new aviation fluid is in flight service evaluation. Several process technologies developed to support the construction of SAFLEX® plants have been started up. Significant progress was achieved in developing a solar safety interlayer and a new interlayer for thin film photovoltaic cell lamination. Window films that mitigate or enhance the reception of electronic signals through windows continue to be developed. New products using advances in exterior coatings, adhesive formulations, and nanoparticle technologies are being commercialized.
Our research and development programs in our Flexsys business emphasize the balance between manufacturing cost reduction and capacity expansion. We have made significant progress in process optimization, capacity expansion and energy reduction across most of our Flexsys product lines.
Our Integrated Nylon segment continues to focus on internal process improvements to mitigate increasing raw material prices and to commercialize new products to address customer needs and improve product mix.
Environmental Matters
The narrative appearing under “Environmental Matters” beginning on page 45 below is incorporated by reference.
Employee Relations
On December 31, 2007, we had approximately 6,000 employees worldwide: with U.S. employees constituting 69 percent of the total number of employees. Approximately 450 of the European employees are represented by the union delegation. Approximately 15 percent of our U.S. workforce is currently represented by various labor unions with local agreements that expire between July 2009 and February 2013, at our following sites: Anniston, Alabama; Sauget, Illinois; Springfield, Massachusetts; and Trenton, Michigan. In the U.S., local agreements cover wages and working conditions. Each of our U.S. labor unions ratified new five-year collective bargaining agreements in 2005 which set pension and health and welfare benefits for our employees who are
represented by the labor unions at the above sites.
International Operations
We are engaged in manufacturing, sales and research and development in areas outside the United States. Approximately 55 percent of our consolidated sales from continuing operations for the year ended December 31, 2007 were made into markets outside the United States, including Europe, Canada, Latin America and Asia.
Operations outside the United States are potentially subject to a number of risks and limitations that are not present in domestic operations, including trade restrictions, investment regulations, governmental instability and other potentially detrimental governmental practices or policies affecting companies doing business abroad. Operations outside the United States are also subject to fluctuations in currency values. The functional currency of each of our non- U.S. operations is generally the local currency. Exchange rates between these currencies and U.S. dollars have fluctuated significantly in recent years and may continue to do so. In addition, we generate revenue from export sales and operations conducted outside the United States that may be denominated in currencies other than the relevant functional currency.
Internet Access to Information
Our Internet address is www.solutia.com. We make available free of charge through our Internet website our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). All of these materials may be accessed from the "Investors" section of our website, www.solutia.com. These materials may also be accessed through the SEC’s website (www.sec.gov) or in the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. ITEM 1A. RISK FACTORS
IN EVALUATING US, CAREFUL CONSIDERATION SHOULD BE GIVEN TO THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS ANNUAL REPORT ON FORM 10-K. ALTHOUGH THESE RISK FACTORS ARE MANY, THESE FACTORS SHOULD NOT BE REGARDED AS CONSTITUTING THE ONLY RISKS ASSOCIATED WITH OUR BUSINESSES. EACH OF THESE RISK FACTORS COULD ADVERSELY AFFECT OUR BUSINESS, OPERATING RESULTS AND/OR FINANCIAL CONDITION. IN ADDITION TO THE FOLLOWING DISCLOSURES, PLEASE REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.
CERTAIN BANKRUPTCY CONSIDERATIONS
We May Not Be Able to Consummate Our Exit Financing and Successfully Implement the Plan
Our emergence from Chapter 11 bankruptcy protection is contingent on the closing of our exit financing. Additionally, if we remain in Chapter 11 beyond the anticipated closing date of February 28, 2008 we may be faced with needing to extend our DIP financing which expires on March 31, 2008. It is not certain that we can extend our DIP financing and, if we can extend it, at what cost. It may also become necessary to amend our Solutia Europe S.A./N.V. (“SESA”) €200 million facility agreement and our Flexsys $225 million multicurrency term and revolving financing facility. It is not certain that we can amend these facilities and, if we can amend them, at what cost.
If we are unable to successfully implement our Plan, it would then be unclear as to whether we would be able to reorganize our businesses and what, if any, distributions holders of claims against or equity interests in us ultimately would receive with respect to their claims or equity interests. If our confirmed Plan does not become effective, there also can be no assurance that we will be able to successfully develop, prosecute, confirm, and consummate an alternative plan of reorganization with respect to the Chapter 11 Cases that would be acceptable to the Bankruptcy Court and our creditors, equity holders and other parties in interest. There can be no assurance that such an alternative plan of reorganization would preserve the reallocation of the Legacy Liabilities that is achieved in the Plan, which eliminates legacy tort liability exposure, reduces environmental obligations, and significantly reduces our exposure with regard to retiree obligations. Additionally, it is possible that third parties may seek and obtain approval to terminate or shorten the exclusivity period during which only we may propose and confirm a plan of reorganization. Finally, our emergence from bankruptcy is not assured.
Prolonged Continuation of the Chapter 11 Cases May Harm Our Businesses
Any prolonged continuation of the Chapter 11 Cases beyond the anticipated closing date of February 28, 2008 could adversely affect our businesses and operations. As long as the Chapter 11 Cases continue, our senior management will be required to spend a significant amount of time and effort dealing with our reorganization instead of focusing exclusively on business operations. Prolonged continuation of the Chapter 11 Cases may also make it more difficult to attract and retain management and other key personnel necessary to the success and growth of our businesses. In addition, the longer the Chapter 11 Cases continue, the more likely it is that our customers, suppliers, distributors and agents will lose confidence in our ability to successfully reorganize our businesses and seek to establish alternative commercial relationships. Furthermore, as long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the proceedings. Additionally, if we remain in Chapter 11 beyond the anticipated closing date of February 28, 2008 we may be faced with needing to extend our DIP financing which expires on March 31, 2008. It is not certain that we can extend our DIP financing and, if we can extend it, at what cost.
The Change of Control Produced by Our Restructuring May Result in a Limitation On or Loss of Net Operating Losses for Federal Income Tax Purposes
Our issuance of new common stock in a reorganized Solutia, along with the cancellation of existing equity interests may cause us to undergo an ownership change upon emergence from Chapter 11. As a result, Section 382 of the Internal Revenue Code (“IRC”) may apply to limit our use of consolidated net operating losses upon emergence. Additionally, our ability to use any remaining capital loss carryforwards and tax credits may be limited. The annual limitation imposed by the particular provision of Section 382 of the IRC that we expect to apply to our ownership change generally equals the product of (i) the fair market value of the net equity value of our stock at the time of the ownership change, taking into account the increase in value of the corporation as a result of the surrender or cancellation of creditor’s claims in the transaction (rather than the value without taking into account such increases, as is the case under the general rule for non-bankruptcy ownership changes) multiplied by (ii) the long-term tax-exempt rate in effect for the month in which the ownership change occurs. The long-term tax-exempt rate is published monthly by the IRS and is intended to reflect current interest rates on long-term tax-exempt debt obligations. Accordingly, under this rule the Section 382 limitation would generally reflect the increase in the value of our new stock resulting from the conversion of debt to equity in the proceeding. Section 383 of the IRC applies a similar limitation to a capital loss carryforward and tax credits. Although it is impossible to predict with absolute certainty the net equity value of reorganized Solutia immediately upon emergence from Chapter 11, our use of our net operating losses is expected to be substantially limited after an ownership change.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
The Prices of Raw Materials and Energy We Require to Produce Our Products Are Volatile and Cannot Always Be Passed On to Our Customers
We purchase large amounts of commodity raw materials, including natural gas, propylene, cyclohexane and benzene. Occasionally, temporary shortages of these raw materials and energy sources may occur. In addition, we often purchase major requirements for key raw materials under medium-term contracts. Pricing under these contracts may fluctuate as a result of unscheduled plant interruptions, United States and worldwide market conditions and government regulation. Given our competitive markets, it is not always possible to pass all of these increased costs on to our customers. In addition, natural gas prices and other raw material and energy costs are currently more than double the average ten-year levels. Elevated raw material and energy costs could significantly reduce our operating margins in the future. See also Business – Raw Materials and Energy Resources.
Problems Encountered in Operating Our Production Facilities Could Adversely Impact Our Business
Our production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unscheduled down time and environmental hazards. From time to time in the past, we have had incidents that have temporarily shut down or otherwise disrupted our manufacturing, causing production delays and resulting in liability for workplace injuries and fatalities. We are dependent upon the continued safe operation of our production facilities.
In addition, some of our products involve the manufacture or handling of a variety of reactive, explosive and flammable materials. Use of these products by our employees, customers and contractors could result in liability to us if an explosion, fire, spill or other accident were to occur.
We Have and Will Continue to Have Significant Indebtedness
We have and will continue to have a significant amount of indebtedness. Our significant indebtedness could have important consequences, including the following:
| | · | We will have to dedicate a significant portion of our cash flow to making interest and principal payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions or other general corporate purposes. |
| | · | Levels of indebtedness may make us less attractive to potential acquirors or acquisition targets. |
| | · | Levels of indebtedness may limit our flexibility to adjust to changing business and market conditions, and make us more vulnerable to downturns in general economic conditions as compared to competitors that may be less leveraged. |
| | · | As described in more detail above, the documents providing for our indebtedness contain restrictive covenants that may limit our financing and operational flexibility. |
Furthermore, our ability to satisfy our debt service obligations will depend, among other things, upon our future operating performance and ability to refinance indebtedness when necessary. These factors depend partly on economic, financial, competitive and other factors beyond our control. We may not be able to generate sufficient cash from operations to meet our debt service obligations as well as fund necessary capital expenditures, pension funding obligations and investments in research and development. In addition, if we need to refinance our debt, obtain additional financing or sell assets or equity, we may not be able to do so on commercially reasonable terms, if at all.
Turnover in the Senior Management Team and Losses of Other Key Personnel Could Have a Significant Adverse Effect on Our Results of Operations
The services of our senior management team, as well as other key personnel, have been integral in our improving results during the Chapter 11 Cases and will be critical to the implementation of our business strategies going forward and our success. If our emergence from the Chapter 11 Cases is delayed, our financial results diminish, the terms of incentive compensation programs are not adequate or any other adverse events occur in the Chapter 11 Cases, we may have difficulty retaining current senior management and other key personnel and be unable to hire qualified personnel to fill any resulting vacancies, which could have a significant adverse effect on our results of operations and ability to emerge from Chapter 11.
We Operate in a Highly Competitive Industry That Includes Competitors with Greater Resources Than Ours
The markets in which we compete are highly competitive. Competition in these markets is based on a number of factors, such as price, product quality and service. Some of our competitors may have greater financial, technological and other resources and may be better able to withstand changes in market conditions. In addition, some of our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Consolidation of our competitors or customers may also adversely affect our businesses. Furthermore, global competition and customer demands for efficiency will continue to make price increases difficult.
We Operate in Cyclical Business Segments and Our Financial Results Are Likely to Fluctuate Accordingly
We operate in cyclical business segments. Specifically, a substantial portion of our sales are to customers involved, directly or indirectly, in the housing and automotive industries, both of which are, by their nature, cyclical industries. A downturn in either or both of these industries would result in lower demand for our products among customers involved in those industries and a reduced ability to pass on cost increases to these customers.
If We Are Unable to Protect Our Intellectual Property Rights, Our Sales and Financial Performance Could Be Adversely Affected
We own a large number of patents that relate to a wide variety of products and processes and have a substantial number of patent applications pending. We own a considerable number of established trademarks in many countries under which we market our products. These patents and trademarks in the aggregate are of material importance to the operations of our businesses. Our performance may depend in part on our ability to establish, protect and enforce such intellectual property and to defend against any claims of infringement, which could involve complex legal, scientific and factual questions and uncertainties.
In the future, we may have to rely on litigation to enforce our intellectual property rights and contractual rights. In addition, we may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. If litigation that we initiate is unsuccessful, we may not be able to protect the value of some of our intellectual property. In the event a claim of infringement against us is successful, we may be required to pay royalties or license fees to continue to use technology or other intellectual property rights that we had been using or we may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable period of time. If we are unable to obtain licenses on reasonable terms, we may be forced to cease selling or using any of our products that incorporate the challenged intellectual property, or to redesign or, in the case of trademark claims, rename our products to avoid infringing the intellectual property rights of third parties, which may not be possible and may be time-consuming. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to us and diversions of some of our resources. Our intellectual property rights may not have the value that we believe them to have, which could result in a competitive disadvantage or adversely affect our business and financial performance. See also Business – Intellectual Property.
Legal Proceedings Could Impose Substantial Costs on Us
As a manufacturer of chemical-based materials, we are subject to various lawsuits involving environmental, hazardous waste, personal injury and product liability claims. We are named in a number of legal proceedings primarily relating to former operations, including claims for personal injury and property damage arising out of releases of or alleged exposure to materials that are classified as hazardous substances under federal environmental law or alleged to be hazardous by plaintiffs. Adverse judgments in these legal proceedings, or the filing of additional environmental or other damage claims against us, may have a negative impact on our future results of operations. Additionally, administrative and legal costs associated with defending or settling large claims, or large numbers of claims, could have a negative impact on our future results of operations. It is possible that the Bankruptcy Court could disagree with our treatment of these claims. It is also possible that third parties, including the U.S. federal government, state regulatory agencies, or others, may challenge the dischargeability of these claims. If these litigation matters or claims are not treated as contemplated in our Plan, as filed, or if the actual costs are materially greater than estimates associated with these claims, they could have a material adverse effect on our financial condition and future operating performance.
The Applicability of Numerous Environmental Laws to Our Manufacturing Facilities Could Cause Us to Incur Material Costs and Liabilities
We are subject to extensive federal, state, local and foreign environmental, safety and health laws and regulations concerning, among other things, emissions to the air, discharges to land and water and the generation, handling, treatment and disposal of hazardous waste and other materials. We are also required to maintain various environmental permits and licenses, many of which require periodic modification and renewal. Our operations entail the risk of violations of these laws and regulations, many of which provide for substantial fines and criminal sanctions for violations.
In addition, these requirements and their enforcement may become more stringent in the future. Non-compliance with such future requirements could subject us to material liabilities, such as government fines, third-party lawsuits or the suspension of non-compliant operations. We may also be required to make significant site or operational modifications at substantial cost. Future regulatory and enforcement developments could also restrict or eliminate our ability to continue to manufacture certain products or could require us to make modifications to our products.
At any given time, we are involved in litigation, administrative proceedings and investigations of various types in a number of jurisdictions involving potential environmental liabilities, including clean-up costs associated with contaminated hazardous waste disposal sites, natural resource damages, property damages and personal injury. For example, natural resource trustees have asserted certain natural resource damage claims against us principally relating to our Anniston and Sauget facilities, the liability for which we expect to share with Monsanto pursuant to our Plan. The natural resource trustees have estimated the value of the natural resource damages at between $366 million and $604 million; we dispute these estimates and have received estimates from third party experts of $14 million to $51 million for such asserted damages. These damage estimates are preliminary and subject to change and do not take into account reductions to damages possible through projects to restore natural resources. We may be required to spend substantial sums to defend or settle these and other actions, to pay any fines levied against us or satisfy any judgments or other rulings rendered against us and such sums may be material.
Under certain environmental laws, we can be held strictly liable for hazardous substance contamination at real property we have owned, operated or used as a disposal site or for natural resource damages associated with such contamination. Liability under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis. One liable party could be held responsible for all costs at a site, regardless of fault, percentage of contribution to the site or the legality of the original disposal. We may also face liability for violations under environmental laws occurring prior to the date of our acquisition of properties subject thereto. As described in more detail above and in the following paragraph, we could incur significant costs,
including cleanup costs, natural resources damages, civil or criminal fines and sanctions and third-party claims as a result of hazardous substance contamination.
We have made and will continue to make substantial expenditures for environmental and regulatory compliance and remediation projects. During 2007, we spent approximately $11 million on environmental compliance-related capital projects for various environmental matters and $68 million for the management of environmental programs. Included in environmental program management is the operation and maintenance of current operating facilities for environmental control which is expensed in the period incurred, and $12 million for remediation activities.
The substantial amounts that we may be required to spend on environmental capital projects and programs could cause substantial cash outlays and, accordingly, could have a material effect on our consolidated financial position, liquidity and profitability or may limit our financial and operating flexibility. In addition, although we believe that we have correctly budgeted and, to the extent appropriate under applicable accounting principles, reserved for these amounts, factors beyond our control may render these budgeted and reserved amounts inadequate. These factors include changing governmental policies and regulations, the commencement of new governmental proceedings or third party litigation regarding environmental remediation, new releases of hazardous substances that result in personal injury, property damage or harm to the environment, the discovery of unknown conditions of contamination or unforeseen problems encountered in the environmental remediation programs.
Our commencement of Chapter 11 proceedings was caused, in significant part, by an accumulation of Legacy Liabilities, including, among others, “legacy environmental liability” arising from historical operations of Pharmacia prior to the Solutia spin-off. In the course of the Chapter 11 proceedings, we have achieved a substantial reallocation of the risk from these Legacy Liabilities. In particular, Monsanto has agreed to be financially responsible for remediation costs and other environmental liabilities for sites owned, operated or used by Pharmacia but never owned, operated or used by us after the Solutia Spin-off, to share liabilities with respect to offsite areas at the Sauget and Anniston plant sites, and to be financially responsible for personal injury and property damage claims associated with exposures to hazardous substances arising from legacy Pharmacia operations (so-called “Legacy Toxic Tort Claims”). If Monsanto and Pharmacia fail to honor their obligation with respect to such remediation costs or Legacy Toxic Tort Claims, we could become responsible for some or all of such liabilities (except for the remediation costs and other environmental liabilities for sites owned, operated or used by Pharmacia but never owned, operated or used by us for which we expect to receive a discharge under the Plan) which liabilities could be material. See also Management’s Discussion and Analysis – Environmental Matters.
We Face Currency and Other Risks Associated with International Sales
We generate revenue from export sales, as well as from operations conducted outside the United States. For example, approximately 55 percent of our consolidated sales in 2007 were made into markets outside the United States, including Europe, Canada, Latin America and Asia. Approximately 74 percent of the sales of the Performance Products segment were made into markets outside the United States. Operations outside the United States expose us to risks which would adversely affect our results of operations and financial conditions including fluctuations in currency values, trade restrictions, tariff and trade regulations, U.S. export controls, foreign tax laws, shipping delays, and economic and political instability. For example, violations of U.S. export controls could result in fines and the suspension or loss of export privileges.
The functional currency of each of our non-U.S. operations is generally the local currency. Exchange rates between some of these currencies and U.S. dollars have fluctuated significantly in recent years and may do so in the future. It is possible that fluctuations in foreign exchange rates will have a negative effect on our results of operations.
Many of Our Products and Manufacturing Processes Are Subject to Technological Change and Our Business Will Suffer if We Fail to Keep Pace
We sell many of our products (and their corresponding manufacturing processes) in markets that are subject to technological change and new product introductions and enhancements. We must continue to enhance our existing products and to develop and manufacture new products with improved capabilities to continue to be a market leader. We must also continue to make improvements in our manufacturing processes and productivity to maintain our competitive position. When we invest in new technologies, processes or production facilities, we will face risks related to construction delays, cost over-runs and unanticipated technical difficulties related to start-up. Our inability to anticipate, respond to, capitalize on or utilize changing technologies could have an adverse effect on our consolidated results of operations, financial condition and cash flows in any given period.
Significant Payments May Be Required to Maintain the Funding of Our Domestic Qualified Pension Plan
We maintain a qualified pension plan under which certain of our employees and retirees are entitled to receive benefits. Although we have frozen future benefit accruals under our U.S. pension plan, significant liabilities still remain. In order to fund the pension plan, we made significant contributions to the pension plan in 2007 amounting to approximately $105 million and will have to fund more going forward. We may be unable to obtain financing to make these pension plan contributions. In addition, even if financing for these contributions is obtained, the funding obligations and the carrying costs of debt incurred to fund the obligations could have a significant adverse effect on our results of operations.
In addition, we are party to certain litigation with respect to our domestic pension plan as more fully described in Part I, Item 3 – Legal Proceedings. It is not known what funding liabilities may be required of us under the Employee Retirement Income Security Act and any other applicable law if a judgment is entered against our pension plan in this litigation, given that we are the sponsor of the Solutia Pension Plan. If a final judgment is entered against the Solutia pension plan, the liability resulting from such judgment could have a material adverse effect on our financial results and continuing operations.
Our Operations Are Restricted by the Terms of Our Credit Facilities
Our current credit facilities include a number of significant restrictive covenants and our exit facility will as well. These covenants could impair our financing and operational flexibility and make it difficult for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. Specifically, such covenants restrict our ability and, if applicable, the ability of our subsidiaries to, among other things:
| | · | make certain investments; |
| | · | enter into certain types of transactions with affiliates; |
| | · | limit dividends or other payments by us and certain of our subsidiaries; |
| | · | use assets as security in other transactions; |
| | · | pay dividends on our common stock or repurchase our equity interests; |
| | · | sell certain assets or merge with or into other companies; |
| | · | guarantee the debts of others; |
| | · | enter into new lines of business; |
| | · | make capital expenditures; |
| | · | prepay, redeem or exchange our debt; |
| | · | form any joint ventures or subsidiary investments. |
In addition, our current credit facilities and our exit facility require us to satisfy certain financial covenants. These financial covenants and tests could limit our ability to react to market conditions or satisfy extraordinary capital needs and could otherwise restrict our financing and operations.
Our ability to comply with the covenants and other terms of our debt obligations will depend on our future operating performance. If we fail to comply with such covenants and terms, we would be required to obtain waivers from our lenders to maintain compliance with our debt obligations. If we are unable to obtain any necessary waivers and the debt is accelerated, a material adverse effect on our financial condition and future operating performance would result.
Labor Disruptions With the Unionized Portion Of Our Workforce Could Have a Negative Effect
As of December 31, 2007, approximately 15 percent of our United States employees were unionized. They are represented by various labor unions with local agreements set to expire between July 2009 and February 2013. While we believe that our relations with our employees are good, we may not be able to negotiate these or other collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, and without production interruptions, including labor stoppages. A prolonged labor dispute, which could include a work stoppage, could impact our ability to satisfy our customers’ requirements and negatively affect our financial condition.
ITEM 3. LEGAL PROCEEDINGS
Because of the size and nature of our business, we are a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages. In addition, at the time of its spinoff from Pharmacia, we assumed the defense of specified legal proceedings and agreed to indemnify Pharmacia for obligations arising in connection with those proceedings. We ceased performing these defense and indemnification obligations to Pharmacia shortly after filing for Chapter 11 protection because such obligations constitute pre-petition obligations under the U.S. Bankruptcy Code that we are prohibited from performing, except pursuant to a confirmed plan of reorganization. Pharmacia has asserted a claim in our Chapter 11 case pertaining to these and other matters which will be resolved via the Plan as discussed in Note 1 to the accompanying consolidated financial statements.
Monsanto also indemnified Pharmacia with respect to a number of legal proceedings described in our 2003 Form 10-K/A in which we were a named defendant or were defending solely due to the Pharmacia related indemnification obligations referred to above. We are prohibited from performing with respect to these obligations, and developments, if any, in these matters are currently managed by Monsanto or other named defendants. Accordingly, we have ceased reporting on the status of these legal proceedings. The legal proceedings in this category relate to property damage, personal injury, products liability, premises liability or other damages relating to exposure to PCB, asbestos and other chemicals manufactured before the Solutia Spinoff. Defense and settlement costs as well as judgments, if any, are currently being funded by Monsanto for these matters. Monsanto’s funding of these legal activities, and the resulting claim against us which Monsanto has asserted in the Chapter 11 case, inclusive of the non-quantified unliquidated and contingent components of their claim, will be resolved via the Plan as discussed in Note 1 to the accompanying consolidated financial statements. The estimated unsecured claim amount, classified as a liability subject to compromise, was $106 and $111, as of December 31, 2007 and December 31, 2006 respectively.
Following is a summary of legal proceedings that we continue to manage that, if resolved unfavorably, could have a material adverse effect on our results of operation and financial position. See also Management’s Discussion and Analysis.
Legal Proceedings in Our Bankruptcy Case
Citigroup Global Markets, et al. Adversary Proceeding
On February 6, 2008, we filed an adversary proceeding in our bankruptcy case against Citigroup Global Markets Inc., Goldman Sachs Credit Partners, L.P. and Deutsche Bank Securities Inc. (collectively, “the Lenders”) seeking a court order requiring the Lenders to meet their commitment under the Exit Financing Facility Commitment Letter that has been approved by the Court on November 21, 2007. Under the Exit Financing Facility Commitment Letter and subject to the conditions contained therein, the Lenders were to provide us with $2.0 billion in financing (collectively, the “Exit Financing Facility”), including (a) a $400 million senior secured asset-based revolving credit facility, (b) a $1.2 billion senior secured term loan facility and (c) if we are unable to issue $400 million senior unsecured notes by the closing of the Exit Financing Facility, a $400 million senior unsecured bridge facility.
On January 22, 2008, the Lenders informed us they were refusing to provide the exit funding, asserting that there has been an adverse change in the markets since entering into the commitment. We disagreed with their assertion and, on February 6, 2008, we filed a complaint in the Bankruptcy Court seeking a court order requiring the Lenders to meet their commitment and fund our exit from bankruptcy. Trial on this matter began February 21, 2008. On February 25, 2008 and before the trial concluded, we reached an agreement with our Lenders on the terms of a revised exit financing package, subject to Bankruptcy Court approval. The Bankruptcy Court approved the revised exit financing package on February 26, 2008 finding that the revisions are substantially consistent with the order confirming our Plan. Accordingly, we are currently scheduled to emerge from Chapter 11 on February 28, 2008.
JPMorgan Adversary Proceeding
On May 27, 2005, JPMorgan, as indenture trustee for our debentures due 2027 and 2037 (the “Prepetition Indenture”), filed an adversary proceeding against us in our bankruptcy case. In the proceeding, JPMorgan asserted causes of action principally seeking declaratory judgments to establish the validity and priority of the purported security interest of the holders of the 2027 and 2037 Debentures. The matter was tried before the Bankruptcy Court in 2006 and in May 2007, the Court ruled in our favor holding that the 2027 and 2037 Debentures were properly de-securitized under the express terms of the Prepetition Indenture and its related agreements, that the holders of the 2027 and 2037 Debentures do not have, and are not entitled to any security interests or liens on any of our assets and that the Noteholders are not entitled to any equitable relief. The ruling was appealed separately by the Prepetition Indenture Trustee and the Ad Hoc Committee of Solutia Noteholders.
The Prepetition Indenture Trustee, the Ad Hoc Committee of Solutia Noteholders and individual Noteholders controlling at least $300 million in principal amount of the 2027/2037 Notes have agreed to stay their appeals in this Adversary Proceeding in consideration for the Noteholders’ treatment under the Plan. The Plan provides that this Adversary Proceeding will be deemed dismissed and withdrawn with prejudice on the effective date of the Plan (the “Effective Date”).
Equity Committee Adversary Proceeding Against Monsanto and Pharmacia
On March 7, 2005, the Equity Committee in our bankruptcy case filed a complaint against, and objections to the proofs of claim filed by Pharmacia and Monsanto in our bankruptcy case. The complaint alleged, among other things, that the Solutia Spinoff was a fraudulent transfer under the Bankruptcy Code because Pharmacia forced us to assume excessive liabilities and insufficient assets such that we were destined to fail from our inception.
Pharmacia and Monsanto filed a motion to dismiss the complaint or, in the alternative, to stay the adversary proceeding. During a hearing held in April 2006, the Bankruptcy Court denied Pharmacia and Monsanto’s motion to dismiss the complaint and in September 2006, the Court ruled that while the Equity Committee did not have standing to pursue these claims on behalf of the Debtors, it had standing to pursue its own objections to the claims of Monsanto and Pharmacia. The Equity Committee has agreed to stay the Equity Committee Adversary Proceeding in consideration for the treatment given to Equity Holders under the Plan. The Plan provides that this Adversary Proceeding will be deemed dismissed and withdrawn with prejudice on the Effective Date.
Dispute Regarding Proof of Claim of Bank of New York
On June 22, 2007, we filed an objection to the proof of claim filed by the Bank of New York, as indenture trustee for the 2009 Notes, seeking disallowance of the portion of the claim that represented original issue discount that would remain unearned as of the Effective Date. The indenture trustee opposed the disallowance, and further asserted that the allowed amount of the claim should include damages arising from, among other things, our proposed payment of the claim prior to the stated maturity of the 2009 Notes.
On November 9, 2007, after briefing by the parties and a hearing held before the Bankruptcy Court on October 31, 2007, the Bankruptcy Court issued a memorandum decision sustaining our objection to the claim filed by the indenture trustee for the 2009 Notes and disallowing the portions of the 2009 Notes’ claim that represent (i) post-effective date unearned original discount and (ii) damages comprised of interest from the Effective Date to the stated maturity date of the 2009 Notes. A subsequent order entered by the Bankruptcy Court on November 26, 2007 fixed the allowed amount of the claim at $181.7 million, plus accrued pre-petition and pendency interest, for a total allowed claim of approximately $209 million as of September 30, 2007. The indenture trustee for the 2009 Notes filed appeals of the Bankruptcy Court’s memorandum decision and related rulings on November 28, 2007.
To prevent any delay to confirmation of the Plan as a result of this pending appeal, we, the Official Committee of Unsecured Creditors (the “Creditors’ Committee”) and the indenture trustee agreed that we would set up a reserve on the Effective Date in the amount of $37.5 million for the benefit of the indenture trustee and the 2009 noteholders, in the event that the indenture trustee should prevail on appeal. Pursuant to the terms agreed upon by the parties, the reserve will be funded with cash or an irrevocable letter of credit. If funded with a letter of credit, the letter of credit must be in the amount of $37.5 million, issued by a nationally recognized financial institution and made payable to the indenture trustee to fund any unpaid amount of the claim as allowed on appeal.
On November 27, 2007, the Creditors’ Committee filed a motion seeking to recharacterize certain interest payments made to the indenture trustee during our bankruptcy cases as payments of principal. On December 10, 2007, the Bankruptcy Court denied the Creditors’ Committee’s motion and entered an order to that effect on December 17, 2007. On December 10, 2007, we and the Creditors’ Committee filed cross appeals of the Bankruptcy Court’s November 9, 2007 memorandum decision and related rulings.
On January 16, 2008, we announced that we had reached a settlement with the indenture trustee and the 2009 noteholders, whereby the 2009 noteholders will receive $220.5 million in cash plus all accrued but unpaid interest through the Effective Date. On February 26, 2008 the Bankruptcy Court entered an order approving the settlement.
Legal Proceedings Outside Our Bankruptcy Case
Flexsys Antitrust Litigation
Antitrust authorities in the United States, Europe and Canada have been investigating past commercial practices in the rubber chemicals industry including the practices of Flexsys. The practices being investigated occurred during the period that
Flexsys was a 50/50 joint venture between us and Akzo Nobel. The European Commission issued its findings from its investigation in 2005, in which the Commission granted Flexsys full immunity from any potential fines. Investigations regarding the industry may still be on-going in the United States and Canada, but to date, no findings have been made against Flexsys in either country.
In addition, a number of purported civil class actions have been filed against Flexsys and other producers of rubber chemicals on behalf of indirect purchasers of rubber chemical products. A series of such purported class actions have been filed against Flexsys in various state courts in the United States and in four courts in Canada. However, all of these cases have been dismissed, or are currently subject to confirmed or tentative settlements.
Flexsys Patent Litigation
Flexsys holds various patents covering inventions in the manufacture of rubber chemicals, including patents describing and claiming a manufacturing process for 4-aminodiphenylamine ("4-ADPA"), a key building block for the manufacture of 6PPD and IPPD, as well as a manufacturing process for 6PPD and IPPD, which function as anti-degradants and are used primarily in the manufacture of rubber tires. Flexsys has been engaged in litigation in several jurisdictions to protect and enforce its patents.
Legal Proceedings in the United States
The ITC proceeding. In February 2005, Flexsys filed a complaint with the U.S. International Trade Commission ("ITC"), requesting that the ITC initiate an investigation against Sinorgchem Co. Shangdong, a Chinese entity ("Sinorgchem"), Korea Kumho Petrochemical Company, a Korean company ("KKPC"), and third party distributors of Sinorgchem. Flexsys claims that the process Sinorgchem used to make 4-ADPA and 6PPD, its sale of 6PPD for importation into the United States, and Sinorgchem's sale of 4-ADPA to KKPC and KKPC's importation of 6PPD into the United States were covered by Flexsys’ patents. Accordingly, Flexsys requested that the ITC issue a limited exclusion order prohibiting the importation into the United States of 4-ADPA and 6PPD originating from these entities. In February 2006, an Administrative Law Judge ("ALJ") of the ITC determined that Flexsys’ patents were valid, that the process used by Sinorgchem to make 4-ADPA and 6PPD was covered by Flexsys’ patents, and that Sinorgchem and its distributor, but not KKPC, had violated section 1337 of the U.S. Tariff Act. In July 2006, the ITC substantially upheld the ALJ's decision on the basis of literal infringement, and subsequently issued a limited exclusion order against Sinorgchem and its distributor prohibiting them from importing 4-ADPA and 6PPD manufactured by Sinorgchem into the United States.
Sinorgchem appealed the ITC decision to the United States Court of Appeals for the Federal Circuit. On December 21, 2007, a three-judge panel of the Federal Circuit overruled the ITC’s finding that Sinorgchem had literally infringed Flexsys’ patent and remanded the matter to the ITC to determine whether Sinorgchem’s processes infringe Flexsys’ patent on other grounds set forth by Flexsys. On February 25, 2008, Flexsys filed a petition for a rehearing of the decision by the full panel of judges on the Federal Circuit. The limited exclusion order issued by the ITC remains in effect.
Flexsys America L.P. v. Kumho Tire U.S.A., Inc. et al. In January 2005, Flexsys filed suit in United States District Court for the Northern District of Ohio for patent infringement against Sinorgchem, KKPC, Kumho Tire Korea and Kumho Tire US, affiliates of KKPC, and certain other tire distributors seeking monetary damages as well as injunctive relief. This action is currently stayed pending resolution of the ITC matter described above.
In re Rubber Chemicals Antitrust Litigation. In April 2006, KKPC filed suit against Flexsys in the United States District Court for the Central District of California for alleged violations of the Sherman Act, breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory relief, intentional interference with prospective economic advantage, disparagement and violations of the California Business & Professions Code. This matter was subsequently transferred to the United States District Court, Northern District of California. Flexsys filed a motion to dismiss KKPC’s complaint, which was granted by the court in August 2007. The court granted KKPC the right to refile an amended complaint, which KKPC filed in September 2007. We filed a motion to dismiss the amended complaint. Argument of this motion was heard on February 13, 2008. A decision on the motion is pending.
Legal Proceedings in Korea
In April 2004, Sinorgchem filed an action with the Korean Intellectual Property Tribunal ("IPT") seeking to invalidate Flexsys’ Korean patent. The IPT issued a decision invalidating significant claims of Flexsys’ Korean patent. The IPT decision was reversed on appeal by the Patent Court of Korea. Sinorgchem appealed the decision of the Patent Court of Korea to the Supreme Court of Korea. On October 25, 2007 the Supreme Court of Korea reversed the decision of the Patent Court on one of the claims
and remanded the case back to the Patent Court for further review of the validity of the other claims in accordance with the Supreme Court decision. We expect the Patent Court of Korea to render a decision in the first half of 2008.
Also, in April 2004, Flexsys filed a patent infringement action in Korean Civil Court against KKPC seeking to enjoin it from manufacturing 6PPD in violation of Flexsys’ Korean patent. Flexsys alleges that Sinorgchem manufactures 4-ADPA using Flexsys’ patented process, that KKPC imports Sinorgchem's 4-ADPA into Korea and uses it to manufacture 6PPD for the production of rubber tires for sale in Korea. In late 2004, the Korean District Court dismissed the action and found Flexsys’ Korean patent invalid. The District Court's decision was upheld on appeal by the Korean High Court. We have appealed the decision to the Supreme Court of Korea. We expect the Supreme Court of Korea to render a decision in this case in the near future.
Legal Proceedings in Europe and China
Various parties, including Sinorgchem and other competitors of Flexsys, have filed other, separate actions in patent courts in Europe and China seeking to invalidate certain of Flexsys’ patents issued in those jurisdictions.
Flexsys Tort Litigation
In December 2004, a purported class action lawsuit was filed in the Circuit Court of Putnam County, West Virginia against Flexsys, Pharmacia, Monsanto and Akzo Nobel alleging exposure to dioxin from Flexsys’ Nitro, West Virginia facility, which is now closed. The relevant production activities at the facility occurred during Pharmacia’s ownership and operation of the facility and well prior to the creation of the Flexsys joint venture between Pharmacia (then known as Monsanto, whose interest was subsequently transferred to us in the Solutia Spinoff) and Akzo Nobel. We are not named as a defendant in the lawsuit. The plaintiffs are seeking damages for loss of property value, medical monitoring and other equitable relief.
Flexsys has asserted a claim against Pharmacia for indemnification and defense in this litigation. Pursuant to a settlement agreement between Flexsys and Pharmacia, Pharmacia has agreed to defend Flexsys in this litigation and to bear the full cost of such defense. Pharmacia retained its right to assert that it is not obligated to indemnify Flexsys for potential damages with respect to this matter.
Other Legal Proceedings
Davis v. Solutia Inc. Employees’ Pension Plan; Hammond, et al. v. Solutia Inc. Employees’ Pension Plan. Since October 2005, current or former participants in the Solutia Inc. Employees’ Pension Plan (the “Pension Plan”) have filed three class actions alleging that the Pension Plan is discriminatory based upon age and that the lump sum values of individual account balances in the Pension Plan have been, and continue to be, miscalculated. None of the Debtors, and no individual or entity other than the Pension Plan, has been named as a defendant in any of these cases. Two of these cases, captioned Davis, et al. v. Solutia, Inc. Employees’ Pension Plan and Hammond, et al. v. Solutia, Inc. Employees’ Pension Plan, are still pending in the Southern District of Illinois, and have been consolidated with similar cases against Monsanto Company and Monsanto Company Pension Plan (Walker et al. v. The Monsanto Pension Plan, et al.) and Pharmacia Cash Balance Pension Plan, Pharmacia Corporation, Pharmacia and Upjohn, Inc., and Pfizer Inc. (Donaldson v. Pharmacia Cash Balance Pension Plan, et al.). The plaintiffs in the Pension Plan cases seek to obtain injunctive and other equitable relief (including money damages awarded by the creation of a common fund) on behalf of themselves and the nationwide putative class of similarly situated current and former participants in the Pension Plan.
A Consolidated Class Action Complaint (the “Complaint”) was filed by all of the plaintiffs in the consolidated case on September 4, 2006. The Complaint alleged three separate causes of action against the Pension Plan: (1) the Pension Plan violates the Employee Retirement Income Security Act (“ERISA”) by terminating interest credits on prior plan accounts at the age of 55; (2) the Pension Plan is improperly backloaded in violation of ERISA; and (3) the Pension Plan is discriminatory on the basis of age. In September 2007, the second and third of these claims were dismissed by the court.
By consent of the parties, the court certified a class in September 2007 with respect to the Pension Plan on plaintiffs’ claim that the Pension Plan discriminated against employees on the basis of their age by only providing interest credits on prior plan accounts through age 55.
Dickerson v. Feldman; Reiff v. Metz. Two companion purported class actions were filed – the former in October 2004, the latter in June, 2007 - in the United States District Court for the Southern District of New York against a number of defendants, including our former officers and employees and Solutia’s Employee Benefits Plans Committee and Pension and Savings Funds Committee. We were not named as a defendant. The actions alleged breach of fiduciary duty under ERISA and sought to recover alleged losses to the Solutia Inc. Savings and Investment Plan (“SIP Plan”) during the period December 16, 1998 to the date the
action was filed. The plaintiffs in both cases alleged the investment of SIP Plan assets in our common stock was imprudent, and the actions sought monetary payment to the SIP Plan to recover the losses resulting from the alleged breach of fiduciary duties, as well as injunctive and other appropriate equitable relief, reasonable attorney’s fees and expenses, costs and interest. In addition, the plaintiffs in these actions filed a proof of claim for $269 million against us in the Bankruptcy Court.
In December 2007, we, the named defendants, and the plaintiffs reached a global settlement in principle which would resolve both the pending bankruptcy claims and the Dickerson and Reiff lawsuits on a class wide basis. The settlement remains subject to the parties entering into a formal settlement agreement, and the settlement must be approved by both the Bankruptcy Court and the District Court.
Ferro Antitrust Investigation. Competition authorities in Belgium are investigating past commercial practices of certain companies engaged in the production and sale of butyl benzyl phthalates (“BBP”). One of the BBP producers under investigation by the Belgian Competition Authority (“BCA”) is Ferro Belgium sprl, a European subsidiary of Ferro Corporation (“Ferro”). Ferro’s BBP business in Europe was purchased from us in 2000. We received an indemnification notice from Ferro and have exercised our right, pursuant to the purchase agreement relating to Ferro’s acquisition of the BBP business from us, to assume and control the defense of Ferro in proceedings relating to these investigations. On July 7, 2005, the BCA Examiner issued a Statement of Objections regarding its BBP investigation in which SESA, our European non-Debtor subsidiary, along with Ferro Belgium sprl and two other producers of BBP, is identified as a party under investigation with respect to its ownership of the BBP business from 1997 until the business was sold to Ferro in 2000. SESA’s written comments on the Reasoned Report were submitted on November 12, and December 17, 2007 and presented at oral hearings before the BCA on December 20, 2007 and January 18, 2008. No decision has been issued to date.
Department of Justice Investigations. We have received two grand jury subpoenas from the Antitrust Division of the United States Department of Justice (the “DOJ”). The first subpoena, which we received in April 2006, relates to the DOJ’s investigation of potential antitrust violations in the adipic acid industry. The second subpoena, which we received in September 2007, pertains to the DOJ’s investigation of potential antitrust violations in the sodium tripoloyphosphate (“STPP”) industry. During the relevant time period of the subpoena, we were an owner of Astaris LLC, a 50/50 joint venture with FMC Corporation, which manufactured and marketed phosphorus-based products, including STPP. We and our joint venture partner sold substantially all of the assets of Astaris in November 2005 to Israel Chemicals Limited. We have not engaged in the STPP business since the sale of our interest in the Astaris assets. We are fully cooperating with the DOJ in both investigations, which are ongoing.
Department of Labor Investigation of Solutia Inc. Savings and Investment Plan. In 2005 the Department of Labor (“DOL”) contacted us through the Employee Benefits Security Administration, informing us that it wanted to conduct an investigation of Solutia’s SIP Plan. We fully cooperated with the DOL throughout the investigation.
On December 6, 2006, the DOL issued a letter stating that, based on facts gathered; it appeared that we, through our fiduciaries, breached our fiduciary obligations and violated provisions of ERISA with respect to the SIP Plan. Specifically, the DOL stated that it found no evidence that: (1) the Pension and Savings Funds Committee (“PSFC”) sufficiently monitored the Solutia Stock Fund option within the SIP Plan to determine if the Solutia Stock Fund continued to be a prudent investment for the SIP Plan prior to December 15, 2003 and (2) our Board of Directors, CEO, and PSFC, prior to December 15, 2003, adequately monitored the SIP Plan fiduciaries, including the PSFC, the Employee Benefits Plan Committee, and the Northern Trust Company of Connecticut. The DOL did not assert in its letter that the SIP Plan or its participants had been harmed by these alleged breaches. Further, the DOL did not find that the offering of the Solutia Stock Fund as an investment option in the SIP Plan was itself a violation of ERISA, or that it caused any participant to suffer investment losses. Further, the DOL did not assert any monetary fines against us based on its findings to date. The DOL stated in the letter that its findings were subject to the possibility that additional information could lead the DOL to revise its views.
The DOL did not choose to file suit against our fiduciaries, instead offering us the opportunity to voluntarily discuss how the alleged violations may be corrected. We have submitted additional information to the DOL to support our request for reconsideration of the DOL’s findings. We believe the DOL is likely to close its investigation in connection with the settlement of the Dickerson and Reiff cases mentioned above.
Solutia Canada Inc. v. INEOS Americas LLC. Solutia Canada Inc. (“Solutia Canada”) filed suit in Quebec Court in December 2006, alleging breach of contract by INEOS Americas LLC (“INEOS”). In late 2002, we negotiated a Stock and Asset Purchase Agreement for the sale of its Resimenes & Additives business to UCB S.A. (“UCB”). As part of this agreement, we agreed to exclude the LaSalle assets from the agreement and entered into the LaSalle Toll Agreement (“LTA”) with UCB. The LTA passed through all the benefits and risks of ownership of the LaSalle operations to UCB, other than pre-closing environmental liabilities. In the LTA, Solutia Canada agreed to operate its LaSalle Plant for the benefit of UCB and to provide all the necessary services to convert UCB’s raw materials on a cost-neutral basis. Thus, UCB would pay Solutia Canada for all of its
actual, direct and indirect costs incurred in connection with the performance or supply of services under the LTA or in holding itself ready to perform or supply those services. In the years after its execution, the LTA was assigned by UCB to Cytec Industries, Inc., then to INEOS.
On January 31, 2006, INEOS notified Solutia Canada of its intention to terminate the LTA effective January 31, 2008, in compliance with the terms of the LTA. INEOS’ decision to terminate the LTA will likely trigger the shutdown of all activities at the LaSalle Plant, resulting in termination costs recoverable by Solutia Canada against INEOS. Solutia Canada estimates that the overall termination costs associated with the termination of the LTA and the shutdown of the LaSalle Plant will total approximately $31 million. INEOS disputes the overall amount of Solutia Canada’s termination costs.
We filed this litigation against INEOS for breach of the LTA with respect to such termination costs. On March 26, 2007, INEOS filed a cross-demand against Solutia Canada for $1 million, alleging that Solutia Canada improperly charged INEOS on its October and November 2006 invoices for items which INEOS claims are not actual direct or indirect costs under the LTA. INEOS reserved the right to amend its demand for additional alleged overpayments on any future invoices through the remaining term of the LTA. Solutia Canada denies INEOS’ allegation.
Texas Commission on Environmental Quality Administrative Enforcement Proceeding. On August 11, 2006, the Executive Director of the Texas Commission on Environmental Quality (the “Commission”) commenced an administrative enforcement proceeding against us by filing a petition with the Texas Commission on Environmental Quality. The petition alleged certain violations of the State of Texas air quality program. The Executive Director requested that an administrative penalty, the amount of which was de minimis, be assessed and that we undertake corrective actions to ensure compliance with the Texas Health and Safety Code and the rules of the Commission in connection with alleged self-reported unauthorized emission events and deviations of air permits. We answered the petition on September 1, 2006, asserted affirmative defenses and requested a contested enforcement case hearing. We have reached a settlement in principle with the Commission that includes payment of a de minimis penalty and contribution to an environmentally beneficial project in exchange for mitigation of a portion of the penalty. All required corrective action has been completed. The final settlement orders are subject to approval by the Commission at an upcoming Commission agenda meeting.
Risk Management
We have evaluated risk retention and insurance levels for product liability, workplace health and safety, property damage and other potential areas of risk. Our management determines the amount of insurance coverage to acquire from unaffiliated companies and the appropriate amount of risk to retain and/or co-insure based on the cost and availability of insurance and the likelihood of a loss. Management believes that the level of risk that we have retained is consistent with those of other companies in the chemical industry. We share certain of these policies with Pharmacia. There can be no assurance that we will not incur losses beyond the limits, or outside the coverage, of our insurance. For additional information, see "Self-Insurance" on page 46.
We will continue to devote significant effort to maintaining and improving safety and internal control programs, which reduce our exposure to certain risks. We actively participate in several programs which provide third party review and verification of our programs and practices. In the U.S. we are engaged in the Occupational Safety and Health Administration’s Voluntary Protection Program with eight locations currently approved at STAR status, the highest level possible. In addition, our operations participate in applicable management system certification processes world wide.
ITEM 6. SELECTED FINANCIAL DATA
Financial Summary
(Dollars and shares in millions, except per share amounts) | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| Operating Results: | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | $ | 3,535 | | | $ | 2,795 | | | $ | 2,645 | | | $ | 2,529 | | | $ | 2,268 | |
| Gross Profit | | | 489 | | | | 360 | | | | 304 | | | | 193 | | | | 77 | |
As percent of net sales | | | 14 | % | | | 13 | % | | | 11 | % | | | 8 | % | | | 3 | % |
| Marketing, Administrative, and Technological Expenses | | | 297 | | | | 272 | | | | 266 | | | | 273 | | | | 332 | |
As percent of net sales | | | 8 | % | | | 10 | % | | | 10 | % | | | 11 | % | | | 15 | % |
Operating Income (Loss)(1) | | | 190 | | | | 87 | | | | 37 | | | | (81 | ) | | | (259 | ) |
As percent of net sales | | | 5 | % | | | 3 | % | | | 1 | % | | | (3 | )% | | | (11 | )% |
| Income (Loss) from Continuing Operations Before Taxes | | | (203 | ) | | | (38 | ) | | | 13 | | | | (303 | ) | | | (497 | ) |
Income (Loss) from Continuing Operations(2) | | | (222 | ) | | | (56 | ) | | | 3 | | | | (296 | ) | | | (893 | ) |
| Income (Loss) from Discontinued Operations, net of tax | | | 14 | | | | 58 | | | | 8 | | | | (24 | ) | | | (77 | ) |
| Cumulative Effect of Change in Accounting Principle, net of tax | | | -- | | | | -- | | | | (3 | ) | | | -- | | | | (5 | ) |
| Net Income (Loss) | | | (208 | ) | | | 2 | | | | 8 | | | | (320 | ) | | | (975 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Per Share Data: | | | | | | | | | | | | | | | | | | | | |
Basic and Diluted Earnings (Loss) per Share from Continuing Operations (2) | | $ | (2.12 | ) | | $ | (0.54 | ) | | $ | 0.03 | | | $ | (2.83 | ) | | $ | (8.54 | ) |
| Weighted Average Shares Outstanding - Basic and Diluted | | | 104.5 | | | | 104.5 | | | | 104.5 | | | | 104.5 | | | | 104.6 | |
| Dividends per Share | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| Common Stock Price: | | | | | | | | | | | | | | | | | | | | |
| High | | | 0.79 | | | | 0.75 | | | | 1.69 | | | | 1.39 | | | | 4.89 | |
Low | | | 0.18 | | | | 0.28 | | | | 0.33 | | | | 0.15 | | | | 0.23 | |
Close | | | 0.22 | | | | 0.75 | | | | 0.45 | | | | 1.17 | | | | 0.37 | |
| | | | | | | | | | | | | | | | | | | | | |
| Financial Position – Continuing Operations: | | | | | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 2,633 | | | $ | 2,017 | | | $ | 1,884 | | | $ | 1,958 | | | $ | 2,313 | |
| Liabilities not Subject to Compromise | | | 2,307 | | | | 1,600 | | | | 1,209 | | | | 1,294 | | | | 1,303 | |
| Liabilities Subject to Compromise | | | 1,922 | | | | 1,849 | | | | 2,176 | | | | 2,187 | | | | 2,220 | |
Long-Term Debt (3) | | | 359 | | | | 210 | | | | 247 | | | | 285 | | | | 294 | |
| Shareholders’ Deficit | | | (1,595 | ) | | | (1,405 | ) | | | (1,433 | ) | | | (1,423 | ) | | | (1,100 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Other Data from Continuing Operations: | | | | | | | | | | | | | | | | | | | | |
Working Capital (4) | | $ | (397 | ) | | $ | (280 | ) | | $ | (2 | ) | | $ | (20 | ) | | $ | 42 | |
Interest Expense (5) | | | 134 | | | | 100 | | | | 79 | | | | 108 | | | | 115 | |
Income Tax Expense (Benefit) (6) | | | 19 | | | | 18 | | | | 10 | | | | (7 | ) | | | 396 | |
| Depreciation and Amortization | | | 116 | | | | 109 | | | | 109 | | | | 118 | | | | 125 | |
| Capital Expenditures | | | 150 | | | | 105 | | | | 75 | | | | 49 | | | | 70 | |
| Employees (Year-End) | | | 6,000 | | | | 5,100 | | | | 5,400 | | | | 5,700 | | | | 6,300 | |
(1) Operating income (loss) includes net restructuring (gains)/charges and other items of $9 million in 2007, ($7 million) in 2006, $14 million in 2005, $62 million in 2004 and $228 million in 2003
(2) Income (loss) from continuing operations includes net restructuring charges and other (gains)/charges of ($5) million, or ($0.05) per share in 2007, $3 million, or $0.03 per share in 2006, ($37) million, or ($0.35) per share in 2005, $146 million, or $1.40 per share in 2004, and $15 million, or $0.14 per share in 2003.
(3) Long-term debt excludes $659 million as of December 31, 2007, $668 million as of December 31, 2006, 2005 and 2004, and $625 million as of December 31, 2003 of debt classified as subject to compromise in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, as a result of Solutia’s Chapter 11 bankruptcy filing in 2003.
(4) Working capital is defined as total current assets less total current liabilities.
(5) Interest expense includes the recognition of interest on allowed secured claims as approved by the Bankruptcy Court of $8 million in 2007 and the write-off of debt issuance costs of $4 million in 2006, $25 million in 2004 and $14 million in 2003 due to the early refinancing of the underlying debt facilities.
(6) Income tax expense (benefit) includes an increase in valuation allowances of $70 million in 2007, $27 million in 2006, $12 million in 2005, $109 million in 2004, and $542 million in 2003.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 for more information.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The following table shows information about our directors as of February 27, 2008:
Name, Age, Year First Became a Solutia Director | Other Directorships | Principal Occupation and Other Business Experience Since At Least January 1, 2003 |
Jeffry N. Quinn, 49 2004 | Tecumsah Products Company | President, Chief Executive Officer and Director since May 2004. Named Chairman of the Board on February 22, 2006. Mr. Quinn previously served as Solutia’s Senior Vice President, General Counsel and Chief Restructuring Officer from 2003 to 2004. Prior to joining Solutia, Mr. Quinn served from 2000 to 2002 as Executive Vice President, Chief Administrative Officer and General Counsel of Premcor Inc., an independent petroleum refiner and supplier of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and other petroleum products. Premcor Inc. is now owned by Valero Energy Corp. |
Paul H. Hatfield, 72 1997 | Bunge Limited; Maritz, Inc.; Penford Corporation | Principal of Hatfield Capital Group, a private investment company. Previously, Mr. Hatfield served as Chairman of the Board, President and Chief Executive Officer of Petrolite Corporation, a specialty chemical company offering integrated technologies with products and services which are used primarily in energy-related industries, from 1995 through 1997. Petrolite Corporation is now known as Baker Petrolite, a division of Baker Hughes. |
Robert H. Jenkins, 64 1997 | AK Steel Holdings Corporation; CLARCOR Inc.; Jason Inc.; ACCO Brands | Retired Chairman of the Board and Chief Executive Officer, Sundstrand Corporation. Previously, Mr. Jenkins served as Chairman of the Board and Chief Executive Officer of Sundstrand Corporation, a multinational organization engaged in the design, manufacture and sale of a variety of proprietary, technology-based components and systems for diversified international markets, from 1997 through 1999. |
Frank A. Metz, Jr., 74 1997 | None | Retired Senior Vice President, Finance and Planning and Chief Financial Officer, International Business Machines Corporation, an information technology company. Previously served as Senior Vice President, Finance and Planning and Chief Financial Officer of IBM, from 1986 through 1993 and as a Director of IBM from 1991 through 1993. |
J. Patrick Mulcahy, 64 1999 | Energizer Holdings, Inc.; Hanesbrands Inc.; Ralcorp Holdings, Inc. | Chairman, Energizer Holdings, Inc., a manufacturer of primary batteries, flashlights and men’s and women’s wet-shave products. Mr. Mulcahy previously served as Chief Executive Officer of Energizer Holdings, Inc., from 2000 through 2005. |
Sally G. Narodick, 62 2000 | Cray Inc.; Penford Corporation; Puget Energy, Inc., and its wholly owned subsidiary, Puget Sound Energy, Inc.; SumTotal Systems, Inc. | Retired President, Narodick Consulting, an educational technology and e-learning consulting firm, from 2000 through 2004. Ms. Narodick previously served as Chief Executive Officer of Apex Learning, Inc., an educational software company, from its founding in 1998 until 2000. |
John B. Slaughter, 73 1997 | None | President and Chief Executive Officer, National Action Council for Minorities in Engineering, Inc. (a non-profit corporation). Mr. Slaughter previously served as the Irving R. Melbo professor of leadership in education at the University of Southern California and President Emeritus of Occidental College from 1999 through 2000. |
All the directors were elected prior to our Chapter 11 filing. We have not held an annual shareholders’ meeting during our Chapter 11 case.
Officers
The following table shows information about our executive officers as of February 27, 2008:
Name, Age and Position with Solutia | Year First Became an Executive Officer of Solutia | Other Business Experience Since At Least January 1, 2003 |
Jeffry N. Quinn, 49 President, Chief Executive Officer and Chairman of the Board | 2003 | President, Chief Executive Officer and Director since May 2004. Named Chairman of the Board on February 22, 2006. Mr. Quinn previously served as Solutia’s Senior Vice President, General Counsel and Chief Restructuring Officer from 2003 to 2004. Prior to joining Solutia, Mr. Quinn served from 2000 to 2002 as Executive Vice President, Chief Administrative Officer and General Counsel of Premcor Inc., an independent petroleum refiner and supplier of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and other petroleum products. Premcor Inc. is now owned by Valero Energy Corp. |
James M. Sullivan, 47 Senior Vice President, Chief Financial Officer and Treasurer | 2004 | Senior Vice President, Chief Financial Officer and Treasurer since 2004. Mr. Sullivan served as Solutia’s Vice President and Controller from 1999 through 2004. |
Luc De Temmerman, 53 Senior Vice President and President, Performance Products | 2003 | Senior Vice President and President, Performance Products since 2005. Mr. De Temmerman is a long-time Solutia employee who has previously served as Senior Vice President and Chief Operating Officer from 2004 through 2005; Vice President and General Manager, Performance Products, from 2003 through 2004; Worldwide Commercial Director for Laminated Glazing Products and Services, from 2001 through 2002. |
Kent J. Davies, 44 Senior Vice President and President, CPFilms | 2006 | Senior Vice President and President, CPFilms since January 2006. Mr. Davies previously served as Senior Vice President, Marketing, R&D and Regulatory, for United Industries Corp., a global consumer products company, from 2002 through 2005 and Senior Vice President, Marketing of United Industries Corp., from 2001 through 2002. |
James R. Voss, 41 Senior Vice President and President, Flexsys | 2005 | Senior Vice President and President, Flexsys since 2007. Mr. Voss served as Senior Vice President, Business Operations from 2005 to 2007. Mr. Voss served as Senior Vice President and Chief Administrative Officer of Premcor Inc., an independent petroleum refiner and supplier of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and other petroleum products in the United States, from 2000 through 2005. Premcor Inc. is now owned by Valero Energy Corp. |
Jonathon P. Wright, 48 Senior Vice President and President, Integrated Nylon | 2005 | Senior Vice President and President, Integrated Nylon since 2005. Mr. Wright served as a Vice President for Charles River Associates, an international economic and business consulting firm, from 2002 through 2005 where he worked extensively in the petrochemical, specialty chemical and related process industries. Mr. Wright was a Managing Director of Arthur D. Little’s North American Strategy and Organizational Consulting business from 1997 through 2002. |
Robert T. DeBolt, 47 Senior Vice President, Business Operations | 2007 | Senior Vice President, Business Operations since 2007. Mr. DeBolt served as Vice President of Corporate Strategy from 2005 to 2007 and as the Controller for Integrated Nylon from 2003 through 2004. Prior thereto, Mr. DeBolt was responsible for all of our manufacturing facilities. |
Rosemary L. Klein, 40 Senior Vice President, General Counsel and Secretary | 2004 | Senior Vice President, General Counsel and Secretary since 2004. Ms. Klein served as Solutia’s Vice President, Secretary and General Counsel, Corporate and External Affairs in 2004 and Assistant General Counsel in 2003. Ms. Klein served as Assistant General Counsel and Secretary of Premcor Inc., an independent petroleum refiner and supplier of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and other petroleum products in the United States, from 2000 through 2003. Premcor Inc. is now owned by Valero Energy Corp. |
Harold E. Wallach, 45 Senior Vice President, Human Resources | 2007 | Senior Vice President, Human Resources since 2007. Mr. Wallach served from 2000 until 2007 as a Market Leader for Mercer Human Resources Consulting, one of the world’s largest human resources consulting firms. Prior to joining Mercer, Mr. Wallach held management positions with two other leading human resources consulting firms: Buck Consultants from 1994 to 2000 and Hewitt, Inc. from 1990 to 1994. |
The above listed individuals are elected to the offices set opposite their names to hold office until their successors are duly elected and have qualified, or until their earlier death, resignation or removal.
Audit and Finance Committee; Audit Committee Financial Expert
The members of our Audit and Finance Committee, which met six times in 2007, are Mr. Metz, chairman; Mr. Mulcahy, Mrs. Narodick and Dr. Slaughter. Our board of directors has concluded that each member of the committee is independent within the meaning of Rule 10A-3 of the Exchange Act of 1934 and the New York Stock Exchange’s listing standards. The board has
also concluded that Mr. Metz is an audit committee financial expert, as that term is defined in the rules issued under the Sarbanes-Oxley Act of 2002.
The purpose of the committee is to assist the board in overseeing the integrity of our financial statements, our compliance with legal and regulatory requirements, the qualifications and independence of the independent auditor, the performance of the independent auditor and our internal audit function, and our systems of disclosure controls and internal controls over financial reporting, and to prepare the report required by the rules of the U.S. Securities and Exchange Commission.
Among the committee’s responsibilities is the selection of our independent auditor.
The committee’s written charter sets out the functions the committee is to perform, in light of the Sarbanes-Oxley Act of 2002 and the rules of the New York Stock Exchange.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers to file reports of holdings and transactions in our common stock with the Securities and Exchange Commission. During 2007, all reports required by our directors and executive officers under Section 16(a) of the Securities Exchange Act of 1934 were made in a timely manner.
Corporate Governance
Our board of directors has adopted a Code of Ethics for Senior Financial Officers. This code applies to our chief executive officer and the other senior officers who have financial responsibilities, including our chief financial officer, treasurer, controller and general counsel. This code is filed as an exhibit to this Annual Report on Form 10-K. Also, our Code of Ethics for Senior Financial Officers, Code of Business Conduct and Ethics, Corporate Governance Guidelines, and the charters of the Audit and Finance Committee, Executive Compensation and Development Committee and Governance Committee are available at our web site www.solutia.com. Any person who wishes to obtain a copy of any of these documents may do so by writing to Investor Relations, Solutia Inc., 575 Maryville Centre Drive, St. Louis, Missouri 63141.
Legal Proceedings
For a description of the Dickerson v. Feldman and Reiff v. Metz litigation pending against certain of our former directors and officers see the fourth paragraph under "Other Legal Proceedings" on page 24 above.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Documents filed as part of this Form 10-K:
| | 1. | Financial Statements--See the Index to Consolidated Financial Statements and Financial Statement Schedule at page 54 of Solutia's Form 10-K as filed with the Securities and Exchange Commission on February 27, 2008. |
| | 2. | The following supplemental schedule for the years ended December 31, 2007, 2006 and 2005 has been filed with Solutia’s Form 10-K as filed with the Securities and Exchange Commission on February 27, 2008. |
II--Valuation and Qualifying Accounts
| | 3. | Exhibits--See the Exhibit Index beginning at page 31 of this Form 10-K/A. For a listing of all management contracts and compensatory plans or arrangements required to be filed as exhibits to this report, see the exhibits listed under (Exhibit Nos. 10(i), 10(l) through 10 (s) and 10(mm) through 10(uu) on pages 32-34) of the Exhibit Index. The following exhibits listed in the Exhibit Index are filed with this Form 10-K/A: |
| | 23(b) | Consent of Independent Registered Public Accounting Firm |
| | 31(a) | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 31(b) | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 32(a) | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | 32(b) | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | 99.4 | Consolidated Financial Statements of Siratsa LLC for the year ended December 31, 2007 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOLUTIA INC.
By: /s/ Timothy J. Spihlman
------------------------------
Timothy J. Spihlman
Vice President and Controller
(Principal Accounting Officer)
Dated: March 18, 2008
EXHIBIT INDEX
These exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S−K.
Exhibit No. Description
−−−−−−−−−−− −−−−−−−−−−−
| 2(a) | Distribution Agreement (incorporated by reference to Exhibit 2 of Solutia’s Registration Statement on Form S−1 (333−36355) filed September 25, 1997) |
| 2(b) | Amendment to Distribution Agreement, dated as of July 1, 2002, by and among Pharmacia Corporation, Solutia Inc., and Monsanto Company (incorporated by reference to Exhibit 2 of Solutia’s Form 10−Q for the quarter ended June 30, 2002) |
| 2(c) | Joint Venture Agreement between Solutia Inc. and FMC Corporation(1) (incorporated by reference to Exhibit 2(i) of Solutia’s Form 8−K filed on April 27, 2000) |
| 2(d) | First Amendment to Joint Venture Agreement between Solutia Inc. and FMC Corporation (incorporated by reference to Exhibit 2(ii) of Solutia’s Form 8−K filed on April 27, 2000) |
| 2(e) | Second Amendment to Joint Venture Agreement between Solutia Inc. and FMC Corporation (incorporated by reference to Exhibit 2(iii) of Solutia’s Form 8−K filed on April 27, 2000) |
| 2(f) | Third Amendment to Joint Venture Agreement between Solutia Inc. and FMC Corporation (incorporated by reference to Exhibit 2(iv) of Solutia’s Form 8−K filed on April 27, 2000) |
| 2(g) | Debtors’ Fifth Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (incorporated by reference to Exhibit 99.2 of Solutia's Form 8-K filed October 25, 2007) |
| 3(a) | Restated Certificate of Incorporation of Solutia (incorporated by reference to Exhibit 3(a) to Solutia’s Registration Statement on Form S-1 (333-36355) filed on September 25, 1997) |
| 3(b) | By-Laws of Solutia Inc., as amended February 26, 2003 (incorporated by reference to Exhibit 3(b) to Solutia’s Form 10-K for the year ended December 31, 2003) |
| 10(a) | Indenture dated as of October 1, 1997, between Solutia Inc. and The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.1 of Solutia’s Form 10−Q for the quarter ended September 30, 1997) |
| 10(b) | 7.375% Debentures due 2027 in the principal amount of $200,000,000 (incorporated by reference to Exhibit 4.3 of Solutia’s Form 10−Q for the quarter ended September 30, 1997) |
| 10(c) | 7.375% Debentures due 2027 in the principal amount of $100,000,000 (incorporated by reference to Exhibit 4.4 of Solutia’s Form 10−Q for the quarter ended September 30, 1997) |
| 10(d) | 6.72% Debentures due 2037 in the principal amount of $150,000,000 (incorporated by reference to Exhibit 4.5 of Solutia’s Form 10−Q for the quarter ended September 30, 1997) |
| 10(e) | Indenture dated as of July 9, 2002, between SOI Funding Corp. and HSBC Bank USA, as Trustee (incorporated by reference to Exhibit 4.2 of Solutia’s Form S−4 (333−99699) filed September 17, 2002) |
| 10(f) | First Supplemental Indenture, dated as of July 25, 2002, among Solutia Inc., SOI Funding Corp., the Subsidiary Guarantors and HSBC Bank USA, as Trustee (incorporated by reference to Exhibit 4.3 of Solutia’s Form S−4 (333−99699) filed September 17, 2002) |
| 10(g) | Second Supplemental Indenture, dated as of October 24, 2002, among Solutia Inc., the subsidiary guarantors named therein and HSBC Bank USA (incorporated by reference to Exhibit 4 of Solutia’s Form 10−Q for the quarter ended September 30, 2002) |
| 10(h) | Third Supplemental Indenture, dated as of October 8, 2003, among Solutia Inc., the subsidiary guarantors named therein and HSBC Bank USA (incorporated by reference to Exhibit 4(c) of Solutia’s Form 10−Q for the quarter ended September 30, 2003) |
| 10(i) | Financial Planning and Tax Preparation Services Program for the Executive Leadership Team (incorporated by reference to Exhibit 10(a) of Solutia’s Form 10−K for the year ended December 31, 1997) |
| 10(j) | Employee Benefits Allocation Agreement (incorporated by reference to Exhibit 10(a) of Solutia’s Registration Statement on Form S−1 (333−36355) filed September 25, 1997) |
| 10(k) | Tax Sharing and Indemnification Agreement (incorporated by reference to Exhibit 10(b) of Solutia’s Registration Statement on Form S−1 (333−36355) filed September 25, 1997) |
| 10(l) | Solutia Inc. 1997 Stock−Based Incentive Plan as amended in 1999 and 2000 (incorporated by reference to Exhibit 10(1) of Solutia’s Form 10−Q for the quarter ended June 30, 2000) |
| 10(m) | Solutia Inc. 2000 Stock−Based Incentive Plan (incorporated by reference to Appendix A of the Solutia Inc. Notice of Annual Meeting and Proxy Statement dated March 9, 2000) |
| 10(n) | Solutia Inc. Non−Employee Director Compensation Plan, as amended in 1999, 2000, and 2001 (incorporated by reference to Exhibit 10 of Solutia’s Form 10−Q for the quarter ended June 30, 2001) |
| 10(o) | Solutia Inc. 2003 Non−Employee Director Compensation Plan (incorporated by reference to Exhibit 10(a) of Solutia’s Form 10−Q for the quarter ended June 30, 2003) |
| 10(p) | 2006 Solutia Annual Incentive Plan (incorporated by reference to Exhibit 10.1 of Solutia’s Form 8−K, filed September 28, 2006) |
| 10(q) | Letter Agreement between Solutia Inc. and Luc De Temmerman effective as of July 19, 2004 (incorporated by reference to Exhibit 99.3 of Solutia’s Form 8−K filed January 18, 2005) |
| 10(r) | Retention Agreement, dated as of June 17, 2004, by and between Solutia Inc. and Rosemary L. Klein (incorporated by reference to Exhibit 10(aa) of Solutia’s Form 10−K for the year ended December 31, 2004) |
| 10(s) | Form of Retention Agreement between Solutia Inc. and Key Employees (incorporated by reference to Exhibit 10(bb) of Solutia’s Form 10−K for the year ended December 31, 2004) |
| 10(t) | Protocol Agreement, dated as of July 1, 2002, by and among Pharmacia Corporation, Solutia Inc., and Monsanto Company (incorporated by reference to Exhibit 10(b) of Solutia’s Form 10−Q for the quarter ended June 30, 2002) |
| 10(u) | Protocol Agreement, dated as of November 15, 2002, by and among Pharmacia Corporation, Solutia Inc. and Monsanto Company (incorporated by reference to Exhibit 10.1 of Solutia’s Form 8−K filed November 18, 2002) |
| 10(v) | Amendment to Protocol Agreement, dated as of March 3, 2003, by and among Pharmacia Corporation, Solutia Inc. and Monsanto Company (incorporated by reference to Exhibit 10(t) of Solutia’s Form10−K for the year ended December 31, 2003) |
| 10(w) | Amendment to Protocol Agreement, dated August 4, 2003, by and among Pharmacia Corporation, Monsanto Company and Solutia Inc. (incorporated by reference to Exhibit 10(e) of Solutia’s Form 10−Q for the quarter ended June 30, 2003) |
| 10(x) | Financing Agreement, dated as of January 16, 2004, by and among Solutia Inc. and Solutia Business Enterprises, Inc., as debtors and debtors−in−possession, as Borrowers, certain subsidiaries of Solutia Inc. listed as a Guarantor, as debtors and debtors−in−possession, as Guarantors, the lenders from time to time party thereto, as Lenders, Citicorp USA, Inc., as Collateral Agent, Administrative Agent and Documentation Agent (incorporated by reference to Exhibit 99.2 of Solutia’s Form 8−K filed January, 23, 2004) |
| 10(y) | Amendment No. 1 to Financing Agreement and Waiver, dated as of March 1, 2004, by and among Solutia Inc. and Solutia Business Enterprises, Inc., as debtors, debtors−in−possession and as Borrowers; certain subsidiaries of Solutia Inc., as debtors, debtors−in−possession and as Guarantors; the lenders from time to time party thereto, as Lenders; Citicorp USA, Inc., as Collateral Agent, Administrative Agent and Co−Documentation Agent and Wells Fargo Foothill, LLC, as Co−Documentation Agent (incorporated by reference to Exhibit 10(y) of Solutia’s Form 10−K for the year ended December 31, 2004) |
| 10(z) | Amendment No. 2 to Financing Agreement and Waiver dated as of July 20, 2004 by and among Solutia Inc. and Solutia Business Enterprises, Inc., as debtors, debtors−in−possession and as Borrowers; certain subsidiaries of Solutia Inc. as debtors, debtors−in−possession and as Guarantors; the lenders from time to time party thereto, as Lenders; Citicorp USA, Inc., as Collateral Agent, Administrative agent and Co−Documentation Agent and Wells Fargo Foothill, LLC, as Co−Documentation Agent (incorporated by reference to Exhibit 10(f) of Solutia’s Form 10−Q for the quarter ended June 30, 2004) |
| 10(aa) | Amendment No. 3 to the $525,000,000 Debtor−in−Possession Financing Agreement dated January 16, 2004 (as amended) between Solutia Inc., Solutia Business Enterprises, Inc. and the other parties thereto (incorporated by reference to Exhibit 10.1 of Solutia’s Form 8−K filed July 27, 2005) |
| 10(bb) | Amendment No. 4 to Financing Agreement and Waiver dated as of March 17, 2006 amending the Debtor−in−Possession Financing Agreement dated January 16, 2005 (as amended) between Solutia Inc., Solutia Business Enterprises, Inc. and the other parties thereto (incorporated by reference to Exhibit 10.1 of Solutia’s Form 8−K filed March 17, 2006) |
| 10(cc) | Amendment No. 5 to the Financing Agreement and Waiver dated as of January 25, 2007 amending the Debtor−in−Possession Financing Agreement dated January 16, 2004 (as amended) between Solutia Inc., Solutia Business Enterprises, Inc. and the other parties thereto. (incorporated by reference to Exhibit 10.1 of Solutia's Form 8-K filed January 31, 2007) |
| 10(dd) | Waiver and Consent dated as of October 31, 2005 by and among Solutia, Solutia Business Enterprises, Inc., each subsidiary of Solutia listed on the signature pages thereto, the lenders party thereto, Citicorp USA, Inc. and Wells Fargo Foothill, LLC (incorporated by reference to Exhibit 10.1 of Solutia’s Form 8−K filed December 5, 2005) |
| 10(ee) | Toll Manufacturing Agreement by and between Solutia Inc. and Phosphorus Derivatives Inc. dated November 4, 2005 (incorporated by reference to Exhibit 10.2 of Solutia’s Form 10−Q for the quarter ended September 30, 2005) |
| 10(ff) | Stock Purchase Agreement, dated as November 23, 2005 by and between Solutia Inc., Vitro S.A. de C.V., and Vitro Plan S.A. de C.V. (incorporated by reference to Exhibit 10.1 of Solutia’s Form 8−K filed on December 21, 2005) |
| 10(gg) | Share and Asset Purchase Agreement entered into on May 23, 2006 between Solutia Europe S.A./N.V. and Dishman Pharmaceuticals & Chemicals Ltd. (incorporated by reference to Exhibit 10.2 of Solutia’s Form 10−Q for the quarter ended June 30, 2006) |
| 10(hh) | Amendment to Share and Asset Purchase Agreement entered into on August 22, 2006 between Solutia Europe S.A./N.V. and Dishman Pharmaceuticals & Chemicals Ltd.(1) (incorporated by reference to Exhibit 10.1 of Solutia’s Form 10−Q for the quarter ended September 30, 2006) |
| 10(ii) | €200,000,000 Facility Agreement dated July 26, 2006 between Solutia Europe S.A./N.V., Solutia Services International S.C.A./Comm. V.A., the guarantors listed therein, Citigroup Global Markets Limited, as mandated lead arranger, the financial institutions listed therein, as the original lenders, Citibank International plc as agent for the finance parties and Citibank N.A. as security agent for the secured parties (incorporated by reference to Exhibit 10.1 of Solutia’s Form 10−Q for the quarter ended June 30, 2006) and amendment and restatement thereof dated September 15, 2006 filed herewith (incorporated by reference to Exhibit 10.1 of Solutia’s Form 10−Q for the quarter ended September 30, 2006) |
| 10(jj) | Transaction agreement by and among Akzo Nobel Chemicals International B.V., Akzo Nobel Chemicals Inc., Akzo Nobel N.V., Flexsys Holding B.V., Flexsys America LP, Flexsys Rubber Chemicals Ltd. and Solutia Inc. (incorporated by reference to Exhibit 10(rr) of Solutia's Form 10-K for the year ended December 31,2006) |
| 10(kk) | Works council side letter by and among Akzo Nobel N.V., Akzo Nobel Chemicals International B.V., Flexsys America LP, Flexsys Rubber Chemicals Ltd. and Solutia Inc., dated as of February 27, 2007 (incorporated by reference to Exhibit 10(ss) of Solutia's Form 10-K for the year ended December 31,2006) |
| *10(ll) | Flexsys USD 225,000,000 Multicurrency Term and Revolving Facilities Agreement 2007 |
| 10(mm) | 2007 Solutia Annual Incentive Program (incorporated by reference to Exhibit 10.1 of Solutia's Form 8-K filed on March 17, 2007) |
| 10(nn) | Amended and Restated Employment Agreement by and between Solutia Inc. and Jeffry N. Quinn (incorporated by reference to Exhibit 10.2 of Solutia's Form 8-K filed on March 17, 2007) |
| 10(oo) | Amended and Restated Employment Agreement by and between Solutia Inc. and Kent J. Davies (incorporated by reference to Exhibit 10.3 of Solutia's Form 8-K filed on March 17, 2007) |
| 10(pp) | Amended and Restated Employment Agreement by and between Solutia Inc. and Luc De Temmerman (incorporated by reference to Exhibit 10.4 of Solutia's Form 8-K filed on March 17, 2007) |
| 10(qq) | Amended and Restated Employment Agreement by and between Solutia Inc. and Rosemary L. Klein (incorporated by reference to Exhibit 10.5 of Solutia's Form 8-K filed on March 17, 2007) |
| 10(rr) | Amended and Restated Employment Agreement by and between Solutia Inc. and James M. Sullivan incorporated by reference to Exhibit 10.6 of Solutia's Form 8-K filed on March 17, 2007) |
| 10(ss) | Amended and Restated Employment Agreement by and between Solutia Inc. and James R. Voss (incorporated by reference to Exhibit 10.7 of Solutia's Form 8-K filed on March 17, 2007) |
| 10(tt) | Amended and Restated Employment Agreement by and between Solutia Inc. and Jonathon P. Wright (incorporated by reference to Exhibit 10.8 of Solutia's Form 8-K filed on March 17, 2007) |
| 10(uu) | Employment Agreement by and between Solutia Inc. and Robert T. DeBolt (incorporated by reference to Exhibit 10.9 of Solutia's Form 8-K filed on March 17, 2007) |
| 10(vv) | Asset Purchase Agreement between Solutia Inc. and Thermphos Trading GmbH dated as of March 11, 2007 (incorporated by reference to Exhibit 10.1 of Solutia's Form 8-K filed on May 5, 2007) |
| 10(ww) | Amendment to Asset Purchase Agreement between Solutia Inc. and Thermphos Trading GmbH dated as of March 13, 2007 (incorporated by reference to Exhibit 10.2 of Solutia's Form 8-K filed on May 5, 2007) |
| 10(xx) | Second Amendment to Asset Purchase Agreement between Solutia Inc. and Thermphos Trading GmbH dated as of May 31, 2007 (incorporated by reference to Exhibit 10.3 of Solutia's Form 8-K filed on May 5, 2007) |
| 11 | Omitted--Inapplicable; see "Consolidated Statement of Operations” on page 51. |
| *12 | Computation of the Ratio of Earnings to Fixed Charges (see Exhibit 12) |
| *14 | Solutia Inc. Code of Ethics for Senior Financial Officers as amended (incorporated by reference to Exhibit 14 of Solutia’s Form 10-K for the year ended December 31, 2006) |
16 Omitted--Inapplicable
18 Omitted--Inapplicable
*21 Subsidiaries of the Registrant
22 Omitted--Inapplicable
*23 Consent of Independent Registered Public Accounting Firm
23(b) Consent of Independent Registered Public Accounting Firm
*24(a) Powers of Attorney
*24(b) Certified copy of board resolution authorizing Form 10-K filing utilizing powers of attorney
| 31(a) | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31(b) | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32(a) | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*99.1 Solutia's Categorical Independence Standards for Non-Employee Directors
| *99.2 | Press Release dated February 25, 2008 Solutia Reaches Agreement with Citi, Goldman Sachs and Deutsche Bank to Fund Exit Financing |
| *99.3 | Press Release dated February 26, 2008 Solutia Gains Court Approval of Exit Financing; Will Emerge from Chapter 11 on February 28 |
| 99.4 | Consolidated Financial Statements for Siratsa LLC for the year ended December 31, 2007 |
| | −−−−−−−−−−−−−−−−−−−−−−−−−−−−− |
| | (1) Confidentiality has been requested for a portion of this exhibit. |
| | * Previously filed with Solutia’s Form 10-K filed with the Securities and Exchange Commission on February 27, 2008. |
| (d) | Financial Statements Schedules |
| | Separate Financial Statements of Subsidiaries Not Consolidated. |
The consolidated financial statements of Siratsa LLC (previously known as Astaris LLC), our 50/50 joint venture with FMC Corporation, for the three year period ended December 31, 2007 required to be included in this report pursuant to Rule 3-09 of Regulation S-X are being filed as exhibit 99.4 to this Amendment No. 1 to Form 10-K.
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