UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
-----------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- --------------------
Commission file number 001-13255
---------
SOLUTIA INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1781797
------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 Name of each exchange on which registered
-------------------- -----------------------------------------
None None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
-------------------
$.01 par value Common Stock
Preferred Stock Purchase Rights
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 (Section 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (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, 2004, based upon the
value of the last sales price of these shares as quoted on the OTC Bulletin
Board, was approximately $24.0 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: 104,459,584
shares of common stock, $.01 par value, outstanding as of the close of
business on February 28, 2005.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Solutia makes statements in this Annual Report on Form 10-K that
are considered forward-looking statements under the federal securities laws.
Solutia considers all statements regarding anticipated or future matters,
including the following, to be forward-looking statements:
o future effects from Solutia's filing for Chapter 11 o results of litigation;
protection which occurred on December 17, 2003;
o Solutia's expected future financial position, o plans and objectives of management for future
liquidity, results of operations, profitability and operations;
cash flows;
o dividends; o contractual obligations;
o financing plans; o off-balance sheet arrangements;
o competitive position; o growth opportunities for existing products and
services;
o business strategy; o price increases;
o budgets; o benefits from new technology; and
o projected cost reductions; o effect of changes in accounting due to recently
issued accounting standards.
These statements are not guarantees of Solutia's future
performance. They represent Solutia's estimates and assumptions only on the
date it made them. There are risks, uncertainties and other important
factors that could cause Solutia's actual performance or achievements to be
materially different from those it may project. These risks, uncertainties
and factors include:
o Solutia's ability to develop, confirm and consummate o disruption of operations;
a Chapter 11 plan of reorganization;
o Solutia's ability to reduce its overall leveraged o exposure to product liability and other litigation,
position; environmental remediation obligations and other
environmental liabilities;
o the potential adverse impact of Solutia's Chapter 11 o lower prices for Solutia's products or a decline in
filing on its operations, management and employees, Solutia's market share due to competition or price
and the risks associated with operating businesses pressure by customers;
under Chapter 11 protection;
o Solutia's ability to comply with the terms of its o ability to implement cost reduction initiatives in
debtor-in-possession ("DIP") financing facility; a timely manner;
o customer response to Solutia's Chapter 11 filing; o ability to divest existing businesses;
o general economic, business and market conditions; o efficacy of new technology and facilities;
o currency fluctuations; o limited access to capital resources;
o interest rate fluctuations; o changes in U.S. and foreign laws and regulations;
o price increases or shortages of raw materials and o geopolitical instability; and
energy;
o changes in pension and other post-retirement
benefit plan assumptions.
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Solutia, together with its subsidiaries (referred to herein as
"Solutia" or the "Company"), is a global manufacturer and marketer of a
variety of high-performance chemical-based materials, which are used in a
broad range of consumer and industrial applications. Solutia is reporting
its business under two segments: Performance Products and Services and
Integrated Nylon.
Solutia's Performance Products and Services segment is comprised of
six product lines and one service business. The product lines are generally
managed based on the markets into which these products are sold.
o Solutia's SAFLEX(R) and VANCEVA(R) brands of plastic interlayer
are used for laminated safety glass, primarily in automotive
original equipment manufacturing and architectural applications.
Solutia markets its plastic interlayer to the automotive industry
for use in automobile windshields and side, rear and roof windows
of vehicles. Solutia also brands plastic interlayer under the
KEEPSAFE(R) and KEEPSAFE MAXIMUM(R) marks for architectural
applications.
o Solutia's LLUMAR(R), VISTA(R) and GILA(R) brands of window films
are custom coated and used primarily for aftermarket automotive
and architectural applications. LLUMAR(R) and VISTA(R) window
films are marketed to the professional aftermarket automotive and
architectural applications, and GILA(R) is marketed to the
do-it-yourself retail market.
o Solutia's plastic products include entrance matting and automotive
spray suppression flaps.
o Solutia's DEQUEST(R) water treatment phosphonates are used to
enhance water quality for industrial and domestic use.
o Solutia's THERMINOL(R) heat transfer fluids are used for indirect
heating or cooling of chemical processes.
o Solutia's SKYDROL(R) brand aviation hydraulic fluids are supplied
across the aviation industry.
o Solutia's Pharmaceutical Services business provides leading
pharmaceutical companies with pharmaceutical development expertise,
including process research, manufacturing and advisory services.
Solutia's Integrated Nylon segment comprises an integrated family
of nylon products.
o Solutia's chemical intermediates are used internally as feedstock
for fiber and resins production and also are sold on the merchant
market.
o Solutia's VYDYNE(R) and ASCEND(R) nylon polymers are sold to the
engineered thermoplastic, apparel, textile and industrial markets.
o Solutia's fibers are sold under the WEAR-DATED(R) brand for
residential carpet and the ULTRON(R) brand for commercial carpet,
as well as under private labels for these and industrial markets.
Solutia was incorporated in Delaware in April 1997 to hold most of the
chemical businesses of the former Monsanto Company, now known as Pharmacia
Corporation, a wholly owned subsidiary of Pfizer Inc. ("Pharmacia"). On
September 1, 1997, Pharmacia spun off Solutia by distributing Solutia's
shares as a dividend to its stockholders. Solutia became an independent
publicly held company as a result of the spinoff.
3
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 in the U.S. Bankruptcy Court for the Southern
District of New York. The cases were consolidated for the purpose of joint
administration and were assigned case number 03-17949 (PCB). Solutia's
subsidiaries outside the United States were not included in the Chapter 11
filing.
The filing was made to restructure Solutia's balance sheet by
reducing indebtedness to appropriate levels, to streamline operations and
reduce costs, in order to allow Solutia to emerge from Chapter 11 as a
viable going concern, and to obtain relief from the negative financial
impact of liabilities for litigation, environmental remediation and certain
post-retirement benefits and liabilities under operating contracts, all of
which were assumed at the time of the spinoff of Solutia from Pharmacia
(collectively "legacy liabilities"). These factors, combined with the
weakened state of the chemical manufacturing sector, general economic
conditions and continuing high, volatile energy and crude oil costs have
been an obstacle to Solutia's financial stability and success. While Solutia
believes it will be able to significantly reduce the legacy liabilities
through the bankruptcy process, there can be no certainty that it will be
successful in doing so.
Under Chapter 11, Solutia is operating its businesses as a
debtor-in-possession ("DIP") under court protection from creditors and
claimants. Since the Chapter 11 filing, all orders sufficient to enable
Solutia to conduct normal business activities, including the approval of
Solutia's DIP financing, have been entered by the bankruptcy court. While
Solutia is 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, Solutia entered into a $525 million DIP credit facility. This DIP
facility consists of (i) a $50 million multiple draw term loan; (ii) a $300
million single draw term loan, which was drawn in full on the effective date
of the facility; and (iii) a $175 million borrowing-based revolving credit
facility, which includes a $150 million letter of credit subfacility. The
DIP credit facility was amended on July 20, 2004, with bankruptcy court
approval. For additional information regarding the DIP financing, see
"Management's Discussion and Analysis" in Item 7 below and Note 14 to the
accompanying consolidated financial statements on page 71 below.
As a consequence of the Chapter 11 filing, pending litigation
against Solutia is generally stayed, and no party may take any action to
collect its pre-petition claims except pursuant to order of the bankruptcy
court. November 30, 2004 was the last date by which holders of pre-filing
date claims against the Debtors could file such claims. Any holder of a
claim that was required to file such claim by November 30, 2004, and did not
do so may be barred from asserting such claim against the Debtors and,
accordingly, may not be able to participate in any distribution on account
of such claim. Differences between claim amounts identified by the Debtors
and claims filed by claimants will be investigated and resolved in
connection with the Debtors' claims resolution process, and only holders of
claims that are ultimately allowed for purposes of the Chapter 11 case will
be entitled to distributions. Solutia has not yet completed its analysis of
all the proofs of claim. Since the settlement terms of allowed claims are
subject to a confirmed plan of reorganization, the ultimate distribution
with respect to allowed claims is not presently ascertainable.
In order to exit Chapter 11 successfully, Solutia must propose and
obtain confirmation by the bankruptcy court of a plan of reorganization that
satisfies the requirements of the U.S. Bankruptcy Code. As provided by the
U.S. Bankruptcy Code, Solutia had the exclusive right to propose a plan of
reorganization for 120 days following the Chapter 11 filing date. The
bankruptcy court has subsequently approved several extensions of the
exclusivity period, the most recent of which is set to expire on April 11,
2005. On February 25, 2005, Solutia filed a motion with the bankruptcy court
seeking to extend the exclusivity period to July 11, 2005. No assurance can
be given that such extension request will be granted by the bankruptcy court
or, if granted, that any future extension requests will be granted by the
bankruptcy court. Moreover, although Solutia expects to file a plan of
reorganization that provides for Solutia's emergence from bankruptcy as a
going concern, there can be no assurance that a plan of reorganization will
be confirmed by the bankruptcy court or that any such plan will be
implemented successfully.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options and
warrants to purchase its common stock, and that it is unlikely that holders
of Solutia's common stock, including options and warrants to purchase
Solutia's common stock, will receive any consideration for that stock or
those options and warrants in such a plan of reorganization. Solutia is
unable to estimate what recovery such a plan of reorganization will provide
to holders of Solutia's outstanding debt securities. While Solutia filed for
Chapter 11 in part to
4
gain relief from the legacy liabilities it was required to assume when it
was spun off from Pharmacia, the extent to which such relief will be
achieved is uncertain at this time. It is also possible that pursuant to a
plan of reorganization Solutia will agree to retain a portion of the legacy
liabilities.
RECENT DEVELOPMENTS
On January 25, 2005, Solutia announced that it would exit the
acrylic fibers business included within its Integrated Nylon segment,
subject to approval by the bankruptcy court. Solutia expects to close its
acrylic fibers operation in April 2005.
SEGMENTS; PRINCIPAL PRODUCTS
Solutia's reportable segments are:
o Performance Products and Services; and
o Integrated Nylon.
The tabular and narrative information contained in Note 22 to the
accompanying consolidated financial statements appearing on pages 89 and 90
is incorporated by reference into this section.
5
Performance Products and Services Segment
- ------------------------------------------------------------------------------------------------------------------------------
Major End-Use
Major End-Use Products & Major Major Raw
Markets Major Products Applications Competitors Materials Major Plants
- ------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION AND HOME Polyvinyl butyral Products to DuPont; Butyraldehyde; Ghent, Belgium;
FURNISHINGS for KEEPSAFE(R) and increase the Kuraray; ethanol; Martinsville, VA;
KEEPSAFE MAXIMUM(R) safety, Sekisui polyvinyl Springfield, MA;
laminated window security, sound alcohol; vinyl Trenton, MI
glass; VANCEVA(R) attenuation, acetate monomer
films; LLUMAR(R) energy
and VISTA(R) efficiency and
professional ultraviolet
window films and protection of
GILA(R) architectural
retail window glass for
films residential and
commercial
structures;
after-market
films for solar
control,
security and
safety
- ------------------------------------------------------------------------------------------------------------------------------
ASTROTURF(R) and Entrance matting Elecster; Polyethylene Ghent, Belgium;
CLEAN Fichet; St. Louis, MO
MACHINE(R) HBN-Teknik
door mats
- ------------------------------------------------------------------------------------------------------------------------------
VEHICLES SAFLEX(R) plastic Products to DuPont; Butyraldehyde; Ghent, Belgium;
interlayer for increase the Sekisui ethanol; Martinsville, VA;
windshields and safety, polyvinyl Springfield, MA;
for side, roof security, sound alcohol; vinyl Trenton, MI
and rear attenuation and acetate monomer
windows of ultraviolet
vehicles; protection of
VANCEVA(R) plastic automotive
interlayer and glass and give
films; LLUMAR(R), vehicles a
FORMULAONE custom
PERFORMANCE appearance
AUTOMOTIVE FILMS(R)
and GILA(R) retail
window films
- ------------------------------------------------------------------------------------------------------------------------------
CLEAR PASS(R) Spray suppression Fichet; Wegu Polyethylene Ghent, Belgium;
spray suppression systems for St. Louis, MO
systems trucks
- ------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL APPLICATIONS AND Metallized films; Window films; 3M; ATI; Polyester film; Martinsville, VA
ELECTRONICS sputtered films; tapes; Garware; glycol;
release liners automotive Intellicoat; n-methyl-2-
and deep-dyed badging; Mitsubishi; pyrrolidone;
films optical and Toray crude and
colored dispersed dyes;
filters; aluminum wires
shades; and boats;
reprographics; uvinol
packaging
- ------------------------------------------------------------------------------------------------------------------------------
Performance Computer Bekaert; Polyester film; Canoga Park, CA;
films; conductive touch-screens; OCLI; Indium tin; Martinsville, VA;
and electro- Southwall precious metals Runcorn, U.K.
anti-reflective luminescent
coated films displays for
hand-held
electronics and
watches;
cathode ray
tube and LCD
monitors
- ------------------------------------------------------------------------------------------------------------------------------
DEQUEST(R) water Water treatment; Bayer; Rhodia Phosphorus Newport, Wales
treatment oil field trichloride (U.K.)
chemicals chemicals
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL EQUIPMENT THERMINOL(R) heat Heat transfer Dow Chemical Benzene; phenol Alvin, TX;
transfer fluids fluids Co.; Nippon Anniston, AL;
Steel Newport, Wales (U.K.)
Chemical Co.
- ------------------------------------------------------------------------------------------------------------------------------
AVIATION/TRANSPORTATION SKYDROL(R) aviation Hydraulic ExxonMobil Phosphorus St. Louis, MO
hydraulic fluids; fluids for oxychloride;
SKYKLEEN(R) commercial methanol
aviation solvents aircraft;
environmentally
friendly
solvents for
aviation
maintenance
- ------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS Services for New Albany Aarau and
process research pharmaceuticals Molecular Bubendorf,
and development, Research; Switzerland
scale-up Evotec;
manufacturing and Pharma-Eco;
small-volume Rhodia ChiRex
licensed
production
- ------------------------------------------------------------------------------------------------------------------------------
6
Integrated Nylon Segment
- ------------------------------------------------------------------------------------------------------------------------------
Major End-Use
Major End-Use Products & Major Major Raw
Markets Major Products Applications Competitors Materials Major Plants
- ------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION AND Nylon carpet WEAR-DATED(R) Honeywell; Propylene; Decatur and
HOME FURNISHINGS staple; nylon bulk residential and Invista natural gas; Foley, AL;
continuous ULTRON(R) cyclohexane; Greenwood, SC;
filament; ASCEND(R) commercial ammonia Pensacola, FL
nylon polymer carpet;
non-woven
reinforcement
and linings
- ------------------------------------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS ASCEND(R) nylon Knit apparel; Invista; Rhodia Propylene; Decatur, AL;
polymer half-hose; natural gas; Greenwood, SC;
active wear; cyclohexane; Pensacola, FL
apparel; dental ammonia
floss; intimate
apparel
- ------------------------------------------------------------------------------------------------------------------------------
VEHICLES Nylon filament; Tires; airbags; Acordis; BASF; Propylene; Decatur, AL;
VYDYNE(R) nylon automotive DuPont; natural gas; Greenwood, SC;
molding resins; interior, Invista; cyclohexane; Pensacola, FL
ASCEND(R) nylon exterior and Rhodia ammonia
polymer under-the-hood
molded parts
- ------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL ASCEND(R) nylon Conveyer belts; DUSA; Invista Propylene; Decatur, AL;
APPLICATIONS polymer; nylon film natural gas; Greenwood, SC;
industrial nylon cooking bags; cyclohexane; Pensacola, FL
fiber specialized food ammonia
packaging;
sewing thread;
backpacks; cots;
tents
- ------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE Adipic acid; hexa- Nylon and Asahi Chemical; Propylene; Alvin, TX;
CHEMICALS methylenediamine; acrylic fiber; BP; Invista; natural gas; Decatur, AL;
acrylonitrile nylon and ABS Rhodia cyclohexane; Greenwood, SC;
plastics; ammonia Pensacola, FL
synthetic
resins;
synthetic
lubricants;
paper chemicals;
plasticizers
- ------------------------------------------------------------------------------------------------------------------------------
7
PRINCIPAL EQUITY AFFILIATES
Solutia participates in several joint ventures in which it shares
ownership and management control with other companies. Solutia's equity
earnings (loss) from affiliates, were $(26) million in 2004, $(133) million
in 2003 and $13 million in 2002. Principal joint ventures include Flexsys
and Astaris LLC ("Astaris").
Flexsys, headquartered in Belgium, is a leading supplier of process
chemicals to the rubber industry. Its product line includes a number of
performance-enhancing products, including branded accelerators
(SANTOCURE(R), THIOFIDE(R) and THIOTAX(R)), pre-vulcanization inhibitors
(SANTOGARD(R) PVI), antidegradants (SANTOFLEX(R)), antioxidants (FLECTOL(R))
and insoluble sulphur (CRYSTEX(R)). Flexsys is a 50/50 joint venture with
Akzo Nobel N.V.
Astaris, headquartered in the United States, sells phosphorus,
phosphoric acid and phosphate salts. Its product line includes a number of
branded products such as LEVN-LITE(R) and PAN-O-LITE(R) phosphate, which are
sold into the bakery markets. The business also services the pharmaceutical,
meat and poultry and industrial marketplaces. Astaris is a 50/50 joint
venture with FMC Corporation.
For additional information about Flexsys and Astaris, see
"Management's Discussion and Analysis" in Item 7 below and Note 10 to the
accompanying consolidated financial statements on page 67 below.
SALE OF PRODUCTS
Solutia sells its products directly to end users in various
industries, principally by using its own sales force, and, to a lesser
extent, by using distributors.
Solutia's marketing and distribution practices do not result in
unusual working capital requirements on a consolidated basis. Solutia
maintains inventories of finished goods, goods in process and raw materials
to meet customer requirements and Solutia's scheduled production. In
general, Solutia does not manufacture its products against a backlog of firm
orders; it schedules production to meet the level of incoming orders and the
projections of future demand. However, in the Performance Products and
Services segment, a large portion of sales for 2005 will be pursuant to
volume commitments. Solutia does not have material contracts with the
government of the United States or any state, local or foreign government.
Solutia is not generally dependent on one or a group of customers, and no
single customer or customer group accounts for 10 percent or more of
Solutia's net sales. However, sales to the carpet mill industry represent a
significant portion of Solutia's net sales.
Solutia's second and third quarters are typically stronger than its
first and fourth quarters because sales of carpet and window films are
stronger in the spring and fall.
COMPETITION
The global markets in which Solutia's businesses operate are highly
competitive. Solutia expects competition from other manufacturers of the
same products and from manufacturers of different products designed for the
same uses as Solutia's products to continue in both U.S. and ex-U.S.
markets. Depending on the product involved, Solutia encounters various types
of competition, including price, delivery, service, performance, product
innovation, product recognition and quality. Overall, Solutia regards its
principal product groups as competitive with many other products of other
producers and believes that Solutia is 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
Solutia buys large amounts of commodity raw materials, including
propylene, cyclohexane, benzene and natural gas. Solutia typically buys
major requirements for key raw materials pursuant to contracts with average
contractual periods of one to four years. Solutia obtains certain important
raw materials from a few major suppliers. In general, in those cases where
Solutia has limited sources of raw materials, it has developed contingency
plans to minimize the effect of any interruption or reduction in supply. For
information about specific raw materials, see the charts under "Segments;
Principal Products" above.
8
While temporary shortages of raw materials and energy resources may
occasionally occur, these items are generally sufficiently available to
cover Solutia's 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
these raw materials and energy resources used by Solutia, a minor shift
in the underlying prices for these items can result in a significant impact
on Solutia's consolidated financial position and results of operations.
PATENTS AND TRADEMARKS
Solutia owns a large number of patents that relate to a wide
variety of products and processes and has pending a substantial number of
patent applications. In addition, Solutia is licensed under a small number
of patents owned by others. Solutia owns a considerable number of
established trademarks in many countries under which Solutia markets its
products. These patents and trademarks in the aggregate are of material
importance to Solutia's operations and to Solutia's Performance Products and
Services and Integrated Nylon segments. Patents and trademarks owned by
Solutia and its domestic subsidiary CPFilms Inc. have been pledged as part
of the collateral for the DIP financing. The holders of Solutia's 11.25
percent Senior Secured Notes due 2009 have a junior security interest in
these patents and trademarks. Any patents and trademarks of Solutia Europe
S.A./N.V. ("SESA"), as well as any trademarks owned by AMCIS AG and Carbogen
AG, have been pledged to the holders of SESA's Euronotes in connection with
the restructuring of that debt.
RESEARCH AND DEVELOPMENT
Research and development constitute an important part of Solutia's
activities. Solutia's expenses for research and development amounted to
approximately $40 million in 2004, $46 million in 2003 and $39 million in
2002, or about 2 percent of sales on average. Solutia focuses its
expenditures for research and development on process improvements and
selected product development.
Solutia's research and development programs in the Performance
Products and Services segment emphasize the development and
commercialization of specialty products for the window glazing and specialty
materials markets, such as a new acoustic safety interlayer for automotive
windshields, a solar absorbing interlayer for automotive sunroofs and
specialty printed window films for home decoration. Solutia's 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. This year Solutia expects to
commercialize speciality nylon staple products and a broader line of
VYDYNE(R) brand products with enhanced toughness and processability.
ENVIRONMENTAL MATTERS
The narrative information appearing under "Environmental Matters"
beginning on page 34 below is incorporated here by reference.
EMPLOYEE RELATIONS
On December 31, 2004, Solutia had approximately 5,700 employees
worldwide. In general, satisfactory relations have prevailed between
Solutia's employees and Solutia. Solutia uses self-directed work teams,
incentive programs and other initiatives to keep employees actively involved
in the success of the business. Approximately 16 percent of Solutia's
worldwide workforce is currently represented by various labor unions with
local agreements that expire at various dates, at the following Solutia
sites: Anniston, Alabama; Sauget, Illinois; Springfield, Massachusetts;
Trenton, Michigan; St. Louis (Queeny Plant), Missouri; Ghent, Belgium; and
LaSalle, Canada. In the U.S., local agreements cover wages and working
conditions. Benefit programs are addressed in a national agreement covering
all local bargaining units. The national agreement expires December 31,
2005.
INTERNATIONAL OPERATIONS
Solutia and its subsidiaries are engaged in manufacturing, sales
and research and development in areas outside the United States.
Approximately 40 percent of Solutia's consolidated sales from continuing
operations in 2004 were made into markets outside the United States,
including Europe, Canada, Latin America and Asia. Solutia's Performance
Products and
9
Services segment is particularly dependent on its international operations.
Approximately 65 percent of the 2004 sales of the Performance Products and
Services segment were made into markets outside the United States.
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 Solutia's non-United States operations is 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, Solutia generates 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
Solutia's Internet address is www.solutia.com. Solutia makes
available free of charge through Solutia's Internet website its annual
report on Form 10-K, its 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. Forms 3, 4 and 5 filed by Solutia's
directors and executive officers with respect to Solutia's equity securities
are also accessible from Solutia's website. All of these materials may be
accessed from the "Investors" section of Solutia's website.
ITEM 2. PROPERTIES
Solutia's general offices are located in St. Louis County,
Missouri, on land owned by Solutia in a facility which is the subject of a
synthetic lease (see Note 12 to the accompanying consolidated financial
statements). Solutia's principal European offices are located in
Louvain-la-Neuve, Belgium, on land leased from the University of Louvain.
Information about Solutia's major manufacturing locations worldwide and
segments that used these locations on February 1, 2005, appears under
"Segments; Principal Products" in Item 1 of this report and is incorporated
here by reference.
Solutia's principal plants are suitable and adequate for their use.
Utilization of these facilities varies with seasonal, economic and other
business conditions, but none of Solutia's principal plants is
substantially idle. Solutia's facilities generally have sufficient capacity
for existing needs and expected near-term growth; where capacity has been
reached, plans are in place to expand the facilities.
Solutia owns most of its principal plants. However, at Antwerp,
Belgium and Sao Jose dos Campos, Brazil, both of which are sites belonging
to the current Monsanto Company, Solutia owns certain buildings and
production equipment and leases the underlying land. In addition, Solutia
leases buildings for its Pharmaceuticals Services business, including the
production site in Aarau, Switzerland. In Bubendorf, Switzerland, Solutia
owns one production building but not the land on which it stands.
Monsanto and Solutia have operating agreements with respect to each
of the two Monsanto facilities listed above and with respect to Solutia's
Chocolate Bayou facility in Alvin, Texas and its facility in Ghent, Belgium.
Under these operating agreements, Solutia is the guest at the facility and
Monsanto is the operator of the facility, except at the Chocolate Bayou and
Ghent facilities at which Monsanto is the guest and Solutia is the operator.
The initial term of each of the operating agreements has 13 years remaining.
After the initial term, the operating agreements continue indefinitely
unless either party terminates on at least 24 months' prior written notice.
Each of the operating agreements also provides that, under certain
circumstances, either the operator or the guest may terminate the operating
agreement before the expiration of its initial term. Solutia operates
several facilities for other third parties on its sites, principally within
the Alvin (Chocolate Bayou), Texas; Sauget, Illinois; Pensacola, Florida;
Newport, Wales (U.K.); St. Louis (Queeny), Missouri; and Springfield,
Massachusetts sites under long-term lease and operating agreements.
Mortgages on Solutia's plants at the following locations constitute
a portion of the collateral securing Solutia's DIP financing facility:
Decatur, Alabama; Springfield, Massachusetts; Trenton, Michigan; Greenwood,
South Carolina; Alvin (Chocolate Bayou), Texas; Pensacola, Florida; and
Martinsville, Virginia. The holders of Solutia's 11.25 percent Senior
Secured Notes due 2009 hold second mortgages on each of these plants.
Holders of SESA's Euronotes hold mortgages on Solutia's facilities in Ghent,
Belgium and Louvain-la-Neuve, Belgium. In addition, there is a mechanics'
lien filed by Fluor Daniel, a division of Fluor Enterprises, Inc., against
Solutia's Chocolate Bayou facility, currently securing an obligation in the
amount of approximately $7 million, which obligation consists of the
remaining payments Solutia agreed to make to Fluor
10
Daniel over a three-year period in settlement of litigation arising out of
the construction of an acrylonitrile facility at the Chocolate Bayou plant.
As a result of the Chapter 11 filing, Solutia has received notices
of mechanics' liens from a number of contractors seeking payment of
pre-petition claims. While contractors are permitted to take certain actions
required to perfect their liens after the commencement of the Chapter 11
case, such as filing written notice, the automatic stay under Section 362 of
the U.S. Bankruptcy Code prevents their taking any further action to enforce
a lien against Solutia's property unless they obtain court approval to lift
the stay for that purpose, and Solutia does not expect the filing of these
mechanics' liens to have any adverse effect on the operation of Solutia's
plants.
ITEM 3. LEGAL PROCEEDINGS
Because of the size and nature of Solutia's business, Solutia is 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 Solutia's spinoff from Pharmacia, Solutia assumed
the defense of specified legal proceedings and agreed to indemnify Pharmacia
in connection with those proceedings. Solutia has determined that these
defense and indemnification obligations to Pharmacia are pre-petition
obligations under the U.S. Bankruptcy Code that Solutia is prohibited from
performing, except pursuant to a confirmed plan of reorganization. As a
result, Solutia has ceased performance of these obligations and has ceased
reporting on the status of these legal proceedings. Solutia's cessation of
performance may give rise to a pre-petition unsecured claim against Solutia
which Pharmacia may assert in Solutia's Chapter 11 case.
In connection with Solutia's Chapter 11 proceedings, Solutia is
engaged in various litigation matters with Pharmacia and the U.S.
Environmental Protection Agency ("EPA"). These litigation matters relate to
the impact of Solutia's Chapter 11 proceedings on the obligations Solutia
assumed at the time of its spinoff and Solutia's obligations and liabilities
under environmental laws. These litigation matters could affect the size of
creditor claims to be asserted in Solutia's Chapter 11 case by the EPA,
Pharmacia and Monsanto, as well as the extent, if any, to which Solutia will
be required to continue to perform environmental obligations and legacy
liabilities under Solutia's plan of reorganization after emergence from
Chapter 11. For additional information regarding Solutia's Chapter 11
Proceedings, see the "Chapter 11 Proceedings" section in Item 1 above.
The following paragraphs describe several proceedings to which
Solutia or an affiliate of Solutia is a party.
ANNISTON PARTIAL CONSENT DECREE
On August 4, 2003, the U.S. District Court for the Northern
District of Alabama approved a Partial Consent Decree in an action captioned
United States of America v. Pharmacia Corporation (p/k/a Monsanto Company)
and Solutia. This Partial Consent Decree provides for Pharmacia and Solutia
to sample certain residential properties and remove soils found on those
properties if polychlorinated biphenyls ("PCBs") are at a level of 1 part
per million (ppm) or above, to conduct a Remedial Investigation and
Feasibility Study to provide information for the selection by the EPA of a
cleanup remedy for the Anniston PCB site, and to pay EPA's past response
costs and future oversight costs related to this work. The decree also
provided for the creation of an educational trust fund of approximately $3
million to be funded over a 12-year period to provide supplemental
educational services for school children in west Anniston. A dispute
currently exists between the EPA and Solutia regarding the scope and
application of the automatic stay arising as a result of Solutia's Chapter
11 filing to the remaining obligations under the Partial Consent Decree. On
April 19, 2004, the district court held that the Partial Consent Decree
enforces police and regulatory powers under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and, as a result, the
automatic stay provisions of the U.S. Bankruptcy Code are inapplicable to
Solutia's obligations under the Partial Consent Decree. On April 30, 2004,
the United States Bankruptcy Court for the Southern District of New York
entered a Stipulation and Agreed Order in which the EPA and Solutia
stipulate that the automatic stay is applicable to certain of the Partial
Consent Decree's requirements. Solutia filed a motion asking the district
court to reconsider its order and to bring it into accord with the
Stipulation and Agreed Order consented to by the EPA and entered by the
bankruptcy court. On September 9, 2004, the district court denied Solutia's
motion and declared that the automatic stay is inapplicable to Solutia's
obligations under the Consent Decree to perform site work. Solutia appealed
this ruling to the Eleventh U.S. Circuit Court of Appeals, which dismissed
the appeal for lack of jurisdiction.
11
FLEXSYS RELATED LITIGATION
Antitrust authorities in the United States, Europe and Canada are
investigating past commercial practices in the rubber chemicals industry.
Flexsys, Solutia's 50/50 joint venture with Akzo Nobel N.V., is a subject of
such an investigation and has been fully cooperating with the authorities
and will continue to do so in the ongoing investigation. In addition, a
number of purported class actions have been filed against Flexsys and other
producers of rubber chemicals.
State court actions against Flexsys. Although not named as a
defendant, Solutia is aware of 22 purported class actions filed in various
state courts against Flexsys and other producers of rubber chemicals. In 20
of these cases, plaintiffs seek actual and treble damages under state law on
behalf of all retail purchasers of tires in that state since as early as
1994. In the other two cases, plaintiffs make similar allegations and seek
similar relief on behalf of all consumers of products containing rubber,
including tires. Twelve of these cases remain pending at the trial level in
procedural stages or are pending on appeal following dismissal on procedural
grounds as to Flexsys. In another case, defendants have appealed following
the denial of their motion to dismiss for lack of standing. On March 1,
2005, Solutia became aware of a new state court action filed in Tennessee on
behalf of consumers who allegedly purchased any product containing rubber
chemicals in Tennessee or a number of other states. The case was filed
against Flexsys and other rubber chemical producers and also names Solutia.
The allegations in the case are similar to the two cases described above
which were previously filed in other states on behalf of all consumers of
products containing rubber chemicals, including tires and requests the same
form of relief. The case will be automatically stayed against Solutia.
Canadian actions against Flexsys. In May 2004, two purported class
actions were filed in the Province of Quebec, Canada, against Flexsys and
other rubber chemical producers alleging that collusive sales and marketing
activities of the defendants damaged all persons in Quebec during the period
July 1995 through September 2001. Plaintiffs seek statutory damages of (CAD)
$14.6 million along with exemplary damages of (CAD) $25 per person. A
hearing will be scheduled to determine which case will be allowed to go
forward. Solutia is not a defendant in either of these class actions.
Federal court actions by purchasers of rubber chemicals. Eight
purported class actions filed in the U.S. District Court for the Northern
District of California on behalf of all individuals and entities that had
purchased rubber chemicals in the United States during the period January 1,
1995 until October 10, 2002, against Solutia, Flexsys and a number of other
companies producing rubber chemicals have been consolidated into a single
action called In Re Rubber Chemicals Antitrust Litigation. The consolidated
action alleges price-fixing and seeks treble damages and injunctive relief
under U.S. antitrust laws on behalf of all the plaintiffs. Solutia filed a
Suggestion of Bankruptcy in this consolidated action staying the litigation
against it. A settlement agreement was filed with the district court on
February 18, 2005. If approved by the district court, the agreement would
release Flexsys, Solutia, Akzo and their predecessors in interest from any
further liability to the members of the class with respect to the
allegations in the action. RBX Industries, Inc. v. Bayer Corp., Flexsys,
et.al., originally filed in federal court in Pennsylvania in July 2004, was
removed to the U.S. District Court for the Northern District of California.
This case alleges that during the period 1995 through 2001 the defendants,
which do not include Solutia, conspired through common marketing and sales
practices to cause plaintiffs to pay supra-competitive prices for rubber
chemicals and seeks treble damages.
Federal court actions alleging violations of federal securities
laws. Six purported shareholder class actions were filed in the U.S.
District Court for the Northern District of California against Solutia, its
then and former chief executive officers and its then chief financial
officer. The complaints were consolidated into a single action called In Re
Solutia Securities Litigation, and a consolidated complaint which named two
additional defendants, Solutia's then current and past controllers, was
filed. The consolidated complaint alleges that from December 16, 1998 to
October 10, 2002, Solutia's accounting practices regarding incorporation of
Flexsys's results into Solutia's financial reports violated federal
securities laws by misleading investors as to Solutia's actual results and
causing inflated prices to be paid by purchasers of Solutia's publicly
traded securities during the period. The plaintiffs seek damages and any
equitable relief that the court deems proper. The consolidated action has
been automatically stayed with respect to Solutia by virtue of Section
362(a) of the U.S. Bankruptcy Code. The consolidated complaint was dismissed
as against the individual defendants for failure to state a claim, but
plaintiffs were granted the right to file an amended complaint, which they
did. The second amended complaint against the individual defendants was
dismissed with prejudice on January 4, 2005. Plaintiffs have the right to
appeal.
Shareholder Derivative Suits. Two purported shareholder derivative
suits were filed in the Missouri Circuit Court for the Twenty-First Judicial
Circuit of St. Louis County against certain of Solutia's current and past
directors, chief executive officers, chief financial officer and former vice
chairman. Solutia is included as a nominal defendant. The plaintiffs seek
12
damages on behalf of Solutia for the individual defendants' alleged breaches
of fiduciary duty, abuse of control, gross mismanagement, waste of corporate
assets and unjust enrichment, arising out of Flexsys's alleged participation
in the price-fixing of rubber chemicals and Solutia's incorporation of
Flexsys's purportedly inflated financial results arising from the alleged
price-fixing into Solutia's financial statements. These two shareholder
derivative suits were consolidated into a single action, In re Solutia Inc.
Derivative Litigation. On December 29, 2003, the court entered an Order in
the consolidated action staying the litigation with respect to all
defendants, including Solutia. In August 2004, the court involuntarily
dismissed the cases for lack of prosecution. Plaintiffs' motion to reinstate
the actions is pending.
OTHER LEGAL PROCEEDINGS
On October 7, 2004, a purported class action captioned Dickerson v.
Feldman, et al. was filed in the United States District Court for the
Southern District of New York against a number of defendants, including
former officers and employees of Solutia and Solutia's Employee Benefits
Plans Committee and Pension and Savings Funds Committee. Solutia was not
named as a defendant. The action alleges breach of fiduciary duty under the
Employee Retirement Income Security Act of 1974 ("ERISA") and seeks to
recover alleged losses to the Solutia Inc. Savings and Investment Plan ("SIP
Plan") arising from the alleged imprudent investment of SIP Plan assets in
Solutia's common stock during the period December 16, 1998 to the date the
action was filed. The investment is alleged to have been imprudent because
of Solutia's legacy environmental and litigation liabilities and because of
Flexsys's alleged involvement in the matters described above under "Flexsys
Related Litigation." The action seeks monetary payment to the SIP Plan to
make good 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
plaintiff in this action filed a proof of claim for $269 million against
Solutia in the U.S. Bankruptcy Court for the Southern District of New York.
The plaintiff now seeks to withdraw the reference of his ERISA claim from
the bankruptcy court to the district court so that the proof of claim and
the class action can be considered together by the district court. On
February 11, 2005, Solutia filed an objection to the motion to withdraw the
reference.
On October 14, 2003, Solutia filed an action captioned Solutia Inc.
v. FMC Corporation ("FMC") in Circuit Court in St. Louis County, Missouri,
against FMC over the failure of purified phosphoric acid technology provided
by FMC to Astaris, the 50/50 joint venture between Solutia and FMC. On
February 20, 2004, Solutia voluntarily dismissed the state court action and
filed an adversary proceeding against FMC in the U.S. Bankruptcy Court for
the Southern District of New York. FMC filed with the bankruptcy court a
motion to withdraw the reference. The motion was granted, and, as a result,
the matter is now pending in the U.S. District Court for the Southern
District of New York. FMC has filed a motion to dismiss Solutia's action
based upon an alleged lack of standing. On October 15, 2004, the court heard
oral arguments on FMC's motion to dismiss. Discovery is on-going with the
discovery deadline set for May 31, 2005. Solutia is vigorously pursuing this
action.
For information about certain environmental proceedings involving
Solutia, see "Environmental Matters" on page 34.
RISK MANAGEMENT
Solutia has evaluated risk retention and insurance levels for
product liability, workplace health and safety, property damage and other
potential areas of risk. Solutia's management determines the amount of
insurance coverage to buy 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
levels of risk that Solutia has retained are consistent with those of other
companies in the chemical industry. Solutia shares certain of these policies
with Pharmacia. There can be no assurance that Solutia will not incur losses
beyond the limits, or outside the coverage, of its insurance. For additional
information, see "Self-Insurance" on page 23.
Solutia will continue to devote significant effort to maintaining
and improving safety and internal control programs, which reduce its
exposure to certain risks. Solutia actively participates in the safety and
health Voluntary Protection Program ("VPP") administered by the Occupational
Safety and Health Administration ("OSHA") for most sites in the United
States, and implemented by Solutia for sites outside the United States.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Solutia did not submit any matters to its security holders during the fourth
quarter of 2004.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER'S PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 17, 2003, following Solutia's Chapter 11 bankruptcy
filing, the New York Stock Exchange (NYSE) halted trading in Solutia's
common stock. On February 27, 2004, Solutia's common stock was delisted from
the NYSE. Solutia's common stock is currently being quoted under the ticker
symbol "SOLUQ" on the Pink Sheets Electronic Quotation Service maintained by
The Pink Sheets LLC and on the OTC Bulletin Board.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options and
warrants to purchase its common stock, and that it is unlikely that holders
of Solutia's common stock, including options and warrants to purchase
Solutia's common stock, will receive any consideration for that stock or
those options and warrants in such a plan of reorganization. Solutia is
unable to estimate what recovery such a plan of reorganization will provide
to holders of Solutia's outstanding debt securities.
The following table shows the high and low sales prices for
Solutia's common stock for each quarter during 2004 and 2003 as reported on
the NYSE, or quoted on the Pink Sheets Quotation Service or the OTC Bulletin
Board, as applicable.
---------------------------------------------------------------------------------------------
2004 HIGH LOW 2003 HIGH LOW
---------------------------------------------------------------------------------------------
First Quarter $0.59 $0.19 First Quarter $4.73 $1.61
---------------------------------------------------------------------------------------------
Second Quarter 0.40 0.23 Second Quarter 2.80 1.20
---------------------------------------------------------------------------------------------
Third Quarter 0.32 0.24 Third Quarter 4.89 0.91
---------------------------------------------------------------------------------------------
Fourth Quarter 1.39 0.15 Fourth Quarter 4.43 0.23
---------------------------------------------------------------------------------------------
On February 28, 2005, Solutia had 30,007 registered shareholders.
The declaration and payment of dividends is made at the discretion
of Solutia's board of directors. There was no annual dividend paid in 2004
or 2003. Solutia is currently prohibited by both the U.S. Bankruptcy Code
and the DIP financing facility from paying dividends to shareholders.
ISSUER'S PURCHASES OF EQUITY SECURITIES*
The following table provides information with respect to shares of its
common stock surrendered to Solutia, which it was obligated to accept, during
the fourth quarter of 2004:
TOTAL NUMBER OF
SHARES PURCHASED APPROXIMATE DOLLAR
TOTAL NUMBER OF AVERAGE PRICE AS PART OF VALUE OF SHARES THAT
SHARES PAID PER PUBLICLY MAY YET BE PURCHASED
PERIOD PURCHASED** SHARES** ANNOUNCED PLAN UNDER THE PLAN*
------ ----------- -------- -------------- ---------------
October 1, 2004 through
October 31, 2004 3,245 $0.25 -- N/A
November 1, 2004 through
November 30, 2004 -- N/A -- N/A
December 1, 2004 through
December 31, 2004 11,871 $1.15 -- N/A
------ ----- --- ---
TOTAL 15,116 $0.96 -- N/A
====== ===== === ===
<FN>
* On April 26, 2000, Solutia announced that its board of directors
authorized the purchase of up to 15 million shares of Solutia's common
stock (the "2000 Repurchase Program") in addition to the normal
repurchase of shares for Solutia's compensation and benefits programs.
There have not been any
15
purchases under the 2000 Repurchase Program since October 2000. Because
of Solutia's Chapter 11 bankruptcy filing and the covenants contained
in Solutia's DIP financing agreement, there cannot be any further
repurchases under the 2000 Repurchase Program.
** This column reflects the surrender to Solutia of shares of Solutia
common stock to satisfy tax withholding obligations in connection with
the vesting of restricted stock awards. The holders of the restricted
stock had a contractual right to surrender these shares to Solutia
under the terms of their restricted award contracts.
16
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY
- ------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in millions, except
per share amounts) 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
OPERATING RESULTS:
- ------------------
NET SALES $ 2,697 $ 2,430 $2,299 $2,322 $2,676
GROSS PROFIT 223 60 363 310 348
As percent of net sales 8% 2% 16% 13% 13%
MARKETING, ADMINISTRATIVE, AND
TECHNOLOGICAL EXPENSES 289 351 322 334 352
As percent of net sales 11% 14% 14% 14% 13%
OPERATING INCOME (LOSS)(1) (96) (372) 38 (36) (15)
As percent of net sales (4)% (15)% 2% (2)% (1)%
INCOME (LOSS) BEFORE TAXES (322) (615) (19) (137) 42
INCOME (LOSS) FROM CONTINUING
OPERATIONS(2),(3) (316) (980) (8) (81) 36
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS -- (2) 24 22 13
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- (5) (167) -- --
NET INCOME (LOSS) (316) (987) (151) (59) 49
PER SHARE DATA:
- ---------------
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE FROM CONTINUING OPERATIONS (3) $ (3.02) $ (9.37) $(0.08) $(0.78) $0.34
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 104.5 104.6 104.7 103.9 105.9
DILUTED 104.5 104.6 104.7 103.9 107.5
DIVIDENDS PER SHARE -- -- 0.04 0.04 0.04
COMMON STOCK PRICE:
HIGH 1.39 4.89 13.20 15.07 17.19
LOW 0.15 0.23 2.81 11.25 10.38
CLOSE 1.17 0.37 3.63 14.02 12.00
FINANCIAL POSITION - CONTINUING OPERATIONS:
- -------------------------------------------
TOTAL ASSETS $ 2,076 $ 2,446 $2,706 $2,667 $2,755
LIABILITIES NOT SUBJECT TO COMPROMISE 1,333 1,350 3,426 3,334 3,381
LIABILITIES SUBJECT TO COMPROMISE 2,187 2,221 -- -- --
LONG-TERM DEBT(4) 285 294 839 626 783
SHAREHOLDERS' DEFICIT (1,444) (1,125) (249) (113) (34)
OTHER DATA FROM CONTINUING OPERATIONS:
- --------------------------------------
WORKING CAPITAL(5) $ (3) $ 61 $ (270) $ (569) $ (391)
INTEREST EXPENSE 6) 113 120 84 70 55
INCOME TAX EXPENSE (BENEFIT)(7) (6) 365 (11) (43) (6)
DEPRECIATION AND AMORTIZATION 127 137 134 143 152
CAPITAL EXPENDITURES 61 78 59 83 211
EMPLOYEES (YEAR-END) 5,700 6,300 7,300 7,100 8,100
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Operating income (loss) includes restructuring charges and other items
of $101 million in 2004, $333 million in 2003, $22 million in 2002, $78
million in 2001, and $158 million in 2000.
(2) Income (loss) from continuing operations includes amortization expense
of $12 million or $0.12 per share net of tax, and $10 million or $0.09 per
share net of tax, in 2001 and 2000, respectively, which under the provisions
of SFAS No. 142, Goodwill and Other Intangible Assets, adopted on January 1,
2002, is no longer recognized.
(3) Income (loss) from continuing operations includes restructuring charges
and other items of $179 million, or $1.71 per share in 2004, $890 million,
or $8.51 per share in 2003, $15 million, or $0.14 per share in 2002, $96
million, or $0.92 per share in 2001, and $81 million, or $0.75 per share in
2000.
(4) Long-term debt as of December 31, 2004 and 2003 excludes $668 million
and $625 million, respectively, 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.
(5) Working capital is defined as total current assets less total current
liabilities.
(6) Interest expense includes the one-time write-off of debt issuance costs
of $25 million in 2004 and $14 million in 2003 due to the early refinancing
of the underlying debt facilities.
(7) Income tax expense (benefit) includes an increase in valuation
allowances of $108 million in 2004, $547 million in 2003, $11 million in
2001 and $7 million in 2000.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations under Item 7 for more information.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and accompanying notes thereto
included in Item 8 of this Form 10-K.
OVERVIEW
Solutia's reportable segments and their major products and services
are as follows:
PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON
--------------------------------- ----------------
SAFLEX(R) and VANCEVA(R) plastic interlayer Nylon intermediate "building block"
chemicals
Polyvinyl butyral for KEEPSAFE(R), and KEEPSAFE Merchant polymer and nylon extrusion
MAXIMUM(R) laminated window glass polymers, including VYDYNE(R) and ASCEND(R)
LLUMAR(R), VISTA(R) and GILA(R) professional Carpet fibers, including the WEAR-DATED(R)
and retail window films and ULTRON(R) brands
THERMINOL(R) heat transfer fluids Industrial nylon fibers
DEQUEST(R) water treatment chemicals
SKYDROL(R) aviation hydraulic fluids
Services for process research and development,
scale-up manufacturing and small volume licensed
production for the pharmaceutical industry
Solutia evaluates the performance of its operating segments based
on segment earnings before interest expense and income taxes (EBIT), which
includes marketing, administrative, technological and amortization expenses,
gains and losses from asset dispositions and restructuring charges, and
other income and expense items that can be directly attributable to the
segment. Certain expenses and other items that are managed outside of the
segments are excluded. These unallocated items consist primarily of
corporate expenses, certain equity earnings from affiliates, other income
and expense items, reorganization items, gains and losses from asset
dispositions and restructuring charges that are not directly attributable to
the operating segment. See Note 22 to the consolidated financial statements
for further information.
Summary of Significant 2004 Events
Senior Management Change
- ------------------------
Jeffry N. Quinn was elected president and chief executive officer
and James M. Sullivan was elected senior vice president and chief financial
officer on May 3, 2004, succeeding John C. Hunter, formerly chairman and
chief executive officer and Robert A. Clausen, formerly vice chairman and
chief financial officer. Mr. Hunter and Mr. Clausen retired from Solutia
effective May 31, 2004. Mr. Quinn was also elected to Solutia's board of
directors. Mr. Quinn had previously served as senior vice president, general
counsel and chief restructuring officer, and Mr. Sullivan had previously
served as vice president and controller. Additionally, Luc De Temmerman,
formerly vice president and general manager of Solutia's Performance
Products division, was elected senior vice president and chief operating
officer. In conjunction with these changes in senior management, a broader
reorganization of Solutia's general and administrative functions was
completed.
18
Reorganization Strategy
- -----------------------
In 2004, Solutia initiated a reorganization strategy with the
principal objectives of (i) managing the businesses to enhance Solutia's
performance; (ii) making changes to Solutia's asset portfolio to maximize
the value of the estate; (iii) achieving reallocation of "legacy
liabilities"; and (iv) negotiating an appropriate capital structure. Solutia
took steps in 2004 to enhance its financial performance including using the
tools of bankruptcy and making changes to its asset portfolio, as explained
below. Solutia continues to pursue a reallocation of legacy liabilities in
the bankruptcy proceeding through negotiations with the other constituents
in the bankruptcy case. However, as a result of the numerous uncertainties
and complexities inherent in Solutia's bankruptcy proceedings, its ability
to emerge and timing of emergence from bankruptcy are subject to significant
uncertainty.
PERFORMANCE ENHANCEMENT
Solutia implemented several actions during 2004 in order to enhance
its performance. These included implementing significant general and
administrative expense reductions; using more performance based compensation
and benefits programs; initiating a cost reduction program at Solutia's
operating sites focused on actions such as lean manufacturing techniques,
yield improvement, maintenance savings and utilities optimization; and
implementing an enterprise-wide procurement effort. In addition, Solutia
used the tools of bankruptcy to renegotiate or reject numerous contracts
with significant savings to Solutia.
Solutia also made several changes to its postretirement benefit
plans in order to reduce costs consistent with the reorganization strategy
efforts listed above and to enhance the financial condition of such plans.
Solutia amended its U.S. qualified pension plan to cease future benefit
accruals effective July 1, 2004, for non-union participants. Solutia also
made an $11 million voluntary contribution to its U.S. qualified pension
plan during the third quarter of 2004. This contribution coupled with the
cessation of future benefit accruals will result in a significant reduction
in the required future contributions to the pension plan, as well as a
deferral of these contributions.
Solutia also enacted several changes to its U.S. other
postemployment benefits ("OPEB") plan for non-union, active employees during
the third quarter of 2004. These changes, effective September 1, 2004,
included discontinuation of all postretirement benefits for a retiree or
spouse after such person attains age 65, changes to certain eligibility
requirements for pre-65 postretirement benefits with the eventual
elimination of these benefits by 2016, and the elimination of retiree life
insurance benefits for future retirees.
PORTFOLIO EVALUATION
Solutia's stated strategy is to build a portfolio of high-potential
businesses that can consistently deliver returns in excess of its cost of
capital. Solutia made several changes to re-shape its asset portfolio in
2004 as part of this strategy. In June 2004, Solutia announced the closure
of its chlorobenzenes business due to its unprofitable financial
performance. In August 2004, Solutia announced it had commenced a process to
explore strategic options for its Pharmaceutical Services business and in
December 2004 sold the assets of Axio Research Corporation, formerly part of
that business. Also in December 2004, Solutia announced its intention to
close operations at its Queeny plant in St. Louis, Missouri with closure in
2006. Finally, Solutia announced in January 2005 that it will close its
acrylic fibers business in April 2005 due to continued losses resulting
primarily from significant foreign competition.
Solutia's equity affiliates, Flexsys and Astaris LLC, benefited in
2004 from restructuring actions designed to enhance financial performance.
These actions included production asset rationalization and certain plant
closures implemented by both affiliates. Solutia will continue to evaluate
all available strategic options with respect to these investments as part of
its on-going reorganization strategy to re-shape its asset portfolio.
Bankruptcy Developments
- -----------------------
See the "Chapter 11 Proceedings" section below for a summary of
developments in Solutia's ongoing Chapter 11 bankruptcy case.
19
Summary Results of Operations and Outlook
The discussions below and accompanying consolidated financial
statements have been prepared in accordance with Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code
("SOP 90-7"), and on a going concern basis, which assumes the continuity of
operations and reflects the realization of assets and satisfaction of
liabilities in the ordinary course of business. However, as a result of the
Chapter 11 bankruptcy proceedings, such realization of assets and
liquidation of liabilities are subject to a significant number of
uncertainties. (a)
Net sales and operating income (loss) of Solutia are as follows for
the years ended December 31:
- ---------------------------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
---- ---- ----
Net Sales.................................................................... $2,697 $2,430 $2,299
====== ====== ======
Operating Income (Loss):
Performance Products and Services Segment Profit (Loss)(a)............... $ 52 $ (39) $ 78
Integrated Nylon Segment Profit (Loss)(a)................................ (59) (59) 24
Less: Corporate Expenses............................................ (89) (268) (61)
Less: Equity (Earnings) Loss from Affiliates, Other (Income)
Expense, and Reorganization Items, net included in Segment
Profit (Loss)....................................................... -- (6) (3)
------ ------ ------
Operating Income (Loss)...................................................... $ (96) $ (372) $ 38
====== ====== ======
Charges included in Operating Income (Loss).................................. $ (101) $ (333) $ (22)
====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(a) See Note 22 to the accompanying consolidated financial statements for
description of the computation of operating segment profit (loss).
The $267 million, or 11 percent, increase in net sales in 2004
reflects higher average selling prices of approximately 6 percent, increased
sales volumes of approximately 3 percent and favorable currency exchange
rate fluctuations of approximately 2 percent. Solutia's net sales for 2003
increased by $131 million, or 6 percent, as compared to 2002. This increase
in net sales reflected higher average selling prices of approximately 3
percent and favorable currency exchange rate fluctuations of approximately 3
percent. Sales volumes in 2003 were relatively comparable to 2002 levels.
Operating losses were $96 million in 2004, compared to operating
losses of $372 million in 2003. As indicated in the preceding table,
operating results for each year were affected by various charges which are
described in greater detail in the "Results of Operations" section below.
The 2004 results as compared to the 2003 results were favorably affected by
higher net sales, controlled spending, lower postretirement expenses,
favorable manufacturing variances and lower environmental remediation
expenses, partially offset by higher overall raw material and energy costs.
The 2003 results, as compared to the 2002 results, were affected by higher
raw material and energy costs, increased pension expense, higher
environmental remediation expense, higher marketing, administrative and
technological expenses and increased professional advisory fees, offset in
part by higher net sales and benefits realized from operational cost
reduction activities.
Chapter 11 Proceedings
Summary
- -------
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 in the U.S. Bankruptcy Court for the Southern
District of New York. The cases were consolidated for the purpose of joint
administration and were assigned case number 03-17949 (PCB). Solutia's
subsidiaries outside the United States were not included in the Chapter 11
filing.
The filing was made to restructure Solutia's balance sheet by
reducing indebtedness to appropriate levels, to streamline operations and
reduce costs, in order to allow Solutia to emerge from Chapter 11 as a
viable going concern, and to obtain relief from the negative financial
impact of liabilities for litigation, environmental remediation and certain
postretirement benefits and liabilities under operating contracts, all of
which were assumed at the time of the spinoff of
20
Solutia from Pharmacia (collectively "legacy liabilities"). These factors,
combined with the weakened state of the chemical manufacturing sector,
general economic conditions and continuing high, volatile energy and crude
oil costs have been an obstacle to Solutia's financial stability and
success. While Solutia believes it will be able to significantly reduce the
legacy liabilities through the bankruptcy process, there can be no certainty
that it will be successful in doing so.
Under Chapter 11, Solutia is operating its businesses as a
debtor-in-possession ("DIP") under court protection from creditors and
claimants. Since the Chapter 11 filing, all orders sufficient to enable
Solutia to conduct normal business activities, including the approval of
Solutia's DIP financing, have been entered by the bankruptcy court. While
Solutia is subject to Chapter 11, all transactions not in the ordinary
course of business require the prior approval of the bankruptcy court.
As a consequence of the Chapter 11 filing, pending litigation
against Solutia is generally stayed, and no party may take any action to
collect its pre-petition claims except pursuant to order of the bankruptcy
court. November 30, 2004 was the last date by which holders of pre-filing
date claims against the Debtors could file such claims. Any holder of a
claim that was required to file such claim by November 30, 2004, and did not
do so may be barred from asserting such claim against the Debtors and,
accordingly, may not be able to participate in any distribution on account
of such claim. Differences between claim amounts identified by the Debtors
and claims filed by claimants will be investigated and resolved in
connection with the Debtors' claims resolution process, and only holders of
claims that are ultimately allowed for purposes of the Chapter 11 case will
be entitled to distributions. Solutia has not yet completed its analysis of
all the proofs of claim. Since the settlement terms of allowed claims are
subject to a confirmed plan of reorganization, the ultimate distribution
with respect to allowed claims is not presently ascertainable.
In order to exit Chapter 11 successfully, Solutia must propose and
obtain confirmation by the bankruptcy court of a plan of reorganization that
satisfies the requirements of the U.S. Bankruptcy Code. As provided by the
U.S. Bankruptcy Code, Solutia had the exclusive right to propose a plan of
reorganization for 120 days following the Chapter 11 filing date. The
bankruptcy court has subsequently approved several extensions of the
exclusivity period, the most recent of which is set to expire April 11,
2005. On February 25, 2005, Solutia filed a motion with the bankruptcy court
seeking to extend the exclusivity period to July 11, 2005. No assurance can
be given that such extension request will be granted by the bankruptcy court
or, if granted, that any future extension requests will be granted by the
bankruptcy court. Moreover although Solutia expects to file a plan of
reorganization that provides for Solutia's emergence from bankruptcy as a
going concern, there can be no assurance that a plan of reorganization will
be confirmed by the bankruptcy court or that any such plan will be
implemented successfully.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options and
warrants to purchase its common stock, and that it is unlikely that holders
of Solutia's common stock, including options and warrants to purchase
Solutia's common stock, will receive any consideration for that stock or
those options and warrants in such a plan of reorganization. Solutia is
unable to estimate what recovery such a plan of reorganization will provide
to holders of Solutia's outstanding debt securities. While Solutia filed for
Chapter 11 in part to gain relief from the legacy liabilities it was
required to assume when it was spun off from Pharmacia, the extent to which
such relief will be achieved is uncertain at this time. It is also possible
that pursuant to a plan of reorganization Solutia will agree to retain a
portion of the legacy liabilities.
Final DIP Financing
- -------------------
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a $525 million DIP credit facility. This DIP
facility consists of (i) a $50 million multiple draw term loan component;
(ii) a $300 million single draw term loan component; and (iii) a $175
million borrowing-based revolving credit component, which includes a $150
million letter of credit subfacility. Proceeds from the DIP financing
facility were used to retire Solutia's existing pre-petition $350 million
credit facility, repay the $75 million provided by the interim DIP facility
and provide approximately $100 million of new liquidity for general
operating purposes.
Euronote Modification
- ---------------------
Prior to Solutia's Chapter 11 bankruptcy filing, Solutia and its
wholly owned subsidiary, Solutia Europe S.A./N.V. ("SESA"), reached an
agreement with the requisite holders of the then (euro)200 million, 6.25
percent notes due 2005 (the "Euronotes"), issued by SESA and guaranteed by
Solutia Inc., to restructure the Euronotes which among other changes
eliminated certain cross-default provisions. On January 30, 2004, SESA
successfully completed the restructuring. The
21
restructuring allows SESA to continue normal operations while Solutia Inc.
and its domestic subsidiaries reorganize under Chapter 11 bankruptcy
protection. See the "Financial Condition and Liquidity" section below for a
further description of the revised terms of the Euronotes.
Financial Information
- ---------------------
Summarized financial information concerning Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as of
and for the year-ended December 31, 2004 is presented as follows:
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
Net sales................................. $ 2,181 $891 $(375) $ 2,697
Operating income (loss)................... (156) 39 21 (96)
Net loss.................................. (316) (20) 20 (316)
Total assets.............................. 1,713 830 (467) 2,076
Liabilities not subject to compromise..... 970 542 (179) 1,333
Liabilities subject to compromise......... 2,187 -- -- 2,187
Total shareholders' equity (deficit)...... (1,444) 288 (288) (1,444)
Outlook
In comparison to results for the first three quarters of 2004, the
fourth quarter 2004 results were negatively impacted by significant
increases in raw material prices, which generally were not recovered as
Solutia had minimal increases in selling prices due to the seasonally low
volumes during the quarter. The cost containment actions initiated earlier
in 2004 continued to provide benefit during the quarter but did not recover
the rapid escalation in raw material costs. Solutia believes the first
quarter 2005 performance will be significantly improved over the fourth
quarter 2004. To date through February 2005, Solutia has enacted its
previously announced price increases and has experienced higher sales
volumes, as well as benefits from higher capacity utilization.
Solutia also expects to experience the full year benefit in 2005 of
the cost reduction measures taken in the second half of 2004, and believes
the cost position resulting from these actions has positioned Solutia to
significantly improve its financial performance. This improvement is
predicated upon a decline in raw material and energy costs in the second
half of the year. If this decline does not occur, or the overall demand for
its products diminishes, Solutia's operating results could materially
suffer.
As a result of the numerous uncertainties and complexities inherent
in Solutia's bankruptcy proceedings, its ability to emerge and timing of
emergence from bankruptcy are subject to significant uncertainty.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying consolidated financial
statements and related footnotes. In preparing these consolidated financial
statements, Solutia has made its best estimates of certain amounts included
in these consolidated financial statements. However, application of these
accounting policies involves the exercise of judgment and use of assumptions
as to future uncertainties and, as a result, actual results could differ
materially from these estimates. Management has discussed the development,
selection and disclosure of these critical accounting policies and estimates
with the Audit and Finance Committee of Solutia's board of directors.
Solutia believes that the estimates, assumptions and judgments
involved in the accounting policies described below have the greatest
potential impact on the consolidated financial statements and require
assumptions that can be highly uncertain at the time the estimate is made.
Solutia considers the following items to be its critical accounting
policies:
o Environmental Remediation
o Self-Insurance
o Income Taxes
22
o Impairment of Long-Lived Assets
o Impairment of Goodwill and Indefinite-Lived Intangible Assets
o Pension and Other Postretirement Benefits
Solutia also has other significant accounting policies. Solutia
believes that, compared to the critical accounting policies listed above,
the other policies either do not generally require estimates and judgments
that are as difficult or as subjective, or are less likely to have a
material impact on the reported results of operations for a given period.
Environmental Remediation
With respect to environmental remediation obligations, Solutia's
policy is to accrue costs for remediation of contaminated sites in the
accounting period in which the obligation becomes probable and the cost is
reasonably estimable. Cost estimates for remediation are developed by
assessing, among other items, (i) the extent of Solutia's contribution to
the environmental matter; (ii) the number and financial viability of other
potentially responsible parties; (iii) the scope of the anticipated
remediation and monitoring plan; (iv) settlements reached with governmental
or private parties; and (v) Solutia's past experience with similar matters.
Solutia's estimates of the environmental remediation reserve requirements
typically fall within a range. If Solutia believes no best estimate exists
within a range of possible outcomes, in accordance with existing accounting
guidance, the minimum loss is accrued. Environmental liabilities are not
discounted, and they have not been reduced for any claims for recoveries
from third parties.
These estimates are critical because Solutia must forecast
environmental remediation activity into the future, which is highly
uncertain and requires a large degree of judgment. Therefore, the
environmental reserves may materially differ from the actual liabilities if
Solutia's estimates prove to be inaccurate, which could materially affect
earnings in a given period. Uncertainties related to recorded environmental
liabilities include changing governmental policy and regulations, judicial
proceedings, the number and financial viability of other potentially
responsible parties, the method and extent of remediation and future
changes in technology. Because of these uncertainties, the range of possible
outcomes for existing environmental remediation reserves not subject to
compromise could exceed the amounts recorded by approximately $15 million
and could be below the amounts recorded by approximately $5 million. These
valuations of future environmental costs do not contemplate the
uncertainties inherent in Solutia's bankruptcy proceedings, as the potential
impact of the Chapter 11 proceedings upon future environmental costs cannot
be reasonably determined at this time. Due to these uncertainties, certain
of the environmental liabilities have been classified as subject to
compromise in the Statement of Consolidated Financial Position as of
December 31, 2004, and have been excluded from the aforementioned range of
possible outcomes of existing environmental remediation reserves. The
estimate for environmental liabilities is a critical accounting estimate for
both reportable segments.
Self-Insurance
Solutia maintains self-insurance reserves to cover its estimated
future legal costs, settlements and judgments related to workers'
compensation, product, general, automobile and operations liability claims
that are less than policy deductible amounts or not covered by insurance.
Self-insured losses are accrued based upon estimates of the aggregate
liability for claims incurred using certain actuarial assumptions followed
in the insurance industry, Solutia's historical experience and certain
case-specific reserves as required, including estimated legal costs. The
maximum extent of the self-insurance provided by Solutia and related
insurance recoveries are dependent upon a number of factors including the
facts and circumstances of individual cases and the terms and conditions of
the commercial policies. Solutia has purchased commercial insurance in order
to reduce its exposure to workers' compensation, product, general,
automobile and property liability claims. Policies for periods prior to the
spinoff are shared with Pharmacia. This insurance has varying policy limits
and deductibles. When recovery from an insurance policy is considered
probable, a receivable is recorded. Self-insurance reserve estimates are
critical because changes to the actuarial assumptions used in the
development of these reserves can materially affect earnings in a given
period and Solutia must forecast loss activity into the distant future which
is highly uncertain and requires a large degree of judgment.
Actuarial reserve indications are projections of the remaining
future payments for workers' compensation, product, general, automobile and
operations liability claims for which Solutia is legally responsible. These
projections are made in the context of an uncertain future where variations
between estimated and actual amounts are attributable to many factors,
including changes in operations, changes in judicial environments, shifts in
the types or timing of the reporting of claims, changes in the frequency or
severity of losses and random chance. The actuarial estimates of the reserve
requirements fall within a range. The actuary's best estimate of the
liability is generally near the middle of the actuary's range; accordingly,
23
Solutia has recorded the liability at this level. Solutia estimates that the
high end of the range of possible outcomes exceeds the amounts recorded by
approximately $3 million and the low end of the range of possible outcomes
is approximately $3 million below the recorded amount. These valuations of
future self-insurance costs do not contemplate the uncertainties inherent in
Solutia's bankruptcy proceedings, as the potential impact of the Chapter 11
proceedings upon future self-insurance costs cannot be reasonably determined
at this time. Due to these uncertainties, certain of the self-insurance
liabilities have been classified as subject to compromise in the Statement
of Consolidated Financial Position as of December 31, 2004, and have been
excluded from the range of possible outcomes of existing self-insurance
reserves. The estimate for self-insurance liabilities is a critical
accounting estimate for both reportable segments.
Income Taxes
Solutia accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities at enacted
rates. Solutia bases its estimate of deferred tax assets and liabilities on
current tax laws and rates and, in certain cases, business plans and other
expectations about future outcomes. Solutia records a valuation allowance to
reduce its deferred tax assets to the amount that is more likely than not to
be realized. While Solutia has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event Solutia were to determine that it would be
able to realize its deferred tax assets in the future in excess of its net
recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, should Solutia
determine that it would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset
would be charged to income in the period such determination was made. The
consolidated financial statements include increases in valuation allowances
as a result of uncertainty created by Solutia's Chapter 11 bankruptcy
filing.
Solutia's accounting for deferred tax consequences represents
management's best estimate of future events that can be appropriately
reflected in the accounting estimates. Changes in existing regulatory tax
laws, rates and future business results may affect the amount of deferred
tax liabilities or the valuation of deferred tax assets over time.
Impairment of Long-Lived Assets
Impairment tests of long-lived assets, including finite-lived
intangible assets, are made when conditions indicate the carrying value may
not be recoverable. The carrying value of a long-lived asset is considered
impaired when the total projected undiscounted cash flows from such asset
are separately identifiable and are less than its carrying value. Solutia's
estimate of the cash flows is based on information available at that time
including these and other factors: sales forecasts, customer trends,
operating rates, raw material and energy prices and other global economic
indicators and factors. If an impairment is indicated, the asset value is
written down to its fair value based upon market prices or, if not
available, upon discounted cash value, at an appropriate discount rate
determined by Solutia to be commensurate with the risk inherent in the
business model. These estimates are critical because changes to Solutia's
assumptions used in the development of the impairment analyses can
materially affect earnings in a given period and Solutia must forecast cash
flows into the future which is highly uncertain and requires a significant
degree of judgment. The consolidated financial statements do not reflect any
adjustments for the impairment of long-lived assets that may result as part
of the approval and implementation of a plan of reorganization to be
submitted as part of the Chapter 11 bankruptcy process. The estimate for
impairment of long-lived assets is a critical accounting estimate for both
reportable segments.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are reviewed for
impairment annually under the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 142, Goodwill and Other Intangible Assets.
However, as required by SFAS No. 142, impairment analyses are performed more
frequently if changes in circumstances indicate the carrying value may not
be recoverable during the intervening period between annual impairment
tests. Solutia performs the review for impairment at the reporting unit
level. The impairment assessment is completed by determining the fair values
of the reporting units using income and market multiple approaches and
comparing those fair values to the carrying values of the reporting units.
If the fair value of a reporting unit is less than its carrying value,
Solutia then allocates the fair value of the reporting unit to all the
assets and liabilities of that reporting unit. The excess of the fair value
of the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of the goodwill. If the carrying value
of the reporting unit's goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized for this differential. This
valuation process involves assumptions based upon management's best
estimates and judgments that approximate the market
24
conditions experienced at the time the impairment assessment is made. These
assumptions include but are not limited to earnings and cash flow
projections, discount rate and peer company comparability. Actual results
may differ from these estimates due to the inherent uncertainty involved in
such estimates. The consolidated financial statements do not reflect any
adjustments for the impairment of goodwill and indefinite-lived intangible
assets that may result as part of the approval and implementation of a plan
of reorganization to be submitted as part of the Chapter 11 bankruptcy
process. The estimate for impairment of goodwill and indefinite-lived
intangible assets is a critical accounting estimate for the Performance
Products and Services reportable segment. The Integrated Nylon reportable
segment does not have goodwill or indefinite-lived intangible assets.
Pension and Other Postretirement Benefits
Under the provisions of SFAS No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, measurement of the obligations under the
defined benefit pension plans and the other postemployment benefit ("OPEB")
plans are subject to several significant estimates. These estimates include
the rate of return on plan assets, the rate at which the future obligations
are discounted to value the liability, the rate of compensation increase for
employees and health care cost trend rates. Additionally, the cost of
providing benefits depends on demographic assumptions including retirements,
mortality, turnover and plan participation. Solutia typically uses actuaries
to assist it in preparing these calculations and determining these
assumptions. Solutia's annual measurement date is December 31 for both the
pension and OPEB plans.
Solutia establishes its discount rate based upon the internal rate
of return for a portfolio of high quality bonds with maturities consistent
with the nature and timing of future cash flows for each specific plan.
Solutia estimates its assumed long-term rate of return on assets based on
the historical rate of return experienced by the plan assets, adjusted for
assumed asset allocation and forecasted capital market returns. Solutia
estimates the assumed trend rate for healthcare costs and the ultimate trend
rate for healthcare costs based on projected increases in medical costs.
If actual results differ from these assumptions, the cost of
providing these benefits could materially increase or decrease. Refer to the
"Employee Benefits" discussion below for the quantification of the
sensitivity of hypothetical changes to these aforementioned critical
assumptions underlying the valuation of pension and OPEB obligations. In
addition, these valuations of future pension and other postretirement costs
do not include the uncertainties inherent in Solutia's Chapter 11 bankruptcy
proceedings, as the potential impact of the Chapter 11 proceedings upon
future spending for these items cannot be reasonably determined at this
time. Due to these uncertainties, all pension and postretirement liabilities
related to Solutia entities filing for Chapter 11 bankruptcy have been
classified as subject to compromise in the Statement of Consolidated
Financial Position as of December 31, 2004.
RESULTS OF OPERATIONS
Performance Products and Services
- ----------------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
---- ---- ----
Net Sales.......................................... $1,109 $1,038 $974
====== ====== ====
Segment Profit (Loss).............................. $ 52 $ (39) $ 78
====== ====== ====
Charges included in Segment Profit (Loss)...... $ (61) $ (143) $ --
====== ====== ====
- ----------------------------------------------------------------------------------
The $71 million, or 7 percent, increase in 2004 net sales compared
to 2003 resulted from higher sales volumes of approximately 5 percent and
favorable currency exchange rate fluctuations of approximately 4 percent,
partially offset by lower average selling prices of approximately 2 percent.
Higher volumes were experienced in SAFLEX(R) and VANCEVA(R) plastic
interlayer products and in LLUMAR(R) professional window film products,
partially offset by lower volumes due to the cessation of certain operations
beginning in the fourth quarter 2003, including the shut-down of certain
chlorobenzenes, feed ingredients and L-Aspartic operations. In addition, net
sales were positively affected by the strengthening euro in relation to the
U.S. dollar in 2004. Lower average selling prices were experienced primarily
in the SAFLEX(R) plastic interlayer products in comparison to 2003,
resulting principally from the completion of new sales contracts in a
competitive pricing environment.
25
The $64 million, or 6 percent, increase in 2003 net sales compared
to 2002 resulted from higher sales volumes of approximately 2 percent and
favorable currency exchange rate fluctuations of approximately 6 percent
partially offset by lower average selling prices of approximately 2 percent.
Sales volumes benefited from increases in SAFLEX(R) plastic interlayer
products sales in Asia Pacific and European markets, more than offsetting
the significantly lower sales to a large SAFLEX(R) customer in the prior
year. Net sales were positively affected by the strengthening euro and
Australian dollar in relation to the U.S. dollar. Lower average selling
prices in 2003 in comparison to 2002 reflected competitive pricing pressures
in SAFLEX(R) plastic interlayer products offset in part by improved selling
prices in chlorobenzenes.
The $91 million improvement in 2004 segment profit in comparison to
2003 resulted principally from lower charges, higher net sales and favorable
manufacturing variances resulting from cost containment activities and
increased capacity utilization, partially offset by higher raw material and
energy costs. Segment profit in 2004 included $61 million of charges
including $18 million of restructuring costs related principally to the
closure of Solutia's chlorobenzenes operations as well as certain other
non-strategic operations, and $3 million of asset write-offs and repairs and
maintenance charges resulting from the impact of Hurricane Ivan at the
Martinsville, Virginia plant. Also included in the 2004 segment results is
an asset impairment charge within the Pharmaceutical Services business
related to fixed assets of approximately $12 million. In addition, a charge
of $28 million is included to write down intangible assets within the
Pharmaceutical Services business. These charges within the Pharmaceutical
Services business were precipitated by the declining estimates of forecasted
results given current economic and market conditions within the
pharmaceutical services business environment. See Notes 7 and 8 to the
accompanying consolidated financial statements for further discussion of
these impairment charges. Charges in 2003 included $47 million of
restructuring charges for workforce reductions, write-down of assets, and
contract termination costs. Also included in the 2003 segment results is an
asset impairment charge within the Pharmaceutical Services business related
to fixed assets of approximately $18 million. In addition, a charge of $78
million is included to write down goodwill and certain indefinite-lived and
finite-lived intangible assets within the Pharmaceutical Services business.
These charges within the Pharmaceutical Services business were also
precipitated by the declining estimates of forecasted results given existing
economic and market conditions within the pharmaceutical services business
environment.
The $117 million decline in 2003 segment profit in comparison to
2002 resulted principally from higher charges and increased raw material
costs, partially offset by benefits realized from operational cost reduction
activities, higher net sales and lower marketing, administrative and
technological spending.
Integrated Nylon
- -----------------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
---- ---- ----
Net Sales............................................ $1,588 $1,392 $1,325
====== ====== ======
Segment Profit (Loss)................................ $ (59) $ (59) $ 24
====== ====== ======
Charges included in Segment Profit (Loss)........ $ (5) $ (5) $ (5)
====== ====== ======
- -----------------------------------------------------------------------------------
The $196 million, or 14 percent, increase in 2004 net sales as
compared to 2003 resulted primarily from higher average selling prices of
approximately 12 percent and sales volume increases of approximately 2
percent. Average selling prices increased in all businesses in response to
the escalating cost of raw materials, with the largest recovery in the
carpet fibers and intermediates businesses. Carpet fiber increases resulted
from price increases implemented across several segments, and the
intermediate chemicals business benefited from an overall increase in market
prices for key products as well as formula-based sales contracts tied to raw
material costs. Increased sales volumes were experienced principally in
carpet fibers and nylon plastics and polymers, partially offset by lower
volumes resulting from restructuring actions taken in the acrylic fibers
business in 2003 and contract terminations in the intermediate chemicals
business in 2004.
The $67 million, or 5 percent, increase in 2003 net sales as
compared to 2002 resulted primarily from higher average selling prices of
approximately 5 percent partially offset by sales volume declines of less
than 1 percent. Price increases occurred primarily in intermediate
chemicals, as they benefited from formula-based sales contracts tied to raw
material costs and higher pricing in the merchant acrylonitrile market. In
addition, price benefits were experienced to a lesser extent in the
remaining Integrated Nylon businesses. Acrylic fiber sales volumes declined
due to weak U.S. demand in the textiles segment. Carpet fibers volumes
increased, although there was an unfavorable change in mix, as demand for
lower margin
26
commodity products increased compared to the prior year. Nylon plastics and
polymers experienced increased volumes, benefiting from reintegrated
marketing responsibilities for the nylon molding resins business that were
previously performed under a marketing alliance with Dow Plastics, a
business unit of The Dow Chemical Company.
Segment losses in total in 2004 were comparable to 2003; however,
affecting 2004 segment losses compared to 2003 were higher net sales,
controlled spending and favorable manufacturing variances resulting from
cost containment activities and increased capacity utilization, offset
primarily by higher raw material and energy costs of approximately $230
million. In addition, segment profit in 2004 was affected by $5 million of
charges resulting from the impact of Hurricane Ivan at the Pensacola,
Florida and Foley, Alabama plants involving primarily repairs and
maintenance costs, as well as asset write-offs. Segment loss in 2003
included severance charges of $5 million associated with workforce
reductions.
The $83 million unfavorable change in 2003 segment profit in
comparison to 2002 was primarily due to higher raw material and energy costs
of approximately $150 million, which offset the effects of higher net sales
and modestly lower manufacturing costs in the segment on a year over year
basis. Raw material and energy costs were higher due to uncertain
geopolitical factors and the declaration of force majeure for supply of
propylene, a key raw material. Manufacturing operations were modestly
favorable as a result of benefits resulting from cost containment activities
completed in 2003, partially offset by slightly lower capacity utilization
in Solutia's facilities for intermediates and acrylic fibers. In addition,
the 2003 and 2002 segment profit included various charges. The 2003 charges
are described above and the 2002 charges included a $5 million charge due to
the resolution of a construction dispute with the contractor of Solutia's
acrylonitrile plant in Alvin, Texas.
Corporate Expenses
- -------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
---- ---- ----
Corporate Expenses...................................... $ 89 $ 268 $ 61
==== ===== ====
Charges included in Corporate Expenses.............. $(35) $(185) $(17)
==== ===== ====
- -------------------------------------------------------------------------------------
Corporate expenses in 2004 and 2003 were affected by various
charges. Included in the 2004 results were $35 million of net curtailment
and settlement charges principally with respect to amendments to Solutia's
various postretirement plans (as more fully described in Note 16 to the
accompanying consolidated financial statements). During 2003, Solutia
recorded a $99 million charge related to Solutia's share of the Anniston
litigation settlement and to increase certain other litigation accruals; a
$35 million charge for pension settlements resulting from the significant
amount of lump sum distributions from the pension plan during 2003; $27
million in charges for environmental remediation and funding of an
educational trust related to the partial consent decree in Anniston,
Alabama; a $20 million charge to increase environmental reserves related to
exiting the Nitro, WV facility; and $4 million in severance charges for
workforce reductions. Also benefiting 2004 results as compared to 2003 were
lower litigation, postretirement and environmental remediation expenses, as
well as lower headcount. Additionally, reorganization related professional
advisory fees were recorded in Reorganization Items, net in 2004 as compared
to 2003 when they were recorded in Corporate Expenses until the bankruptcy
filing in December 2003.
Corporate expenses in 2003 and 2002 were affected by various
charges. The 2003 charges are described in the preceding paragraph while
charges in 2002 were comprised of a $17 million charge for pension
settlements resulting from the significant amount of lump sum distributions
from the pension plan during 2002. Also included in the 2003 results
compared to 2002 were increased pension expense, higher environmental
remediation expense, and increased professional advisory fees.
Impairment of Intangible Assets
During 2004, Solutia recorded an impairment charge of $28 million
within the Pharmaceutical Services business for the write down of goodwill
and certain finite-lived intangible assets. In accordance with SFAS No. 142,
the impairment charge for goodwill of $23 million was based upon fair value
estimates of the reporting unit through the use of a discounted cash flow
model. The $5 million impairment charge for certain finite-lived intangible
assets was determined through an impairment test performed in accordance
with SFAS No. 144, as more fully described in Note 7 to the accompanying
consolidated financial statements. These impairment charges were both
recorded in the Impairment of Intangible Assets line
27
within the Statement of Consolidated Operations and are included within the
results of operations of the Performance Products and Services operating
segment.
During 2003, Solutia recorded an impairment charge of $78 million
within the Pharmaceutical Services reporting business for the write down of
goodwill, certain indefinite-lived intangible assets and certain
finite-lived intangible assets. In accordance with SFAS No. 142 the
impairment charge for goodwill and indefinite-lived intangible assets of $64
million was based upon fair value estimates of the reporting unit with the
assistance of a third-party specialist using income and market approaches.
The $14 million impairment charge for certain finite-lived intangible assets
was determined through an impairment test performed in accordance with SFAS
No. 144, as more fully described in Note 7 to the accompanying consolidated
financial statements. These impairment charges were both recorded in the
Impairment of Intangible Assets line within the Statement of Consolidated
Operations and are included within the results of operations of the
Performance Products and Services operating segment.
Equity Earnings (Loss) from Affiliates
- -------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
---- ---- ----
Flexsys Equity Earnings (Loss)................................ $(20) $ (20) $10
Astaris LLC Equity Earnings (Loss)............................ (7) (114) 1
Advanced Elastomer Systems L.P. Equity Earnings............... -- -- 3
Other Equity Earnings (Loss) from Affiliates included
in Reportable Segment Profit (Loss).......................... 1 1 (1)
---- ----- ---
Equity Earnings (Loss) from Affiliates........................ $(26) $(133) $13
==== ===== ===
Charges included in Equity Earnings (Loss) from Affiliates.. $(49) $(134) $(7)
==== ===== ===
- -------------------------------------------------------------------------------------------
Equity earnings (loss) from affiliates were affected by various
items in both 2004 and 2003. During 2004, equity loss from affiliates was
negatively affected by $49 million in restructuring and litigation charges
resulting from (i) restructuring charges related to production asset
rationalization and certain plant closures at both the Flexsys and Astaris
joint ventures; (ii) severance charges at both the Flexsys and Astaris joint
ventures; and (iii) charges recorded by the Flexsys joint venture related to
litigation contingencies. During 2003, equity loss from affiliates was
negatively affected by $134 million in charges resulting from (i) the
Astaris joint venture for selective production asset and product
rationalizations, including the closure of the Conda, Idaho, purified
phosphoric acid facility, which had performed significantly below
expectations since its start-up in 2001; (ii) restructuring charges related
to production asset rationalization and certain plant closures at the
Flexsys joint venture; (iii) severance charges at both the Flexsys and
Astaris joint ventures; and (iv) charges recorded by the Flexsys joint
venture related to litigation contingencies. Also included in the 2004
results compared to 2003 were higher earnings from both Astaris and Flexsys.
Astaris' earnings improved primarily as a result of higher average selling
prices, lower fixed costs resulting from the aforementioned restructuring
activities and lower interest expense, and Flexsys' earnings improved
primarily through a more favorable mix of net sales.
Equity earnings (loss) from affiliates were affected by various
items in both 2003 and 2002. The 2003 charges are described in the preceding
paragraph. During 2002, the Flexsys joint venture recorded charges to
writedown certain production assets to fair market value. Solutia's share
of these charges was $7 million. Also included in the 2003 results compared
to 2002 were lower earnings from Astaris and Flexsys. Astaris's earnings
decreased as a result of lower volumes, lower selling prices and absence of
revenue from electricity sales in 2003. Flexsys's earnings were negatively
affected by lower average selling prices, higher raw material costs and
unfavorable currency exchange rates. In addition, equity earnings from
affiliates in 2002 included $3 million of earnings from Solutia's 50 percent
share of the Advanced Elastomer Systems ("AES") joint venture, which was
sold to ExxonMobil Chemical Company, a division of ExxonMobil Corporation
and Exxon Chemical Asset Management Partnership, a subsidiary of ExxonMobil
Corporation, during the first quarter of 2002.
28
Interest Expense
- ---------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
---- ---- ----
Interest Expense.............................. $113 $120 $84
==== ==== ===
Charges included in Interest Expense.......... $(25) $(14) $--
==== ==== ===
- ---------------------------------------------------------------------------
Interest expense was affected by various charges in both 2004 and
2003. Included in 2004 interest expense was the write-off of unamortized
debt issuance costs of approximately $25 million related to Solutia's
October 2003 credit facility and interim DIP facility which were retired in
January 2004 with proceeds from the final DIP facility. The 2003 charge of
$14 million resulted from the write-off of unamortized debt issuance costs
of $14 million related to the credit facility retired in 2003. Also
affecting 2004 interest expense was the cessation of interest payments on
Solutia's 6.72% debentures puttable 2004, due 2037 and its 7.375% debentures
due 2027 while operating as a debtor-in-possession during the Chapter 11
bankruptcy proceedings. The amount of contractual interest not recorded was
$32 million in 2004 and $1 million in 2003. In addition, Solutia refinanced
its Euronotes in 2004 at a higher interest rate resulting in higher interest
expense in 2004.
The $36 million increase in interest expense in 2003 as compared to
2002 resulted principally from the write-off of unamortized debt issuance
costs of $14 million related to the credit facility retired in 2003, the
full year effect of amortization of deferred debt issuance costs incurred
during the second half of 2002, and higher interest costs associated with
the credit facility and the senior secured notes as compared to 2002.
Other Income, net
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
---- ---- ----
Other Income, net...................................................... $ 1 $11 $14
=== === ===
Other Income, net included in Reportable Segment Profit (Loss)..... $ 1 $ 5 $ 4
=== === ===
Net Gains included in Other Income, net............................ $-- $ 4 $ 5
=== === ===
- ----------------------------------------------------------------------------------------------------
The $10 million decrease in other income, net in 2004 as compared
to 2003 resulted principally from lower one-time gains and higher realized
foreign currency losses, partially offset by higher interest income. During
2003, Solutia realized a benefit of $4 million related to the recovery of
certain receivables, established prior to 1997, which had previously been
written off.
Other income, net was affected by various one-time gains in 2003
and 2002. The 2003 one-time gain is described above and in 2002 Solutia sold
its 50 percent interest in the AES joint venture resulting in a gain of $5
million. Also, reduced royalty income in 2003 affected the 2003 results
compared to 2002.
Reorganization Items, net
- ------------------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
---- ---- ----
Reorganization Items, net ................................................... $73 $ 1 $--
=== === ===
Reorganization Items, net included in Reportable Segment Profit (Loss) .. $ 2 $-- $--
=== === ===
- ------------------------------------------------------------------------------------------------------------
Reorganization items, net are presented separately in the Statement
of Consolidated Operations and represent items of income, expense, gain, or
loss that are realized or incurred by Solutia as a result of its
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization
items incurred in 2004 included $46 million of professional fees for
services provided by debtor and creditor professionals directly related to
Solutia's reorganization proceedings; $20 million of asset write-offs
associated with contract rejections and terminations; $9 million of expense
provisions for (i) employee severance
29
costs incurred directly as part of the Chapter 11 reorganization process and
(ii) a retention plan for certain Solutia employees approved by the
bankruptcy court; and a $2 million gain representing the difference between
the settlement amount of certain pre-petition obligations and the
corresponding amounts previously recorded. Reorganization items, net in 2003
consisted primarily of professional fees for services provided by debtor and
creditor professionals directly related to Solutia's reorganization
proceedings. The significant increase in reorganization expense in 2004 as
compared to 2003 was principally due to the Solutia's Chapter 11 bankruptcy
filing occurring in December 2003.
Income Tax Expense (Benefit)
- ----------------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
---- ---- ----
Income Tax Expense (Benefit) ................................................ $ (6) $365 $(11)
==== ==== ====
Increase in Valuation Allowances included in Income Tax Expense
(Benefit).............................................................. $108 $547 $ --
==== ==== ====
- ----------------------------------------------------------------------------------------------------------
Solutia's effective income tax expense (benefit) rate was
approximately (2) percent in 2004 compared to approximately 59 percent in
2003. Increases in valuation allowances in 2004 were $110 million, of which
$108 million was recorded in Income Tax Expense (Benefit) in the Statement
of Consolidated Operations and $2 million was recorded in Other
Comprehensive Loss in the Statement of Consolidated Comprehensive Loss, as
compared to increases in valuation allowances in 2003 of $580 million, of
which $547 million was recorded in Income Tax Expense (Benefit) in the
Statement of Consolidated Operations and $33 million was recorded in Other
Comprehensive Loss in the Statement of Consolidated Comprehensive Loss. The
additional valuation allowances in both 2004 and 2003 were provided
principally for the U.S. deferred tax assets as a result of Solutia's
Chapter 11 bankruptcy filing (as more fully described in Note 13 to the
accompanying consolidated financial statements).
Solutia's effective income tax expense (benefit) rate was
approximately 59 percent in 2003 compared to approximately (58) percent in
2002. The above noted valuation allowance increases in 2003 was the primary
difference in comparing the 2003 and 2002 rates.
Cumulative Effect of Change in Accounting Principle
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This Interpretation, as
amended, provides guidance related to identifying variable interest entities
("VIEs") and determining whether such entities should be consolidated.
Solutia adopted the provisions of the Interpretation in 2003. Solutia has a
synthetic lease related to its corporate headquarters in St. Louis,
Missouri, entered into in 1999, that qualifies as a VIE. Based on the
current terms of the lease agreement and the residual value guarantee
Solutia provides to the lessor, Solutia concluded it is the primary
beneficiary of the VIE. As a result, in 2003 Solutia consolidated the
property, plant and equipment of $37 million and long-term debt of $43
million held by this VIE, and recorded minority interest of $1 million and a
resulting after-tax charge of $5 million, reported as a cumulative effect of
a change in accounting principle, net of tax. The assets and liabilities of
$37 million and $43 million, respectively, which were consolidated as part
of adoption of this Interpretation, were not included within the Statement
of Consolidated Cash Flows for the year ended December 31, 2003, as these
items represent non-cash transactions upon adoption of this Interpretation.
Effective January 1, 2002, Solutia adopted SFAS No. 142, Goodwill
and Other Intangible Assets, and accordingly discontinued the amortization
of goodwill and identifiable intangible assets that have indefinite useful
lives. Fair value measurements of the reporting units were estimated with
the assistance of a third-party specialist using both income and market
multiple approaches. Based on this analysis, Solutia recorded an impairment
loss of $167 million during 2002 for the resins, additives and adhesives
businesses (which is presented as discontinued operations) due to declining
estimates of future results given current economic and market conditions.
The goodwill impairment charge was non-deductible for tax purposes and is
reflected as the cumulative effect of change in accounting principle in the
Statement of Consolidated Operations.
30
Summary of Events Affecting Comparability
Charges and gains recorded in 2004, 2003 and 2002 and other events
affecting comparability have been summarized in the tables below (dollars in
millions).
2004
--------------------------------------------------
PERFORMANCE
PRODUCTS AND INTEGRATED CORPORATE/
INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED
- -------------------------------------------- -------- ----- ----- ------------
IMPACT ON:
- -----------------------------------------------------------------------------------------------
Cost of goods sold.................. $ 18 $-- $ -- $ 18 (a)
-- 26 26 (b)
12 -- -- 12 (c)
3 5 -- 8 (d)
1 -- -- 1 (e)
(1) -- -- (1) (f)
---------------------------------------------------
Total cost of goods sold ........... 33 5 26 64
Marketing .......................... -- -- 2 2 (b)
Administrative ..................... -- -- 4 4 (b)
Technological ...................... -- -- 3 3 (b)
Impairment of intangible assets .... 28 -- -- 28 (g)
---------------------------------------------------
OPERATING LOSS IMPACT.......... (61) (5) (35) (101)
Equity loss from affiliates......... -- -- (49) (49) (h)
Interest expense.................... -- -- (25) (25) (i)
Loss on debt modification........... -- -- (15) (15) (j)
---------------------------------------------------
PRE-TAX INCOME STATEMENT
IMPACT....................... $(61) $(5) $(124) (190)
=====================================
Income tax benefit impact........... (11) (k)
-------------
AFTER-TAX INCOME STATEMENT
IMPACT......................... $(179)
=============
<FN>
2004 EVENTS
-----------
a) Restructuring costs related principally to the closure of Solutia's
chlorobenzenes operations as well as certain other non-strategic
operations, including costs for decommissioning and dismantling
activities, future costs for non-cancelable operating leases, and
severance and retraining costs ($18 million pre-tax and after-tax -
see note (k) below).
b) Net pension and other postretirement benefit plan curtailments and
settlements, as more fully described in Note 16 to the accompanying
consolidated financial statements ($35 million pre-tax and
after-tax - see note (k) below).
c) Impairment of fixed assets in the Pharmaceutical Services business
($12 million pre-tax and $8 million after-tax).
d) Losses incurred directly related to the hurricanes experienced in
the U.S. in 2004 resulting in the disruption of operations and
property damage at Solutia's operations in the Integrated Nylon
chain located principally in the Southeastern part of the U.S., and
the Performance Products and Services location in Martinsville,
Virginia. These costs included primarily asset write-offs and
repairs and maintenance costs ($8 million pre-tax and after-tax -
see note (k) below).
e) Loss on the sale of the assets of Axio Research Corporation
($1 million pre-tax and after-tax - see note (k) below).
f) Gain resulting from the favorable settlement of reserves
established in 2003 related to the closure of non-strategic
facilities in Solutia's Pharmaceutical Services business ($1
million pre-tax and after-tax).
31
g) Write-down of non-deductible goodwill in accordance with SFAS No.
142 ($23 million pre-tax and after-tax) and of finite-lived
intangible assets in accordance with SFAS No. 144 ($5 million
pre-tax and $4 million after-tax); both charges within the
Pharmaceutical Services business.
h) Charges related to the Flexsys and Astaris joint ventures, in each
of which Solutia has a fifty percent interest, associated with
litigation matters and restructuring activities involving contract
terminations, dismantling costs, asset impairments and severance
charges ($49 million pre-tax and after-tax - see note (k) below).
i) Write-off of unamortized debt issuance costs related to the October
2003 and interim DIP credit facilities; both were retired in
January 2004 with proceeds from the final DIP facility ($25 million
pre-tax and after-tax - see note (k) below).
j) Loss due to the modification of Solutia's Euronotes in January 2004
($15 million pre-tax and $9 million after-tax).
k) With the exception of items (c), (f), (g) and (j) above, which
relate to ex-U.S. operations, the above items are considered to
have like pre-tax and after-tax impact as the tax benefit realized
from the charges is offset by the increase in valuation allowance
for U.S. deferred tax assets resulting from uncertainty as to their
recovery due to Solutia's Chapter 11 bankruptcy filing.
2003
--------------------------------------------------
PERFORMANCE
PRODUCTS AND INTEGRATED CORPORATE/
INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED
- -------------------------------------------- -------- ----- ----- ------------
IMPACT ON:
- -----------------------------------------------------------------------------------------------
Cost of goods sold................. $ 37 $ 5 $ -- $ 42 (l)
18 -- -- 18 (m)
-- -- 27 27 (n)
-- -- 26 26 (o)
-- -- 99 99 (p)
-- -- 20 20 (q)
----------------------------------------------------
Total cost of goods sold........... 55 5 172 232
Marketing.......................... 2 -- -- 2 (l)
-- -- 2 2 (o)
Administrative..................... 2 -- 4 6 (l)
-- -- 4 4 (o)
Technological...................... 6 -- -- 6 (l)
-- -- 3 3 (o)
Impairment of intangible assets.... 78 -- -- 78 (r)
----------------------------------------------------
OPERATING LOSS IMPACT.............. (143) (5) (185) (333)
Equity loss from affiliates........ -- -- (134) (134) (s)
Interest expense................... -- -- (14) (14) (t)
Other income, net.................. -- -- 4 4 (u)
----------------------------------------------------
PRE-TAX INCOME STATEMENT
IMPACT........................... $(143) $(5) $(329) (477)
======================================
Income tax expense................. 413 (v)
--------------
AFTER-TAX INCOME STATEMENT
IMPACT...................... $(890)
==============
<FN>
2003 EVENTS
-----------
l) Restructuring charges for workforce reductions of approximately 530
positions across all world areas and functions of Solutia,
write-down of assets, and contract termination costs ($56 million
pre-tax and after-tax - see note (v) below).
m) Impairment of fixed assets in the Pharmaceutical Services business
($18 million pre-tax and $16 million after-tax).
32
n) Charge for environmental remediation and funding for an educational
trust related to the partial consent decree in Anniston, Alabama
($27 million pre-tax and after-tax - see note (v) below).
o) Losses from pension settlements, as more fully described in Note 16
to the accompanying consolidated financial statements ($35 million
pre-tax and after-tax - see note (v) below).
p) Charge related to Solutia's share of the Anniston litigation
settlement and to increase certain other litigation accruals ($99
million pre-tax and after-tax - see note (v) below).
q) Increase to environmental reserves related to exiting the Nitro, WV
facility ($20 million pre-tax and after-tax - see note (v) below).
r) Write-down of non-deductible goodwill and other indefinite-lived
intangible assets in accordance with SFAS No. 142 ($64 million
pre-tax and after-tax) and of finite-lived intangible assets in
accordance with SFAS No. 144 ($14 million pre-tax and after-tax);
both charges within the Pharmaceutical Services business.
s) Restructuring and litigation charges incurred at the Flexsys and
Astaris joint ventures related to asset impairments, severance
charges, and litigation expenses ($134 million pre-tax and
after-tax - see note (v) below).
t) Write-off of unamortized debt issuance cost related to the credit
facility refinanced during 2003 ($14 million pre-tax and
after-tax - see note (v) below).
u) Recovery of certain receivables, established prior to 1997, which
had previously been written off ($4 million pre-tax and
after-tax - see note (v) below).
v) With the exception of items (m) and (r) above, which relate to
ex-U.S. operations, the above items are considered to have the same
pre-tax and after-tax impact as the tax benefit or expense realized
from the losses or gains, respectively, are offset by the increase
in valuation allowance for U.S. deferred tax assets resulting from
uncertainty as to their recovery due to Solutia's Chapter 11
bankruptcy filing.
2002
--------------------------------------------------
PERFORMANCE
PRODUCTS AND INTEGRATED CORPORATE/
INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED
- -------------------------------------------- -------- ----- ----- ------------
IMPACT ON:
- -----------------------------------------------------------------------------------------------
Cost of goods sold................. $-- $ 5 $ -- $ 5 (w)
-- -- 12 12 (x)
-------------------------------------------------------
Total cost of goods sold........... -- 5 12 17
Marketing.......................... -- -- 1 1 (x)
Administrative..................... -- -- 2 2 (x)
Technological ..................... -- -- 2 2 (x)
-------------------------------------------------------
OPERATING INCOME IMPACT............ -- (5) (17) (22)
Equity earnings from affiliates.... -- -- (7) (7) (y)
Other income, net.................. -- -- 5 5 (z)
-------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT.... $-- $(5) $(19) (24)
=========================================
Income tax benefit................. (9)
--------------
AFTER-TAX INCOME STATEMENT IMPACT.. $(15)
==============
<FN>
2002 EVENTS
-----------
w) Charges related to the resolution of a construction dispute with
the contractor of the acrylonitrile plant in Alvin (Chocolate
Bayou), Texas ($5 million pre-tax and $3 million after-tax).
33
x) Losses from pension settlements, as more fully described in Note 16
to the accompanying consolidated financial statements ($17 million
pre-tax and $11 million after-tax).
y) Charges for the Flexsys joint venture related to the write-down of
production assets to fair market value ($7 million pre-tax and $4
million after-tax).
z) Gain resulting from the sale of Solutia's 50 percent interest in
the AES joint venture ($5 million pre-tax and $3 million
after-tax).
ENVIRONMENTAL MATTERS
Solutia is subject to numerous laws and government regulations
concerning environmental, safety and health matters in the United States and
other countries. U.S. environmental legislation that has a particular impact
on Solutia includes the Toxic Substances Control Act; the Resource
Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the
Safe Drinking Water Act; and the Comprehensive Environmental Response,
Compensation and Liability Act (commonly known as Superfund). Solutia is
also subject to the Occupational Safety and Health Act and regulations of
the Occupational Safety and Health Administration ("OSHA") concerning
employee safety and health matters. The EPA, OSHA and other federal agencies
have the authority to promulgate regulations that have an impact on
Solutia's operations. In addition to these federal activities, various
states have been delegated certain authority under several of these federal
statutes and have adopted environmental, safety and health laws and
regulations. State or federal agencies having lead enforcement authority may
seek fines and penalties for violation of these laws and regulations. Also,
private parties have rights to seek recovery, under the above statutes or
the common law, for civil damages arising from environmental conditions,
including damages for personal injury and property damage.
Expenditures for environmental capital projects were approximately
$8 million, $7 million and $5 million in 2004, 2003 and 2002, respectively.
Expenditures for the management of environmental programs and remediation
activities were approximately $69 million, $96 million and $88 million in
2004, 2003 and 2002, respectively. 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 $19
million, $33 million and $26 million in 2004, 2003 and 2002, respectively,
for remediation activity, which was charged against recorded environmental
liabilities. Recoveries from third parties were $2 million, $4 million and
$5 million in 2004, 2003 and 2002, respectively.
Environmental compliance and remediation costs and other
environmental liabilities incurred by Solutia generally fall into two broad
categories: (a) those related to properties currently owned or operated by
Solutia and (b) those related to properties that are not owned by Solutia,
including non-owned properties adjacent to plant sites and certain owned
offsite disposal locations. For the owned and operated sites, Solutia had an
accrued liability of $78 million as of December 31, 2004 for solid and
hazardous waste remediation, which represents Solutia's best estimate of the
underlying obligation. In addition, this balance also includes post-closure
costs at certain of Solutia's operating locations. This liability is not
classified as subject to compromise in the Statement of Consolidated
Financial Position because, irrespective of the bankruptcy proceedings,
Solutia will be required to comply with environmental requirements in the
conduct of its business, regardless of when the underlying environmental
contamination occurred. However, Solutia ultimately expects to seek recovery
against other potentially responsible parties at certain of these locations.
Solutia spent $18 million in 2004 for remediation of these properties. In
2005, Solutia anticipates spending approximately $18 million related to
these properties currently owned or operated by Solutia.
Solutia had an accrued liability of $82 million as of December 31,
2004 for properties not owned or operated by Solutia. This liability is
classified as subject to compromise in the Statement of Consolidated
Financial Position as Solutia currently believes it constitutes a
pre-petition claim that will be discharged in the bankruptcy process. During
2004, approximately $1 million was expended for remediation of properties
not owned by Solutia.
Given the inherent uncertainties associated with the bankruptcy
process, Solutia cannot forecast its level of spending or expense in 2005,
or any anticipated recoveries in 2005 relating to past or current
remediation activities for obligations
34
related to properties that are not owned by Solutia, including non-owned
properties adjacent to plant sites and certain owned offsite disposal
locations. However, Solutia can predict future spending and expense for
obligations related to properties currently owned or operated by Solutia
and, accordingly, these amounts are included in the contractual obligations
table in the "Commitments" section of Management's Discussion and Analysis
below. Furthermore, in addition to the bankruptcy court proceedings,
Solutia's environmental liabilities are also subject to changing
governmental policy and regulations, discovery of unknown conditions,
judicial proceedings, method and extent of remediation, existence of other
potentially responsible parties and future changes in technology. Solutia
believes that known and unknown environmental matters, when ultimately
resolved, which may be over an extended period of time, could have a
material effect on the consolidated financial position, liquidity and
results of operations of Solutia.
SELF-INSURANCE
As discussed in Item 3 to this report, because of the size and
nature of its business, Solutia is 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 Solutia's
spinoff from Pharmacia, Solutia assumed the defense of specified legal
proceedings and agreed to indemnify Pharmacia in connection with those
proceedings. Solutia has determined that these defense and indemnification
obligations to Pharmacia are pre-petition obligations under the U.S.
Bankruptcy Code that Solutia is prohibited from performing, except pursuant
to a confirmed plan of reorganization. As a result, Solutia has ceased
performance of these obligations. Solutia's cessation of performance may
give rise to a pre-petition unsecured claim against Solutia which Pharmacia
may assert in Solutia's Chapter 11 bankruptcy case.
Since the spinoff, Solutia has been responsible for bearing the
costs associated with various toxic tort lawsuits related to PCBs,
premises-based asbestos and other chemical exposures from the conduct of the
historic chemical business of Pharmacia. At the time of the Chapter 11
bankruptcy filing, Solutia was defending approximately 520 asbestos actions
(involving an estimated 3,500 to 4,500 plaintiffs) brought against
Pharmacia. In addition, notwithstanding the settlement of cases relating to
the Anniston plant site, Solutia was defending approximately 30 cases
involving alleged exposure from PCB's manufactured by Pharmacia prior to the
spinoff. Solutia was also defending approximately 100 general and product
liability claims brought against Pharmacia.
Claims for legal matters arising prior to Solutia's Chapter 11
bankruptcy filing will be addressed in the bankruptcy proceedings. As a
result of the Chapter 11 petition, an automatic stay has been imposed
against the commencement or continuation of legal proceedings against
Solutia outside of the bankruptcy court process. Consequently, Solutia's
pre-petition accrued liability for litigation of $141 million as of December
31, 2004 has been classified as subject to compromise in the Statement of
Consolidated Financial Position. In general, all claims against Solutia that
seek a recovery of assets of Solutia's estate will be addressed in the
Chapter 11 bankruptcy process and paid only pursuant to the terms of a
confirmed plan of reorganization. However, pursuant to a bankruptcy court
order, Solutia made a $5 million payment with respect to pre-petition legal
proceedings in 2004. Solutia cannot forecast the level of future
pre-petition self-insurance spending and anticipated levels of recoveries
based upon the inherent uncertainty underlying the bankruptcy proceedings.
Solutia had an accrued liability of $7 million as of December 31,
2004 for post-petition self-insurance liabilities including workers'
compensation, product, general, automobile and operations liability claims.
Self-insurance expense was $4 million in 2004, $82 million in 2003, and $25
million in 2002. The decrease in self-insurance expense in 2004 compared
with 2003 was principally a result of an increase in the existing reserve
levels in 2003 up to the discounted settlement amount in the Anniston PCB
litigation settlement coupled with lower overall settlement accruals and
legal expenses due to the aforementioned stay with respect to pre-petition
litigation. Cash payments for self-insurance matters were $9 million in
2004, $50 million in 2003, and $47 million in 2002, whereas recoveries from
insurance carriers were $7 million in 2004, $8 million in 2003, and $16
million in 2002. Included in the 2004 payments of $9 million was a $5
million scheduled payment with respect to the 2003 Anniston PCB litigation
settlement paid pursuant to a bankruptcy court order.
EMPLOYEE BENEFITS
Employee benefits include noncontributory defined benefit pension
plans and other postemployment benefits ("OPEB") that provide certain health
care and life insurance benefits. Solutia also has stock option plans
covering officers and employees and a non-employee director compensation
plan for non-employee members of Solutia's board of directors.
Under the provisions of SFAS No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, measurement of the obligations under the
defined benefit
35
pension plans and the OPEB plans are subject to a number of assumptions.
These include the rate of return on pension plan assets, health care cost
trend rates and the rate at which the future obligations are discounted to
value the liability at December 31st of each year presented in the Statement
of Consolidated Financial Position. The amounts reflected in the
consolidated financial statements and accompanying notes do not reflect the
impact of any future changes to the benefit plans that might be contemplated
as a result of the bankruptcy filing. Due to the inherent uncertainty
involved with the Chapter 11 bankruptcy proceedings, the recorded amounts
related to Solutia's domestic pension plans, as well as other domestic
postretirement plans, have been classified as subject to compromise in the
Statement of Consolidated Financial Position as of December 31, 2004.
Pension expense in accordance with SFAS No. 87 was $29 million in
2004, $42 million in 2003 and $23 million in 2002, and expense for OPEB was
$44 million in 2004, $55 million in 2003 and $57 million in 2002. In
addition, Solutia recorded net charges resulting from pension and other
postretirement benefit plan curtailments and settlements of $35 million in
2004 and 2003, respectively, and $17 million in 2002 (as more fully
described in Note 16 to the accompanying consolidated financial statements).
The expected long-term rate of return on pension plan assets
assumption was 9.0 percent in 2004 and is anticipated to be 9.0 percent in
2005. The expected long-term rate of return on pension plan assets
assumption is based on the target asset allocation policy and the expected
future rates of return on these assets. See Note 16 to the accompanying
consolidated financial statements for Solutia's historical and target
allocation of plan assets for the pension plans. A hypothetical 25 basis
point change in the assumed long-term rate of return would result in a
change of approximately $2 million to pension expense.
The discount rates used to remeasure the pension plans were 5.50
percent in 2004 and 6.25 percent in 2003, and the discount rates to
remeasure the other postretirement benefit plans were 5.25 percent in 2004
and 6.25 percent in 2003. Solutia establishes its discount rate based upon
the internal rate of return for a portfolio of high quality bonds with
maturities consistent with the nature and timing of future cash flows for
each specific plan. A hypothetical 25 basis point change in the discount
rate for Solutia's pension plans results in a change of approximately $20
million in the projected benefit obligation and less than a $1 million
change in pension expense. A hypothetical 25 basis point change in the
discount rate for Solutia's OPEB plans results in a change of approximately
$10 million in the accumulated benefit obligation and less than
approximately $1 million change to OPEB expense.
Solutia estimated the five-year assumed trend rate for healthcare
costs in 2004 to be 9 percent with the ultimate trend rate for healthcare
costs grading to 5 percent by 2008 and remaining at that level thereafter. A
1 percent change in the assumed health care cost trend rate would have
changed the postretirement benefit obligation by $4 million as of December
31, 2004 and would have had a less than $1 million change to OPEB expense in
2004. Solutia's costs for postretirement medical benefits are capped for
many current retirees and active employees; therefore, the impact of this
hypothetical change in the assumed health care cost trend rate is limited.
As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, Solutia has elected to account for stock options under APB
Opinion No. 25, Accounting for Stock Issued to Employees, based on their
intrinsic value at the date of grant. Because options are granted at market
value, there is no intrinsic value or resultant compensation expense. If
Solutia had accounted for options based on the method prescribed by SFAS No.
123, pro-forma loss would have been increased by approximately $3 million in
2004, $5 million in 2003 and $7 million in 2002. This valuation methodology
provides an estimate of fair value that encapsulates a number of management
estimates, including estimated option life and future volatility. Changes in
these assumptions could significantly affect the estimated fair value of the
options. In addition, Solutia believes that its plan of reorganization will
result in cancellation of its existing shares of common stock, as well as
options and warrants to purchase its common stock, and that it is unlikely
that holders of options to purchase Solutia's common stock will receive any
consideration for those options in such a plan of reorganization.
Pension Plan Funded Status
The majority of Solutia's employees are covered under
noncontributory defined benefit pension plans. The pension plans are funded
in accordance with Solutia's long-range projections of the plan's financial
conditions. These projections take into account benefits earned and expected
to be earned, anticipated returns on pension plan assets and income tax and
other regulations. The amount of pension plan underfunding in the pension
plans decreased to $508 million as of December 31, 2004 from $516 million as
of December 31, 2003.
36
Solutia actively manages funding of its domestic qualified pension
plan in order to meet the requirements of the IRS and the Pension Benefits
Guarantee Corporation (a U.S. federal agency). In 2004 and 2002, Solutia
made discretionary contributions of $11 million and $17 million,
respectively, to the qualified pension plan in order to minimize future
required contributions and to utilize available tax benefits. No
contributions were made during 2003 to the qualified pension plan. In
addition, Solutia contributed $7 million in 2004, 2003 and 2002,
respectively, to fund its other pension plans. According to current IRS
funding rules, Solutia does not expect to be required to make pension
contributions to its U.S. qualified pension plan in 2005. However, Solutia
may elect to make voluntary contributions to the pension trust in 2005 in
order to minimize future required contributions.
DERIVATIVE FINANCIAL INSTRUMENTS
Solutia's business operations give rise to market risk exposures
that result from changes in currency exchange rates, interest rates and
certain commodity prices. To manage the volatility relating to these
exposures, Solutia enters into various hedging transactions that enable it
to alleviate the adverse effects of financial market risk. Solutia's hedging
transactions are carried out under policies and procedures approved by the
Audit and Finance Committee of the board of directors, which does not permit
the purchase or holding of any derivative financial instruments for trading
purposes. Notes 2 and 9 to the accompanying consolidated financial
statements include further discussion of Solutia's accounting policies for
derivative financial instruments.
Foreign Currency Exchange Rate Risk
Solutia manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. Solutia uses foreign currency hedging
instruments to manage the volatility associated with foreign currency
purchases of materials and other assets and liabilities created in the
normal course of business. Solutia primarily uses forward exchange contracts
and purchased options with maturities of less than 18 months to hedge these
risks. Solutia also enters into certain foreign currency derivative
instruments primarily to protect against exposure related to intercompany
financing transactions. Corporate policy prescribes the range of allowable
hedging activity and what hedging instruments Solutia is permitted to use.
Because the counterparties to these contracts are major international
financing institutions, credit risk arising from these contracts is not
significant, and Solutia does not anticipate any counterparty losses.
At December 31, 2004, Solutia had currency forward contracts to
purchase and sell $147 million of currencies, principally the euro, Swiss
Franc and U.S. Dollar, with average remaining maturities of nine months.
Based on Solutia's overall currency rate exposure at December 31, 2004,
including derivatives and other foreign currency sensitive instruments, a 10
percent adverse change in quoted foreign currency rates of these instruments
would result in an immaterial change in fair value of these instruments.
This is consistent with the overall foreign currency exchange rate exposure
at December 31, 2003.
Interest Rate Risk
Interest rate risk is primarily related to changes in the fair
value of fixed-rate long-term debt and short-term, floating rate debt.
Solutia believes its current debt structure appropriately protects Solutia
from changes in interest rates and does not actively use any contracts to
manage interest rate risk. A 1 percent increase in the prime lending rate
would have increased interest expense by approximately $3 million during
2004, assuming the debt composition at December 31, 2004 was consistent
throughout the year. This is consistent with the overall interest rate
exposure at December 31, 2003.
Commodity Price Risk
Certain raw materials and energy resources used by Solutia are
subject to price volatility caused by weather, crude oil prices, supply
conditions, political and economic variables and other unpredictable
factors. Solutia uses forward and option contracts to manage a portion of
the volatility related to anticipated energy purchases. There were no
commodity forward or option contracts outstanding as of December 31, 2004.
37
RESTRUCTURING ACTIVITIES
During 2004, Solutia recorded restructuring charges of $18 million
to Cost of Goods Sold principally related to the closure of Solutia's
chlorobenzenes operations as well as certain other non-strategic operations,
including $10 million for decommissioning and dismantling costs, $3 million
of severance and retraining costs; $2 million related to operating leases
where the underlying services and properties are no longer providing
benefit; and $3 million of various other restructuring charges. In addition,
Solutia recorded a reduction of $1 million to Cost of Goods Sold for the
favorable settlement of reserves established in 2003 related to the closure
of non-strategic facilities in Solutia's Pharmaceutical Services business.
These restructuring charges were recorded in the Performance Products and
Services segment and resulted principally from Solutia's continued strategic
evaluation of its businesses. In addition, Solutia recorded $4 million of
severance and retraining costs during 2004 in Reorganization Items, net
principally related to workforce reduction initiatives of management
positions within the corporate function directly associated with the
bankruptcy reorganization process. Cash outlays associated with the
restructuring actions were funded from operations.
During 2003, Solutia recorded restructuring and severance charges
of $56 million. The restructuring charges resulted from Solutia's continued
strategic evaluation of its businesses, and the resulting decisions to shut
down certain operations due to various market and economic conditions.
Included in these restructuring charges was $22 million of severance charges
associated with ongoing workforce reductions precipitated by the sale of the
resins, additives and adhesives businesses and other ongoing cost reduction
initiatives; $17 million of asset write-downs; $14 million related to
non-cancellable operating leases, because Solutia was no longer fully
utilizing the properties underlying these leases; and $3 million in contract
termination costs. Cash outlays associated with the restructuring actions
were funded from operations.
FINANCIAL CONDITION AND LIQUIDITY
As discussed above, Solutia is operating as a debtor-in-possession
under Chapter 11 of the U.S. Bankruptcy Code. As a result of the uncertainty
surrounding Solutia's current circumstances, it is difficult to predict
Solutia's actual liquidity needs and sources at this time. However, based
upon current and anticipated levels of operations during the continuation of
the bankruptcy proceedings, Solutia believes that its liquidity and capital
resources will be sufficient to maintain its normal operations at current
levels. Solutia's access to additional financing while in the Chapter 11
bankruptcy process will likely be very limited.
Financial Analysis
Solutia used its existing cash on-hand to finance operating needs
and capital expenditures during 2004. Cash provided by continuing operations
was $41 million in 2004 compared to cash used in continuing operations of
$25 million in 2003. This change was primarily attributable to the continued
increase in post-petition accounts payable balances due to improved vendor
terms, partially offset by a $11 million voluntary pension contribution and
payments for reorganization related items. In addition, pursuant to a
bankruptcy court order Solutia made the first of ten annually scheduled $5
million payments in August 2004 with respect to the Anniston litigation
settlement reached in 2003. In 2003, cash used in continuing operations of
$25 million compared to cash provided by continuing operations of $127
million in 2002. The decrease was primarily attributable to lower earnings,
vendor term compression, and a $60 million income-tax refund received during
2002, partially offset by a $25 million advance payment received from
Monsanto in 2003.
Capital spending was $61 million in 2004 as compared to $78 million
in 2003. This decrease was primarily due to the mandatory purchase of the
co-generation facility in Pensacola, Florida in 2003, for approximately $32
million, whereas the expenditures in 2004 were used primarily to fund
various minor capital improvements, as well as certain cost reduction
projects. In addition, included in 2004 was $5 million of capital spending
incurred as a result of damage from Hurricane Ivan. Spending increased $19
million in 2003 to $78 million as compared to $59 million in 2002, primarily
as a result of the aforementioned co-generation purchase in 2003. In 2005,
Solutia expects capital spending will be approximately $80 million.
Approximately $15 million of estimated capital requirements were committed
at December 31, 2004.
Solutia continued to divest certain non-strategic businesses in
order to focus resources on core businesses. The proceeds from these and
other asset sales generated $479 million in 2003 and $109 million in 2002.
Proceeds from divestitures in 2004 were less than $1 million. During 2003,
net proceeds included the sale of the resins, additives and adhesives
businesses of $474 million, which were included in cash provided by
discontinued operations. Proceeds generated
38
in 2002 included the sale of Solutia's 50 percent interest in the AES joint
venture to ExxonMobil Chemical Company, a division of Exxon Mobil
Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of
Exxon Mobil Corporation, for approximately $102 million.
Net cash used for acquisitions completed during 2002 totaled
approximately $5 million for the purchase of Axio Research Corporation.
There were no acquisitions in 2004 or 2003.
Total debt of $1,253 million as of December 31, 2004, including
$585 million not subject to compromise and $668 million subject to
compromise, decreased by $27 million as compared to $1,280 million at
December 31, 2003, including $655 million not subject to compromise and $625
million subject to compromise. The composition of Solutia's debt changed
during 2004 as compared to 2003 with the completion of the final DIP
facility in January 2004 and concurrent retirement of Solutia's borrowings
under the October 2003 and interim DIP credit facilities, which aggregated
$361 million outstanding as of December 31, 2003, with proceeds from the
final DIP facility and existing cash on-hand. Outstanding borrowings under
the final DIP facility were $300 million as of December 31, 2004. In
addition, the Euronotes were increased by $15 million in order to record the
notes at their fair value on the date of modification, January 30, 2004. The
$43 million change in debt subject to compromise resulted from the
reclassification of the debt obligation for Solutia's headquarters building
to liabilities subject to compromise in the third quarter 2004 as Solutia
believes it is unable to continue to perform on this debt obligation.
Solutia's working capital from continuing operations decreased by
$64 million to ($3) million at December 31, 2004, compared to $61 million at
December 31, 2003. This decrease in working capital was primarily
attributable to the continued increase in post-petition accounts payable
balances due to improved vendor terms and lower cash on hand, partially
offset by the decrease in short-term debt.
Solutia had a shareholders' deficit of $1,444 million at December
31, 2004, compared to a shareholders' deficit of $1,125 million at December
31, 2003. Shareholders' deficit increased principally due to 2004 losses of
$316 million and the $18 million increase in additional minimum pension
liability in 2004, partially offset by favorable currency translation
adjustments, principally related to the increase in value of the euro in
relation to the U.S. dollar in 2004.
The weighted average interest rate on Solutia's total debt
outstanding at December 31, 2004, was approximately 9.0 percent compared to
8.9 percent at December 31, 2003. Excluding debt subject to compromise, the
weighted average interest rate on total debt was 9.6 percent at December 31,
2004 compared to 9.3 percent at December 31, 2003.
As a result of the Chapter 11 bankruptcy filing, Solutia was in
default on all its debt agreements as of December 31, 2004, with the
exception of its DIP credit facility and Euronotes. In addition, subsequent
to Solutia's bankruptcy filing, Moody's Investors Ratings Services and
Standard & Poor's withdrew all ratings for Solutia and its related debt
securities.
At December 31, 2004, Solutia's total liquidity was $246 million in
the form of $131 million of availability under the final DIP credit facility
and approximately $115 million of cash on-hand, of which $65 million was
cash of Solutia's subsidiaries that are not parties to the Chapter 11
bankruptcy proceedings. At December 31, 2003, all of Solutia's liquidity was
in the form of cash in the amount of $159 million, of which $34 million was
cash of Solutia's subsidiaries that are not parties to the Chapter 11
bankruptcy proceedings.
According to current IRS funding rules, Solutia was not required to
make pension contributions in 2004 for its qualified domestic pension plan.
However, Solutia made a voluntary contribution of $11 million to the
qualified domestic pension plan in 2004. This voluntary contribution coupled
with the cessation of future benefit accruals effective July 1, 2004 (as
discussed in Note 16 to the accompanying consolidated financial statements),
resulted in the reduction of required contributions, as well as the deferral
of the timing of future required contributions. Based upon current actuarial
assumptions, these two actions will result in the reduction of future
required contributions to the qualified domestic pension plan of
approximately $100 million over the next five years.
Astaris Financing Activities
On October 8, 2003, Solutia and Astaris, a 50/50 joint venture with
FMC Corporation ("FMC"), amended their external financing agreement to
release the Astaris lenders' security interests in certain Solutia assets in
exchange for Solutia's posting of a $67 million letter of credit,
representing fifty percent of the Astaris lenders' outstanding commitments
to Astaris. The agreement also was amended to provide for a
dollar-for-dollar reduction of the Astaris lenders' commitments
39
with future payments ("keepwell payments") made by Solutia and FMC under
their existing support agreements to Astaris. This additional amendment
provided a $67 million limitation for each of Solutia and FMC on future
funding in the event the joint venture continued to fail to meet certain
financial benchmarks. Solutia's $67 million letter of credit was reduced
dollar-for-dollar as payments were made by Solutia under its existing
support agreement. Solutia used approximately $36 million in 2004, $63
million in 2003 and $30 million in 2002 for investment payments to keep the
Astaris joint venture in compliance with its financial covenants. The
remaining commitment to Astaris was $10 million and $51 million as of
December 31, 2004 and 2003, respectively, and was recorded as a liability in
the Statement of Consolidated Financial Position in these periods
accordingly.
Solutia and FMC had also agreed to allow Astaris to defer up to $27
million of payment obligations to each of Solutia and FMC under existing
operating agreements and certain other agreements. The deferral amount
outstanding from Astaris to Solutia was $16 million and $2 million as of
December 31, 2004 and 2003, respectively. In February 2005, this deferral
agreement was terminated and all amounts outstanding were paid in full in
conjunction with the Astaris refinancing (as more fully described below).
On February 8, 2005, Astaris refinanced its existing $20 million
credit facility that was scheduled to expire in September 2005 with a new
three-year, $75 million revolving credit facility. Among other items, the
new credit facility allowed Astaris to repay Solutia and FMC approximately
$16 million each that had been deferred under existing operating agreements
and certain other agreements. Completion of the new facility also resulted
in the release of a $10 million letter of credit back to Solutia that was
previously established to support prior keepwell arrangements that have now
been terminated as part of the new credit facility. Under the new credit
facility Astaris is required to delay certain payments to Solutia and FMC if
it does not achieve certain financial metrics, with repayment of any amounts
required once Astaris achieves the required financial metrics. Solutia does
not expect any potential future deferral amounts will be significant in
amount or prolonged in duration of repayment. Solutia's consent to the
potential payment restrictions contained in the new credit facility and
termination of the deferral agreement under the previous credit facility are
both subject to approval by the bankruptcy court.
Prior and Current Credit Facilities
Final DIP Financing
- -------------------
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a $525 million DIP credit facility. This DIP
facility consists of (i) a $50 million multiple draw term loan component
("Term Loan A"); (ii) a $300 million single draw term loan component ("Term
Loan B"); and (iii) a $175 million borrowing-based revolving credit
component, which includes a $150 million letter of credit subfacility.
Proceeds from the final DIP financing facility were used to retire Solutia's
existing pre-petition $350 million credit facility, to repay the $75 million
provided by the interim DIP facility and to provide approximately $100
million of new liquidity for general operating purposes.
The final DIP facility has a maturity date which is the earliest of
(i) December 19, 2005; (ii) the earlier of the effective date and the date
of the substantial consummation (as defined in Section 1101(2) of the U.S.
Bankruptcy Code), in each case, of a plan of reorganization in the Chapter
11 bankruptcy case confirmed by an order of the bankruptcy court; and (iii)
such earlier date on which all loans under the final DIP facility shall
become due and payable in accordance with the terms of the final DIP
facility or other loan documents. Additionally, the final DIP facility is
subject to various mandatory commitment reductions and prepayments in
connection with asset sales, equity issuances, receipt of extraordinary
proceeds and certain other events. In particular, the final DIP facility
significantly limits Solutia's ability to use divesture proceeds for any
purpose other than the permanent reduction of the final DIP facility.
COLLATERAL
The bankruptcy court's final order granted all the perfected first
priority and senior liens, originally granted to the $350 million
pre-petition facility and $75 million interim DIP facility, to the lenders
under the final DIP facility in conjunction with its post-petition senior
secured status. In particular, the final DIP facility is secured by a lien
on substantially all of Solutia's domestic assets, including (i) accounts
receivable and inventory; (ii) certain intellectual property; (iii) pledges
of stock of certain domestic subsidiaries; (iv) pledges of 65 percent of the
outstanding stock of certain foreign subsidiaries; (v) liens on intercompany
notes receivable held by parties to the loan; and (vi) liens on property,
plant and equipment located at St. Louis, Missouri; Columbia, Tennessee;
Foley, Alabama; Martinsville, Virginia; Springfield, Massachusetts; Trenton,
Michigan; Alvin, Texas; Pensacola, Florida; Decatur, Alabama; and Greenwood,
South Carolina.
40
INTEREST
Borrowings under the revolving credit component bear interest at a
rate per annum equal to the prime rate or LIBOR plus 2.25 percent at the
election of the borrower. Borrowings under the term loan bear interest at a
rate per annum equal to the greater of (i) the prime rate plus 4.0 percent
or (ii) 8.0 percent.
GUARANTEES
The obligations of Solutia Inc. and Solutia Business Enterprises,
Inc., as borrowers under the final DIP facility, are guaranteed by Solutia's
other domestic subsidiaries which own substantially all of Solutia's
domestic assets. These subsidiaries are Axio Research Corporation, Beamer
Road Management Company, CPFilms Inc., Monchem, Inc., Monchem International,
Inc., Solutia Greater China, Inc., Solutia Inter-America, Inc., Solutia
International Holding, LLC, Solutia Investments, LLC, Solutia Management
Company, Inc., Solutia Overseas, Inc., Solutia Systems, Inc. and Solutia
Taiwan, Inc. The obligations must also be guaranteed by each of Solutia's
subsequently acquired or organized domestic subsidiaries, subject to certain
exceptions. In addition, Solutia Inc. and Solutia Business Enterprises, Inc.
are jointly and severally liable with respect to their obligations under the
final DIP facility, thus in effect each guaranteeing the other's debt.
COVENANTS AND OTHER RESTRICTIONS
The final DIP facility requires Solutia to meet certain financial
covenants, including but not limited to, minimum earnings before interest,
taxes, depreciation and amortization (EBITDA) targets on a consolidated
basis and for one of its operating units. In addition, the credit facility
contains certain covenants which, among other things, limit the incurrence
of additional debt, aggregate capital expenditures, additional operating
leases, issuance of capital stock, issuance of guarantees, liens,
investments, asset sales, dividends, certain payments, acquisitions,
mergers, consolidations and dissolutions, change of business, transactions
with affiliates, prepayments of debt, repurchases of stock and redemptions
of certain other indebtedness and other matters customarily restricted in
such agreements.
The final DIP facility contains customary and other events of
default, including, among others, payment defaults, breaches of
representations and warranties, covenant defaults, cross-defaults to
Solutia's Euronotes, failure of guaranties or security documentation to be
effective, judgment defaults, ERISA defaults, Solutia Inc. change of
control, conversion of the case from a Chapter 11 to a Chapter 7 bankruptcy
and a material adverse effect default.
Amendment to DIP Financing Agreement
- ------------------------------------
Solutia amended its DIP financing agreement on July 20, 2004, after
receiving bankruptcy court approval. The amendment provides greater
flexibility to Solutia in executing certain actions contemplated in its
financial projections, provides cost savings through lower requirements of
certain letters of credit, and enhances liquidity opportunities through
retaining certain potential receipts which were previously required to be
used to reduce the commitment amount. No changes were made to the financial
covenants contained in the DIP agreement.
Interim DIP Financing
- ---------------------
On December 19, 2003, the bankruptcy court entered an interim
order authorizing Solutia to borrow up to $85 million of DIP financing for
the period between the entry of the interim order and the entry of a final
order authorizing a full DIP facility. Accordingly, on December 19, 2003,
Solutia entered into an interim financing facility providing for $515
million of total DIP financing, of which $85 million was immediately
available under the interim bankruptcy court order, with an additional $430
million of DIP financing to be available upon entry of a final bankruptcy
court order approving the total $515 million. As of December 31, 2003, $75
million was outstanding under the interim DIP facility, which amount was
subsequently paid in full through the final DIP facility entered into as of
January 16, 2004, as more fully described above.
October 2003 Credit Facility
- ----------------------------
On October 8, 2003, Solutia entered into a new $350 million credit
facility. The proceeds of the loans made under the facility were used to
retire Solutia's pre-existing bank debt and for general working capital
purposes, including fees and expenses related to the credit facility. The
amount of outstanding borrowings under the credit facility as of December 31,
41
2003, was approximately $286 million. The facility was paid in full and
cancelled as part of the final DIP facility entered into by Solutia on
January 16, 2004, as more fully described above.
Euronote Amendment - January 2004
- ---------------------------------
On January 30, 2004, Solutia and its wholly owned subsidiary,
Solutia Europe S.A./N.V. ("SESA"), restructured its then 6.25 percent notes
due in 2005 ("Euronotes"). The restructuring allows SESA to continue normal
operations while Solutia Inc. and its domestic subsidiaries reorganize under
Chapter 11 bankruptcy protection.
The restructuring was implemented in a multi-step process. The
first step was completed on December 16, 2003, at a meeting of Euronote
holders at which the required percentage of Euronote holders adopted
resolutions agreeing to forebear through January 30, 2004, the acceleration
and default of the Euronotes in the event of a Chapter 11 bankruptcy filing
by Solutia Inc. In consideration for that agreement, SESA made an additional
interest payment to the Euronote holders of approximately $2 million. The
second step of the restructuring was completed on January 30, 2004, at a
meeting of Euronote holders at which the required percentage of Euronote
holders adopted resolutions approving definitive documentation set forth in
the terms and conditions of the restructuring and approving other related
actions. The Euronotes were amended in the following manner:
1. Certain cross-default provisions in the Euronotes that would
have resulted in default and acceleration upon the filing of a
Chapter 11 bankruptcy proceeding by Solutia Inc. were eliminated.
Solutia Inc.'s guarantee of the Euronotes was also eliminated.
2. The maturity of the Euronotes was extended to December 15, 2008,
from the original maturity date of February 15, 2005.
3. Interest on the Euronotes was fixed at the rate of 10 percent
per annum, payable semi-annually in arrears.
4. SESA agreed to grant to the holders of the Euronotes security
interests in substantially all of the assets of SESA and certain
of its subsidiaries (excluding Flexsys Holding BV) and to cause
these subsidiaries to be added as guarantors of the Euronotes,
all to the extent permitted under applicable law and as further
provided in the underlying documentation implementing the
restructuring.
5. Certain redemption provisions were added that allow partial
redemption of the Euronotes as a result of permitted asset sales
and full redemption in certain circumstances. Full redemption is
barred for 18 months; thereafter, full redemption is allowed at
105 percent of principal for the next twelve months, 103 percent
of principal for the twelve months thereafter, 101 percent of
principal for the twelve months after that and at par thereafter.
6. Covenants were added that have the effect of limiting the
ability of SESA and its subsidiaries to transfer assets or cash
out of those entities until the Euronotes are paid.
7. SESA agreed to certain financial reporting requirements and to
indemnify Euronote holders against certain liabilities.
SESA and the holders of the Euronotes also entered into an
Agreement of Understanding that sets forth, among other items, the
post-closing process for implementing the guarantees, security and pledges
associated with the restructuring.
Solutia analyzed the modifications of the Euronotes in accordance
with the provisions of Emerging Issues Task Force ("EITF") No. 02-04,
Determining Whether a Debtor's Modification or Exchange of Debt Instruments
is within the Scope of FASB Statement No. 15, and EITF No. 96-19, Debtor's
Accounting for a Modification or Exchange of Debt Instruments, and recorded
a charge of approximately $15 million in 2004 to record the Euronotes as
modified at their fair value on January 30, 2004.
Euronote Amendment - November 2004
- ----------------------------------
On October 7, 2004, Solutia and its wholly owned subsidiary, SESA,
commenced the notification process for convening a meeting pursuant to
Article 568 of the Belgian Companies Code of the holders of the Euronotes.
At the
42
bondholders' meeting, which took place on November 8, 2004, the bondholders
approved amendments to the Euronotes including the authorization of the
potential sale of Solutia's Pharmaceutical Services business. The amendments
will require SESA to use 95 percent of the net cash proceeds from the sale
to redeem a portion of the Euronotes at a redemption price of 109 percent of
the principal amount of the notes redeemed.
Off-Balance Sheet Arrangements
See Note 20 to the accompanying consolidated financial statements
for a summary of off-balance sheet arrangements.
Contingencies
See Note 20 to the accompanying consolidated financial statements
for a summary of Solutia's contingencies as of December 31, 2004.
Commitments
Solutia has entered into agreements with certain customers to
supply a guaranteed quantity of certain products annually at prices
specified in the agreements. In return, the customers have advanced funds to
Solutia to cover the costs of expanding capacity to provide the guaranteed
supply. Solutia has recorded the advances as deferred credits and amortizes
the amounts to income as the customers purchase the associated products. The
unamortized deferred credits were $109 million at December 31, 2004, and
$168 million at December 31, 2003.
The obligations of Solutia Inc. and Solutia Business Enterprises,
Inc., as borrowers under the final DIP facility, are guaranteed by Solutia's
other domestic subsidiaries which own substantially all of Solutia's
domestic assets. These subsidiaries are Axio Research Corporation, Beamer
Road Management Company, CPFilms Inc., Monchem, Inc., Monchem International,
Inc., Solutia Greater China, Inc., Solutia Inter-America, Inc., Solutia
International Holding, LLC, Solutia Investments, LLC, Solutia Management
Company, Inc., Solutia Overseas, Inc., Solutia Systems, Inc. and Solutia
Taiwan, Inc. The obligations also must be guaranteed by each of Solutia's
subsequently acquired or organized domestic subsidiaries, subject to certain
exceptions. In addition, Solutia Inc. and Solutia Business Enterprises, Inc.
are jointly and severally liable with respect to their obligations under the
final DIP facility, thus in effect each guaranteeing the other's debt.
43
The following table summarizes Solutia's contractual obligations
and commercial commitments that are not subject to compromise as of December
31, 2004. Payments associated with liabilities subject to compromise have
been excluded from the table below, as Solutia cannot accurately forecast
its future level and timing of spending given the inherent uncertainties
associated with the ongoing Chapter 11 bankruptcy process. See Note 3 to the
accompanying consolidated financial statements for further disclosure
concerning liabilities subject to compromise.
- ------------------------------------------------------------------------------------------------------------
OBLIGATIONS DUE BY PERIOD (DOLLARS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS 2010 AND
TOTAL 2005 2006 2007 2008-2009 THEREAFTER
- ------------------------------------------------------------------------------------------------------------
Credit Facility (a) $300 $300 $-- $-- $ -- $ --
- ------------------------------------------------------------------------------------------------------------
Long-Term Debt (a) 285 -- -- -- 285 --
- ------------------------------------------------------------------------------------------------------------
Capital Leases 3 2 1 -- -- --
- ------------------------------------------------------------------------------------------------------------
Operating Leases 64 14 11 8 14 17
- ------------------------------------------------------------------------------------------------------------
Unconditional Purchase Obligations 181 41 39 38 57 6
- ------------------------------------------------------------------------------------------------------------
Standby Letters of Credit (b) 113 103 8 -- 1 1
- ------------------------------------------------------------------------------------------------------------
Postretirement Obligations (c) 51 4 4 5 8 30
- ------------------------------------------------------------------------------------------------------------
Environmental Remediation 78 18 14 7 18 21
- ------------------------------------------------------------------------------------------------------------
Other Commercial Commitments(d) 109 9 9 9 15 67
- ------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL OBLIGATIONS $1,184 $491 $86 $67 $398 $142
- ------------------------------------------------------------------------------------------------------------
<FN>
(a) See Note 14 to the accompanying consolidated financial statements
for information with respect to the amount and timing of interest
payments on Solutia's debt obligations.
(b) Standby letters of credit contractually expiring in 2005 are
generally anticipated to be renewed or extended by extensions with
existing standby letters of credit providers.
(c) Represents estimated future minimum funding requirements for funded
pension plans classified as not subject to compromise and estimated
future benefit payments for unfunded pension and other
postretirement plans classified as not subject to compromise.
(d) Other commercial commitments represent agreements with Solutia's
customers to supply a guaranteed quantity of certain products
annually at prices specified in the underlying agreements.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 to the accompanying consolidated financial statements
for a summary of recently issued accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under "Derivative Financial Instruments"
on page 37 is incorporated here by reference.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL SECTION - TABLE OF CONTENTS
Page Number
---------------
Report of Independent Registered Public Accounting Firm - Deloitte
& Touche LLP 46
Report of Independent Registered Public Accounting Firm - KPMG LLP 47
Statement of Consolidated Operations 48
Statement of Consolidated Comprehensive Loss 48
Statement of Consolidated Financial Position 49
Statement of Consolidated Cash Flows 50
Statement of Consolidated Shareholders' Deficit 51
Notes to Consolidated Financial Statements 52
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Solutia Inc.:
We have audited the accompanying consolidated statements of financial
position of Solutia Inc. and subsidiaries (Debtor-In-Possession) (the
Company) as of December 31, 2004 and 2003, and the related consolidated
statements of operations, comprehensive loss, cash flows and shareholders'
deficit for each of the three years in the period ended December 31, 2004.
Our audits also included the financial statement schedule listed in the
Index at Item 15. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits. We did not audit the
financial statements of Astaris LLC ("Astaris"), the Company's investment in
which is accounted for by use of the equity method. The Company's share of
Astaris' net deficiency of $23 million at December 31, 2003 and of $115
million in that company's loss for the year ended December 31, 2003 are
included in the accompanying financial statements. The financial statements
of Astaris were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for such
company for the year ended December 31, 2003, is based solely on the report
of such auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Solutia Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company has filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. The accompanying financial statements do not purport to
reflect or provide for the consequences of the bankruptcy proceedings. In
particular, such financial statements do not purport to show (a) as to
assets, their realizable value on a liquidation basis or their availability
to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that
may be allowed for claims or contingencies, or the status and priority
thereof; (c) as to shareholder accounts, the effect of any changes that may
be made in the capitalization of the Company; or (d) as to operations, the
effect of any changes that may be made in its business.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1, the
Company's recurring losses from operations, negative working capital and
shareholders' deficit raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The financial statements do not include adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board Interpretation No. 46,
"Consolidated of Variable Interest Entities," and Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets"
effective July 1, 2003 and January 1, 2002, respectively.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO") in Internal Control--Integrated Framework,
and our report dated March 8, 2005, expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal
control over financial reporting and an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
St. Louis, Missouri
March 8, 2005
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Managers
Astaris LLC:
We have audited the consolidated balance sheets of Astaris LLC (a Delaware
limited liability company) and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of operations, changes in
members' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of
Astaris LLC and subsidiaries as of December 31, 2001 and for the year then
ended were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements in
their report dated January 18, 2002.
We conducted our audits in accordance with generally accepted auditing
standards as established by the Auditing Standards Board (United States) and
in accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over
financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Astaris LLC and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United
States of America.
/s/ KMPG LLP
St. Louis Missouri
January 30, 2004
47
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED OPERATIONS
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
---- ---- ----
NET SALES....................................................... $2,697 $2,430 $2,299
Cost of goods sold.............................................. 2,474 2,370 1,936
------ ------ ------
GROSS PROFIT.................................................... 223 60 363
Marketing expenses.............................................. 143 156 147
Administrative expenses......................................... 102 142 128
Technological expenses.......................................... 44 53 47
Amortization expense............................................ 2 3 3
Impairment of intangible assets................................. 28 78 --
------ ------ ------
OPERATING INCOME (LOSS)......................................... (96) (372) 38
Equity earnings (loss) from affiliates.......................... (26) (133) 13
Interest expense (a)............................................ (113) (120) (84)
Other income, net............................................... 1 11 14
Loss on debt modification....................................... (15) -- --
Reorganization items, net....................................... (73) (1) --
------ ------ ------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT)........................ (322) (615) (19)
Income tax expense (benefit).................................... (6) 365 (11)
------ ------ ------
LOSS FROM CONTINUING OPERATIONS................................. (316) (980) (8)
Income (Loss) from Discontinued Operations, net of tax.......... -- (2) 24
Cumulative Effect of Change in Accounting Principle, net of tax. -- (5) (167)
------ ------ ------
NET LOSS........................................................ $ (316) $ (987) $ (151)
====== ====== ======
BASIC AND DILUTED LOSS PER SHARE:
Loss from Continuing Operations................................. $(3.02) $(9.37) $(0.08)
Net Loss........................................................ $(3.02) $(9.44) $(1.44)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 104.5 104.6 104.7
<FN>
(a) Interest expense excludes unrecorded contractual interest expense of $32 in 2004 and $1 in 2003.
STATEMENT OF CONSOLIDATED COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
---- ---- ----
NET LOSS......................................................... $(316) $(987) $(151)
OTHER COMPREHENSIVE LOSS:
Currency translation adjustments................................. 15 55 119
Net realized loss on derivative instruments, net of tax of
$(1) in 2002................................................... -- -- 1
Minimum pension liability adjustments, net of tax of
$3 in 2004, $(70) in 2003 and $72 in 2002...................... (18) 19 (122)
----- ----- -----
COMPREHENSIVE LOSS............................................... $(319) $(913) $(153)
===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
48
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AS OF DECEMBER 31,
----------------------------
2004 2003
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 115 $ 159
Trade receivables, net of allowances of $11 in 2004 and $14 in 2003....... 286 281
Miscellaneous receivables ................................................ 93 84
Inventories............................................................... 239 240
Prepaid expenses and other assets......................................... 45 40
------- -------
TOTAL CURRENT ASSETS...................................................... 778 804
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$2,511 in 2004 and $2,597 in 2003.................................... 841 909
INVESTMENTS IN AFFILIATES................................................. 177 206
GOODWILL, net............................................................. 76 97
IDENTIFIED INTANGIBLE ASSETS, net ........................................ 38 43
OTHER ASSETS.............................................................. 166 387
------- -------
TOTAL ASSETS.............................................................. $ 2,076 $ 2,446
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 198 $ 78
Accrued liabilities ...................................................... 283 304
Short-term debt .......................................................... 300 361
------- -------
TOTAL CURRENT LIABILITIES ................................................ 781 743
LONG-TERM DEBT ........................................................... 285 294
OTHER LIABILITIES ........................................................ 267 313
------- -------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,333 1,350
LIABILITIES SUBJECT TO COMPROMISE ........................................ 2,187 2,221
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
Issued: 118,400,635 shares in 2004 and 2003............................. 1 1
Additional contributed capital............................................ 56 56
Treasury stock, at cost (13,941,057 shares in 2004 and 13,838,717
shares in 2003)....................................................... (251) (251)
Net deficiency of assets at spinoff....................................... (113) (113)
Accumulated other comprehensive loss...................................... (75) (72)
Accumulated deficit....................................................... (1,062) (746)
------- -------
TOTAL SHAREHOLDERS' DEFICIT............................................... (1,444) (1,125)
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $ 2,076 $ 2,446
======= =======
See accompanying Notes to Consolidated Financial Statements.
49
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED
DECEMBER 31,
---------------------------------------
2004 2003 2002
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss $(316) $(987) $(151)
Adjustments to reconcile to Cash From Operations:
Cumulative effect of change in accounting principle, net of tax -- 5 167
Loss (Income) from discontinued operations, net of tax.......... -- 2 (24)
Depreciation and amortization................................... 127 137 134
Amortization of deferred credits................................ (33) (17) (14)
Settlement of Anniston litigation and other litigation matters.. -- 99 --
Impairment of intangible assets ................................ 28 78 --
Restructuring expenses and other charges ....................... 162 300 24
Other, net...................................................... 4 15 7
Changes in assets and liabilities:
Income and deferred taxes................................. (16) 356 51
Trade receivables......................................... (5) (11) (6)
Inventories............................................... 1 22 (20)
Accounts payable.......................................... 120 (30) 41
Liabilities subject to compromise ........................ (34) 2 --
Other assets and liabilities.............................. 3 4 (82)
----- ----- -----
CASH PROVIDED BY (USED IN) OPERATIONS--CONTINUING OPERATIONS.......... 41 (25) 127
CASH PROVIDED BY (USED IN) OPERATIONS--DISCONTINUED OPERATIONS........ -- (11) 44
----- ----- -----
CASH PROVIDED BY (USED IN) OPERATIONS................................. 41 (36) 171
----- ----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases............................... (61) (78) (59)
Acquisition and investment payments, net of cash acquired............. (36) (63) (37)
Property disposals and investment proceeds, net....................... -- 5 109
----- ----- -----
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES--CONTINUING OPERATIONS (97) (136) 13
CASH PROVIDED BY INVESTING ACTIVITIES--DISCONTINUED OPERATIONS........ -- 474 --
----- ----- -----
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....................... (97) 338 13
----- ----- -----
FINANCING ACTIVITIES:
Net change in short-term debt obligations............................. (361) 3 (327)
Proceeds from issuance of long-term debt obligations.................. 300 -- 182
Net change in cash collateralized letters of credit................... 87 (121) (11)
Issuance of stock warrants............................................ -- -- 19
Deferred debt issuance costs.......................................... (14) (31) (29)
Dividend payments..................................................... -- -- (4)
Other, net............................................................ -- (6) --
----- ----- -----
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES--CONTINUING OPERATIONS 12 (155) (170)
CASH USED IN FINANCING ACTIVITIES--DISCONTINUED OPERATIONS............ -- (5) (20)
----- ----- -----
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....................... 12 (160) (190)
----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (44) 142 (6)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR..................................................... 159 17 23
----- ----- -----
END OF YEAR........................................................... $ 115 $ 159 $ 17
===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
50
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED SHAREHOLDERS' DEFICIT
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
-------------------------------------
COMMON STOCK:
BALANCE, JANUARY 1 $ 1 $ 1 $ 1
------- ------- -----
BALANCE, DECEMBER 31 $ 1 1 $ 1
------- ------- -----
ADDITIONAL CONTRIBUTED CAPITAL:
BALANCE, JANUARY 1 $ 56 $ 19 $ --
Issuance of 10,000,000 and 5,533,522 warrants in 2003 and 2002,
respectively -- 37 19
------- ------- -----
BALANCE, DECEMBER 31 $ 56 $ 56 $ 19
------- ------- -----
NET DEFICIENCY OF ASSETS AT SPINOFF:
BALANCE, JANUARY 1 $ (113) $ (113) $(113)
------- ------- -----
BALANCE, DECEMBER 31 $ (113) $ (113) $(113)
------- ------- -----
TREASURY STOCK:
BALANCE, JANUARY 1 $ (251) $ (251) $(257)
Net shares (purchased) issued under employee stock plans -
((102,340) shares in 2004, (179,366) shares in 2003, and 262,253
shares in 2002) -- -- 6
------- ------- -----
BALANCE, DECEMBER 31 $ (251) $ (251) $(251)
------- ------- -----
UNEARNED ESOP SHARES:
BALANCE, JANUARY 1 $ -- $ -- $ (1)
Amortization of ESOP balance -- -- 1
------- ------- -----
BALANCE, DECEMBER 31 $ -- $ -- $ --
------- ------- -----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
ACCUMULATED CURRENCY ADJUSTMENT:
BALANCE, JANUARY 1 $ 36 $ (19) $(138)
Accumulated currency adjustments 15 55 119
------- ------- -----
BALANCE, DECEMBER 31 $ 51 $ 36 $ (19)
------- ------- -----
MINIMUM PENSION LIABILITY:
BALANCE, JANUARY 1 $ (108) $ (127) $ (5)
Minimum pension liability adjustments (18) 19 (122)
------- ------- -----
BALANCE, DECEMBER 31 $ (126) $ (108) $(127)
------- ------- -----
DERIVATIVE INSTRUMENTS:
BALANCE, JANUARY 1 $ -- $ -- $ (1)
Net losses on derivative instruments -- -- 1
------- ------- -----
BALANCE, DECEMBER 31 $ -- $ -- $ --
------- ------- -----
BALANCE, DECEMBER 31 $ (75) $ (72) $(146)
------- ------- -----
(ACCUMULATED DEFICIT) REINVESTED EARNINGS:
BALANCE, JANUARY 1 $ (746) $ 241 $ 401
Net loss (316) (987) (151)
Employee stock plans -- -- (5)
Dividends -- -- (4)
------- ------- -----
BALANCE, DECEMBER 31 $(1,062) $ (746) $ 241
------- ------- -----
TOTAL SHAREHOLDERS' DEFICIT $(1,444) $(1,125) $(249)
------- ------- -----
See accompanying Notes to Consolidated Financial Statements.
51
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS
Nature of Operations
Solutia Inc., together with its subsidiaries (referred to herein as
"Solutia" or the "Company"), is a global manufacturer and marketer of a
variety of high-performance chemical-based materials. Solutia is a world
leader in performance films for laminated safety glass and after-market
applications; specialties such as water treatment chemicals, heat transfer
fluids and aviation hydraulic fluids; and an integrated family of nylon
products including high-performance polymers and fibers.
Prior to September 1, 1997, Solutia was a wholly-owned subsidiary
of the former Monsanto Company (now known as Pharmacia Corporation, a
wholly-owned subsidiary of Pfizer, Inc.). On September 1, 1997, Pharmacia
distributed all of the outstanding shares of common stock of Solutia as a
dividend to Pharmacia stockholders (the "spinoff"). As a result of the
spinoff, on September 1, 1997, Solutia became an independent publicly held
company and its operations ceased to be owned by Pharmacia. A net deficiency
of assets of $113 resulted from the spinoff.
Bankruptcy Proceedings
Overview
- --------
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 in the U.S. Bankruptcy Court for the Southern
District of New York. The cases were consolidated for the purpose of joint
administration and were assigned case number 03-17949 (PCB). Solutia's
subsidiaries outside the United States were not included in the Chapter 11
filing.
The filing was made to restructure Solutia's balance sheet by
reducing indebtedness to appropriate levels, to streamline operations and
reduce costs, in order to allow Solutia to emerge from Chapter 11 as a
viable going concern, and to obtain relief from the negative financial
impact of liabilities for litigation, environmental remediation and certain
postretirement benefits and liabilities under operating contracts, all of
which were assumed at the time of the spinoff of Solutia from Pharmacia
(collectively "legacy liabilities"). These factors, combined with the
weakened state of the chemical manufacturing sector, general economic
conditions and continuing high, volatile energy and crude oil costs have
been an obstacle to Solutia's financial stability and success. While Solutia
believes it will be able to significantly reduce the legacy liabilities
through the bankruptcy process, there can be no certainty that it will be
successful in doing so.
Under Chapter 11, Solutia is operating its businesses as a
debtor-in-possession ("DIP") under court protection from creditors and
claimants. Since the Chapter 11 filing, all orders sufficient to enable
Solutia to conduct normal business activities, including the approval of
Solutia's DIP financing, have been entered by the bankruptcy court. While
Solutia is subject to Chapter 11, all transactions not in the ordinary
course of business require the prior approval of the bankruptcy court.
As a consequence of the Chapter 11 filing, pending litigation
against Solutia is generally stayed, and no party may take any action to
collect its pre-petition claims except pursuant to order of the bankruptcy
court. November 30, 2004 was the last date by which holders of pre-filing
date claims against the Debtors could file such claims. Any holder of a
claim that was required to file such claim by November 30, 2004, and did not
do so, may be barred from asserting such claim against the Debtors and,
accordingly, may not be able to participate in any distribution on account
of such claim. Differences between claim amounts identified by the Debtors
and claims filed by claimants will be investigated and resolved in
connection with the Debtors' claims resolution process, and only holders of
claims that are ultimately allowed for purposes of the Chapter 11 case will
be entitled to distributions. Solutia has not yet completed its analysis of
all the proofs of claim. Since the settlement terms of allowed claims are
subject to a confirmed plan of reorganization, the ultimate distribution
with respect to allowed claims is not presently ascertainable.
In order to exit Chapter 11 successfully, Solutia must propose and
obtain confirmation by the bankruptcy court of a plan of reorganization that
satisfies the requirements of the U.S. Bankruptcy Code. As provided by the
U.S. Bankruptcy Code, Solutia had the exclusive right to propose a plan of
reorganization for 120 days following the Chapter 11 filing date. The
bankruptcy court has subsequently approved several extensions of the
exclusivity period, the most recent of which is set to expire on April 11,
2005. On February 25, 2005, Solutia filed a motion with the bankruptcy court
seeking to extend the exclusivity period to July 11, 2005.
52
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
No assurance can be given that such extension request will be granted by the
bankruptcy court or, if granted, that any future extension requests will be
granted by the bankruptcy court. Moreover, although Solutia expects to file
a plan of reorganization that provides for Solutia's emergence from
bankruptcy as a going concern, there can be no assurance that a plan of
reorganization will be confirmed by the bankruptcy court or that any such
plan will be implemented successfully.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options and
warrants to purchase its common stock, and that it is unlikely that holders
of Solutia's common stock, including options and warrants to purchase
Solutia's common stock, will receive any consideration for that stock or
those options and warrants in such a plan of reorganization. Solutia is
unable to estimate what recovery such a plan of reorganization will provide
to holders of Solutia's outstanding debt securities. While Solutia filed for
Chapter 11 in part to gain relief from the legacy liabilities it was
required to assume when it was spun off from Pharmacia, the extent to which
such relief will be achieved is uncertain at this time. It is also possible
that pursuant to a plan of reorganization Solutia will agree to retain a
portion of the legacy liabilities.
Final DIP Financing
- -------------------
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a $525 DIP credit facility. This DIP facility
consists of (i) a $50 multiple draw term loan component; (ii) a $300 single
draw term loan component; and (iii) a $175 borrowing-based revolving credit
component, which includes a $150 letter of credit subfacility. Proceeds from
the DIP financing facility were used to retire Solutia's existing
pre-petition $350 credit facility, repay the $75 provided by the interim DIP
facility and provide approximately $100 of new liquidity for general
operating purposes.
Euronote Modification
- ---------------------
Prior to Solutia's Chapter 11 bankruptcy filing, Solutia and its
wholly owned subsidiary, Solutia Europe S.A./N.V. ("SESA"), reached an
agreement with the requisite holders of the then (euro)200 million, 6.25
percent notes due 2005 (the "Euronotes"), issued by SESA and guaranteed by
Solutia Inc., to restructure the Euronotes which among other changes
eliminated certain cross-default provisions. On January 30, 2004, SESA
successfully completed the restructuring. The restructuring allows SESA to
continue normal operations while Solutia Inc. and its domestic subsidiaries
reorganize under Chapter 11 bankruptcy protection. See Note 14 for further
description of the revised terms of the Euronotes.
Going Concern
- -------------
Solutia is currently operating under Chapter 11 of the U.S.
Bankruptcy Code and continuation of Solutia as a going concern is contingent
upon, among other things, Solutia's ability to (i) comply with the terms and
conditions of its DIP financing; (ii) obtain confirmation of a plan of
reorganization under the U.S. Bankruptcy Code; (iii) return to
profitability; (iv) generate sufficient cash flow from operations; and (v)
obtain financing sources to meet Solutia's future obligations. These matters
create substantial doubt about Solutia's ability to continue as a going
concern. The consolidated financial statements do not reflect any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might
result from the outcome of these uncertainties. Additionally, a plan of
reorganization could materially change amounts reported in the consolidated
financial statements, which do not give effect to all adjustments of the
carrying value of assets and liabilities that are necessary as a consequence
of reorganization under Chapter 11 bankruptcy.
Consolidating Financial Statements
- ----------------------------------
Consolidating financial statements for Solutia and subsidiaries in
reorganization and subsidiaries not in reorganization as of and for the
years ended December 31, 2004 and 2003, respectively, are presented below.
These consolidating financial statements include investments in subsidiaries
carried under the equity method.
53
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2004
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
ASSETS
Current assets................................. $ 476 $390 $ (88) $ 778
Property, plant and equipment, net............. 701 140 -- 841
Investment in subsidiaries and affiliates...... 324 232 (379) 177
Goodwill and identified intangible assets, net. 102 12 -- 114
Other assets................................... 110 56 -- 166
------------------------------------------------------------
TOTAL ASSETS................................ $ 1,713 $830 $(467) $ 2,076
============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities............................ $ 758 $202 $(179) $ 781
Long-term debt................................. -- 285 -- 285
Other liabilities.............................. 212 55 -- 267
------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE.... 970 542 (179) 1,333
LIABILITIES SUBJECT TO COMPROMISE.............. 2,187 -- -- 2,187
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........... (1,444) 288 (288) (1,444)
------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT).................................... $ 1,713 $830 $(467) $ 2,076
============================================================
CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2003
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
ASSETS
Current assets................................. $ 557 $323 $ (76) $ 804
Property, plant and equipment, net............. 771 138 -- 909
Investment in subsidiaries and affiliates...... 344 236 (374) 206
Goodwill and identified intangible assets, net. 102 38 -- 140
Other assets................................... 340 47 -- 387
------------------------------------------------------------
TOTAL ASSETS................................ $ 2,114 $782 $(450) $ 2,446
============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities............................ $ 716 $341 $(314) $ 743
Long-term debt................................. 43 251 -- 294
Other liabilities.............................. 259 54 -- 313
------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 1,018 646 (314) 1,350
LIABILITIES SUBJECT TO COMPROMISE.............. 2,221 -- -- 2,221
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........... (1,125) 136 (136) (1,125)
------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT).................................... $ 2,114 $782 $(450) $ 2,446
============================================================
54
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET SALES ................................ $2,181 $891 $(375) $2,697
Cost of goods sold........................ 2,111 758 (395) 2,474
------------------------------------------------------------
GROSS PROFIT ............................. 70 133 20 223
Marketing, administrative and
technological expenses.................. 225 65 (1) 289
Amortization expense...................... 1 1 -- 2
Impairment of intangible assets........... -- 28 -- 28
------------------------------------------------------------
OPERATING INCOME (LOSS) .................. (156) 39 21 (96)
Equity loss from affiliates............... (34) (14) 22 (26)
Interest expense.......................... (89) (24) -- (113)
Other income (expense), net............... 31 (7) (23) 1
Loss on debt modification................. -- (15) -- (15)
Reorganization items, net................. (73) -- -- (73)
------------------------------------------------------------
LOSS BEFORE INCOME TAX BENEFIT............ (321) (21) 20 (322)
Income tax benefit........................ (5) (1) -- (6)
------------------------------------------------------------
NET LOSS.................................. $ (316) $(20) $ 20 $ (316)
============================================================
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET SALES................................. $1,992 $769 $(331) $2,430
Cost of goods sold........................ 2,045 675 (350) 2,370
-------------------------------------------------------------
GROSS PROFIT.............................. (53) 94 19 60
Marketing, administrative and
technological expenses.................. 288 65 (2) 351
Amortization expense...................... 1 2 -- 3
Impairment of intangible assets........... 3 75 -- 78
-------------------------------------------------------------
OPERATING INCOME (LOSS)................... (345) (48) 21 (372)
Equity loss from affiliates............... (192) (2) 61 (133)
Interest expense.......................... (102) (18) -- (120)
Other income (expense), net............... 37 (10) (16) 11
Reorganization items, net................. (1) -- -- (1)
-------------------------------------------------------------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT).. (603) (78) 66 (615)
Income tax expense (benefit).............. 379 (18) 4 365
-------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS........... (982) (60) 62 (980)
Loss from Discontinued Operations,
net of tax.............................. -- (2) -- (2)
Cumulative Effect of Change in Accounting
Principle, net of tax..................... (5) -- -- (5)
-------------------------------------------------------------
NET LOSS ................................. $ (987) $(62) $ 62 $ (987)
=============================================================
55
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2004
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................ $(17) $ 58 $ -- $ 41
NET CASH USED IN INVESTING ACTIVITIES....... (73) (24) -- (97)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................ 15 (3) -- 12
-------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH (75) 31 -- (44)
EQUIVALENTS...............................
CASH AND CASH EQUIVALENTS:
Beginning of year......................... 125 34 -- 159
-------------------------------------------------------------
End of year............................... $ 50 $ 65 $ -- $115
=============================================================
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2003
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................ $(99) $ 63 $ -- $ (36)
NET CASH PROVIDED BY INVESTING ACTIVITIES... 48 290 -- 338
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................ 176 (336) -- (160)
-------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS... 125 17 -- 142
CASH AND CASH EQUIVALENTS:
Beginning of year......................... -- 17 -- 17
-------------------------------------------------------------
End of year............................... $125 $ 34 $ -- $ 159
=============================================================
2. SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The consolidated financial statements have been prepared in
accordance with Statement of Position 90-7 ("SOP 90-7"), Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code, and on a going
concern basis, which assumes the continuity of operations and reflects the
realization of assets and satisfaction of liabilities in the ordinary course
of business. However, as a result of the Chapter 11 bankruptcy proceedings,
such realization of assets and satisfaction of liabilities are subject to a
significant number of uncertainties that have not been reflected in the
consolidated financial statements.
Basis of Consolidation
The consolidated financial statements include the accounts of
Solutia and its majority-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Companies
in which Solutia has a significant interest but not a controlling interest
are accounted for under the equity method of accounting and included in
Investments in Affiliates in the Statement of Consolidated Financial
Position. Solutia's proportionate share of these companies' net earnings or
losses is reflected in Equity Earnings (Loss) from Affiliates in the
Statement of Consolidated Operations. In accordance with Financial
Accounting Standards Board ("FASB") Interpretation No. 46, Consolidation of
Variable Interest Entities, as amended, variable interest entities in which
Solutia is the primary beneficiary are consolidated within the consolidated
financial statements.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and that
affect revenues and expenses during the period reported. Estimates are
adjusted when necessary to reflect actual experience. Significant estimates
were used to account for
56
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
restructuring reserves, environmental reserves, self-insurance reserves,
employee benefit plans, intangible assets, income taxes, asset impairments,
contingencies and classification of liabilities subject to compromise.
Actual results, particularly with respect to those matters affected by the
Chapter 11 bankruptcy proceedings, could materially differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and temporary investments
with maturities of three months or less when purchased.
Inventory Valuation
Inventories are stated at cost or market, whichever is less. Actual
cost is used to value raw materials and supplies. Standard cost, which
approximates actual cost, is used to value finished goods and goods in
process. Standard cost includes direct labor and raw materials, and
manufacturing overhead based on practical capacity. The cost of certain
inventories (67 percent as of both December 31, 2004 and 2003) is determined
by the last-in, first-out ("LIFO") method, which generally reflects the
effects of inflation or deflation on cost of goods sold sooner than other
inventory cost methods. The cost of other inventories generally is
determined by the first-in, first-out ("FIFO") method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The cost of
plant and equipment is depreciated over 5 to 35 years for buildings and
improvements and 3 to 15 years for machinery and equipment, by the
straight-line method.
Intangible Assets
Effective January 1, 2002, Solutia discontinued the amortization of
goodwill and identifiable intangible assets that have indefinite useful
lives upon adoption of Statement of Financial Accounting Standard ("SFAS")
No. 142, Goodwill and Other Intangible Assets. Intangible assets that have
finite useful lives are amortized on a straight-line basis over their useful
lives, generally periods ranging from 5 to 20 years. Goodwill and
indefinite-lived intangible assets are assessed annually for impairment in
the fourth quarter.
Impairment of Long-Lived Assets
Impairment tests of long-lived assets are made when conditions
indicate a possible loss. Impairment tests are based on a comparison of
undiscounted cash flows to the recorded value of the asset. If an impairment
is indicated, the asset value is written down to its fair value based upon
market prices or, if not available, upon discounted cash value, at an
appropriate discount rate.
Environmental Remediation
Costs for remediation of waste disposal sites are accrued in the
accounting period in which the obligation is probable and when the cost is
reasonably estimable. Environmental liabilities are not discounted, and they
have not been reduced for any claims for recoveries from third parties. In
those cases where third-party indemnitors have agreed to pay any amounts and
management believes that collection of such amounts is probable, the amounts
are reflected as receivables in the consolidated financial statements.
Self-Insurance and Insurance Recoveries
Solutia maintains self-insurance reserves to reflect its estimate
of uninsured losses. Self-insured losses are accrued based upon estimates of
the aggregate liability for claims incurred using certain actuarial
assumptions followed in the insurance industry, Solutia's historical
experience and certain case specific reserves as required, including
estimated legal costs. The maximum extent of the self-insurance provided by
Solutia is dependent upon a number of factors including the facts and
circumstances of individual cases and the terms and conditions of the
commercial policies. Solutia has purchased commercial insurance in order to
reduce its exposure to workers' compensation, product, general, automobile
and property liability claims. Policies for periods prior to the spinoff are
shared with Pharmacia. This insurance has varying policy limits and
deductibles.
Insurance recoveries are estimated in consideration of expected
losses, coverage limits and policy deductibles. When recovery from an
insurance policy is considered probable, a receivable is recorded.
57
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenue Recognition
Solutia's primary revenue-earning activities involve producing and
delivering goods. Revenues are considered to be earned when Solutia has
completed the process by which it is entitled to such revenues. The
following criteria are used for revenue recognition: persuasive evidence
that an arrangement exists, delivery has occurred, selling price is fixed or
determinable and collection is reasonably assured. In the case of the
pharmaceutical services business, revenues are primarily recorded as
services are rendered.
Allowance for Doubtful Accounts
The provisions for losses on uncollectible trade receivables are
determined primarily on the basis of past collection experience applied to
ongoing evaluations of Solutia's receivables and evaluations of the risks of
uncollectibility.
Distribution Costs
Solutia includes inbound freight charges, purchasing and receiving
costs, inspection costs, warehousing costs, internal transfer costs and the
other costs of its distribution network in Cost of Goods Sold within the
Statement of Consolidated Operations.
Shipping and Handling Costs
Amounts billed for shipping and handling are included in Net Sales
and the costs incurred for these activities are included in Cost of Goods
Sold in the Statement of Consolidated Operations.
Derivative Financial Instruments
Currency forward contracts are used to manage currency exposures
for financial instruments denominated in currencies other than the entity's
functional currency. Natural gas forward and option contracts are used to
manage some of the exposure for the cost of natural gas. Gains and losses on
contracts that are designated and effective as hedges are included in net
income (loss) and offset the exchange gain or loss of the transaction being
hedged.
Major currencies affecting Solutia's business are the U.S. dollar,
British pound sterling, euro, Canadian dollar, Australian dollar, Swiss
franc, and the Brazilian real. Currency restrictions are not expected to
have a significant effect on Solutia's cash flows, liquidity or capital
resources.
Income Taxes
Solutia accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities at enacted
rates. Solutia determines the appropriateness of valuation allowances in
accordance with the "more likely than not" recognition criteria outlined in
SFAS No. 109, Accounting for Income Taxes.
Currency Translation
The local currency has been used as the functional currency for
nearly all worldwide locations. The financial statements for most of
Solutia's ex-U.S. operations are translated into U.S. dollars at current or
average exchange rates. Unrealized currency translation adjustments in the
Statement of Consolidated Financial Position are accumulated as a component
of shareholders' deficit.
Earnings (Loss) per Share
Basic earnings (loss) per share is a measure of operating
performance that assumes no dilution from securities or contracts to issue
common stock. Diluted earnings (loss) per share is a measure of operating
performance by giving effect to the dilution that would occur if securities
or contracts to issue common stock were exercised or converted.
58
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Stock Option Plans
Effective January 1, 2003, Solutia adopted SFAS No. 148, Accounting
for Stock-Based Compensation--Transition and Disclosure, which allowed
Solutia to continue following the guidance of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, for
measurement and recognition of stock-based transactions with employees.
Accordingly, no compensation cost has been recognized for Solutia's option
plans in the Statement of Consolidated Operations, as all options granted
under the plans had an exercise price equal to the market value of Solutia's
stock on the date of the grant. The following table illustrates the effect
on net loss and loss per share if the fair value based method had been
applied to all outstanding and unvested awards in each year ended December
31 as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
---- ---- ----
NET LOSS:
As reported ............................................... $ (316) $ (987) $ (151)
Deduct: Total stock-based employee compensation expense
determined using the Black-Scholes option-pricing model
for all awards, net of tax .............................. (3) (5) (7)
------- ------- ------
Pro forma ................................................. $ (319) $ (992) $ (158)
====== ====== ======
LOSS PER SHARE:
Basic and Diluted--as reported............................. $(3.02) $(9.44) $(1.44)
Basic and Diluted--pro forma .............................. $(3.05) $(9.48) $(1.51)
Compensation expense resulting from the fair value method may not
be representative of compensation expense to be incurred on a pro forma
basis in future years. The fair value of each option grant is estimated on
the date of grant by use of the Black-Scholes option-pricing model. In
addition, Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options and
warrants to purchase its common stock and that it is unlikely that holders
of options to purchase Solutia's common stock will receive any consideration
for those options in such a plan of reorganization.
Recently Issued Accounting Standards
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act
introduces a prescription drug benefit under Medicare (Medicare Part D) as
well as a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare
Part D. As a result of the Act's passage, the FASB issued FASB Staff
Position ("FSP") No. 106-1, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of
2003. The FSP permitted a sponsor of a postretirement health care plan that
provides a prescription drug benefit to make a one-time election to defer
accounting for the effects of the Act. Accordingly, Solutia elected to defer
recording the impact of the Act in its consolidated financial statements for
the year ended December 31, 2003, in view of the fact that specific
authoritative guidance on accounting for the federal subsidy was pending and
that guidance, when issued, could require Solutia to change previously
reported information. In May 2004, the FASB issued FSP 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. FSP 106-2 provides guidance on
the accounting for the effects of the Act for employers that sponsor
postretirement health care plans that provide drug benefits. This FSP also
requires those employers to provide certain disclosures regarding the effect
of the federal subsidy provided by the Act and supersedes FSP 106-1. Solutia
adopted the provisions of FSP 106-2 in the second quarter of 2004. See Note
16 for additional information including the impact of adoption of FSP 106-2
on the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R replaced SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), and superseded
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in
the consolidated financial statements based on their fair values and
eliminates the alternative method of accounting for employee share-based
payments previously available under APB 25. Historically Solutia has elected
to follow the guidance of APB 25 which allowed Solutia to use the intrinsic
value method of accounting to value its share-based payment transactions
with employees. Based on this method, Solutia did not recognize compensation
expense in its consolidated financial statements as the stock options
granted had an exercise price equal to the fair market value of the
underlying common stock on the date of the grant. SFAS 123R requires
measurement of the cost of share-based
59
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
payment transactions to employees at the fair value of the award on the
grant date and recognition of expense over the required service or vesting
period. The provisions of SFAS 123R are required to be adopted by Solutia
beginning July 1, 2005. The impact on Solutia's net loss will include the
remaining amortization of the fair value of existing options currently
disclosed as pro-forma expense in Note 2 and is contingent upon the number
of future options granted, the selected transition method and the selection
between acceptable valuation methodologies for valuing options.
In December 2004, the FASB issued FASB Staff Position No. 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004, which provides guidance on applying SFAS No. 109
to the tax deduction on qualified production activities provided under the
American Jobs Creation Act of 2004 (the Act). In addition, the FASB issued
FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004, which provides guidance on the Act's repatriation provision.
Solutia is currently completing its assessment with respect to the impact of
the provisions of FSP 109-1 and FSP 109-2; however, most of the provisions
that could significantly affect Solutia are not likely to do so as a result
of Solutia's net operating loss position coupled with complexities involving
Solutia's status as a debtor-in-possession.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 amends the
guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify that
abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges
and requires the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. This guidance is
effective for Solutia for inventory costs incurred beginning January 1,
2006. Solutia does not believe adoption of this amendment will have a
material impact on Solutia's overall results of operations or financial
position.
Reclassifications
Certain reclassifications to prior years' financial information
have been made to conform to the 2004 presentation.
3. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET
Liabilities Subject to Compromise
Under Chapter 11 of the U.S. Bankruptcy Code, certain claims
against Solutia in existence prior to the filing of the petitions for relief
under the federal bankruptcy laws are stayed while Solutia continues
business operations as debtor-in-possession. These estimated claims are
reflected in the December 31, 2004 and 2003 Statement of Consolidated
Financial Position as Liabilities Subject to Compromise and are summarized
in the table below. Such claims remain subject to future adjustments.
Adjustments may result from actions of the bankruptcy court, negotiations,
rejection or acceptance of executory contracts, determination of value of
any collateral securing claims, proofs of claim or other events.
Solutia has received approval from the bankruptcy court to pay or
otherwise honor certain of its pre-petition obligations, including (i)
certain pre-petition compensation to employees and employee-equivalent
independent contractors; (ii) business expenses of employees; (iii)
obligations under employee benefit plans; (iv) employee payroll deductions
and withholdings; (v) costs and expenses incident to the foregoing payments
(including payroll-related taxes and processing costs); (vi) certain
pre-petition workers' compensation claims, premiums and related expenses;
(vii) certain pre-petition trust fund and franchise taxes; (viii)
pre-petition claims of certain contractors, freight carriers, processors,
customs brokers and related parties; (ix) customer accommodation programs;
and (x) pre-petition claims of critical vendors in the ordinary course of
business. Accordingly, these pre-petition items have been excluded from
Liabilities Subject to Compromise as of December 31, 2004 and 2003, as
applicable.
60
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The amounts subject to compromise consisted of the following items:
DECEMBER 31,
------------
2004 2003
---- ----
Postretirement benefits (a)........................ $1,090 $1,153
Litigation reserves (b)............................ 141 146
Accounts payable (c)............................... 130 122
Environmental reserves (d)......................... 82 85
Other miscellaneous liabilities.................... 76 90
6.72% debentures puttable 2004, due 2037(e)........ 150 150
7.375% debentures due 2027(e)...................... 300 300
11.25% notes due 2009 (f).......................... 223 223
Other (g).......................................... 43 --
------ ------
716 673
Unamortized debt discount and debt issuance costs.. (48) (48)
------ ------
TOTAL DEBT SUBJECT TO COMPROMISE............. 668 625
------ ------
TOTAL LIABILITIES SUBJECT TO COMPROMISE............ $2,187 $2,221
====== ======
<FN>
(a) Postretirement benefits include Solutia's domestic (i) qualified
pension plan of $445 and $420 as of December 31, 2004 and December
31, 2003, respectively; (ii) non-qualified pension plan of $18 and
$23 as of December 31, 2004 and December 31, 2003, respectively;
and (iii) other postretirement benefits of $627 and $710 as of
December 31, 2004 and December 31, 2003, respectively. Pursuant to
a bankruptcy court order, Solutia made payments with respect to
other postretirement obligations of approximately $87 in 2004.
(b) An automatic stay has been imposed against the commencement or
continuation of legal proceedings against Solutia outside of the
bankruptcy court process. Consequently, Solutia's accrued liability
with respect to pre-petition legal proceedings has been classified
as subject to compromise as of December 31, 2004 and 2003. Pursuant
to a bankruptcy court order, Solutia made payments with respect to
pre-petition legal proceedings of $5 in 2004.
(c) Pursuant to a bankruptcy court order, Solutia made payments of
approximately $19 in 2004. Solutia also reclassified into accounts
payable subject to compromise, from balances previously accrued in
liability accounts not subject to compromise, approximately $27 in
2004.
(d) Represents remediation obligations related primarily to properties
that are not owned or operated by Solutia, including non-owned
properties adjacent to plant sites and certain owned offsite
disposal locations. Solutia made payments of approximately $1 in
2004 with respect to these environmental obligations subject to
compromise. See Note 20 for further disclosure with respect to
ongoing legal proceedings concerning environmental liabilities
subject to compromise.
(e) While operating during the Chapter 11 bankruptcy proceedings,
Solutia has ceased recording interest on its 6.72% debentures
puttable 2004, due 2037 and its 7.375% debentures due 2027. The
amount of contractual interest expense not recorded in 2004 and
2003 was approximately $32 and $1, respectively.
(f) Pursuant to a bankruptcy court order, Solutia is required to
continue payments of the contractual interest for the 11.25% notes
due 2009 as a form of adequate protection under the U.S. Bankruptcy
Code; provided, however, that Solutia's official committee of
unsecured creditors (the "Creditors' Committee") has the right at
any time, and Solutia has the right at any time after the payment
of the contractual interest due in July 2005, to seek to terminate
Solutia's obligation to continue making the interest payments.
Solutia or the Creditors' Committee could successfully terminate
all or part of Solutia's interest payment obligations only after a
showing that the noteholders are not entitled to adequate
protection, which would depend, among other things, on the value of
the collateral securing the notes as of December 17, 2003, and
whether that value is decreasing during the course of Solutia's
bankruptcy case. The amount of contractual interest paid with
respect to these notes was approximately $25 in the fiscal year
ended December 31, 2004, and the accrued interest related to these
notes was included in Accrued Liabilities classified as not subject
to compromise as of December 31, 2004 and 2003.
(g) Represents the debt obligation included with the consolidation of the
assets and liabilities of a synthetic lease structure consolidated as
part of the adoption of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. The obligation, representing the synthetic
lease arrangement with respect to Solutia's headquarters building, was
reclassified to liabilities subject to compromise in 2004 as Solutia
believes it is unable to continue to perform on this debt obligation.
61
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Reorganization Items, net
Reorganization items, net are presented separately in the Statement
of Consolidated Operations and represent items of income, expense, gain or
loss that are realized or incurred by Solutia because it is in
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Reorganization items, net consisted of the following items:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
---- ---- ----
Professional fees (a).................................... $46 $ 1 $--
Contract rejection and termination costs (b)............. 20 -- --
Severance and employee retention costs (c)............... 9 -- --
Net gain on settlement of pre-petition claims (d)........ (2) -- --
--- --- ---
TOTAL REORGANIZATION ITEMS, NET.......................... $73 $ 1 $--
=== === ===
<FN>
(a) Professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization
proceedings.
(b) Asset write-offs associated with contract rejections and
terminations resulting from the ongoing reorganization-related
evaluation of the financial viability of Solutia's existing
contracts. The potential claim amount against Solutia with respect
to these contract rejections and terminations cannot be reasonably
determined, and accordingly no amount has been recorded as of
December 31, 2004.
(c) Expense provisions related to (i) employee severance costs incurred
directly as part of the Chapter 11 reorganization process and (ii)
a retention plan for certain Solutia employees approved by the
bankruptcy court.
(d) Solutia recorded a net gain of $2 representing the difference
between the settlement amount of certain pre-petition obligations
and the corresponding amounts previously recorded. The pre-petition
obligations were for certain retirement benefits and retention
obligations involving particular employees severed in 2004.
4. ACQUISITIONS AND DIVESTITURES
Discontinued Operations
On December 2, 2002, Solutia signed a definitive agreement to sell
its resins, additives and adhesives businesses to UCB S.A. for $500 in cash,
plus an upfront payment of $10 for a period of exclusivity. On January 31,
2003, the sale was completed resulting in a pre-tax gain of $24. The
operating results of the resins, additives and adhesives businesses were
reported separately as discontinued operations in the consolidated financial
statements in 2003 and 2002. The operating results exclude certain corporate
expenses of $10 in 2002, which had previously been allocated to the resins,
additives and adhesives businesses. In addition, interest expense of $24 in
2003 and $26 in 2002 associated with debt that was repaid with the sales
proceeds was allocated to discontinued operations. The operating results for
2003 include results of operations for the month of January 2003. Net sales
and income (loss) from discontinued operations are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
---- ----
Net sales........................................ $53 $559
Income before income tax expense................. 7 34
Income tax expense............................... (9) (10)
--- ----
Income (Loss) from Discontinued Operations....... $(2) $ 24
=== ====
Other Acquisitions and Divestitures
In December 2004, Solutia sold the assets of Axio Research
Corporation (Axio) for less than $1, resulting in a loss on sale of $1.
Solutia originally acquired Axio in May 2002 for $5. Axio's results of
operations were included in Solutia's results of operations from the
acquisition date and were not material to Solutia's consolidated results of
operations for the year ended December 31, 2002.
62
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
During 2002, Solutia sold its 50 percent interest in the Advanced
Elastomer Systems (AES) joint venture to ExxonMobil Chemical Company, a
division of ExxonMobil Corporation and Exxon Chemical Asset Management
Partnership, a subsidiary of ExxonMobil Corporation for $102. The sale
resulted in a gain of $5.
5. LOSS PER SHARE
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
---- ---- ----
Loss from Continuing Operations................................... $ (316) $ (980) $ (8)
Income (Loss) from Discontinued Operations, net of tax............ -- (2) 24
Cumulative Effect of Change in Accounting Principle, net of tax... -- (5) (167)
------ ------ ------
Net Loss.......................................................... $ (316) $ (987) $ (151)
====== ====== ======
Basic and Diluted Loss per Share:
Loss from Continuing Operations................................... $(3.02) $(9.37) $(0.08)
Income (Loss) from Discontinued Operations, net of tax............ -- (0.02) 0.23
Cumulative Effect of Change in Accounting Principle, net of tax... -- (0.05) (1.59)
------ ------ ------
Basic and Diluted Loss per Share.................................. $(3.02) $(9.44) $(1.44)
------ ------ ------
Basic and Diluted Weighted Average Shares Outstanding (in millions) 104.5 104.6 104.7
----- ----- -----
At December 31, 2003 and 2002, 0.1 million and 0.2 million common
share equivalents, respectively, were excluded because the effect would be
antidilutive.
6. RESTRUCTURING RESERVES
During 2004 Solutia recorded restructuring charges of $18 to Cost
of Goods Sold principally related to the closure of Solutia's chlorobenzenes
operations as well as certain other non-strategic operations, including $10
for decommissioning and dismantling costs, $3 of severance and retraining
costs; $2 related to operating leases where the underlying services and
properties are no longer providing benefit; and $3 of various other
restructuring charges. In addition, Solutia recorded a reduction of $1 to
Cost of Goods Sold for the favorable settlement of reserves established in
2003 related to the closure of non-strategic facilities in Solutia's
Pharmaceutical Services business. These restructuring charges were recorded
in the Performance Products and Services segment and resulted principally
from Solutia's continued strategic evaluation of its businesses. In
addition, Solutia recorded $4 of severance and retraining costs during 2004
in Reorganization Items, net principally related to workforce reduction
initiatives of management positions within the corporate function directly
associated with the bankruptcy reorganization process. Cash outlays
associated with the restructuring actions were funded from operations.
During 2003 Solutia recorded restructuring and severance charges of
$56. The restructuring charges resulted from Solutia's continued strategic
evaluation of its businesses, and the resulting decisions to shut down
certain operations due to various market and economic conditions. Included
in these restructuring charges were $22 of severance charges associated with
workforce reductions precipitated by the sale of the resins, additives and
adhesives businesses and other ongoing cost reduction initiatives; $17 of
asset write-downs; $14 related to non-cancelable operating leases because
Solutia was no longer utilizing the properties or services underlying these
leases arrangements; and $3 in contract termination costs. Cash outlays
associated with the restructuring actions were funded from operations. Of
this $56 in restructuring and severance charges, $47 was recorded in the
Performance Products and Services segment, $5 was recorded in the Integrated
Nylon segment, and $4 was recorded in Corporate/Other.
63
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes the above noted restructuring
charges, amounts utilized to carry out those plans and amount remaining at
December 31, 2004:
FUTURE
DECOMMISSIONING/ EMPLOYMENT ASSET LEASE OTHER
DISMANTLING REDUCTIONS WRITE-DOWNS PAYMENTS COSTS TOTAL
------------------------------------------------------------------------------------
Balance at January 1, 2003 $-- $ -- $ -- $-- $-- $ --
Charges taken -- 22 17 14 3 56
Amounts utilized -- (22) (17) -- -- (39)
------------------------------------------------------------------------------------
Balance at December 31, 2003 $-- $ -- $ -- $14 $ 3 $ 17
CHARGES TAKEN 10 7 -- 2 3 22
AMOUNTS UTILIZED (5) (7) -- (4) (6) (22)
------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2004 $ 5 $ -- $ -- $12 $-- $ 17
====================================================================================
Restructuring reserves of approximately $12 and $13 as of December
31, 2004 and 2003, respectively, were included in Liabilities Subject to
Compromise in the Statement of Consolidated Financial Position. See Note 3
for further description of Solutia's Liabilities Subject to Compromise. In
addition, Solutia expects the $5 of restructuring liabilities classified as
not subject to compromise as of December 31, 2004 to be utilized within the
next twelve months. Given the inherent uncertainties associated with the
bankruptcy process, Solutia cannot forecast its level of future spending for
restructuring reserves classified as subject to compromise.
7. IMPAIRMENT OF LONG-LIVED ASSETS
In 2004 an impairment analysis was completed in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived
Assets, based upon indicators of impairment present within certain asset
groups in Solutia's Pharmaceutical Services business, included in the
Performance Products and Services operating segment. These indicators
included historical losses and declining estimates of forecasted results
given current economic and market conditions in the pharmaceutical services
industry. The carrying value of the assets was compared to undiscounted
expected cash flows indicating an impairment was present, as the carrying
value of the assets were above the undiscounted cash flow amount. Therefore,
the assets were written down to fair value, as determined by fair value
estimates of the asset group through the use of a discounted cash flow model
The assumptions used in the cash flow projections approximated the market
conditions experienced in 2004. As a result, Solutia recorded an impairment
charge of $12 to Cost of Goods Sold for the write down of certain fixed
assets and a charge of $5 to Impairment of Intangible Assets for the write
down of certain finite-lived intangible assets (as more fully described in
Note 8), both included within the Pharmaceutical Services business of the
Performance Products and Services operating segment.
In 2003 an impairment analysis was completed in accordance with
SFAS No. 144 based upon indicators of impairment present within certain
asset groups in Solutia's Pharmaceutical Services business. Similar to 2004
above, these indicators included historical losses and declining estimates
of forecasted results given current economic and market conditions in the
pharmaceutical services industry. The carrying value of the assets was
compared to undiscounted expected cash flows indicating an impairment was
present, as the carrying value of the assets were above the undiscounted
cash flow amount. Therefore, the assets were written down to fair value, as
determined by fair value estimates of the asset group through the use of a
discounted cash flow model. The assumptions used in the cash flow
projections approximated the market conditions experienced in 2003. As a
result, Solutia recorded an impairment charge of $18 to Cost of Goods Sold
for the write down of certain fixed assets and a charge of $14 to Impairment
of Intangible Assets for the write down of certain finite-lived intangible
assets, both included within the Pharmaceutical Services business of the
Performance Products and Services operating segment.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and trademarks are allocated to the Performance Products
and Services segment, which includes the CPFilms and Pharmaceutical Services
reporting units. Trademarks are included within Identified Intangible
Assets, net in the Statement of Consolidated Financial Position. The
allocation of these items is as follows:
64
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
TOTAL
PERFORMANCE
PHARMACEUTICAL PRODUCTS AND
CPFILMS SERVICES SERVICES
--------------------------------------------------
Goodwill, December 31, 2003...................... $74 $ 23 $ 97
Impairment....................................... -- (23) (23)
Translation...................................... 2 -- 2
--------------------------------------------------
Goodwill, December 31, 2004...................... $76 $ -- $ 76
--------------------------------------------------
TOTAL
PERFORMANCE
PHARMACEUTICAL PRODUCTS AND
CPFILMS SERVICES SERVICES
--------------------------------------------------
Trademarks, December 31, 2003.................... $26 $ 1 $27
Translation...................................... -- -- --
--------------------------------------------------
Trademarks, December 31, 2004.................... $26 $ 1 $27
--------------------------------------------------
Amortized identified intangible assets generally are comprised of
contract-based intangible assets and are summarized in aggregate as follows:
GROSS
CARRYING ACCUMULATED NET CARRYING
VALUE AMORTIZATION VALUE
--------------------------------------------------
Amortized Intangible Assets, December 31, 2003... $33 $(17) $16
Impairment....................................... (5) -- (5)
Translation...................................... 3 (1) 2
Amortization..................................... -- (2) (2)
--------------------------------------------------
Amortized Intangible Assets, December 31, 2004... $31 $(20) $11
--------------------------------------------------
There were no material acquisitions of intangible assets and there
have been no changes to amortizable lives or methods during 2004.
Amortization expense for the net carrying amount of finite-lived intangible
assets was $2 in 2004 and $3 in both 2003 and 2002, respectively. In
addition, amortization expense for the net carrying amount of finite-lived
intangible assets is estimated to be $1 annually in 2005 through 2009.
Goodwill and indefinite-lived intangible assets are assessed annually for
impairment in the fourth quarter.
Goodwill and Other Intangible Assets Impairments
Solutia recorded an impairment charge of $23 in 2004 within the
Pharmaceutical Services business in accordance with SFAS No. 142 for the
write down of goodwill. This charge was based upon fair value estimates of
the reporting unit through the utilization of a discounted cash flow model.
In addition, Solutia recorded an impairment charge of $5 in 2004 for
certain finite-lived intangible assets, as determined through impairment
tests performed in accordance with SFAS No. 144, as more fully described in
Note 7. These impairment charges totaling $28 were recorded in the
Impairment of Intangible Assets line within the Statement of Consolidated
Operations and are included within the results of operations of the
Performance Products and Services operating segment. These charges were
precipitated by the declining estimates of forecasted results given current
economic and market conditions within the pharmaceutical services industry
in 2004.
Solutia recorded an impairment charge of $64 in 2003 within the
Pharmaceutical Services business in accordance with SFAS No. 142 for the
write down of goodwill of $53 and certain indefinite-lived intangible assets
of $11. These charges were based upon fair value estimates of the reporting
unit as determined with the assistance of a third-party specialist using
income and market approaches. In addition, Solutia recorded an impairment
charge of $14 in 2003 for certain finite-lived intangible assets, as
determined through an impairment test performed in accordance with SFAS No.
144, as more fully described in Note 7. These impairment charges totaling
$78 were recorded in the Impairment of Intangible Assets line within the
Statement of Consolidated Operations and
65
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
are included within the results of operations of the Performance Products
and Services operating segment. These charges were precipitated by the
declining estimates of forecasted results given current economic and market
conditions within the pharmaceutical services industry in 2003.
The adoption of SFAS No. 142 in 2002 required certain intangible
assets that did not meet the criteria for recognition apart from goodwill,
to be subsumed into goodwill. Fair value measurements of the reporting units
upon adoption of SFAS No. 142 were estimated with the assistance of a
third-party specialist utilizing both income and market multiple approaches.
Based on this analysis, Solutia recorded an impairment loss of $167 during
2002 for the resins, additives and adhesives businesses, which is presented
as discontinued operations, due to declining estimates of future results
given existing economic and market conditions at the time. The goodwill
impairment charge was non-deductible for tax purposes and is reflected as
the cumulative effect of change in accounting principle in the Statement of
Consolidated Operations.
9. RISK MANAGEMENT ACTIVITIES
Solutia's business operations give rise to market risk exposures
that result from changes in currency exchange rates, interest rates and
certain commodity prices. To manage the volatility relating to these
exposures, Solutia enters into various hedging transactions that enable it
to alleviate the adverse effects of financial market risk. Designation is
performed on a specific exposure basis to support hedge accounting. The
changes in fair value of these hedging instruments are offset in part or in
whole by corresponding changes in the fair value or cash flows of the
underlying exposures being hedged. Solutia's hedging transactions are
carried out under policies and procedures approved by the Audit and Finance
Committee of the board of directors, which does not permit the purchase or
holding of any derivative financial instruments for trading purposes.
Foreign Currency Exchange Rate Risk
Solutia manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. Solutia uses foreign currency hedging
instruments to manage the volatility associated with foreign currency
purchases of materials and other assets and liabilities created in the
normal course of business. Solutia primarily uses forward exchange contracts
and purchased options to hedge these risks with maturities of less than 18
months.
Solutia also enters into certain foreign currency derivative
instruments primarily to protect against exposure related to intercompany
financing transactions. Solutia has chosen not to designate these
instruments as hedges and to allow the gains and losses that arise from
marking the contracts to market to be recorded in other income (expense),
net in the period. The net impact of the related gains and losses recorded
was a net loss of $4 and $1 in the years ended December 31, 2004 and 2003,
respectively, and a net gain of less than $1 in 2002. Solutia had currency
forward contracts to purchase and sell $147 and $186 of currencies as of
December 31, 2004 and 2003, respectively, comprised principally of the euro,
United Kingdom Pound-Sterling, Swiss Franc and U.S. Dollar.
Interest Rate Risk
Interest rate risk is primarily related to the changes in fair
value of fixed-rate long-term debt and short-term, floating rate debt.
Solutia believes its current debt structure appropriately protects Solutia
from changes in interest rates and is not actively using any contracts to
manage interest rate risk.
Commodity Price Risk
Certain raw materials and energy resources used by Solutia are
subject to price volatility caused by weather, crude oil prices, supply
conditions, political and economic variables and other unpredictable
factors. Solutia uses forward and option contracts to manage a portion of
the volatility related to anticipated energy purchases with maturities up to
6 months. These market instruments are designated as cash flow hedges. The
mark-to-market gain or loss on qualifying hedges is included in Other
Comprehensive Loss to the extent effective, and reclassified into Cost of
Goods Sold in the period during which the hedged transaction affects
earnings. The mark-to-market gains or losses on ineffective portions of
hedges are recognized in Cost of Goods Sold immediately. There were no
commodity forward or option contracts outstanding as of December 31, 2004 or
December 31, 2003. In addition, no cash flow hedges were discontinued during
2004 or 2003 due to changes in expectations on the original forecasted
transactions, and there were no gains or losses recorded in Cost of Goods
Sold as a result of the ineffectiveness of any hedging contacts.
66
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Credit Risk
Credit risk arising from the inability of a counterparty to meet
the terms of Solutia's financial instrument contracts is generally limited
to the amounts, if any, by which the counterparty's obligations exceed the
obligations of Solutia. It is Solutia's policy to enter into financial
instruments with a number of creditworthy counterparties. Therefore, Solutia
does not expect to incur material credit losses on its risk management or
other financial statement instruments.
10. INVESTMENTS IN AFFILIATES
At December 31, 2004, Solutia's investments in affiliates consisted
principally of its 50 percent interests in the Flexsys and Astaris joint
ventures for which Solutia applies the equity method of accounting. Solutia
received dividends from affiliates of approximately $25 in 2002. There were
no dividends received during 2004 or 2003. Summarized combined financial
information for 100 percent of the Flexsys and Astaris joint ventures and
the results of operations for AES for the period up until its sale during
the first quarter of 2002 is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
---- ---- ----
RESULTS OF OPERATIONS:
Net sales................................... $878 $890 $985
Gross profit ............................... 140 89 152
Operating income (loss)..................... (18) (242) 30
Net income (loss)........................... (46) (273) 12
DECEMBER 31,
------------
2004 2003 2002
---- ---- ----
FINANCIAL POSITION:
Current assets.............................. 310 $353 $357
Non-current assets.......................... 503 491 645
Current liabilities......................... 262 305 355
Non-current liabilities..................... 261 278 253
Solutia's investment in Astaris as of December 31, 2004 and 2003
exceeded Solutia's proportionate share of the underlying equity of Astaris
by $18 and $59, respectively, primarily due to the guarantee of debt
recorded in 2004 and 2003, and goodwill recorded by Solutia at inception of
the joint venture. Solutia's investment in Flexsys as of both December 31,
2004 and 2003 exceeded Solutia's proportionate share of the underlying
equity of Flexsys by $4 primarily due to goodwill recorded by Solutia at
inception of the joint venture.
During the first quarter of 2002, Solutia sold its 50 percent
interest in the AES joint venture to ExxonMobil Chemical Company, a division
of ExxonMobil Corporation and Exxon Chemical Asset Management Partnership, a
subsidiary of ExxonMobil Corporation for approximately $102. The sale
resulted in a gain of $5.
67
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
11. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
DECEMBER 31,
------------
INVENTORIES 2004 2003
---- ----
Finished goods................................................ $ 223 $ 192
Goods in process.............................................. 99 92
Raw materials and supplies.................................... 92 83
------ -------
Inventories, at FIFO cost..................................... 414 367
Excess of FIFO over LIFO cost................................. (175) (127)
------ -------
TOTAL......................................................... $ 239 $ 240
====== =======
Inventories at FIFO approximate current cost. The effects of LIFO
inventory liquidations were not significant.
DECEMBER 31,
------------
PROPERTY, PLANT AND EQUIPMENT 2004 2003
---- ----
Land.......................................................... $ 19 $ 19
Buildings..................................................... 421 420
Machinery and equipment....................................... 2,864 3,038
Construction in progress...................................... 48 29
------ -------
Total property, plant and equipment........................... 3,352 3,506
Less accumulated depreciation................................. (2,511) (2,597)
------ -------
TOTAL......................................................... $ 841 $ 909
====== =======
DECEMBER 31,
------------
OTHER ASSETS 2004 2003
---- ----
Computer software............................................. $ 37 $ 48
Cash underlying collateralized letters of credit (a).......... 18 132
Intangible pension asset...................................... 9 81
Other......................................................... 102 126
------ -------
TOTAL......................................................... $ 166 $ 387
====== =======
<FN>
(a) In 2004 Solutia settled a $27 pre-petition letter of credit paid by the
intermediary financial institution to the letter of credit counterparty.
This letter of credit was collateralized by cash that Solutia had disbursed
prior to the bankruptcy filing, and accordingly, has been presented as a
non-cash transaction with respect to the Statement of Consolidated Cash
Flows in 2004.
DECEMBER 31,
------------
ACCRUED LIABILITIES 2004 2003
---- ----
Wages and benefits............................................ $ 55 $ 24
Accrued rebates and sales returns/allowances.................. 31 32
Accrued interest.............................................. 25 28
Astaris keepwell guarantee.................................... 10 51
Other......................................................... 162 169
------ -------
TOTAL ACCRUED LIABILITIES..................................... $ 283 $ 304
====== =======
12. VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This Interpretation, as
amended, provides guidance related to identifying variable interest entities
("VIEs") and determining whether such entities should be consolidated.
Solutia adopted the provisions of the Interpretation in 2003.
68
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Solutia has a synthetic lease related to its corporate headquarters
in St. Louis, Missouri, entered into in 1999, that qualifies as a VIE. Based
on the current terms of the lease agreement and the residual value guarantee
Solutia provides to the lessor, Solutia concluded it is the primary
beneficiary of the VIE. As a result, in 2003 Solutia consolidated the
property, plant and equipment of $37 and long-term debt of $43 held by this
VIE, and recorded minority interest of $1 and a resulting after-tax charge
of $5, reported as a cumulative effect of a change in accounting principle,
net of tax. The assets and liabilities of $37 and $43, respectively, which
were consolidated as part of adoption of this Interpretation, were not
included within the Statement of Consolidated Cash Flows for the year ended
December 31, 2003, as these items represent non-cash transactions upon
adoption of this Interpretation.
13. INCOME TAXES
The components of loss from continuing operations before income
taxes were:
2004 2003 2002
---- ---- ----
United States.................................. $(301) $(549) $(53)
Outside United States.......................... (21) (66) 34
----- ----- ----
TOTAL.......................................... $(322) $(615) $(19)
===== ===== ====
The components of income tax expense (benefit) recorded in
continuing operations were:
2004 2003 2002
---- ---- ----
Current:
U.S. federal................................ $ -- $ -- $ --
U.S. state.................................. -- -- --
Outside United States....................... 10 17 27
----- ----- ----
10 17 27
Deferred:
U.S. federal................................ (90) (156) (25)
U.S. state.................................. (17) (26) (9)
Outside United States....................... (11) (17) (6)
----- ----- ----
(118) (199) (40)
Tax contingency adjustment (a).................. (6) -- 2
Valuation allowances............................ 108 547 --
----- ----- ----
TOTAL........................................... $ (6) $ 365 $(11)
===== ===== ====
<FN>
(a) The tax contingency reserve adjustment in 2004 of $(6) is principally a
result of the favorable settlement of an Internal Revenue Service (IRS)
audit for the years 1999 and 2000. During 2002, Solutia increased its tax
contingency reserves by $2 based on expected unfavorable outcomes of audits
in various jurisdictions.
69
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Factors causing Solutia's effective tax rate for continuing
operations to differ from the U.S. federal statutory rate were:
2004 2003 2002
---- ---- ----
U.S. federal statutory rate.......................... (35)% (35)% (35)%
U.S. state income taxes.............................. (3) (3) (32)
Export tax benefit................................... (1) (1) (17)
Taxes related to foreign earnings, net of credits.... 3 7 65
Valuation allowances................................. 33 88 --
Income (loss) from equity affiliates................. (1) -- (25)
Tax contingency adjustment........................... (2) -- 12
Other................................................ 4 3 (26)
--- --- ---
EFFECTIVE INCOME TAX RATE............................ (2)% 59% (58)%
=== === ===
Deferred income tax balances were related to:
2004 2003
---- ----
Property.......................................... $(179) $(196)
Postretirement benefits........................... 416 412
Restructuring reserves............................ 7 5
Environmental liabilities......................... 55 56
Inventory......................................... 12 5
Insurance reserves................................ 51 51
Miscellaneous accruals............................ 27 25
Equity affiliates................................. 23 45
Tax credit carryforward........................... 7 15
Net operating losses.............................. 283 152
Valuation allowances.............................. (695) (585)
Other............................................. 13 23
----- -----
NET DEFERRED TAX ASSETS........................... $ 20 $ 8
===== =====
At December 31, 2004, research and development tax credit
carryforwards available to reduce possible future U.S. income taxes amounted
to approximately $5, all of which will expire in 2019 through 2022. At
December 31, 2004, various federal, state and foreign net operating loss
carryforwards are available to offset future taxable income. These net
operating losses expire in 2005 through 2024 or have an indefinite
carryforward period. Valuation allowances have been provided for the tax
credit and net operating loss carryforwards that are not likely to be
utilized. Income taxes and remittance taxes have not been recorded on $97 of
undistributed earnings of subsidiaries because Solutia intends to reinvest
those earnings indefinitely.
Solutia provided additional valuation allowances of $110 in 2004 of
which $108 was recorded in Income Tax Expense (Benefit) in the Statement of
Consolidated Operations and $2 was recorded in Accumulated Other
Comprehensive Loss in the Statement of Consolidated Comprehensive Loss. The
additional valuation allowances were principally provided for the U.S.
deferred tax assets as Solutia continued to no longer believe that the "more
likely than not" recognition criteria outlined in SFAS No. 109, Accounting
for Income Taxes, were appropriate given a combination of factors
surrounding Solutia's Chapter 11 bankruptcy filing including: (i) the
possibility that all or a substantial portion of the loss and credit
carryforwards and tax bases of assets could be reduced to the extent of
cancellation of indebtedness occurring as part of a reorganization plan;
(ii) the possibility that all or a substantial portion of the loss and
credit carryforwards could become limited if a change in ownership occurs as
a result of a reorganization plan; and (iii) updated expectations regarding
near-term taxable income.
As of December 31, 2004, the IRS had completed its examination of
the income tax returns of Solutia through 2001. No other years are currently
being examined by the IRS. In addition, Solutia is subject to audits in
several state and foreign jurisdictions. Solutia believes that it has
adequate contingency reserves established for probable adjustments resulting
from these audits.
70
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
American Jobs Creation Act of 2004
The American Jobs Creation Act of 2004 (the "Act"), enacted on
October 22, 2004, provides for a temporary 85 percent dividends received
deduction ("DRD") election on certain repatriated foreign earnings, the
creation of a new deduction from taxable income for manufacturers' qualified
domestic production activities and the phased-out elimination of the
extraterritorial income exclusion from 2005 to 2007. Due to Solutia's net
operating loss position in the United States, no benefit is anticipated from
the Act's new DRD election or domestic manufacturing deduction provisions in
the near term.
14. DEBT OBLIGATIONS
As of December 31, 2004, Solutia's debt obligations include
borrowings from the final DIP facility, notes and debentures. The weighted
average interest rate on Solutia's total debt outstanding at December 31,
2004, was 9.0 percent compared to 8.9 percent at December 31, 2003.
Excluding debt subject to compromise, the weighted average interest rate on
total debt was 9.6 percent at December 31, 2004, compared to 9.3 percent at
December 31, 2003. The weighted average interest rate on Solutia's
short-term debt outstanding at December 31, 2004, was 9.3 percent as compared
to 11.7 percent at December 31, 2003. As a result of the Chapter 11 filing,
Solutia was in default on all its debt agreements as of December 31, 2004,
with the exception of its DIP credit facility and Euronotes. While operating
as a debtor-in-possession during the Chapter 11 bankruptcy proceedings,
Solutia has ceased recording interest on all unsecured pre-petition
indebtedness in accordance with SOP 90-7, with the exception of the 11.25
percent notes due 2009 on which the bankruptcy court has permitted
continued payments of the contractual interest (see Note 3 for further
description of the 2009 notes). The amount of contractual interest not
recorded in 2004 and 2003 was $32 and $1, respectively. Therefore, interest
for long-term debt will only be payable on the 10.00 percent Euronotes due
2008 and the 11.25 percent notes due 2009. Contractual interest is payable
semiannually in February and August for Solutia's Euronotes and in January
and July for the 11.25 percent notes.
Long-term debt consisted of the following as of December 31,
2004 2003
---- ----
6.72% debentures puttable 2004, due 2037......... 150 150
10.00% euro notes due 2008 ...................... 285 251
11.25% notes due 2009............................ 223 223
7.375% debentures due 2027....................... 300 300
Other............................................ 43 43
------ -----
Total principal amount..................... 1,001 967
Unamortized net discount (a)..................... -- --
------ -----
1,001 967
Less amounts subject to compromise (Note 3)...... (716) (673)
------ -----
TOTAL............................................ $ 285 $ 294
====== =====
<FN>
(a) Unamortized net discount of $38 as of both December 31, 2004 and
December 31, 2003 is included in liabilities subject to compromise, as
further described in Note 3.
Prior and Current Credit Facilities
Final DIP Financing
- -------------------
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a $525 DIP credit facility. This DIP facility
consists of (i) a $50 multiple draw term loan component ("Term Loan A");
(ii) a $300 single draw term loan component ("Term Loan B"); and (iii) a
$175 borrowing-based revolving credit component, which includes a $150
letter of credit
71
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
subfacility. Proceeds from the final DIP financing facility were used to
retire Solutia's existing pre-petition $350 credit facility, to repay the
$75 provided by the interim DIP facility and to provide approximately $100
of new liquidity for general operating purposes.
The final DIP facility has a maturity date which is the earliest of
(i) December 19, 2005; (ii) the earlier of the effective date and the date
of the substantial consummation (as defined in Section 1101(2) of the U.S.
Bankruptcy Code), in each case, of a plan of reorganization in the Chapter
11 bankruptcy case confirmed by an order of the bankruptcy court; and (iii)
such earlier date on which all loans under the final DIP facility shall
become due and payable in accordance with the terms of the final DIP
facility or other loan documents. Additionally, the final DIP facility is
subject to various mandatory commitment reductions and prepayments in
connection with asset sales, equity issuances, receipt of extraordinary
proceeds and certain other events. In particular, the final DIP facility
significantly limits Solutia's ability to use divesture proceeds for any
purpose other than the permanent reduction of the final DIP facility.
COLLATERAL
The final order granted all the perfected first priority and senior
liens, originally granted to the $350 pre-petition facility and $75 interim
DIP facility, to the lenders under the final DIP facility in conjunction
with its post-petition senior secured status. In particular, the final DIP
facility is secured by a lien on substantially all of Solutia's domestic
assets, including (i) accounts receivable and inventory; (ii) certain
intellectual property; (iii) pledges of stock of certain domestic
subsidiaries; (iv) pledges of 65 percent of the outstanding stock of certain
foreign subsidiaries; (v) liens on intercompany notes receivable held by
parties to the loan; and (vi) liens on property, plant and equipment located
at St. Louis, Missouri; Columbia, Tennessee; Foley, Alabama; Martinsville,
Virginia; Springfield, Massachusetts; Trenton, Michigan; Alvin, Texas;
Pensacola, Florida; Decatur, Alabama; and Greenwood, South Carolina.
INTEREST
Borrowings under the revolving credit component bear interest at a
rate per annum equal to the prime rate or LIBOR plus 2.25 percent at the
election of the borrower. Borrowings under the term loan bear interest at a
rate per annum equal to the greater of (i) the prime rate plus 4.0 percent
or (ii) 8.0 percent.
GUARANTEES
The obligations of Solutia Inc. and Solutia Business Enterprises,
Inc., as borrowers under the final DIP facility, are guaranteed by Solutia's
other domestic subsidiaries which own substantially all of Solutia's
domestic assets. These subsidiaries are Axio Research Corporation, Beamer
Road Management Company, CPFilms Inc., Monchem, Inc., Monchem International,
Inc., Solutia Greater China, Inc., Solutia Inter-America, Inc., Solutia
International Holding, LLC, Solutia Investments, LLC, Solutia Management
Company, Inc., Solutia Overseas, Inc., Solutia Systems, Inc., and Solutia
Taiwan, Inc. The obligations must also be guaranteed by each of Solutia's
subsequently acquired or organized domestic subsidiaries, subject to certain
exceptions. In addition, Solutia Inc. and Solutia Business Enterprises, Inc.
are jointly and severally liable with respect to their obligations under the
final DIP facility, thus in effect each guaranteeing the other's debt.
COVENANTS AND OTHER RESTRICTIONS
The final DIP facility requires Solutia to meet certain financial
covenants, including but not limited to, minimum earnings before interest,
taxes, depreciation and amortization (EBITDA) targets, on a consolidated
basis and for one of its operating units. In addition, the credit facility
contains certain covenants which, among other things, limits the incurrence
of additional debt, aggregate capital expenditures, additional operating
leases, issuance of capital stock, issuance of guarantees, liens,
investments, asset sales, dividends, certain payments, acquisitions,
mergers, consolidations and dissolutions, change of business, transactions
with affiliates, prepayments of debt, repurchases of stock and redemptions
of certain other indebtedness and other matters customarily restricted in
such agreements.
The final DIP facility contains customary and other events of
default, including, among others, payment defaults, breaches of
representations and warranties, covenant defaults, cross-defaults to
Solutia's Euronotes, failure of guaranties or security documentation to be
effective, judgment defaults, ERISA defaults, Solutia Inc. change of
control, conversion of the case from a Chapter 11 to a Chapter 7 bankruptcy
and a material adverse effect default.
72
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Amendment to DIP Financing Agreement
- ------------------------------------
Solutia amended its DIP financing agreement on July 20, 2004, after
receiving bankruptcy court approval. The amendment provides greater
flexibility to Solutia in executing certain actions contemplated in its
financial projections, provides cost savings through lower requirements of
certain letters of credit, and enhances liquidity opportunities through
retaining certain potential receipts which were previously required to be
used to reduce the commitment amount. No changes were made to the financial
covenants contained in the DIP agreement.
Interim DIP Financing
- ---------------------
On December 19, 2003, the bankruptcy court entered an interim order
authorizing Solutia to borrow up to $85 of DIP financing for the period
between the entry of the interim order and the entry of a final order
authorizing a full DIP facility. Accordingly, on December 19, 2003, Solutia
entered into an interim financing facility providing for $515 of total DIP
financing, of which $85 was immediately available under the interim
bankruptcy court order, with an additional $430 of DIP financing to be
available upon entry of a final bankruptcy court order approving the total
$515. As of December 31, 2003, $75 was outstanding under the interim DIP
facility, which amount was subsequently paid in full through the final DIP
facility entered into as of January 16, 2004, as more fully described above.
October 2003 Credit Facility
- ----------------------------
On October 8, 2003, Solutia entered into a new $350 credit
facility. The proceeds of the loans made under the facility were used to
retire Solutia's pre-existing bank debt and for general working capital
purposes, including fees and expenses related to the credit facility. The
amount of outstanding borrowings under the credit facility as of December
31, 2003 was approximately $286. The facility was paid in full and cancelled
as part of the final DIP facility entered into by Solutia on January 16,
2004, as more fully described above.
Euronote Amendment - January 2004
- ---------------------------------
On January 30, 2004, Solutia's wholly-owned subsidiary, SESA,
restructured its then 6.25 percent Euronotes, due in 2005. The Euronotes are
issued by SESA and aggregate (euro)200 million in principal amount. The
restructuring allows SESA to continue normal operations while Solutia Inc.
and its domestic subsidiaries reorganize under Chapter 11 bankruptcy
protection.
The restructuring was implemented in a multi-step process. The
first step was completed on December 16, 2003 at a meeting of Euronote
holders at which the required percentage of Euronote holders adopted
resolutions agreeing to forebear through January 30, 2004 the acceleration
and default of the Euronotes in the event of a Chapter 11 filing by Solutia
Inc. In consideration for that agreement, SESA made an additional interest
payment to the Euronote holders of approximately $2. The second step of the
restructuring was completed on January 30, 2004 at a meeting of Euronote
holders at which the required percentage of Euronote holders adopted
resolutions approving definitive documentation set forth in the terms and
conditions of the restructuring and approving other related actions. The
Euronotes were amended in the following manner:
1. Certain cross default provisions in the Euronotes that would
have resulted in default and acceleration upon the filing of a
Chapter 11 bankruptcy proceeding by Solutia Inc. were eliminated.
Solutia Inc.'s guarantee of the Euronotes was also eliminated.
2. The maturity of the Euronotes was extended to December 15, 2008,
from the original maturity date of February 15, 2005.
3. Interest on the Euronotes was fixed at the rate of 10 percent
per annum, payable semi-annually in arrears.
4. SESA agreed to grant to the holders of the Euronotes security
interests in substantially all of the assets of SESA and certain
of its subsidiaries (excluding Flexsys Holding BV) and to cause
these subsidiaries to be added as guarantors of the Euronotes,
all to the extent permitted under applicable law and as further
provided in the underlying documentation implementing the
restructuring.
73
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
5. Certain redemption provisions were added that allow partial
redemption of the Euronotes as a result of permitted asset sales
and full redemption in certain circumstances. Full redemption is
barred for 18 months; thereafter, full redemption is allowed at
105 percent of principal for the next twelve months, 103 percent
of principal for the twelve months thereafter, 101 percent of
principal for the twelve months after that and at par thereafter.
6. Covenants were added that have the effect of limiting the
ability of SESA and its subsidiaries to transfer assets or cash
out of those entities until the Euronotes are paid.
7. SESA agreed to certain financial reporting requirements and to
indemnify Euronote holders against certain liabilities.
SESA and the holders of the Euronotes also entered into an
Agreement of Understanding that sets forth, among other items, the
post-closing process for implementing the guarantees, security and pledges
associated with the restructuring.
Solutia analyzed the modifications of the Euronotes in accordance
with the provisions of Emerging Issues Task Force (EITF) No. 02-04,
Determining Whether a Debtor's Modification or Exchange of Debt Instruments
is within the Scope of FASB Statement No. 15, and EITF No. 96-19, Debtor's
Accounting for a Modification or Exchange of Debt Instruments, and recorded
a charge of approximately $15 in 2004 to record the Euronotes as modified at
their fair value on January 30, 2004.
Euronote Amendment - November 2004
- ----------------------------------
On October 7, 2004, Solutia and its wholly owned subsidiary, SESA,
commenced the notification process for convening a meeting pursuant to
Article 568 of the Belgian Companies Code of the holders of the Euronotes.
At the bondholders' meeting, which took place on November 8, 2004, the
bondholders approved amendments to the Euronotes including the authorization
of the potential sale of Solutia's Pharmaceutical Services business. The
amendments will require SESA to use 95 percent of the net cash proceeds from
the sale to redeem a portion of the Euronotes at a redemption price of 109
percent of the principal amount of the notes redeemed.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value of Solutia's long-term debt not subject to
compromise was $290 at December 31, 2004 and $305 as of December 31, 2003.
These estimates compare with the recorded amount of $285 in 2004 and $294 in
2003. Fair value of the debt subject to compromise cannot be fairly
determined due to the inherent uncertainties underlying the valuation
assumptions impacted by the Chapter 11 bankruptcy proceedings.
The recorded amounts of cash, trade receivables, third-party
guarantees, accounts payable and short-term debt approximate their fair
values at both December 31, 2004 and 2003, respectively. The estimated fair
value of Solutia's foreign currency forward contracts on intercompany
financing transactions was approximately $1 at December 31, 2004, and
approximately $2 at December 31, 2003. Notional amounts for these foreign
currency forward purchase and sales contracts were $147 at December 31, 2004,
and $186 at December 31, 2003.
Fair values are estimated by the use of quoted market prices,
estimates obtained from brokers and other appropriate valuation techniques
and are based upon information available as of both December 31, 2004, and
December 31, 2003. The fair-value estimates do not necessarily reflect the
values Solutia could realize in the current market.
16. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension benefits generally are based on the employee's age, years
of service and/or compensation level. The domestic qualified pension plan is
funded in accordance with Solutia's long-range projections of the plan's
financial conditions. These projections take into account benefits earned
and expected to be earned, anticipated returns on pension plan assets and
income tax and other regulations. Solutia amended its U.S. qualified and
non-qualified pension plans in 2004 to cease future benefit accruals
effective July 1, 2004, for non-union participants in these plans (as
further described below). Prior to the spinoff, the majority of Solutia's
employees participated in Pharmacia's noncontributory pension plans. In
conjunction with the spinoff, Solutia assumed pension liabilities and
received related assets from those plans for its applicable active employees
and for certain former employees who left Pharmacia in earlier years.
74
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Certain employees also participate in benefit programs that provide
certain health care and life insurance benefits for retired employees. All
regular, full-time U.S. employees and certain employees in other countries
who were employed by Solutia on or before December 31, 1998, may become
eligible for these benefits if they reach retirement age while employed by
Solutia and have the required years of service. These postretirement
benefits are unfunded and are generally based on the employee's age, years
of service and/or compensation level. The costs of postretirement benefits
are accrued by the date the employees become eligible for the benefits. In
2004, Solutia amended its U.S. postretirement plan for non-union, active
employees (as further described below). In connection with the spinoff,
Solutia assumed retiree medical liabilities for its applicable active
employees and for approximately two-thirds of the retired U.S. employees of
Pharmacia.
Solutia uses a measurement date of December 31 for the majority of
its pension and other postretirement benefit plans. The amounts disclosed
below do not reflect the impact of any changes to the benefit plans that
might be contemplated as a result of the bankruptcy filing. In addition, the
accrued liabilities for domestic pension and other postretirement
obligations have been classified as liabilities subject to compromise as of
December 31, 2004 and 2003 (see Note 3).
Medicare Prescription Drug, Improvement and Modernization Act of 2003
On December 8, 2003, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the "Act") was signed into law. The Act
introduces a prescription drug benefit under Medicare (Medicare Part D) as
well as a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare
Part D. As a result of the Act's passage, the FASB issued FASB Staff
Position ("FSP") No. 106-1, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of
2003. The FSP permitted a sponsor of a postretirement health care plan that
provides a prescription drug benefit to make a one-time election to defer
accounting for the effects of the Act. Accordingly, Solutia elected to defer
recording the impact of the Act in its consolidated financial statements for
the year ended December 31, 2003 in view of the fact that specific
authoritative guidance on the accounting for the federal subsidy was pending
and that guidance, when issued, could require Solutia to change previously
reported information.
In May 2004, the FASB issued FSP 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. FSP 106-2 provides guidance on the accounting for
the effects of the Act for employers that sponsor postretirement health care
plans that provide drug benefits. This FSP also requires those employers to
provide certain disclosures regarding the effect of the federal subsidy
provided by the Act and supercedes FSP 106-1. Solutia adopted the provisions
of FSP 106-2 in the second quarter of 2004. The adoption of FSP 106-2
resulted in a reduction in the accumulated postretirement benefit obligation
related to benefits attributed to past service of approximately $26. In
addition, net periodic postretirement benefit expense was reduced by
approximately $3 in 2004, reflecting amortization of the actuarial gain with
respect to the subsidy, as well as a reduction in current period interest
costs due to the subsidy.
Net Periodic Cost
For the years ended December 31, 2004, 2003, and 2002, Solutia's
pension and healthcare and other benefit costs were as follows:
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Service costs for benefits earned........... $ 14 $ 27 $ 26 $ 8 $ 9 $ 9
Interest cost on benefit obligation......... 77 95 112 42 50 52
Assumed return on plan assets............... (75) (100) (129) -- -- --
Prior service costs ........................ 6 17 20 (13) (13) (13)
Recognized net (gain)/loss.................. 7 3 (6) 7 9 9
Net curtailment and settlement charges/
(gains)................................... 73 35 17 (38) -- --
---- ----- ----- ---- ---- ----
TOTAL....................................... $102 $ 77 $ 40 $ 6 $ 55 $ 57
==== ===== ===== ==== ==== ====
75
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Curtailments and Settlements
- ----------------------------
Solutia amended its U.S. postretirement plan for non-union, active
employees during 2004. These changes, effective September 1, 2004, include
discontinuation of all postretirement benefits after attaining age 65,
changes to certain eligibility requirements for pre-65 postretirement
benefits with the eventual elimination of these benefits by 2016, and
elimination of retiree life insurance benefits for future retirees. As a
result, Solutia recorded a curtailment gain of $38 due to the reduction in
anticipated future service of non-union participants in Solutia's U.S.
postretirement plan.
Solutia amended its U.S. qualified and non-qualified pension plans
in 2004 to cease future benefit accruals effective July 1, 2004 for
non-union participants in these plans. As a result, Solutia recorded a
pension curtailment net loss of $63 due to the reduction in anticipated
future service of participants in Solutia's U.S. qualified and non-qualified
pension plans. In addition, Solutia recorded a pension settlement net gain
of $1 resulting from the significant reduction in the number of participants
in Solutia's non-qualified pension plan principally resulting from workforce
reduction initiatives.
Solutia recorded pension settlement charges of $10, $35, and $17 in
2004, 2003, and 2002, respectively, resulting principally from the
significant amount of lump sum distributions from Solutia's U.S. qualified
pension plan during each of those years relating primarily to headcount
reductions. In addition, Solutia recorded a curtailment loss of $1 during
2004 due to the reduction in anticipated future service of participants in
Solutia's Canadian pension plan resulting from headcount reductions.
Actuarial Assumptions
- ---------------------
The significant actuarial assumptions used to determine net
periodic cost for Solutia's principal pension, healthcare and other benefit
plans were as follows:
HEALTHCARE AND OTHER
PENSION BENEFITS BENEFITS
---------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Discount rate.............................. 6.25% 6.75% 6.25% 6.75%
Expected return on plan assets............. 9.00% 9.00% N/A N/A
Rate of compensation increase.............. 3.25% 3.75% 3.25% 3.75%
Assumed trend rate for healthcare costs ... N/A N/A 9.00% 10.00%
Ultimate trend rate for healthcare costs... N/A N/A 5.00% 5.00%
Solutia establishes its discount rate based upon the internal rate
of return for a portfolio of high quality bonds with maturities consistent
with the nature and timing of future cash flows for each specific plan. The
expected long-term rate of return on pension plan assets assumption is based
on the target asset allocation policy and the expected future rates of
return on these assets.
A 1 percent change in the assumed health care cost trend rates
would have the following effect as of December 31, 2004:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on postretirement benefit obligation................ $ 4 $(4)
Effect on total service and interest cost components ...... -- --
Solutia's costs for postretirement medical benefits are capped for
many current retirees and for active employees; therefore, the impact of
this hypothetical change in the assumed health care cost trend rate is
limited.
76
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Benefit Obligations
Components of the changes in the benefit obligation of Solutia's
principal pension, healthcare and other benefit plans were as follows:
HEALTHCARE AND OTHER
PENSION BENEFITS BENEFITS
---------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
CHANGES IN BENEFIT OBLIGATION
Benefit obligation at January 1...... $1,448 $1,626 $ 774 $ 803
Service costs........................ 14 27 8 10
Interest cost........................ 77 95 42 50
Contributions........................ 1 1 22 17
Actuarial (gain) losses.............. 44 21 14 (3)
Foreign currency .................... 12 14 -- 1
Plan amendments ..................... (38) -- (37) --
Benefits paid........................ (239) (336) (106) (104)
------ ------ ----- -----
BENEFIT OBLIGATION AT DECEMBER 31.... $1,319 $1,448 $ 717 $ 774
====== ====== ===== =====
The accumulated benefit obligation was $1,297 and $1,382 as of
December 31, 2004 and 2003, respectively.
The significant actuarial assumptions used to estimate the
projected benefit obligation for Solutia's principal pension, healthcare and
other benefit plans were as follows:
HEALTHCARE AND OTHER
PENSION BENEFITS BENEFITS
---------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Discount rate............................. 5.50% 6.25% 5.25% 6.25%
Expected return on plan assets............ 9.00% 9.00% N/A N/A
Rate of compensation increase (a)......... 4.00% 3.25% N/A N/A
Assumed trend rate for healthcare costs .. N/A N/A 8.00% 9.00%
Ultimate trend rate for healthcare costs.. N/A N/A 5.00% 5.00%
<FN>
(a) The rate of compensation increase in 2004 relates specifically to
Solutia's foreign pension plans. The rate of compensation increase
is not applicable to the valuation of U.S. pension plans as of
December 31, 2004 due to the aforementioned cessation of future
benefit accruals in 2004 for participants in the U.S. pension
plans.
Plan Assets
Components of the changes in fair value of plan assets of Solutia's
pension plans were as follows:
PENSION BENEFITS
----------------
2004 2003
---- ----
CHANGES IN FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at January 1.......... $ 932 $1,039
Actual return on plan assets.................... 93 212
Contributions................................... 18 7
Foreign currency................................ 7 10
Benefits paid................................... (239) (336)
---- ------
FAIR VALUE OF PLAN ASSETS AT DECEMBER 31........ $811 $ 932
---- ------
The other postretirement benefits plans are unfunded as of December
31, 2004 and 2003.
The asset allocation for Solutia's pension plans as of December 31,
2004 and 2003, and the target allocation for 2005, by asset category,
follows.
77
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PERCENTAGE OF PLAN ASSETS AT DECEMBER 31,
-----------------------------------------
ASSET CATEGORY 2005 TARGET ALLOCATION 2004 2003
- -------------- ---------------------- ---- ----
Equity securities 61% 65% 62%
Debt securities 30 30 29
Real estate 5 2 4
Other 4 3 5
--- --- ---
Total 100% 100% 100%
The Solutia defined benefit plan investment strategy is to maintain
an asset allocation that is diversified among multiple different asset
classes, and among multiple managers within each asset class, in order to
minimize the risk of large losses and to maximize the long-term
risk-adjusted rate of return.
Funded Status
The funded status of Solutia's principal pension, healthcare and
other benefit plans at December 31, 2004, and 2003 was as follows:
HEALTHCARE AND OTHER
PENSION BENEFITS BENEFITS
---------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
FUNDED STATUS $(508) $(516) $(717) $(774)
Unrecognized actuarial loss................ 152 176 149 139
Unrecognized prior service costs (gains)... 9 78 (64) (78)
----- ----- ----- -----
ACCRUED NET LIABILITY AT DECEMBER 31....... $(347) $(262) $(632) $(713)
===== ===== ===== =====
The accrued net liability was included in the Statement of
Consolidated Financial Position as of December 31 as follows:
HEALTHCARE AND OTHER
PENSION BENEFITS BENEFITS
---------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Prepaid benefit cost....................... $ 21 $ 21 $ -- $ --
Accrued benefit cost....................... (499) (467) (632) (713)
Intangible asset........................... 9 81 -- --
Deferred tax asset......................... 9 5 -- --
Accumulated other comprehensive loss....... 113 98 -- --
----- ----- ----- -----
ACCRUED NET LIABILITY...................... $(347) $(262) $(632) $(713)
===== ===== ===== =====
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for the pension plans with projected benefit
obligation in excess of plan assets and for the pension plans with
accumulated benefit obligations in excess of plan assets were as follows as
of December 31:
PROJECTED BENEFIT ACCUMULATED BENEFIT
OBLIGATION EXCEEDS THE OBLIGATION EXCEEDS THE
FAIR VALUE OF PLAN ASSETS FAIR VALUE OF PLAN ASSETS
------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Projected benefit obligation............... $1,319 $1,448 1,281 1,415
Accumulated benefit obligation............. 1,297 1,382 1,265 1,357
Fair value of plan assets.................. 811 932 778 903
The accumulated postretirement benefit obligation exceeds plan
assets for all of Solutia's other postretirement benefit plans.
78
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Solutia actively manages funding of its domestic qualified pension
plan in order to meet the requirements of the IRS and the Pension Benefits
Guarantee Corporation (a U.S. federal agency). In 2004 and 2002, Solutia
made discretionary contributions of $11 and $17, respectively, to the
qualified pension plan in order to minimize future required contributions
and to utilize available tax benefits. No contributions were made during
2003 to the qualified pension plan. In addition, Solutia contributed $7 in
2004, 2003 and 2002, respectively, to fund its other pension plans.
According to current IRS funding rules, Solutia does not expect to be
required to make pension contributions to its U.S. qualified pension plan in
2005. However, Solutia may elect to make voluntary contributions to the
pension trust in 2005 in order to minimize future required contributions.
Estimated Future Benefit Payments
Estimated benefit payments expected to be made over the next five
years and the cumulative five year period thereafter are as follows:
PENSION HEALTHCARE AND
BENEFITS OTHER BENEFITS
-------- --------------
2005......................... $145 $ 90
2006............................ 120 80
2007............................ 115 75
2008............................ 115 70
2009............................ 110 70
2010-2014....................... 495 285
17. EMPLOYEE SAVINGS PLANS
In connection with the spinoff, Pharmacia common stock held by the
Pharmacia Employee Stock Ownership Plan (ESOP) and related Pharmacia ESOP
borrowings were allocated between Solutia and Pharmacia. As a result of this
allocation, Solutia received 2.4 million shares of Pharmacia common stock
and assumed $29 of ESOP debt to third parties. Simultaneously, Solutia
created its own ESOP, established a trust to hold the Pharmacia shares, and
issued a $29 loan to the trust. The trust used the proceeds of the loan to
repay the assumed third-party debt. Subsequent to the spinoff, the ESOP
trust was required by government regulations to divest its holdings of
Pharmacia common stock and to use the proceeds to acquire Solutia common
stock. The divestiture of Pharmacia common stock and the purchase of Solutia
common stock were completed in early 1998. At inception, the trust held
10,737,097 shares of Solutia common stock, all of which have been allocated
to participants. The ESOP loans to Solutia were repaid in 2002. The ESOP is
no longer leveraged. During 2002 and 2003, the ESOP purchased Solutia common
stock on the open market to fund Solutia match. Effective December 15, 2003,
the ESOP component of the Solutia Savings and Investment Plan (SIP) was
eliminated.
Substantially all U.S. employees of Solutia are eligible to
participate in the SIP, a 401(k) plan. Prior to December 15, 2003, shares
held in the ESOP were used to make Solutia's matching contribution to
eligible participants' accounts under this plan. Effective December 15,
2003, all matching contributions are invested in the same manner as
participants' personal SIP contributions. Company cash contributions in 2004
were $10 and were invested in accordance with participants' personal
investment elections. Company cash contributions were $12 during 2003 and
$11 was used to purchase Solutia common stock on the open market and $1 was
invested in accordance with participants' personal investment elections.
Company cash contributions were $13 during 2002 and $2 was used to repay
ESOP loans and $11 was used to purchase Solutia common stock on the open
market. The expenses related to the employer match were $10 in 2004, $12 in
2003, and $13 in 2002. In addition, the interest portion of total ESOP
expense was less than $1 in 2002. Finally, effective January 1, 2005,
Solutia increased its SIP matching contribution percentage to 100 percent on
the first 7 percent of a participant's qualified contributions from 60
percent on the first 8 percent, previously.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options and
warrants to purchase its common stock and that it is unlikely that holders
of Solutia's common stock, including options and warrants to purchase
Solutia's common stock, will receive any consideration for that stock or
those options and warrants in such a plan of reorganization.
79
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
18. STOCK OPTION PLANS
Solutia has two stock-based incentive plans under which awards are
available for grants to officers and employees; the Solutia Inc. 2000
Stock-Based Incentive Plan ("2000 Plan") and the Solutia Inc. 1997
Stock-Based Incentive Plan ("1997 Plan"). The 2000 Plan authorizes up to
5,400,000 shares and the 1997 Plan up to 7,800,000 shares of Solutia common
stock for grants of non-qualified and incentive stock options, stock
appreciation rights, restricted stock awards and bonus stock awards. The
shares used may be newly issued shares, treasury shares or a combination.
Under both plans, the exercise price of a stock option must be no less than
the fair market value of Solutia's common stock on the option grant date.
Additionally, the plans provide that the term of any stock option granted
may not exceed 10 years. At December 31, 2004, approximately 1,899,266
shares from the 2000 Plan and 1,024,950 shares from the 1997 Plan remained
available for grants.
During 2004, no options were granted to current executive officers
and other senior executives as a group, or other employees. Total shares
covered by options granted under the plans to current executive officers and
other senior executives as a group totaled 3,011,000, and those to other
employees totaled 10,016,592, through December 31, 2004. The options granted
to Solutia's executive officers and other senior executives are primarily
performance options that become exercisable upon the earlier of achievement
of specified share price targets or the ninth anniversary of the option
grant. The options granted to the other management employees are time-based.
They generally become exercisable in thirds, one-third on each of the first
three anniversaries of the option grant date.
The Solutia Inc. Non-Employee Director Compensation Plan provides
incentives to non-employee members of Solutia's board of directors. This
plan authorizes up to 400,000 shares for grants of non-qualified stock
options and for grants of deferred shares in payment of all or a portion of
the annual retainer for the non-employee directors. Only treasury shares may
be used. Under this plan, the exercise price of a stock option must be no
less than the fair market value of Solutia's common stock on the grant date
and the term of any stock option granted under the plan may not exceed 10
years. At December 31, 2004, 25,174 shares of Solutia's common stock
remained available for grants under the plan. Shares covered by options
granted to non-employee directors totaled 16,000 in 2003 and 24,833 in 2002.
There were no options or deferred shares granted in 2004 as all non-employee
director compensation is now paid in cash.
As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, Solutia has elected to continue following the guidance of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, for measurement and recognition of stock-based
transactions with employees. Accordingly, no compensation cost has been
recognized for Solutia's option plans in the Statement of Consolidated
Operations, as all options granted under the plans had an exercise price
equal to the market value of Solutia's stock on the date of the grant. Had
the determination of compensation cost for these plans been based on the
fair value at the grant dates for awards under these plans, consistent with
the method of SFAS No. 123, Solutia's net loss would have been increased to
the pro forma amounts indicated in Note 2. Solutia believes that its plan of
reorganization will result in cancellation of its existing shares of common
stock, as well as options and warrants to purchase its common stock and that
it is unlikely that holders of options to purchase Solutia's common stock,
will receive any consideration for those options in such a plan of
reorganization.
The following weighted-average assumptions were used for grants of
Solutia options during the year ended December 31:
2003 2002
---- ----
Expected dividend yield.................... 0.0% 0.4%
Expected volatility........................ 123.8% 54.7%
Risk-free interest rates................... 3.2% 4.3%
Expected option lives (years).............. 5.0 5.0
The weighted-average fair values of options granted were $1.14 in
2003 and $5.08 in 2002.
80
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
A summary of the status of Solutia's stock option plans for years
ended December 31, 2004, 2003 and 2002 follows:
OUTSTANDING
-----------------------------------------------
EXERCISABLE WEIGHTED-AVERAGE
OPTIONS OPTIONS EXERCISE PRICE
-----------------------------------------------------------------------
December 31, 2001............. 22,015,711 25,700,981 $15.68
-----------------------------------------------------------------------
Granted.................... 1,597,633 $10.23
Exercised.................. (365,394) 5.57
Expired.................... (1,582,710) 15.99
-----------------------------------------------------------------------
December 31, 2002............. 21,712,940 25,350,510 $15.47
-----------------------------------------------------------------------
Granted.................... 1,003,274 $1.36
Exercised.................. -- 0.00
Expired.................... (2,874,547) 11.49
-----------------------------------------------------------------------
December 31, 2003............. 20,838,155 23,500,239 $15.31
-----------------------------------------------------------------------
Granted.................... -- $0.00
Exercised.................. -- 0.00
Expired.................... (3,886,064) 13.41
=======================================================================
December 31, 2004............. 18,646,490 19,614,175 $15.69
=======================================================================
The following table summarizes information about stock options
outstanding at December 31, 2004:
OPTIONS OUTSTANDING:
WEIGHTED-AVERAGE
RANGE OF REMAINING CONTRACTUAL WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER LIFE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------
$ 0 to 2.99.................. 758,830 8.5 1.25
3 to 7.99.................. 437,226 1.1 6.63
8 to 11.99.................. 1,243,653 5.0 10.32
12 to 15.99.................. 4,259,606 3.0 13.83
16 to 18.99.................. 7,474,358 1.8 16.50
19 to 22.99.................. 5,255,123 2.4 19.73
23 to 29.99.................. 185,379 2.7 27.40
-----------------------------------------------------------------------
$ 0 to 29.99.................. 19,614,175 2.7 15.69
=======================================================================
OPTIONS EXERCISABLE:
RANGE OF WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------
$0 to 2.99.................. 285,461 1.25
3 to 7.99.................. 392,813 6.93
8 to 11.99.................. 998,750 10.33
12 to 15.99.................. 4,101,606 13.83
16 to 18.99.................. 7,474,358 16.50
19 to 22.99.................. 5,208,123 19.73
23 to 29.99.................. 185,379 27.40
-----------------------------------------------
$0 to 29.99.................. 18,646,490 16.16
===============================================
81
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
19. CAPITAL STOCK
On December 17, 2003, following the announcement that Solutia had
filed for Chapter 11 bankruptcy protection, the New York Stock Exchange
halted trading in Solutia's common stock. Solutia's common stock was
delisted from the NYSE on February 24, 2004. Solutia's common stock is
currently being quoted under the ticker symbol SOLUQ on the Pink Sheets
Electronic Quotation Service maintained by The Pink Sheets LLC and on the
OTC Bulletin Board.
The declaration and payment of dividends is made at the discretion
of Solutia's board of directors. There was no annual dividend paid in 2004
or 2003. Solutia is currently prohibited by both the U.S. Bankruptcy Code
and the DIP financing facility from paying dividends to shareholders.
In conjunction with the settlement of the Anniston PCB litigation
during 2003, Solutia issued Monsanto warrants to purchase up to 10 million
shares of Solutia common stock at an exercise price of $1.10 per common
share. The warrants issued pursuant to the settlement are to be exercisable
only if Solutia's common stock reaches an average closing price target
exceeding $10 per share for any thirty-day period, or upon a
change-of-control of Solutia. Solutia has determined the value of the
warrants as of the date of the courts' approval of the settlement to be $37
based on the share price on that date. However, Solutia believes that its
plan of reorganization will result in cancellation of its existing shares of
common stock, as well as options and warrants to purchase its common stock
and that it is unlikely that holders of Solutia's common stock, including
options and warrants to purchase Solutia's common stock, will receive any
consideration for that stock or those options and warrants in such a plan of
reorganization. Consequently, these warrants would be cancelled if the
underlying common stock were to be cancelled. The warrants were not included
within the Financing Activities section of the Statement of Consolidated
Cash Flows in 2003, as the agreement to issue the warrants represents a
non-cash transaction.
Solutia's board of directors declared a dividend of one preferred
stock purchase right for each share of Solutia's common stock issued in the
distribution of shares by Pharmacia to its shareholders on the effective
date of the spinoff and authorized the issuance of one right for each share
of common stock issued after the effective date of the spinoff until the
earlier of the date the rights become exercisable and the termination date
of the rights plan. If a person or group acquires beneficial ownership of 20
percent or more, or announces a tender offer that would result in beneficial
ownership of 20 percent or more, of Solutia's outstanding common stock, the
rights become exercisable. Then, for every right held, the owner will be
entitled to purchase one one-hundredth of a share of a series of preferred
stock for $.000125. If Solutia is acquired in a business combination
transaction while the rights are outstanding, for every right held the
holder will be entitled to purchase, for $.000125, common shares of the
acquiring company having a market value of $.000250. In addition, if a
person or group acquires beneficial ownership of 20 percent or more of
Solutia's outstanding common stock, for every right held, the holder (other
than such person or members of such group) will be entitled to purchase, for
$.000125, a number of shares of Solutia's common stock having a market value
of $.000250. Furthermore, at any time after a person or group acquires
beneficial ownership of 20 percent or more (but less than 50 percent) of
Solutia's outstanding common stock, Solutia's board of directors may, at its
option, exchange part or all of the rights (other than rights held by the
acquiring person or group) for shares of Solutia's common stock on a
one-share-for-every-one-right basis. At any time prior to the acquisition of
such a 20 percent position, Solutia can redeem each right for $.00000001.
The board of directors is also authorized to reduce the 20 percent
thresholds described above to not less than 10 percent. The rights expire in
the year 2007. However, Solutia believes that its plan of reorganization
will result in cancellation of its existing shares of common stock, as well
as options and warrants to purchase its common stock and that it is unlikely
that holders of Solutia's common stock, including options and warrants to
purchase Solutia's common stock, will receive any consideration for that
stock or those options and warrants in such a plan of reorganization.
Consequently, this preferred stock purchase right plan would be cancelled if
the underlying common stock were to be cancelled.
Solutia has 10 million shares of preferred stock, par value $0.01
per share, authorized. As of December 31, 2004, there were no preferred
shares issued or outstanding.
20. COMMITMENTS AND CONTINGENCIES
Commitments
Commitments, principally in connection with uncompleted additions
to property, were approximately $15 and $14 at December 31, 2004 and 2003,
respectively. In addition, as of December 31, 2004, Solutia was contingently
liable under letters of credit totaling $113, $18 of which were cash
collaterized, primarily related to environmental remediation and various
insurance related
82
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
activities. The cash underlying these collateralized letters of credit is
contractually restricted and accordingly is excluded from cash and cash
equivalents and recorded in Other Assets within the Statement of
Consolidated Financial Position as of December 31, 2004.
Solutia's future minimum payments under operating leases and
various unconditional purchase obligations are $55 for 2005, $50 for 2006,
$46 for 2007, $45 for 2008, $26 for 2009 and $23 thereafter. The amounts of
these commitments have not been adjusted to reflect any potential impact
that the bankruptcy proceedings may have upon the timing and valuation of
such commitments.
Solutia has entered into agreements with certain customers to
supply a guaranteed quantity of certain products annually at prices
specified in the agreements. In return, the customers have advanced funds to
Solutia to cover the costs of expanding capacity to provide the guaranteed
supply. Solutia has recorded the advances as deferred credits and amortizes
the amounts to income as the customers purchase the products. The
unamortized deferred credits were $109 at December 31, 2004 and $168 at
December 31, 2003.
The more significant concentrations in Solutia's trade receivables
at December 31, 2004 and 2003 were:
2004
----
NORTH EUROPE/ LATIN ASIA
AMERICA AFRICA AMERICA PACIFIC TOTAL
------- ------ ------- ------- -----
Glass..................... $16 $64 $11 $14 $105
Chemicals................. 26 18 7 10 61
Carpet.................... 16 1 -- -- 17
2003
----
NORTH EUROPE/ LATIN ASIA
AMERICA AFRICA AMERICA PACIFIC TOTAL
------- ------ ------- ------- -----
Glass..................... $13 $55 $11 $15 $94
Chemicals................. 28 17 2 9 56
Carpet.................... 28 1 -- 1 30
Management does not anticipate losses on its trade receivables in
excess of established allowances.
Contingencies
Litigation
- ----------
Because of the size and nature of its business, Solutia is 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, Solutia assumed the
defense of specified legal proceedings and agreed to indemnify Pharmacia for
obligations arising in connection with those proceedings. Solutia has
determined that these defense and indemnification obligations to Pharmacia
are pre-petition obligations under the U.S. Bankruptcy Code that Solutia is
prohibited from performing, except pursuant to a confirmed plan of
reorganization. As a result, Solutia has ceased performance of these
obligations. Solutia's cessation of performance may give rise to a
pre-petition unsecured claim against Solutia which Pharmacia may assert in
Solutia's Chapter 11 bankruptcy case. This estimated unsecured claim amount
was classified as a liability subject to compromise as of December 31, 2004
and 2003 in the amount of $141 and $146, respectively.
Solutia's 2003 Form 10-K/A described a number of legal proceedings
in which Solutia was a named defendant or was defending solely due to its
indemnification obligations referred to above. Solutia is prohibited from
performing with respect to these obligations, and developments, if any, in
these matters are currently managed by other named defendants. Accordingly,
Solutia has ceased reporting on the status of those legal proceedings. The
legal proceedings which are in this category are (i) Owens v. Monsanto; (ii)
Payton v. Monsanto; (iii) other Anniston cases; (iv) the PENNDOT case; and
(v) premises based asbestos litigation.
Following is a summary of legal proceedings that Solutia or certain
of its equity affiliates continue to manage that could result in an outcome
that is material to the consolidated financial statements:
83
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ANNISTON PARTIAL CONSENT DECREE
On August 4, 2003, the U.S. District Court for the Northern
District of Alabama approved a Partial Consent Decree in an action captioned
United States of America v. Pharmacia Corporation (p/k/a Monsanto Company)
and Solutia. This Partial Consent Decree provides for Pharmacia and Solutia
to sample certain residential properties and remove soils found on those
properties if polychlorinated biphenyls ("PCBs") are at a level of 1 part
per million ("ppm") or above, to conduct a Remedial Investigation and
Feasibility Study to provide information for the selection by the EPA of a
cleanup remedy for the Anniston PCB site, and to pay EPA's past response
costs and future oversight costs related to this work. The decree also
provided for the creation of an educational trust fund of approximately $3
to be funded over a 12-year period to provide supplemental educational
services for school children in west Anniston. A dispute currently exists
between the EPA and Solutia regarding the scope and application of the
automatic stay arising as a result of Solutia's Chapter 11 filing to the
remaining obligations under the Partial Consent Decree. On April 19, 2004,
the district court held that the Partial Consent Decree enforces police and
regulatory powers under the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") and as a result the automatic
stay provisions of the U.S. Bankruptcy Code are inapplicable to Solutia's
obligations under the Partial Consent Decree. On April 30, 2004, the United
States Bankruptcy Court for the Southern District of New York entered a
Stipulation and Agreed Order in which the EPA and Solutia stipulate that the
automatic stay is applicable to certain of the Partial Consent Decree's
requirements. Solutia filed a motion asking the district court to reconsider
its order and to bring it into accord with the Stipulation and Agreed Order
consented to by the EPA and entered by the bankruptcy court. On September 9,
2004, the district court denied Solutia's motion and declared that the
automatic stay is inapplicable to Solutia's obligations under the Partial
Consent Decree to perform site work. Solutia appealed this ruling to the
Eleventh U.S. Circuit Court of Appeals, which dismissed the appeal for lack
of jurisdiction.
FLEXSYS RELATED LITIGATION
Antitrust authorities in the United States, Europe and Canada are
investigating past commercial practices in the rubber chemicals industry.
Flexsys, Solutia's 50/50 joint venture with Akzo Nobel N.V., is a subject of
such an investigation and has been fully cooperating with the authorities
and will continue to do so in the ongoing investigation. In addition, a
number of purported class actions have been filed against Flexsys and other
producers of rubber chemicals.
State court actions against Flexsys. Although not named as a
defendant, Solutia is aware of 22 purported class actions filed in various
state courts against Flexsys and other producers of rubber chemicals. In 20
of these cases, plaintiffs seek actual and treble damages under state law on
behalf of all retail purchasers of tires in that state since as early as
1994. In the other two cases, plaintiffs make similar allegations and seek
similar relief on behalf of all consumers of products containing rubber,
including tires. Twelve of these cases remain pending at the trial level in
procedural stages or are pending on appeal following dismissal as to Flexsys
on procedural grounds. In another case, defendants have appealed following
the denial of their motion to dismiss for lack of standing. On March 1,
2005, Solutia became aware of a new state court action filed in Tennessee on
behalf of consumers who allegedly purchased any product containing rubber
chemicals in Tennessee or a number of other states. The case was filed
against Flexsys and other rubber chemical producers and also names Solutia.
The allegations in the case are similar to the two cases described above
which were previously filed in other states on behalf of all consumers of
products containing rubber chemicals, including tires and requests the same
form of relief. The case will be automatically stayed against Solutia.
Canadian actions against Flexsys. In May 2004, two purported class
actions were filed in the Province of Quebec, Canada, against Flexsys and
other rubber chemical producers alleging that collusive sales and marketing
activities of the defendants damaged all persons in Quebec during the period
July 1995 through September 2001. Plaintiffs seek statutory damages of (CAD)
$14.6 along with exemplary damages of (CAD) $.000025 per person. A hearing
will be scheduled to determine which case will be allowed to go torward.
Solutia is not a defendant in either of these class actions.
Federal court actions by purchasers of rubber chemicals. Eight
purported class actions filed in the U.S. District Court for the Northern
District of California on behalf of all individuals and entities that had
purchased rubber chemicals in the United States during the period January 1,
1995 until October 10, 2002, against Solutia, Flexsys and a number of other
companies producing rubber chemicals have been consolidated into a single
action called In Re Rubber Chemicals Antitrust Litigation. The consolidated
action alleges price-fixing and seeks treble damages and injunctive relief
under U.S. antitrust laws on behalf of all the plaintiffs. Solutia filed a
Suggestion of Bankruptcy in this consolidated action staying the litigation
against it. A settlement agreement was filed with the district court on
February 18, 2005. If approved by the district court, the agreement would
release Flexsys, Solutia, Akzo and their
84
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
predecessors in interest from any further liability to the members of the
class with respect to the allegations in the action. RBX Industries, Inc. v.
Bayer Corp., Flexsys, et.al., originally filed in federal court in
Pennsylvania in July 2004, was removed to the U.S. District Court for the
Northern District of California. This case alleges that during the period
1995 through 2001 the defendants, which do not include Solutia, conspired
through common marketing and sales practices to cause plaintiffs to pay
supra-competitive prices for rubber chemicals and seeks treble damages.
Federal court actions alleging violations of federal securities
laws. Six purported shareholder class actions were filed in the U.S.
District Court for the Northern District of California against Solutia, its
then and former chief executive officers and its then chief financial
officer. The complaints were consolidated into a single action called In Re
Solutia Securities Litigation, and a consolidated complaint which named two
additional defendants, Solutia's then current and past controllers, was
filed. The consolidated complaint alleges that from December 16, 1998 to
October 10, 2002, Solutia's accounting practices regarding incorporation of
Flexsys's results into Solutia's financial reports violated federal
securities laws by misleading investors as to Solutia's actual results and
causing inflated prices to be paid by purchasers of Solutia's publicly
traded securities during the period. The plaintiffs seek damages and any
equitable relief that the court deems proper. The consolidated action has
been automatically stayed with respect to Solutia by virtue of Section
362(a) of the U.S. Bankruptcy Code. The consolidated complaint was dismissed
as against the individual defendants for failure to state a claim, but
plaintiffs were granted the right to file an amended complaint, which they
did. The second amended complaint against the individual defendants was
dismissed with prejudice on January 4, 2005. Plaintiffs have the right to
appeal.
Shareholder Derivative Suits. Two purported shareholder derivative
suits were filed in the Missouri Circuit Court for the Twenty-First Judicial
Circuit of St. Louis County against certain of Solutia's current and past
directors, chief executive officers, chief financial officer and former vice
chairman. Solutia is included as a nominal defendant. The plaintiffs seek
damages on behalf of Solutia for the individual defendants' alleged breaches
of fiduciary duty, abuse of control, gross mismanagement, waste of corporate
assets and unjust enrichment, arising out of Flexsys's alleged participation
in the price-fixing of rubber chemicals and Solutia's incorporation of
Flexsys's purportedly inflated financial results arising from the alleged
price-fixing into Solutia's financial statements. These two shareholder
derivative suits were consolidated into a single action, In re Solutia Inc.
Derivative Litigation. On December 29, 2003, the court entered an Order in
the consolidated action staying the litigation with respect to all
defendants, including Solutia. In August 2004, the court involuntarily
dismissed the cases for lack of prosecution. Plaintiffs' motion to reinstate
the actions is pending.
OTHER LEGAL PROCEEDINGS
On October 7, 2004, a purported class action captioned Dickerson v.
Feldman, et al. was filed in the United States District Court for the
Southern District of New York against a number of defendants, including
former officers and employees of Solutia and Solutia's Employee Benefits
Plans Committee and Pension and Savings Funds Committee. Solutia was not
named as a defendant. The action alleges breach of fiduciary duty under the
Employee Retirement Income Security Act of 1974 ("ERISA") and seeks to
recover alleged losses to the Solutia Inc. Savings and Investment Plan ("SIP
Plan") arising from the alleged imprudent investment of SIP Plan assets in
Solutia's common stock during the period December 16, 1998 to the date the
action was filed. The investment is alleged to have been imprudent because
of Solutia's legacy environmental and litigation liabilities and because of
Flexsys' alleged involvement in the matters described above under "Flexsys
Related Litigation." The action seeks monetary payment to the SIP Plan to
make good 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
plaintiff in this action filed a proof of claim for $269 against Solutia in
the U.S. Bankruptcy Court for the Southern District of New York. The
plaintiff now seeks to withdraw the reference of his ERISA claim from the
bankruptcy court to the district court so that the proof of claim and the
class action can be considered together by the district court. On February
11, 2005, Solutia filed an objection to the motion to withdraw the
reference.
On October 14, 2003, Solutia filed an action captioned Solutia Inc.
v. FMC Corporation in Circuit Court in St. Louis County, Missouri, against
FMC over the failure of purified phosphoric acid technology provided by FMC
to Astaris, the 50/50 joint venture between Solutia and FMC. On February 20,
2004, Solutia voluntarily dismissed the state court action and filed an
adversary proceeding against FMC in the U.S. Bankruptcy Court for the
Southern District of New York. FMC filed with the bankruptcy court a motion
to withdraw the reference. The motion was granted, and, as a result, the
matter is now pending in the U.S. District Court for the Southern District
of New York. FMC has filed a motion to dismiss Solutia's action based upon
an alleged lack of standing. On October 15, 2004, the court heard oral
arguments on FMC's motion to dismiss. Discovery is on-going with the
discovery deadline set for May 31, 2005. Solutia is vigorously pursuing this
action.
85
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Environmental Liabilities
- -------------------------
Environmental compliance and remediation costs and other
environmental liabilities incurred by Solutia generally fall into two broad
categories: (a) those related to properties currently owned or operated by
Solutia and (b) those related to properties that are not owned by Solutia,
including non-owned properties adjacent to plant sites and certain owned
offsite disposal locations. For the owned and operated sites, Solutia had an
accrued liability of $78 and $81 as of December 31, 2004 and 2003,
respectively, for solid and hazardous waste remediation, which represents
Solutia's best estimate of the underlying obligation. In addition, this
balance also includes post-closure costs at certain of Solutia's operating
locations. This liability is not classified as subject to compromise in the
Statement of Consolidated Financial Position because, irrespective of the
bankruptcy proceedings, Solutia will be required to comply with
environmental requirements in the conduct of its business, regardless of
when the underlying environmental contamination occurred. However, Solutia
ultimately expects to seek recovery against other potentially responsible
parties at certain of these locations.
Solutia had an accrued liability of $82 and $85 as of December 31,
2004 and 2003, respectively, for properties not owned or operated by
Solutia. This liability is classified as subject to compromise in the
Statement of Consolidated Financial Position as of both December 31, 2004
and 2003, as Solutia currently believes it constitutes a pre-petition claim
that will be discharged in the bankruptcy process. The EPA and/or Pharmacia
are currently contesting the enforceability of the automatic stay provisions
with respect to the Anniston, Alabama location (as more fully disclosed in
the above Anniston Partial Consent Decree disclosure). In addition,
remediation activities are currently being funded by Monsanto for certain of
these properties not owned or operated by Solutia. Monsanto's funding of
these remediation activities may give rise to a claim against Solutia which
Monsanto may assert in Solutia's Chapter 11 bankruptcy case.
In addition to the bankruptcy proceedings, Solutia's environmental
liabilities are also subject to changing governmental policy and
regulations, discovery of unknown conditions, judicial proceedings, method
and extent of remediation, existence of other potentially responsible
parties and future changes in technology. Solutia believes that the known
and unknown environmental matters, when ultimately resolved, which may be
over an extended period of time, could have a material effect on the
consolidated financial position, liquidity and profitability of Solutia.
Astaris Joint Venture
- ---------------------
On October 8, 2003, Solutia and Astaris, a 50/50 joint venture with
FMC Corporation ("FMC"), amended its external financing agreement to release
the Astaris lenders' security interests in certain Solutia assets in
exchange for Solutia's posting of a $67 letter of credit, representing fifty
percent of the Astaris lenders' outstanding commitments to Astaris. The
agreement was also amended to provide for a dollar-for-dollar reduction of
the Astaris lenders' commitments with future payments ("keepwell payments")
made by Solutia and FMC under their existing support agreements to Astaris.
This additional amendment provided a $67 limitation for each of Solutia and
FMC on future funding in the event the joint venture continued to fail to
meet certain financial benchmarks. Solutia's $67 letter of credit was
reduced dollar-for-dollar as payments were made by Solutia under its
existing support agreement. Solutia used approximately $36 in 2004 and $63
in 2003 for investment payments to keep the Astaris joint venture in
compliance with its financial covenants. The remaining commitment to Astaris
was $10 and $51 as of December 31, 2004 and 2003, respectively, and was
recorded as a liability in the Statement of Consolidated Financial Position
in these periods accordingly.
FMC and Solutia had also agreed to allow Astaris to defer up to $27
of payment obligations to each of FMC and Solutia under existing operating
agreements and certain other agreements. The deferral amount outstanding
from Astaris to Solutia was $16 and $2 as of December 31, 2004 and 2003,
respectively. In February 2005, this deferral agreement was terminated and
all amounts outstanding were paid in full in conjunction with the Astaris
refinancing (as more fully described below).
On February 8, 2005, Astaris refinanced its existing $20 credit
facility that was scheduled to expire in September 2005 with a new
three-year, $75 revolving credit facility. Among other items, the new credit
facility allowed Astaris to repay Solutia and FMC approximately $16 each
that had been deferred under existing operating agreements and certain other
agreements. Completion of the new facility also resulted in the release of a
$10 letter of credit back to Solutia that was previously established to
support prior keepwell arrangements that have now been terminated as part of
the new credit facility. Under the new credit facility Astaris is required
to delay certain payments to Solutia and FMC if it does not achieve certain
financial metrics, with repayment of any amounts required once Astaris
achieves the required financial metrics. Solutia does not believe any
potential deferral amounts will be significant in amount or prolonged in
duration of repayment. Solutia's consent to the potential payment
restrictions contained in the new credit facility and termination of the
deferral agreement under the previous credit facility are both subject to
approval by the bankruptcy court.
86
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UCB S.A. Dispute
- ----------------
On December 2, 2002, Solutia signed a definitive stock and asset
purchase agreement ("SAPA") to sell its resins, additives and adhesives
businesses to UCB S.A. ("UCB") for $500 in cash, plus an upfront payment of
$10 for a period of exclusivity. On January 31, 2003, the sale was
completed. In connection with the closing of the transactions contemplated
under the SAPA, Solutia and UCB entered into certain contracts for the
provision of certain goods and services to UCB following closing. After the
closing, certain disputes arose between the parties under these contracts
and the SAPA with each party asserting that the other owed it certain sums.
These disputes were unresolved as of Solutia's Chapter 11 filing date.
Solutia had approximately $30 recorded for this liability as of both
December 31, 2004 and 2003. As a result of Solutia's Chapter 11 bankruptcy
filing, this liability was classified as subject to compromise in the
Statement of Consolidated Financial Position. On December 30, 2004, Solutia,
UCB and Cytec Industries ("Cytec") entered into an agreement to settle most
of the contract disputes subject to bankruptcy court approval and closing of
the stock and asset purchase agreement between UCB and Cytec. Pursuant to
the settlement agreement, among other things, UCB waived certain tax
indemnity and purchase price adjustment claims against Solutia arising under
the SAPA. The stock and asset purchase agreement between UCB and Cytec
closed on March 1, 2005 and the bankruptcy court entered an order approving
the terms of the settlement agreement on March 2, 2005. See Note 23 for
further information with respect to the settlement agreement.
Impact of Chapter 11 Proceedings
- --------------------------------
During the reorganization process, substantially all pending
litigation against Solutia and its subsidiaries that filed for
reorganization under Chapter 11 ("Debtors") is stayed, as well as the
majority of all other pre-petition claims. Exceptions would generally
include pre-petition claims addressed by the bankruptcy court, as well as
fully secured claims. Such claims may be subject to future adjustments.
Adjustments may result from actions of the bankruptcy court, negotiations,
assumption or rejection of executory contracts, determination as to the
value of any collateral securing claims, proofs of claims or other events.
Additional pre-filing claims not currently reflected in the consolidated
financial statements may be identified through the proof of claim
reconciliation process. The amount of pre-filing claims ultimately allowed
by the bankruptcy court with respect to contingent claims may be materially
different from the amounts reflected in the condensed consolidated financial
statements. Generally, claims against Debtors arising from actions or
omissions prior to their filing date may be subject to compromise in
connection with the plan of reorganization. The ultimate resolution of all
of these claims may be settled through negotiation as compared to court
proceedings, with the result being that Solutia may retain certain
obligations currently classified as subject to compromise in the Statement
of Consolidated Financial Position.
21. SUPPLEMENTAL DATA
Supplemental income statement and cash flow data from continuing
operations were:
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
--------------------------------------
Income Statement:
- -----------------
Raw material and energy costs ......................... $1,429 $1,088 $1,008
Employee compensation and benefits .................... 613 664 693
Depreciation expense .................................. 114 121 119
Taxes other than income................................ 76 76 80
Rent expense .......................................... 26 29 39
Provision for doubtful accounts (net of recoveries).... 2 5 --
Technological expenses:
Research and development ........................... $ 40 $ 46 $ 39
Engineering, commercial development
and patent ......................................... 4 7 8
--------------------------------------
Total technological expenses .......................... $ 44 $ 53 $ 47
Interest expense:
Total interest cost ................................ $ 116 $ 121 $ 85
Less capitalized interest .......................... 3 1 1
--------------------------------------
Net interest expense .................................. $ 113 $ 120 $ 84
87
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Cash Flow:
- ----------
Cash payments for interest (net of amounts capitalized) $ 86 $ 99 $ 84
Cash payments for income taxes......................... 12 16 31
Cash payments for reorganization items (a)............. 44 -- --
The effect of exchange rate changes on cash and cash equivalents was not
significant.
<FN>
(a) Cash payments for reorganization items were included in Cash from
Operations in the Statement of Consolidated Operations in 2004.
88
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
22. SEGMENT AND GEOGRAPHIC DATA
Solutia, together with its subsidiaries, is a global manufacturer
and marketer of a variety of high-performance chemical-based materials,
which are used in a broad range of consumer and industrial applications.
Solutia manages its business in two segments: Performance Products and
Services and Integrated Nylon. The Performance Products and Services segment
is a world leader in performance films for laminated safety glass and
after-market applications, and specialties such as water treatment
chemicals, heat transfer fluids and aviation hydraulic fluid. The Integrated
Nylon segment consists of an integrated family of nylon products including
high-performance polymers and fibers. The major products and services by
reportable segment are as follows:
PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON
--------------------------------- ----------------
SAFLEX(R) and VANCEVA(R) plastic Nylon intermediate "building
interlayer block" chemicals
Polyvinyl butyral for KEEPSAFE(R), Merchant polymer and nylon
and KEEPSAFE MAXIMUM(R) extrusion polymers, including
laminated window glass VYDYNE(R) and ASCEND(R)
LLUMAR(R), VISTA(R) and GILA(R) Carpet fibers, including the
professional and retail window films WEAR-DATED(R) and ULTRON(R)
brands
THERMINOL(R) heat transfer fluids
Industrial nylon fibers
DEQUEST(R) water treatment chemicals
SKYDROL(R) aviation hydraulic fluids
Services for process research and
development, scale-up manufacturing
and small volume licensed production
for the pharmaceutical industry
Solutia evaluates the performance of its operating segments based
on segment earnings before interest expense and income taxes (EBIT), which
includes marketing, administrative, technological and amortization expenses,
gains and losses from asset dispositions and restructuring charges, and
other income and expense items that can be directly attributable to the
segment. Certain expenses and other items that are managed outside the
segments are excluded. These unallocated items consist primarily of
corporate expenses, certain equity earnings from affiliates, other income
and expense items, reorganization items, gains and losses from asset
dispositions and restructuring charges that are not directly attributable to
the operating segment. There were no inter-segment sales in the periods
presented below.
89
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Solutia's 2004, 2003 and 2002 segment information follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2004 2003 2002
----------------------------------------------------------------------
NET PROFIT Net Profit Net Profit
SALES (LOSS) Sales (Loss) Sales (Loss)
----- ------ ----- ------ ----- ------
SEGMENT:
Performance Products and
Services................... $1,109 $ 52 $1,038 $ (39) $ 974 $ 78
Integrated Nylon............. 1,588 (59) 1,392 (59) 1,325 24
------ ----- ------ ----- ------ ----
SEGMENT TOTALS.................. 2,697 (7) 2,430 (98) 2,299 102
RECONCILIATION TO
CONSOLIDATED TOTALS:
Corporate expenses.......... (89) (268) (61)
Equity earnings (loss)
from affiliates............ (27) (134) 14
Interest expense............ (113) (120) (84)
Other income, net........... -- 6 10
Loss on debt modification... (15) -- --
Reorganization items, net... (71) (1) --
CONSOLIDATED TOTALS:
------ ------ ------
NET SALES................... $2,697 $2,430 $2,299
====== ----- ====== ----- ====== ----
LOSS BEFORE INCOME TAXES.... $(322) $(615) $(19)
===== ===== ====
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------------------------------------
DEPRECIATION DEPRECIATION DEPRECIATION
CAPITAL AND CAPITAL AND CAPITAL AND
ASSETS EXPENDITURES AMORTIZATION ASSETS EXPENDITURES AMORTIZATION ASSETS EXPENDITURES AMORTIZATION
------ ------------ ------------ ------ ------------ ------------ ------ ------------ ------------
SEGMENT:
Performance Products
and Services.......... $ 866 $44 $ 45 $ 861 $ 24 $ 51 $ 923 $35 $ 50
Integrated Nylon........ 713 15 76 812 53 80 882 21 79
------ --- ---- ------ ---- ---- ------ --- ----
SEGMENT TOTALS............ $1,579 $59 $121 $1,673 $ 77 $131 $1,805 $56 $129
RECONCILIATION TO
CONSOLIDATED TOTALS:
Unallocated amounts .... 497 2 6 773 1 6 901 3 5
------ --- ---- ------ ---- ---- ------ --- ----
CONSOLIDATED TOTALS $2,076 $61 $127 $2,446 $ 78 $137 $2,706 $59 $134
====== === ==== ====== ==== ==== ====== === ====
Solutia's geographic information for the year ended December 31,
2004, 2003 and 2002 follows:
PROPERTY, PLANT AND
NET SALES EQUIPMENT, NET
----------------------------------- ------------------------
2004 2003 2002 2004 2003
---- ---- ---- ---- ----
U.S. ............................ $1,559 $1,475 $1,407 $701 $771
Other countries.................. 1,138 955 892 140 138
------ ------ ------ ---- ----
CONSOLIDATED TOTALS.............. $2,697 $2,430 $2,299 $841 $909
====== ====== ====== ==== ====
90
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
23. SUBSEQUENT EVENTS
Solutia announced on January 25, 2005, that it will exit the acrylic
fibers business in its Integrated Nylon operating segment, pending approval
by the bankruptcy court. Solutia's plant in Decatur, Alabama, will continue
to operate as a producer of chemical intermediates for use in nylon
products but will close its acrylic fiber operation in April 2005. As a
result of the decision to exit the acrylic fibers business and after
obtaining appropriate approvals through the bankruptcy court process,
Solutia expects to record charges and to incur cash expenditures that are
currently estimated at approximately $10 during the remainder of 2005. These
charges relate to approximately $5 for severance and other employee costs
expected to occur in the first half of 2005 and approximately $5 of other
exit costs, such as decommissioning related activities, which are projected
to be expensed as incurred primarily during the second and third quarters of
2005. Additionally, Solutia previously impaired a majority of the acrylic
fibers' property, plant and equipment and accordingly does not expect to
record material charges with respect to property, plant and equipment.
On February 8, 2005, Astaris refinanced its existing $20 credit
facility that was scheduled to expire in September 2005 with a new
three-year, $75 revolving credit facility. Among other items, the new credit
facility allowed Astaris to repay Solutia and FMC approximately $16 each
that had been deferred under existing operating agreements and certain other
agreements. Completion of the new facility also resulted in the release of a
$10 letter of credit back to Solutia that was previously established to
support prior keepwell arrangements that have now been terminated as part of
the new credit facility. Under the new credit facility Astaris is required
to delay certain payments to Solutia and FMC if it does not achieve certain
financial metrics, with repayment of any amounts required once Astaris
achieves the required financial metrics. Solutia does not believe any
potential deferral amounts will be significant in amount or prolonged in
duration of repayment. Solutia's consent to the potential payment
restrictions contained in the new credit facility and termination of the
deferral agreement under the previous credit facility are both subject to
approval by the bankruptcy court.
On March 2, 2005, the bankruptcy court approved a settlement
agreement entered into as of December 30, 2004, by and among Solutia, Cytec
Industries Inc. ("Cytec"), and UCB S.A. ("UCB"). The settlement agreement
(i) resolved issues arising out of various contracts entered into by Solutia
in connection with the sale of Solutia's resins, additives and adhesives
business to UCB pursuant to a Stock and Asset Purchase Agreement dated
December 2, 2002 and (ii) required Solutia to assume certain of these
contracts as amended under the settlement agreement and to consent to the
assignment to Cytec of certain other of these contracts in connection with
the sale of certain of UCB's assets to Cytec pursuant to a Stock and Asset
Purchase Agreement between UCB and Cytec dated October 1, 2004. In exchange
for Solutia's assumption of certain contracts and consent to UCB's
assignment of other contracts to Cytec, UCB waived (i) certain tax indemnity
and purchase price adjustment claims against Solutia arising under the
purchase agreement between Solutia and UCB and (ii) all pre-petition claims
against Solutia for amounts allegedly due UCB for accounts receivable
collected by Solutia on behalf of UCB. Also, certain monetary disputes
arising under the purchase agreement and certain other contracts between
Solutia and UCB were resolved. In addition, UCB retained its unliquidated
tax indemnity claim against Solutia, and Solutia has reserved any and all of
its rights to object to or otherwise dispute such claim as part of the
claims resolution process in its bankruptcy case. Overall, Solutia expects
the net impact of this settlement agreement to result in an approximate $30
gain in the first quarter 2005.
On March 2, 2005, the bankruptcy court approved Solutia's motion,
among other things, to (i) reject certain executory contracts with Gateway
Energy WGK Project, LLC ("Gateway"); (ii) terminate a performance guaranty
related thereto; and (iii) resolve rejection damage claims by providing an
allowed claim of approximately $20 for damages arising from Solutia's
rejection of these executory contracts and for other outstanding
pre-petition obligations. The order also allows Solutia to enter into a new
steam services agreement under more favorable terms than the previous steam
services agreement. At December 31, 2004, Solutia had a recorded liability
of approximately $12 with respect to these contracts. This liability was
classified as subject to compromise in the Statement of Consolidated
Financial Position. As a result, Solutia expects to incur a charge of
approximately $8 in the first quarter 2005 related to the allowed claim
arising from the contract rejection.
91
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
24. QUARTERLY DATA -- UNAUDITED
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales from Continuing Operations............... 2004 $643 $699 $677 $678 $2,697
2003 $611 $625 $594 $600 $2,430
Gross Profit from Continuing Operations............ 2004 71 44 91 17 223
2003 69 49 (50) (8) 60
Loss from Continuing Operations.................... 2004 (100) (98) (18) (100) (316)
2003 (17) (38) (173) (752) (980)
Loss from Discontinued Operations.................. 2003 (2) -- -- -- (2)
Cumulative Effect of Change in Accounting
Principle........................................ 2003 -- -- (5) -- (5)
Net Income (Loss).................................. 2004 (100) (98) (18) (100) (316)
2003 (19) (38) (178) (752) (987)
Basic and Diluted Loss per Share:
Loss from Continuing Operations.................... 2004 (0.96) (0.94) (0.17) (0.96) (3.02)
2003 (0.16) (0.36) (1.65) (7.19) (9.37)
Net Loss........................................... 2004 (0.96) (0.94) (0.17) (0.96) (3.02)
2003 (0.18) (0.36) (1.70) (7.19) (9.44)
Common Stock Price:
2004...................................... HIGH 0.59 0.40 0.32 1.39 1.39
LOW 0.19 0.23 0.24 0.15 0.15
2003...................................... High 4.73 2.80 4.89 4.43 4.89
Low 1.61 1.20 0.91 0.23 0.23
Net loss in the first quarter of 2004 included charges of $5 for
various restructuring charges principally related to the closure of
Solutia's chlorobenzenes operations as well as certain other non-strategic
operations; $11 for restructuring charges at the Astaris and Flexsys joint
ventures; $25 for the write-off of unamortized debt issuance costs related
to debt facilities retired in January 2004; and $15 loss on the modification
of Solutia's Euronotes. Net loss in the second quarter of 2004 included
charges of $12 for various restructuring charges principally related to the
closure of Solutia's chlorobenzenes operations as well as certain other
non-strategic operations; $7 for restructuring charges at the Astaris and
Flexsys joint ventures; and $63 of net pension settlement and curtailment
charges. Net loss in the third quarter of 2004 included a $1 gain from the
favorable settlement of reserves established in 2003 related to the closure
of non-strategic facilities; $32 gain from the net pension and other
postretirement benefit plan curtailments and settlements; $7 loss resulting
from damage at certain plant sites from hurricanes experienced in the U.S.;
and $27 for restructuring charges at the Astaris and Flexsys joint ventures.
Net loss in the fourth quarter of 2004 included charges of $28 to write down
goodwill and other identifiable intangible assets and $12 for the write-down
of certain assets, both within the Pharmaceutical Services business; $1 for
various restructuring charges principally related to the closure of
Solutia's chlorobenzenes operations as well as certain other non-strategic
operations; $4 for restructuring charges at the Astaris and Flexsys joint
ventures; and $4 of net pension settlement and curtailment charges; $1 loss
resulting from damage at certain plant sites from hurricanes experienced in
the U.S.; $1 loss on sale of the assets of Axio Research Corporation.
Net loss in the first quarter of 2003 includes charges of $11 for
workforce reductions taken worldwide and $6 for asset impairments and
severance charges at the Astaris and Flexsys joint ventures, and a $4 gain
related to the recovery of a receivable
92
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
which had previously been written off. Net loss in the second quarter of
2003 includes charges of $9 for additional workforce reductions taken
worldwide and contract termination costs associated with restructuring, $27
for environmental charges pursuant to the partial consent decree approved on
August 4, 2003 related to remediation and the establishment of an
educational trust in Anniston, Alabama, and $3 for additional severance
charges at the Astaris and Flexsys joint ventures. Net loss in the third
quarter of 2003 includes charges of $1 for additional workforce reductions
taken worldwide, $90 for additional restructuring charges taken at the
Astaris and Flexsys joint ventures related to asset impairments and
severance charges, $30 for a pension settlement loss, and $99 related to
Solutia's share of the Anniston PCB litigation settlement and to increase
certain other litigation accruals. Net loss in the fourth quarter of 2003
includes charges of $35 for additional workforce reductions and contract
termination costs, $5 for a pension settlement loss, $20 to increase the
environmental reserve related to exiting the Nitro, WV facility, $78 to
write down goodwill and other identifiable intangible assets and $18 for the
write-down of assets, both within the Pharmaceutical Services business, $35
of additional restructuring and litigation charges taken at the Astaris and
Flexsys joint ventures related to asset impairments and severance charges,
$14 for the write-off of unamortized debt issuance costs related to the
amended credit facility refinanced during the quarter, and $543 in income
tax expense to increase valuation allowances for considerably all U.S.
deferred tax assets.
Under SFAS No. 128, Earnings per Share, the quarterly and total
year calculations of basic and diluted loss per share are based on weighted
average shares outstanding for that quarterly or total year period,
respectively. As a result, the sum of basic and diluted loss per share for
the quarterly periods may not equal total year loss per share.
25. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
CPFilms, Inc., Monchem International, Inc., Monchem, Inc., Solutia
Systems, Inc., Solutia Investments, LLC and Solutia Business Enterprises,
Inc., wholly-owned subsidiaries of Solutia (the "Guarantors"), are
guarantors of the holders of Solutia's 11.25% Senior Secured Notes due 2009
(the "Notes"). In connection with the completion of the October 2003 credit
facility, Solutia Investments, LLC and Solutia Business Enterprises, Inc.
became guarantors of the Notes through cross-guarantor provisions.
Accordingly, the 2002 consolidating condensed financial statements below
have been restated to reflect the addition of these two new guarantors.
Solutia's obligations under the October 2003 facility were paid in full with
the proceeds of a final DIP facility dated as of January 16, 2004, which
payment did not affect the Guarantors' obligations in respect of the Notes.
Certain other wholly-owned subsidiaries of Solutia (the "DIP Guarantors")
guaranteed the final DIP facility (as well as a smaller, interim DIP
facility put in place as of December 19, 2003), but the DIP Guarantors were
not required by the cross-guarantor provisions to guarantee the Notes.
The Guarantors fully and unconditionally guarantee the Notes on a
joint and several basis. The following consolidating condensed financial
statements present, in separate columns, financial information for: Solutia
Inc. on a parent only basis carrying its investment in subsidiaries under
the equity method; Guarantors on a combined, or where appropriate,
consolidated basis, carrying investments in subsidiaries which do not
guarantee the debt (the "Non-Guarantors") under the equity method;
Non-Guarantors on a combined, or where appropriate, consolidated basis;
eliminating adjustments; and consolidated totals as of December 31, 2004 and
December 31, 2003, and for the years ended December 31, 2004, 2003 and 2002.
The eliminating adjustments primarily reflect intercompany transactions,
such as interest income and expense, accounts receivable and payable,
advances, short and long-term debt, royalties and profit in inventory
eliminations. Solutia has not presented separate financial statements and
other disclosures concerning the Guarantors as such information is not
material and would substantially duplicate disclosures included elsewhere in
this report.
93
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Consolidating Statement of Operations
Year Ended December 31, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES............................... $2,010 $164 $898 $(375) $2,697
Cost of goods sold...................... 2,021 85 763 (395) 2,462
----------------------------------------------------------------------------
GROSS PROFIT............................ (11) 79 135 20 223
Marketing expenses...................... 88 22 34 (1) 143
Administrative expenses................. 63 8 31 -- 102
Technological expenses.................. 40 2 2 -- 44
Amortization expense.................... -- -- 2 -- 2
Impairment of intangible assets......... -- -- 28 -- 28
----------------------------------------------------------------------------
OPERATING INCOME (LOSS)................. (202) 47 38 21 (96)
Equity earnings (loss) from affiliates.. 43 (22) (14) (33) (26)
Interest expense........................ (154) -- (52) 93 (113)
Other income, net....................... 19 75 22 (115) 1
Loss on debt modification............... -- -- (15) -- (15)
Reorganization items, net............... (73) -- -- -- (73)
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(BENEFIT)............................. (367) 100 (21) (34) (322)
Income tax expense (benefit)............ (51) 45 -- -- (6)
----------------------------------------------------------------------------
NET INCOME (LOSS)....................... $ (316) $ 55 $(21) $ (34) $ (316)
============================================================================
Consolidating Statement of Comprehensive Income (Loss)
Year Ended December 31, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS)....................... $(316) $55 $(21) $(34) $(316)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments........ 15 14 28 (42) 15
Minimum pension liability adjustments,
net of tax............................ (18) -- (9) 9 (18)
-----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) ............ $(319) $69 $ (2) $(67) $(319)
=============================================================================
94
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Consolidating Statement of Operations
Year Ended December 31, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES............................... $1,839 $ 146 $ 776 $(331) $2,430
Cost of goods sold...................... 1,973 67 680 (350) 2,370
----------------------------------------------------------------------------
GROSS PROFIT............................ (134) 79 96 19 60
Marketing expenses...................... 105 20 31 -- 156
Administrative expenses................. 100 7 35 -- 142
Technological expenses.................. 49 3 1 -- 53
Amortization expense.................... -- -- 3 -- 3
Impairment of intangible assets......... -- -- 78 -- 78
----------------------------------------------------------------------------
OPERATING INCOME (LOSS)................. (388) 49 (52) 19 (372)
Equity loss from affiliates............. (114) (65) (5) 51 (133)
Interest expense........................ (169) (6) (60) 115 (120)
Other income, net....................... 17 89 34 (129) 11
Reorganization items, net............... (1) -- -- -- (1)
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(BENEFIT)............................. (655) 67 (83) 56 (615)
Income tax expense (benefit)............ 325 53 (18) 5 365
----------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................ (980) 14 (65) 51 (980)
Loss from Discontinued Operations,
net of tax............................ (2) (108) (109) 217 (2)
Cumulative Effect of Change in
Accounting Principle, net of tax...... (5) -- -- -- (5)
----------------------------------------------------------------------------
NET LOSS................................ $ (987) $ (94) $(174) $ 268 $ (987)
============================================================================
Consolidating Statement of Comprehensive Income (Loss)
Year Ended December 31, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET LOSS................................ $ (987) $ (94) $ (174) $ 268 $ (987)
OTHER COMPREHENSIVE LOSS:
Currency translation adjustments........ 55 59 31 (90) 55
Minimum pension liability adjustments,
net of tax............................ 19 -- (1) 1 19
----------------------------------------------------------------------------
COMPREHENSIVE LOSS...................... $ (913) $ (35) $ (144) $ 179 $ (913)
============================================================================
95
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Consolidating Statement of Operations
Year Ended December 31, 2002
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES................................... $1,766 $ 153 $ 676 $(296) $2,299
Cost of goods sold.......................... 1,626 64 556 (310) 1,936
--------------------------------------------------------------------------
GROSS PROFIT................................ 140 89 120 14 363
Marketing expenses.......................... 103 19 25 -- 147
Administrative expenses..................... 91 7 30 -- 128
Technological expenses...................... 43 2 2 -- 47
Amortization expense........................ -- -- 3 -- 3
--------------------------------------------------------------------------
OPERATING INCOME (LOSS)..................... (97) 61 60 14 38
Equity earnings (loss) from affiliates...... (36) (179) -- 228 13
Interest expense............................ (148) (8) (123) 195 (84)
Other income, net........................... 22 108 77 (193) 14
--------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(BENEFIT)................................. (259) (18) 14 244 (19)
Income tax expense (benefit)................ (86) 54 25 (4) (11)
--------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS............. (173) (72) (11) 248 (8)
Income from Discontinued Operations,
net of tax................................ 24 59 58 (117) 24
Cumulative Effect of Change in Accounting
Principle, net of tax..................... (2) -- (165) -- (167)
--------------------------------------------------------------------------
NET LOSS.................................... $ (151) $ (13) $(118) $ 131 $ (151)
===========================================================================
Consolidating Statement of Comprehensive Income (Loss)
Year Ended December 31, 2002
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET LOSS.................................. $(151) $(13) $(118) $ 131 $(151)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments.......... 119 121 3 (124) 119
Net unrealized loss on derivative
instruments, net of tax................. 1 -- -- -- 1
Minimum pension liability adjustments,
net of tax.............................. (122) -- (11) 11 (122)
--------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)............... $(153) $108 $(126) $ 18 $(153)
==========================================================================
96
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Consolidating Balance Sheet
December 31, 2004
(Dollars in millions)
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 43 $ 7 $ 65 $ -- $ 115
Trade receivables, net.................... 7 131 148 -- 286
Intercompany receivables.................. 130 759 77 (966) --
Miscellaneous receivables................. 65 1 27 -- 93
Inventories............................... 112 28 116 (17) 239
Prepaid expenses and other assets......... 27 -- 15 3 45
----------------------------------------------------------------------------
TOTAL CURRENT ASSETS................... 384 926 448 (980) 778
PROPERTY, PLANT AND EQUIPMENT, NET........ 623 78 140 -- 841
INVESTMENTS IN AFFILIATES................. 2,220 189 22 (2,254) 177
GOODWILL, NET............................. -- 71 5 -- 76
IDENTIFIED INTANGIBLE ASSETS, NET......... 2 27 9 -- 38
INTERCOMPANY ADVANCES..................... 128 1,238 806 (2,172) --
OTHER ASSETS.............................. 111 -- 55 -- 166
----------------------------------------------------------------------------
TOTAL ASSETS........................... $ 3,468 $2,529 $1,485 $(5,406) $ 2,076
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................... $ 138 $ 8 $ 53 $ (1) $ 198
Intercompany payables..................... 113 17 109 (239) --
Accrued liabilities....................... 176 11 96 -- 283
Short-term debt........................... 300 -- -- -- 300
Intercompany short-term debt.............. -- -- 214 (214) --
----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES................. 727 36 472 (454) 781
LONG-TERM DEBT............................ -- -- 285 -- 285
INTERCOMPANY LONG-TERM DEBT............... -- -- 463 (463) --
OTHER LIABILITIES......................... 212 -- 56 (1) 267
----------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE.............................. 939 36 1,276 (918) 1,333
LIABILITIES SUBJECT TO COMPROMISE......... 3,973 415 22 (2,223) 2,187
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock.............................. 1 -- -- -- 1
Additional contributed capital ........... 56 -- -- -- 56
Treasury stock............................ (251) -- -- -- (251)
Net (deficiency) excess of assets at
spinoff and subsidiary capital.......... (113) 2,078 187 (2,265) (113)
Accumulated other comprehensive loss...... (75) -- -- -- (75)
Accumulated deficit....................... (1,062) -- -- -- (1,062)
----------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,444) 2,078 187 (2,265) (1,444)
----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $ 3,468 $2,529 $1,485 $(5,406) $ 2,076
============================================================================
97
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Consolidating Balance Sheet
December 31, 2003
(Dollars in millions)
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 105 $ 20 $ 34 $ -- $ 159
Trade receivables, net.................... 8 135 138 -- 281
Intercompany receivables.................. 65 677 100 (842) --
Miscellaneous receivables................. 56 -- 28 -- 84
Inventories............................... 130 24 102 (16) 240
Prepaid expenses and other assets......... 25 1 11 3 40
--------------------------------------------------------------------------
TOTAL CURRENT ASSETS................... 389 857 413 (855) 804
PROPERTY, PLANT AND EQUIPMENT, NET........ 695 75 139 -- 909
INVESTMENTS IN AFFILIATES................. 2,176 29 34 (2,033) 206
GOODWILL, NET............................. -- 72 25 -- 97
IDENTIFIED INTANGIBLE ASSETS, NET......... 2 27 14 -- 43
INTERCOMPANY ADVANCES..................... 128 1,392 962 (2,482) --
OTHER ASSETS.............................. 340 -- 47 -- 387
--------------------------------------------------------------------------
TOTAL ASSETS........................... $ 3,730 $2,452 $1,634 $(5,370) $ 2,446
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................... $ 46 $ 1 $ 33 $ (2) $ 78
Intercompany payables..................... 9 20 87 (116) --
Accrued liabilities....................... 185 9 110 -- 304
Short-term debt........................... 361 -- -- -- 361
Intercompany short-term debt.............. -- -- 419 (419) --
--------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES................. 601 30 649 (537) 743
LONG-TERM DEBT............................ 43 -- 251 -- 294
INTERCOMPANY LONG-TERM DEBT............... -- -- 574 (574) --
OTHER LIABILITIES......................... 263 -- 50 -- 313
--------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE.............................. 907 30 1,524 (1,111) 1,350
LIABILITIES SUBJECT TO COMPROMISE......... 3,948 412 75 (2,214) 2,221
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock.............................. 1 -- -- -- 1
Additional contributed capital ........... 56 -- -- -- 56
Treasury stock............................ (251) -- -- -- (251)
Net (deficiency) excess of assets at
spinoff and subsidiary capital.......... (113) 2,010 35 (2,045) (113)
Accumulated other comprehensive loss...... (72) -- -- -- (72)
Accumulated deficit....................... (746) -- -- -- (746)
--------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,125) 2,010 35 (2,045) (1,125)
--------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $ 3,730 $2,452 $1,634 $(5,370) $ 2,446
==========================================================================
98
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Consolidating Condensed Statement of Cash Flows
Year Ended December 31, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS............... $ (53) $ 91 $ 3 $-- $ 41
--------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases...... (27) (10) (24) -- (61)
Acquisition and investment payments, net of
cash acquired.............................. (36) -- -- -- (36)
--------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES............ (63) (10) (24) -- (97)
--------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations (361) -- -- -- (361)
Proceeds from issuance of long debt
obligations................................ 300 -- -- -- 300
Net change in cash collateralized letters of
credit..................................... 87 -- -- -- 87
Changes in investments and advances from
(to) affiliates............................ 37 (94) 57 -- --
Other financing activities................... (9) -- (5) -- (14)
--------------------------------------------------------------------------
CASH FROM (USED IN) FINANCING ACTIVITIES..... 54 (94) 52 -- 12
--------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ (62) (13) 31 -- (44)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR............................ 105 20 34 -- 159
--------------------------------------------------------------------------
END OF YEAR.................................. $ 43 $ 7 $ 65 $-- $ 115
==========================================================================
99
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Consolidating Condensed Statement of Cash Flows
Year Ended December 31, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS............... $(175) $ 98 $ 41 $-- $ (36)
--------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases...... (61) (2) (15) -- (78)
Acquisition and investment payments, net of
cash acquired.............................. (63) -- -- -- (63)
Property disposals and investment proceeds... 174 -- 305 -- 479
--------------------------------------------------------------------------
CASH FROM (USED IN) INVESTING ACTIVITIES..... 50 (2) 290 -- 338
--------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations.... 128 -- (125) -- 3
Net change in cash collateralized letters of
credit..................................... (121) -- -- -- (121)
Debt issuance costs.......................... (31) -- -- -- (31)
Other financing activities................... (11) -- -- -- (11)
Changes in investments and advances from
(to) affiliates............................ 265 (76) (189) -- --
--------------------------------------------------------------------------
CASH FROM (USED IN) FINANCING ACTIVITIES..... 230 (76) (314) -- (160)
--------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS........ 105 20 17 -- 142
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR............................ -- -- 17 -- 17
--------------------------------------------------------------------------
END OF YEAR.................................. $ 105 $ 20 $ 34 $-- $ 159
==========================================================================
100
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Consolidating Condensed Statement of Cash Flows
Year Ended December 31, 2002
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS................. $ (72) $ 130 $113 $-- $ 171
--------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases........ (36) (6) (26) -- (68)
Acquisition and investment payments,
net of cash acquired......................... (37) -- -- -- (37)
Property disposals and investment proceeds..... 118 -- -- -- 118
--------------------------------------------------------------------------
CASH FROM (USED IN) INVESTING ACTIVITIES....... 45 (6) (26) -- 13
--------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations...... (450) -- 123 -- (327)
Net change in long-term debt obligations....... 181 -- 1 -- 182
Issuance of stock warrants..................... 19 -- -- -- 19
Common stock issued under employee stock
plans........................................ 2 -- -- -- 2
Other financing activities..................... (66) -- -- -- (66)
Changes in investments and advances from
(to) affiliates.............................. 338 (125) (213) -- --
--------------------------------------------------------------------------
CASH FROM (USED IN) FINANCING ACTIVITIES....... 24 (125) (89) -- (190)
--------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS.......... (3) (1) (2) -- (6)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.............................. 3 1 19 -- 23
--------------------------------------------------------------------------
END OF YEAR.................................... $ -- $ -- $ 17 $-- $ 17
==========================================================================
****
101
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2004, Solutia carried out an evaluation, under
the supervision and with the participation of its management, including its
chief executive officer and chief financial officer, of the effectiveness of
the design and operation of Solutia's disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934. Based upon that evaluation, the chief executive officer and chief
financial officer concluded that as of December 31, 2004, Solutia's
disclosure controls and procedures are effective in timely alerting them to
material information relating to Solutia and its consolidated subsidiaries
that is required to be included in Solutia's periodic SEC filings.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
MANAGEMENT REPORT
Management of Solutia Inc. and its subsidiaries (the "Company") is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. Solutia's internal control over financial
reporting is a process designed by, or under the supervision of, Solutia's
principal executive and principal financial officers and effected by
Solutia's board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Solutia's internal control
over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of Solutia;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and
that receipts and expenditures of Solutia are being made only in
accordance with authorizations of management and directors of
Solutia; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
Solutia's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Management assessed the effectiveness of Solutia's internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework. Based on our assessment and those criteria,
management believes that Solutia maintained effective internal control over
financial reporting as of December 31, 2004.
Solutia's independent auditors have issued an attestation report on
management's assessment of Solutia's internal control over financial
reporting. This report appears on page 103.
102
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Solutia Inc.:
We have audited management's assessment, included in the accompanying
Management Report, that Solutia Inc. and its subsidiaries (the "Company")
maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive
and principal financial officers, or persons performing similar functions,
and effected by the company's board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004,
is fairly stated, in all material respects, based on the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO") in Internal Control-Integrated Framework. Also in our opinion, the
Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2004, based on the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in Internal Control-Integrated Framework.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year ended December 31, 2004 of the
Company and our report dated March 8, 2005 expressed an unqualified opinion
on those financial statements and included explanatory paragraphs regarding
the Company's filing for reorganization under Chapter 11 of the United
States Bankruptcy Code and the Company's ability to continue as a going
concern.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
St. Louis, Missouri
March 8, 2005
103
ITEM 9B. OTHER INFORMATION
None
104
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table shows information about Solutia's directors on
March 1, 2005:
- ------------------------------------------------------------------------------------------------------------------------------------
Name, Age, Year First Became a Other Business Experience Since
Solutia Director Principal Occupation Other Directorships At Least January 1, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffry N. Quinn, 46 President, Chief Executive None Senior Vice President, General
2004 Officer and Director, Solutia Counsel and Chief Restructuring
Inc. Officer, Solutia, 2003-2004;
Executive Vice President, Chief
Administrative Officer and
General Counsel, Premcor Inc.,
2000-2002; Senior Vice
President of Law and Human
Resources, Secretary and
General Counsel, Arch Coal,
Inc., 1995-2000
- ------------------------------------------------------------------------------------------------------------------------------------
Paul H. Hatfield, 69 Principal, Hatfield Capital Bunge Limited; Engineered Chairman of the Board,
1997 Group Products Inc.; Maritz, Inc.; President and Chief Executive
Penford Corporation Officer, Petrolite Corporation,
1995-1997
- ------------------------------------------------------------------------------------------------------------------------------------
Robert H. Jenkins, 62 Retired Chairman of the Board AK Steel Holdings Chairman of the Board and Chief
1997 and Chief Executive Officer, Corporation; CLARCOR Inc.; Executive Officer, Sundstrand
Sundstrand Corporation Sentry Insurance Corporation, 1997-1999
- ------------------------------------------------------------------------------------------------------------------------------------
Philip R. Lochner, 61 Director Adelphia Communications Senior Vice President and Chief
2002 Corporation; Apria Administrative Officer, Time
Healthcare Group Inc.; Warner Inc., 1991-1998;
CLARCOR Inc.; GTECH Holdings Commissioner, Securities and
Corporation Exchange Commission, 1990-1991
- ------------------------------------------------------------------------------------------------------------------------------------
Frank A. Metz, Jr., 71 Retired Senior Vice None Senior Vice President, Finance
1997 President, Finance and and Planning and Chief
Planning and Chief Financial Financial Officer,
Officer, International International Business Machines
Business Machines Corporation Corporation (IBM), 1986-1993
and a Director of IBM,
1991-1993
- ------------------------------------------------------------------------------------------------------------------------------------
J. Patrick Mulcahy, 61 Vice Chairman, Energizer Energizer Holdings, Inc. Chief Executive Officer,
1999 Holdings, Inc. Energizer Holdings, Inc.,
2000-2005; Chairman and Chief
Executive Officer, Eveready
Battery Company Inc., a
subsidiary of Ralston Purina
Company, 1987-2000 and a
corporate officer of Ralston
Purina Company, 1984-2000
- ------------------------------------------------------------------------------------------------------------------------------------
Sally G. Narodick, 59 Retired Cray Inc.; Penford President, Narodick Consulting
2000 Corporation; Puget Energy, (an educational technology and
Inc., and its wholly owned e-learning consulting firm),
subsidiary, Puget Sound 2000-2004; Chief Executive
Energy, Inc.; SumTotal Officer, Apex Learning, Inc.
Systems, Inc. (an educational software
company) from its founding in
1998 until 2000
- ------------------------------------------------------------------------------------------------------------------------------------
John B. Slaughter, 70 President and Chief Executive International Business Irving R. Melbo professor of
1997 Officer, National Action Machines Corporation; leadership in education,
Council for Minorities in Northrop Grumman Corp. University of Southern
Engineering, Inc. (a California and President
non-profit corporation) Emeritus, Occidental College,
1999-2000; Director, National
Science Foundation, 1980-1982
- ------------------------------------------------------------------------------------------------------------------------------------
105
The above listed individuals were elected for staggered three-year
terms, or until their successors are duly elected and have qualified, or
until their earlier death, resignation or removal. Mr. Hatfield serves as
chairman of the board. Normally, the elected term of office for Messrs.
Hatfield and Mulcahy and Mrs. Narodick would expire in April 2005; the
elected term for Mr. Lochner and Dr. Slaughter would have expired in April
2004, and on that date, Mr. Metz and Dr. Slaughter would normally have
retired in accordance with Solutia's retirement policy for non-employee
directors. However, as a result of Solutia's Chapter 11 filing, Solutia did
not hold a shareholders' meeting to elect directors in 2004 and does not
expect to do so in the foreseeable future. Therefore, we anticipate that the
current directors will remain in office beyond April 2005.
Solutia's board of directors has determined that all its
non-employee directors - Messrs. Hatfield, Jenkins, Lochner, Metz, Mulcahy,
Mrs. Narodick and Dr. Slaughter - are independent under the board's
categorical independence standards. A copy of these standards is attached to
this report as Exhibit 99.
OFFICERS
The following table shows information about Solutia's executive
officers on March 1, 2005:
- ------------------------------------------------------------------------------------------------------------------------------------
Name and Age Present Position with Solutia Year First Became an Other Business Experience Since At
Executive Officer of Solutia Least January 1, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffry N. Quinn, 46 President, Chief Executive 2003 Senior Vice President, General
Officer and Director Counsel and Chief Restructuring
Officer, Solutia, 2003-2004;
Executive Vice President, Chief
Administrative Officer and
General Counsel, Premcor Inc.,
2000-2002; Senior Vice President
of Law and Human Resources,
Secretary and General Counsel,
Arch Coal, Inc., 1995-2000
- ------------------------------------------------------------------------------------------------------------------------------------
Luc De Temmerman, 50 Senior Vice President and 2003 Vice President and General Manager,
Chief Operating Officer Performance Products, Solutia,
2003-2004; Worldwide Commercial
Director for Laminated Glazing
Products and Services, Solutia,
2001-2002; Business Director,
Saflex-Europe/Africa, Solutia,
2000-2001; Worldwide Director,
Saflex Technology, Solutia,
1997-2000
- ------------------------------------------------------------------------------------------------------------------------------------
Rosemary L. Klein, 37 Senior Vice President, 2004 Vice President, Secretary and General
General Counsel and Secretary Counsel, Corporate and External
Affairs, Solutia, 2004; Assistant
General Counsel, Solutia, 2003;
Assistant General Counsel and
Secretary, Premcor Inc., 2000-2003;
Assistant General Counsel and
Secretary, Arch Coal, Inc., 2000;
Senior Counsel, Arch Coal, Inc.,
1999-2000
- ------------------------------------------------------------------------------------------------------------------------------------
James M. Sullivan, 44 Senior Vice President, Chief 2004 Vice President and Controller,
Financial Officer and Solutia, 1999-2004
Treasurer
- ------------------------------------------------------------------------------------------------------------------------------------
John F. Saucier, 51 President, Integrated Nylon 2001 Vice President and General Manager,
Division Integrated Nylon, Solutia, 2001-2004;
Vice President, Strategic Planning,
Mergers and Acquisitions, Solutia,
1997-2001
- ------------------------------------------------------------------------------------------------------------------------------------
Max W. McCombs, 52 Vice President, Environment, 2004 Director, ESH, Solutia, 2002-2004;
Safety and Health ("ESH") Nylon ESH and Public Affairs Lead,
Solutia, 2000-2002; Chairman, Solutia
ESH Council, 1999-2000
====================================================================================================================================
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 Solutia's Audit and Finance Committee, which met
nine times in 2004, are Mr. Metz, chairman; Mr. Mulcahy, Mrs. Narodick and
Dr. Slaughter. Solutia's 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.
106
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 Solutia's financial statements, Solutia's compliance with
legal and regulatory requirements, the qualifications and independence of
the independent auditor, the performance of the independent auditor and
Solutia's internal audit function, and Solutia's 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
Solutia's 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
Solutia's directors and executive officers to file reports of holdings and
transactions in Solutia's common stock with the Securities and Exchange
Commission. One of our executive officers, Mr. Saucier, inadvertently made
one late filing to report one transaction: the use of stock tax withholding
rights to satisfy his withholding obligation on the release of his
restricted stock grant in December 2004.
CODE OF ETHICS
Solutia's board of directors has adopted a Code of Ethics for
Senior Financial Officers. This code applies to Solutia's chief executive
officer and the other senior officers who have financial responsibilities,
including Solutia's chief financial officer, treasurer, controller and
general counsel. This code was filed as an exhibit to Solutia's Annual
Report on Form 10-K for the year ending December 31, 2003. Any amendments
to, or waivers from, the provisions of this code will be posted to the
"Investor" section of Solutia's web site: www.solutia.com.
LEGAL PROCEEDINGS
For a description of litigation pending against certain former
officers of Solutia, including Mr. Hunter, see the first paragraph under
"Other Legal Proceedings" on page 13 above.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows information about the compensation of
Solutia's chief executive officer and four most highly compensated executive
officers other than the chief executive officer who were serving as
executive officers at the end of 2004. It also includes information about
the compensation of Solutia's former chief executive officer, who served in
such position for a portion of 2004.
107
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
--------------------------------------------------
Annual Compensation Awards Payouts
------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted Securities All Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Salary Bonus sation Awards Options Payouts sation
Position Year ($) ($)(1) ($) ($) (#) ($)(2) ($)(3)
- ------------------------------------------------------------------------------------------------------------------------------------
J. N. Quinn (4) 2004 443,269 1,470,000 -0- -0- -0- -0- 10,098
President, Chief Executive 2003 290,909 200,000 -0- -0- 65,000 -0- 9,603
Officer and Director
- ------------------------------------------------------------------------------------------------------------------------------------
L. De Temmerman (5) 2004 338,035(9) 705,074(10) 39,135(11) -0- -0- -0- 258
Senior Vice President and 2003 275,424(9) 225,019(10) 46,156(11) -0- 50,000 -0- 228
Chief Operating Officer
- ------------------------------------------------------------------------------------------------------------------------------------
R. L. Klein (6) 2004 182,500 377,813 -0- -0- -0- -0- 8,748
Senior Vice President,
Secretary and General Counsel
- ------------------------------------------------------------------------------------------------------------------------------------
J. F. Saucier 2004 313,154 841,000 2,680(12) -0- -0- -0- 10,098
President, Integrated Nylon 2003 300,000 -0- -0- -0- 50,000 -0- 9,828
Division 2002 266,667 110,000 3,585(12) -0- 30,000 -0- 9,746
- ------------------------------------------------------------------------------------------------------------------------------------
J. M. Sullivan (7) 2004 249,327 500,000 -0- -0- -0- -0- 10,098
Senior Vice President,
Chief Financial Officer and
Treasurer
- ------------------------------------------------------------------------------------------------------------------------------------
J. C. Hunter III (8) 2004 333,333 -0- 7,000(12) -0- -0- -0- 1,850,098
Retired Chairman, President, 2003 800,000 -0- 7,000(12) -0- -0- -0- 93,028
Chief Executive 2002 791,667 1,200,000 7,000(12) -0- 150,000 -0- 95,291
Officer and Director
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Included in this column as 2004 compensation are awards under the 2004
Solutia Annual Incentive Plan and 2004 payments under retention
agreements as follows:
--------------------------------------------------------------------------------------------
Name 2004 Annual Incentive Award Retention Bonus Payments
--------------------------------------------------------------------------------------------
J. N. Quinn $1,470,000 $ -0-
--------------------------------------------------------------------------------------------
L. De Temmerman 705,074 -0-
--------------------------------------------------------------------------------------------
R. L. Klein 300,000 77,813
--------------------------------------------------------------------------------------------
J. F. Saucier 541,000 300,000
--------------------------------------------------------------------------------------------
J. M. Sullivan 500,000 -0-
--------------------------------------------------------------------------------------------
J. C. Hunter -0- -0-
--------------------------------------------------------------------------------------------
<FN>
Any necessary approvals by the unsecured creditors' committee in
Solutia's Chapter 11 case have been obtained.
Included as 2003 compensation are special recognition awards for
2003 that were paid in mid-year 2004 and a $200,000 special
recognition award to Mr. Quinn that was paid in 2003.
(2) There were no payouts under the 2002-2004 cycle of the Solutia Inc.
2002-2006 Long-Term Incentive Plan.
(3) Contributions to thrift/savings plans, as follows: Mr. Quinn,
$9,840; Ms. Klein, $8,490; Mr. Saucier, $9,840; Mr. Sullivan,
$9,840 and Mr. Hunter, $9,840;
Cost of executive travel accident protection for each executive
officer named in this table: $258; and separation pay for
Mr. Hunter: $1,840,000.
(4) Mr. Quinn became president, chief executive officer and director
effective May 3, 2004. He joined Solutia on January 13, 2003.
(5) Mr. De Temmerman became an executive officer of Solutia on January
1, 2003. Therefore, his compensation for 2002 is not included in
this table.
(6) Ms. Klein, who joined Solutia in 2003, became an executive officer
of Solutia on November 29, 2004. Therefore, her compensation for
2003, including her special recognition award for 2003, is not
included in this table.
(7) Mr. Sullivan became an executive officer of Solutia on May 3, 2004.
Therefore, his compensation for 2003 and 2002, including his
special recognition award for 2003, is not included in this table.
(8) Mr. Hunter resigned as chairman, president, chief executive officer
and director effective May 3, 2004.
108
(9) Mr. De Temmerman, who is based in Belgium, was paid in euros. His
salary for 2004 and 2003 has been converted into U.S. dollars at
the weighted average exchange rate of 1.23531 U.S. dollars to 1
euro for 2004 and 1.12115 U.S. dollars to 1 euro for 2003.
(10) Mr. De Temmerman's bonus was paid in euros. For 2004 his bonus has
been converted into U.S. dollars at the weighted average exchange
rate of 1.23531 U.S. dollars to 1 euro; for 2003, at the weighted
average exchange rate of 1.12115 U.S. dollars to 1 euro.
(11) The amount for 2004 consists of $9,932 for a customary Belgian
representation allowance, $17,028 in automobile leasing payments
and $12,175 for a children's allowance mandated by the Belgian
government. The amount for 2003 consists of an $11,837 grossed-up
reimbursement for certain taxes, $9,014 for a customary Belgian
representation allowance, $14,255 in automobile leasing payments
and $11,050 for a children's allowance mandated by the Belgian
government. All amounts have been converted from euros at the
weighted average exchange rate of 1.23531 U.S. dollars to 1 euro
for 2004 and 1.12115 U.S. dollars to 1 euro for 2003.
(12) This amount represents reimbursement under the Financial Planning
and Tax Preparation Services Program for the Executive Leadership
Team.
AGGREGATED OPTION EXERCISES IN 2004 AND YEAR-END OPTION VALUES
The following table shows information about unexercised options
held by named executive officers on December 31, 2004. There were no options
exercised by the named executive officers during 2004, and none of the
options held by them at the end of 2004 were "in the money." Solutia
believes that its plan of reorganization will result in cancellation of its
existing shares of common stock, as well as options and warrants to purchase
its common stock, and that it is unlikely that holders of options to
purchase Solutia's common stock will receive any consideration for those
options in such a plan of reorganization.
- ---------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at FY-End Options at FY-End
(#) ($)
---------------------------------------------
Shares
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------
J. N. Quinn -0- N/A 25,000/40,000 -0-/-0-
- ---------------------------------------------------------------------------------------------------------
L. De Temmerman -0- N/A 63,216/70,000 -0-/-0-
- ---------------------------------------------------------------------------------------------------------
R. L. Klein -0- N/A 6,666/13,334 -0-/-0-
- ---------------------------------------------------------------------------------------------------------
J. F. Saucier -0- N/A 85,148/89,000 -0-/-0-
- ---------------------------------------------------------------------------------------------------------
J. M. Sullivan -0- N/A 86,849/61,334 -0-/-0-
- ---------------------------------------------------------------------------------------------------------
J. C. Hunter -0- N/A 906,799/0 -0-/-0-
- ---------------------------------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
Targets for incentive award opportunities were not established for
the January 1, 2004 through December 31, 2006 performance period under the
Solutia Inc. 2002-2006 Long-Term Incentive Plan. No awards will be paid for
this performance cycle.
PENSION PLANS
The named executive officers are eligible for benefits payable
under the defined benefit pension plans applicable to Solutia's regular
full-time employees. An executive's benefits are based on his service, if
any, with Pharmacia prior to the spinoff of Solutia and service with Solutia
since the spinoff. Solutia's defined benefit pension plans for its U.S.
employees consist of two accounts: a "Prior Plan Account" (for those
employees who earned benefits under Pharmacia's pension plan before the
spinoff) and a "Cash Balance Account." Both accounts were frozen as of June
30, 2004, with only interest credits being applied to the accounts after
June 30, 2004.
109
The opening balance of the Prior Plan Account was the December 31,
1996 present value of the executive's lump sum retirement benefit earned
prior to January 1, 1997, under Pharmacia's defined benefit pension plans,
calculated using the assumption that the monthly benefit would be payable at
age 55 with no reduction for early payment. The formula used to calculate
the opening balance was the greater of 1.4% (1.2% for executives hired on or
after April 1, 1986) of average final compensation multiplied by years of
service, without reduction for Social Security or other offset amounts, or
1.5% of average final compensation multiplied by years of service, less a
50% Social Security offset. Average final compensation for purposes of
determining the opening balance was the greater of (1) average compensation
received during the 36 months of employment with Pharmacia prior to 1997 or
(2) average compensation received during the highest three of the five
calendar years of employment with Pharmacia prior to 1997. Until June 30,
2004, for each year of the executive's continued employment with Solutia
(including all of 1997), the executive's Prior Plan Account increased by 4%
to recognize that prior plan benefits would have grown as a result of pay
increases. As a result of the plan freeze, the 4% annual increases to the
Prior Plan Account were eliminated for service after June 30, 2004. The
Prior Plan Account is credited with 8.5% interest each year until the
executive reaches age 55.
Until June 30, 2004, for each year during which the executive was
employed by Solutia, 3% of annual compensation (salary and annual bonus) in
excess of the Social Security wage base and a percentage, based on age, of
annual compensation were credited to the Cash Balance Account. The
applicable percentages and age ranges were: 3% before age 30, 4% for ages 30
to 39, 5% for ages 40 to 44, 6% for ages 45 to 49, and 7% for age 50 and
over. In addition, the Cash Balance Account of executives who earned
benefits under Pharmacia's defined benefit pension plans before 1997 was
credited each year (for up to ten years based on prior years of service with
Pharmacia before 1997) during which the executive was employed by Solutia
(including all of 1997) with an amount equal to a percentage (based on age)
of annual compensation. The applicable percentages and age ranges were: 2%
before age 30, 3% for ages 30 to 39, 4% for ages 40 to 44, 5% for ages 45 to
49, and 6% for age 50 and over. As a result of the plan freeze, all credits
to the Cash Balance Account that are based on annual compensation were
eliminated for compensation earned after June 30, 2004. The Cash Balance
Account is credited with interest each year based on the 30-year treasury
rate. In light of the discontinuance of the 30-year treasury rate, the Cash
Balance Account is currently credited with an interest rate determined and
published by the Internal Revenue Service to serve as a proxy for the
30-year treasury rate.
The estimated annual benefits payable as a single life annuity
beginning at age 65 (assuming that each executive officer remains employed
by Solutia until age 65) are as follows: Mr. Quinn, $9,391; Ms. Klein,
$1,791; Mr. Saucier, $97,846; and Mr. Sullivan, $71,187. Mr. Hunter received
a lump sum payment of $2,457,341 under the qualified pension plan in 2004
following his retirement from Solutia.
The following table shows the annual normal retirement benefits
payable under the pension plan applicable to Mr. De Temmerman and other
employees of Solutia's Belgian subsidiary. The benefit levels in the table
assume retirement at age 65 and payment in the form of a single life
annuity. Remuneration is an average of the final three years of pay,
excluding vacation pay and bonuses. Compensation used for pension formula
purposes equates to salary reported in column (c) of the Summary
Compensation Table minus the amount attributable to vacation pay
(approximately $38,682 for 2004 and $20,097 for 2003). The benefit formula
is integrated with the Belgian social security earnings ceiling, and the
amounts shown in the table reflect integration based on the current Belgian
social security ceiling.
- -------------------------------------------------------------------------------
Years of Service
Remuneration --------------------------------------------------
(in U.S.$) 15 20 25 30 35
- -------------------------------------------------------------------------------
125,000 23,847 31,795 39,744 47,693 55,642
- -------------------------------------------------------------------------------
150,000 30,840 41,120 51,400 61,680 71,960
- -------------------------------------------------------------------------------
175,000 37,833 50,445 63,056 75,667 88,278
- -------------------------------------------------------------------------------
200,000 44,827 59,769 74,711 89,654 104,596
- -------------------------------------------------------------------------------
225,000 51,820 69,094 86,367 103,641 120,914
- -------------------------------------------------------------------------------
250,000 58,814 78,418 98,023 117,627 137,232
- -------------------------------------------------------------------------------
300,000 72,801 97,067 121,334 145,601 169,868
- -------------------------------------------------------------------------------
400,000 100,774 134,366 167,957 201,549 235,140
- -------------------------------------------------------------------------------
450,000 114,761 153,015 191,269 229,522 267,776
- -------------------------------------------------------------------------------
500,000 128,748 171,664 214,580 257,496 300,412
- -------------------------------------------------------------------------------
As of January 1, 2004, Mr. De Temmerman had 20.33 years of credited
service and final average earnings of $272,704, as converted from euros
using a rate of 1.23531 U.S. dollars per euro, the weighted average exchange
rate for 2004.
110
AGREEMENTS WITH CURRENT AND FORMER NAMED EXECUTIVE OFFICERS
The descriptions below are only summaries of the agreements that
Solutia has with its current and former named executive officers and are
qualified in their entirety by the actual agreements, copies of which have
been filed with the Securities and Exchange Commission and are identified in
the Exhibit Index to this Annual Report on Form 10-K.
Senior Executive Retention Agreements
Effective July 19, 2004, Solutia entered into agreements with Mr.
Quinn, Mr. De Temmerman and Mr. Sullivan ("Senior Executive Agreements").
The Senior Executive Agreements were approved by Solutia's board of
directors and the bankruptcy court. The Senior Executive Agreements provide
for a minimum annual base salary for each of these three executives
retroactively to May 5, 2004 and during the Employment Period, i.e., the
period from July 19, 2004 until the six month anniversary of the Emergence
Date (as described below). Mr. Quinn's annual base salary will be not less
than $500,000; Mr. De Temmerman's not less than euro 289,519 (corresponding
to USD $350,000 at the exchange rate of 1.2089); and Mr. Sullivan's not less
than $275,000. Each of these executives is entitled to participate in
Solutia's annual incentive program with each having a target annual bonus
opportunity of a percentage of his annual base salary. For Mr. Quinn, the
percentage is 150%; for Mr. De Temmerman, 100%; and for Mr. Sullivan, 75%.
Each is also entitled to participate in all long-term and other incentive
plans or programs applicable to senior executive officers of Solutia and its
subsidiaries and in the applicable savings, retirement, welfare benefit and
vacation plans.
The Senior Executive Agreements provide for eligibility for a
special emergence bonus at such time, if ever, at which the bankruptcy court
shall have confirmed a plan of reorganization of Solutia Inc. under Chapter
11 of the U.S. Bankruptcy Code and such plan shall have become effective
(the "Emergence Date"), if the executives are employed by Solutia (or a
subsidiary of Solutia) on the Emergence Date. If the executives are employed
by Solutia on the six-month anniversary of the Emergence Date, or shall have
been terminated by Solutia without Cause (as defined in the Senior Executive
Agreements), or shall have resigned for Good Reason (as defined in the
Senior Executive Agreements), or shall have died or been terminated for
Disability (as defined in the Senior Executive Agreements), they shall be
entitled to receive from Solutia a special emergence bonus. For Mr. Quinn
the bonus will be equal to 50% of the bonus pool as determined in accordance
with the terms of the Solutia Inc. Emergence Incentive Bonus Program
("Emergence Incentive Bonus Program") described in an attachment to the
Senior Executive Agreements; for Mr. De Temmerman, 30%, and for Mr.
Sullivan, 20%. Under the Emergence Incentive Bonus Program, the amount of
the entire bonus pool cannot exceed $7.5 million. Funding of the bonus pool
will depend upon the achievement of three performance measures: EBITDA,
Enterprise Value and Unsecured Creditor Recoveries (all as defined and
described in the Emergence Incentive Bonus Program). Solutia's board of
directors, in its discretion, may elect to pay the bonuses in shares of
Solutia common stock in lieu of cash. If the executive voluntarily
terminates his employment other than for Good Reason or is terminated for
Cause between the Emergence Date and the six-month anniversary thereof, then
he shall forfeit his right to receive the special emergence bonus.
If, during the Employment Period, Solutia terminates these
executives other than for Cause, or they terminate their employment for Good
Reason, Solutia will pay them: (a) any unpaid but accrued base salary
through the Date of Termination (as defined in the Senior Executive
Agreements), (b) any unpaid annual bonus earned with respect to the previous
year, and (c) any unpaid accrued vacation pay (collectively, "Accrued
Obligations"). In addition, if the Date of Termination occurs before the
Emergence Date, the executives will receive an amount equal to 125% of their
annual base salary immediately prior to the Date of Termination, provided
that they waive any and all claims against Solutia and its subsidiaries. The
executives will also be entitled to any other benefits or amounts, excluding
severance or separation pay or benefits, for which they are eligible under
any plan, program, or policy of Solutia and its subsidiaries, such as any
vested benefit under any qualified defined benefit or defined contribution
retirement plan in which they participate (collectively, "Other Benefits").
If employment terminates because of death or Disability, the executive or
his estate, as applicable, will receive Accrued Obligations and Other
Benefits.
The Senior Executive Agreements also contain provisions relating to
non-competition, protection of Solutia's confidential information and
non-solicitation of Solutia employees.
The Senior Executive Agreements supersede the prior retention
agreements between Solutia and these executives that provided for a special
incentive award equal to 100% of the executive's annual base salary, payable
in two equal installments on June 30 and December 30, 2004. The Senior
Executive Agreements also supersede the change-of-control agreements between
Solutia and these executives. No payments were made under any of these
superseded agreements.
International Assignment Agreement with Mr. De Temmerman
Effective January 11, 2005, Solutia and Mr. De Temmerman entered
into a letter agreement regarding the relocation of Mr. De Temmerman from
Belgium to St. Louis, Missouri. The letter agreement provides for certain
allowances (goods and services, housing and utilities, moving costs,
automobile, family travel) so that Mr. De Temmerman will be made whole with
respect to the costs incurred as a
111
result of his relocation assignment. The letter agreement also provides that
such assignment to St. Louis does not constitute Good Reason under his
Senior Executive Agreement.
Agreement with Mr. Saucier
Effective July 19, 2004, Solutia entered into an agreement with Mr.
Saucier. The agreement was approved by Solutia's board of directors and the
bankruptcy court. The agreement provides for a minimum annual base salary of
not less than $320,000 retroactive to May 5, 2004, and during the Employment
Period, i.e., the period from July 19, 2004 through June 30, 2006. The
agreement further provides for a cash retention payment of $600,000 in four
equal installments of $150,000 each, payable on the date of approval of the
agreement by the bankruptcy court, December 31, 2004, June 30, 2005, and
December 31, 2005, provided that Mr. Saucier has been continuously employed
by Solutia from the effective date through the date of the applicable
installment payment. In addition, Mr. Saucier is entitled to participate in
Solutia's annual incentive program with a target annual bonus opportunity
equal to 100% of his annual base salary. He is also entitled to participate
in all long-term and other incentive plans or programs applicable to senior
executives of Solutia and its subsidiaries and in the applicable savings,
retirement, welfare benefit and vacation plans.
If, during the Employment Period, Solutia terminates Mr. Saucier
other than for Cause (as defined in the agreement), or Mr. Saucier
terminates his employment for Good Reason (as defined in the agreement),
Solutia will pay him: (a) any unpaid but accrued base salary through the
Date of Termination (as defined in the agreement), (b) any unpaid annual
bonus earned with respect to the previous year, and (c) any unpaid accrued
vacation pay (collectively, "Accrued Obligations"). In addition, Mr. Saucier
will receive an amount equal to 100% of his annual base salary and the cash
retention payment to the extent not previously paid. Mr. Saucier will also
be entitled to any other benefits or amounts, excluding severance or
separation pay or benefits, for which he is eligible under any plan,
program, or policy of Solutia and its subsidiaries, such as any vested
benefit under any qualified defined benefit or defined contribution
retirement plan in which he participates (collectively, "Other Benefits").
If employment terminates because of death or Disability (as defined in the
agreement), Mr. Saucier or his estate, as applicable, will receive (a)
Accrued Obligations, (b) Other Benefits, (c) an amount equal to the product
of (x) $400,000 and (y) a fraction, the numerator of which is the number of
whole months that have elapsed from July 1, 2004 through the Date of
Termination, and the denominator of which is 24; and (d) an amount equal to
the product of (x) any amount of cash retention payments described above
that remain unpaid and (y) a fraction, the numerator of which is the number
of days that have elapsed from the effective date through the Date of
Termination, and the denominator of which is the number of days between the
effective date and June 30, 2006. If Mr. Saucier voluntarily terminates his
employment other than for Good Reason or is terminated for Cause, then he
shall receive only Accrued Obligations and Other Benefits.
If there is a change of control of Solutia (as defined in the
agreement) and Mr. Saucier is not offered an employment agreement providing
terms of employment substantially similar to those under which he is
employed at the effective date, then Solutia will pay Mr. Saucier a special
bonus of $400,000 and any cash retention payments described above that have
accrued but have not been paid, provided that he waives any and all claims
against Solutia and its subsidiaries.
The agreement with Mr. Saucier also contains provisions relating to
non-competition, protection of Solutia's confidential information and
non-solicitation of Solutia employees.
The agreement with Mr. Saucier supersedes the prior retention
agreement between Solutia and Mr. Saucier that provided for a special
incentive award equal to 100% of Mr. Saucier's annual base salary, payable
in two equal installments on June 30 and December 30, 2004. The agreement
with Mr. Saucier also supersedes the change-of-control agreement between
Solutia and Mr. Saucier. No payments were made under either of these
superseded agreements.
Agreements with Ms. Klein
Effective June 17, 2004, Solutia entered into a retention agreement
with Ms. Klein that was approved by the bankruptcy court. The agreement
provides for a cash retention payment equal to 75% of Ms. Klein's base
salary at the time of payment in four equal installments, provided that Ms.
Klein remains employed by Solutia on the applicable payment date. The dates
are June 30, 2004; December 31, 2004; a date which is as soon as practicable
following the time, if ever, at which Solutia's plan of reorganization is
confirmed by the bankruptcy court and the confirmation has become
non-appealable; and the date that is the six-month anniversary of the date
on which the order of confirmation became non-appealable. If Ms. Klein is
terminated other than for Cause (as defined in the agreement) before an
installment payment date, Solutia will pay her any unpaid retention amounts
that would otherwise have been payable. This agreement supersedes a prior
retention agreement under which no payments were made.
Ms. Klein's offer of employment, dated June 4, 2003, provided for a
starting annual base salary of $165,000, a target bonus opportunity of 20%
of annual base salary under Solutia's annual incentive plan, and a target
stock option grant of 10,000 shares of Solutia common stock. In addition, it
provided that Ms. Klein would be eligible to participate in Solutia's 401(k)
plan and its retirement benefit program. If terminated without Cause (as
defined in the offer), the agreement provided that Ms. Klein would have been
entitled to an amount equal to six months of her annual base salary as of
the date of termination if the termination occurred within one year of her
start
112
date; and three months if she were terminated in the second year. Ms.
Klein's annual base salary has been raised to $250,000 and her target bonus
opportunity under the annual incentive plan to 75%.
Retention Agreements with Other Key Employees
In addition to the retention agreements with the named executive
officers described above, Solutia has instituted a Key Employee Retention
Program, approved by the bankruptcy court, for approximately 190 employees
consisting of senior level personnel, critical managers and technical
personnel who provide essential management and other necessary services. The
purpose of the program is to provide the key employees with competitive
financial incentives to remain employees of Solutia throughout the critical
stages of the Chapter 11 case and assume the additional administrative and
operational burdens resulting from the case. The retention agreements with
these employees provide for a cash retention award calculated as a multiple
(25%, 50%, 75% or 100%, depending on the employee) of the key employee's
base annual salary. The awards are to be paid out in four equal
installments. The first two installments were paid on or about June 30, 2004
and December 31, 2004. The remaining two installments will be paid on the
date when an order confirming a plan of reorganization has become final and
non-appealable and on the six-month anniversary of that date. The retention
payments will be made only if the key employee has, in the judgment of
Solutia's chief executive officer or his designate, fulfilled his or her
employment obligations and remains employed by Solutia, unless the employee
has died, suffered total and permanent disability or been terminated
without cause.
Separation Agreements with Former Named Executive Officers
Effective May 19, 2004, Solutia entered into amended and restated
separation agreements, approved by the bankruptcy court, with Mr. Hunter,
who resigned as chairman of the board, chief executive officer, president
and a director of Solutia, and Mr. Clausen, who resigned as vice chairman,
chief financial officer, chief administrative officer and a director of
Solutia, May 3, 2004, and retired effective May 31, 2004. The agreements
provided that Mr. Hunter and Mr. Clausen would cooperate with Solutia and
their successors in facilitating the transition in leadership. Mr. Hunter
received a severance benefit of $1,840,000, and Mr. Clausen, $1,160,000,
under letters of credit established in July 2003, pursuant to the retention
agreements described below, as consideration for (a) their agreement to
provide consulting services to Solutia at the rate of $400 per hour for Mr.
Hunter and $200 per hour for Mr. Clausen, in each case after the first 40
hours (plus reasonable travel and other business expenses) until the earlier
of the date that a plan of reorganization of Solutia under Chapter 11 has
become non-appealable or December 31, 2005), (b) their waiver of any and all
claims against Solutia, Pharmacia Corporation, Monsanto Company, and Pfizer
Inc. for various benefits and payments, including any claims arising from
their retention agreements dated June 30, 2003, and (c) their execution of
releases and waivers of claims. In addition, Mr. Hunter and Mr. Clausen
agreed to cooperate in any current or potential litigation involving issues
relating to their job responsibilities or to decisions made during their
employment with Solutia, not to disclose or use any confidential information
of Solutia, and, for a period of two years, not to engage in or contribute
their knowledge to any work or activity involving a product, process,
service or development competitive with or similar to a product, process,
service or development with respect to which they had access to confidential
information while at Solutia without Solutia's consent. To date, no
consulting services have been provided.
The separation agreements superseded the retention agreements
entered into with each of these former executives on June 30, 2003, each of
which provided for a payment, secured by a letter of credit, equal to the
executive's annual base salary on each of the first and second year
anniversaries of the effective date of the agreement and a payment equal to
half his annual base salary on the thirty-month anniversary of the effective
date, provided that the executive remained employed by Solutia on such
anniversaries or his employment was terminated by Solutia without Cause (as
defined in the agreement) or by the executive for Good Reason (as defined in
the agreement).
COMPENSATION OF DIRECTORS
The following table shows the total compensation for 2004 paid to
each of Solutia's current non-employee directors.
- -------------------------------------------------------------------------------
Director Annual Annual Board and
Board Retainer for Committee
Retainer Chairmanship Attendance Fees
- -------------------------------------------------------------------------------
Paul H. Hatfield (1) $56,666.67 $52,500 $37,000
- -------------------------------------------------------------------------------
Robert H. Jenkins (2) 56,666.67 2,500 30,000
- -------------------------------------------------------------------------------
Philip R. Lochner, Jr. 56,666.67 21,000
- -------------------------------------------------------------------------------
Frank A. Metz, Jr. (3) 56,666.67 5,000 36,000
- -------------------------------------------------------------------------------
J. Patrick Mulcahy 56,666.67 33,000
- -------------------------------------------------------------------------------
Sally G. Narodick 56,666.67 31,000
- -------------------------------------------------------------------------------
John B. Slaughter (4) 56,666.67 5,000 35,000
- -------------------------------------------------------------------------------
<FN>
(1) Mr. Hatfield became chairman of the board on May 3, 2004. In this
capacity, he receives an annualized retainer of $75,000.
113
He served as Chairman of the Executive Compensation and
Development Committee until June 23, 2004.
(2) Mr. Jenkins became chairman of the Executive Compensation and
Development Committee on June 23, 2004.
(3) Mr. Metz is chairman of the Audit and Finance Committee.
(4) Dr. Slaughter is chairman of the Governance Committee.
Non-employee directors do not have a retirement plan, nor do they
participate in Solutia's benefit plans.
Directors who are Solutia employees do not receive payment for
their services as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation and Development Committee is comprised
of four directors: Mr. Jenkins, chairman, and Messrs. Lochner, Metz and
Mulcahy. None of these individuals is a current or former officer or
employee of Solutia or any of its subsidiaries, nor did any of these
individuals have any reportable transactions with Solutia or any of its
subsidiaries during 2004. During 2004, none of Solutia's executive officers
served as a director or member of the compensation committee (or equivalent
thereof) of another entity, any of whose executive officers served as a
director of Solutia.
114
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table shows Solutia common stock owned beneficially
by Solutia's directors and executive officers, including Solutia's former
chief executive officer, as of December 31, 2004, including those deferred
shares credited to the account of each non-employee director that are
payable in stock. Solutia believes that its plan of reorganization will
result in cancellation of its existing shares of common stock and that it is
unlikely that its directors or executive officers will receive any
consideration for their stock or those options in such a plan of
reorganization. In general, "beneficial ownership" includes those shares a
person has the power to vote, or the power to transfer, and stock options
that are exercisable currently or become exercisable within 60 days. Except
as otherwise noted, each person has sole voting and investment power over
his or her shares.
- --------------------------------------------------------------------------------------------------
Shares of Common Stock Shares Underlying
Beneficially Owned Options Exercisable
Name (a)(b) Within 60 Days (c) Total
- -------------------------------------------------------------------------------------------------
Luc De Temmerman 50(d) 73,216 73,266
- -------------------------------------------------------------------------------------------------
Paul H. Hatfield 31,602 19,333 50,935
- -------------------------------------------------------------------------------------------------
John C. Hunter III 1 903,554 903,555
- -------------------------------------------------------------------------------------------------
Robert H. Jenkins 24,372(e) 19,333 43,705
- -------------------------------------------------------------------------------------------------
Rosemary L. Klein 0 6,666 6,666
- -------------------------------------------------------------------------------------------------
Philip R. Lochner, Jr. 2,859 6,554 9,413
- -------------------------------------------------------------------------------------------------
Frank A. Metz, Jr. 13,912 19,333 33,245
- -------------------------------------------------------------------------------------------------
J. Patrick Mulcahy 31,348 15,499 46,847
- -------------------------------------------------------------------------------------------------
Sally G. Narodick 16,426 13,166 29,592
- -------------------------------------------------------------------------------------------------
Jeffry N. Quinn 45,710(f) 25,000 70,710
- -------------------------------------------------------------------------------------------------
John F. Saucier 23,916(g) 82,985 106,901
- -------------------------------------------------------------------------------------------------
John B. Slaughter 13,903(h) 19,333 33,236
- -------------------------------------------------------------------------------------------------
James M. Sullivan 13,966(i) 86,849 100,815
- -------------------------------------------------------------------------------------------------
All directors and executive officers 234,988 1,361,451 1,596,439
(14 persons)
- --------------------------------------------------------------------------------------------------
<FN>
(a) The number of shares shown includes shares held under the Solutia
Inc. Savings and Investment Plan ("SIP"):
-----------------------------------------------------------
Mr. Quinn 5,710
-----------------------------------------------------------
Mr. Saucier 12,255
-----------------------------------------------------------
Mr. Sullivan 11,966
-----------------------------------------------------------
All directors and executive officers 46,854
-----------------------------------------------------------
Executive officers have sole discretion over voting shares held under
SIP and, within limitations imposed by SIP, sole discretion over
investment of shares. Shares are voted by the trustee of SIP in
accordance with instructions from participants. If the trustees do
not receive instructions as to the voting of particular shares, the
shares are voted in proportion to instructions actually received
from other participants in SIP.
(b) The number of shares shown includes those deferred shares credited
to the account of each non-employee director that are scheduled to
be paid out in the form of stock, as follows:
-----------------------------------------------------------
Mr. Hatfield 24,202
-----------------------------------------------------------
Mr. Jenkins 24,202
-----------------------------------------------------------
Mr. Lochner 2,859
-----------------------------------------------------------
Mr. Metz 12,103
-----------------------------------------------------------
Mr. Mulcahy 20,348
-----------------------------------------------------------
Mrs. Narodick 16,426
-----------------------------------------------------------
Dr. Slaughter 12,103
-----------------------------------------------------------
The non-employee directors have no current voting or investment
power over these deferred shares.
(c) The shares shown represent stock options granted under Solutia's
incentive plans, including stock options resulting from the
conversion of Pharmacia stock options at the time of the spinoff of
Solutia by Pharmacia in 1997.
(d) Mr. De Temmerman and his wife own these shares jointly.
(e) The number of shares shown for Mr. Jenkins includes 170 shares
owned jointly by Mr. Jenkins and his wife.
115
(f) The number of shares shown for Mr. Quinn includes 20,000 shares
owned in trust by Mr. Quinn's wife. Mr. Quinn expressly disclaims
beneficial ownership of these shares.
(g) The number of shares shown for Mr. Saucier includes 20 shares owned
by Mr. Saucier's wife.
(h) The number of shares shown for Dr. Slaughter includes 137 shares
owned by Dr. Slaughter's wife. Dr. Slaughter expressly disclaims
beneficial ownership of these shares.
(i) The number of shares shown for Mr. Sullivan includes 2,000 shares
owned jointly by Mr. Sullivan and his wife.
The total share holdings reported above for all directors and
executive officers as a group equal approximately 1.5% of the number of
shares of Solutia common stock outstanding on December 31, 2004. No director
or executive officer holds more than 1% of these shares.
OWNERSHIP BY CERTAIN BENEFICIARIES
The following table shows all persons or entities that Solutia
knows were "beneficial owners" of more than five percent of Solutia common
stock on December 31, 2004.
- -----------------------------------------------------------------------------------------------------------
Amount and Nature of Beneficial
Name and Address of Beneficial Owner Ownership of Solutia Common Stock Percent of Class
- -----------------------------------------------------------------------------------------------------------
FMR Corp. 12,452,080 11.919% (a)
82 Devonshire Street
Boston, Massachusetts 02109
- -----------------------------------------------------------------------------------------------------------
<FN>
(a) This information is based on a Schedule 13G that FMR Corp. filed
with the SEC on behalf of itself, its subsidiary Fidelity
Management & Research Company, and certain FMR shareholders.
Fidelity Management & Research Company, an investment adviser
registered under the Investment Advisers Act of 1940, is the
beneficial owner of 12,452,080 shares (11.919% of Solutia's common
stock) as a result of acting as investment adviser to various
investment companies registered under the Investment Company Act of
1940. One of these investment companies, Fidelity Low Priced Stock
Fund, is the beneficial owner of 10,452,080 of these shares
(10.004% of Solutia's common stock). FMR Corp. and Fidelity
Management & Research Company have no sole or shared power to vote
or direct the voting of these shares. They do have sole power to
dispose of, or direct the disposition of, the shares.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about Solutia's equity
compensation plans as of December 31, 2004. Solutia believes that its plan
of reorganization will result in cancellation of its existing shares of
common stock and that it is unlikely that its directors or executive
officers will receive any consideration for their grants or awards under
these equity compensation plans.
- ---------------------------------------------------------------------------------------------------------------------
Number of Securities Remaining
Number of Securities to Weighted-Average Available for Future Issuance
be Issued upon Exercise Exercise Price of under Equity Compensation Plans
of Outstanding Options, Outstanding Options, (Excluding Securities Reflected
Warrants, and Rights Warrants, and Rights in Column (a))
Plan Category (a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 19,459,228 15.70 2,924,216(1)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders (2) 273,431(3) 14.91(4) 25,174(5)
- ---------------------------------------------------------------------------------------------------------------------
Total 19,732,659 15.69 2,949,390
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) In addition to options and stock appreciation rights, both the
Solutia Inc. 2000 Stock-Based Incentive Plan (2000 Plan) and the
Solutia Inc. 1997 Stock-Based Incentive Plan (1997 Plan) provide
for awards of restricted and unrestricted stock. Of the shares
remaining available for future issuance under the 2000 Plan, up to
162,000 shares may be used for awards of restricted stock. The 2000
Plan does not limit the number of shares that may be used for
awards of unrestricted stock, but unrestricted shares may be
awarded only in lieu of cash payments under other incentive plans
of Solutia and its subsidiaries. Because of forfeitures, 1,024,950
shares are available for issuance
116
under the 1997 Plan. These may be used for awards of restricted or
unrestricted stock or for stock options. Because of Solutia's
Chapter 11 filing, it is unlikely that these available shares will
ever be used.
(2) The Solutia Inc. Non-Employee Director Compensation Plan was not
approved by Solutia's stockholders. This plan authorized the use of
up to 400,000 treasury shares of Solutia common stock for
non-qualified stock options and deferred stock. Shares subject to
awards that are forfeited or terminated may not be re-issued under
this plan. The participants in the plan are those directors of
Solutia who are not employed by Solutia or any subsidiary of
Solutia.
Stock Options: The plan provided for an initial stock option grant
on the date the director first became a non-employee director. In
addition, each director elected or continuing in office received an
annual stock option grant on the date of the annual meeting of
stockholders. If a director was first elected at a time other than
the date of the annual meeting, the director's annual grant for the
first year was prorated to reflect the number of months or partial
months served before the next annual meeting of stockholders. The
exercise price of these options is equal to the fair market value
of a share of Solutia common stock on the grant date. The stock
options become exercisable in three equal annual installments. The
options have a term of ten years but terminate two years after a
director's board service ends for any reason, if earlier.
Deferred Stock: Until May 2003, half of a director's annual retainer
was mandatorily credited under this plan to the director's deferred
stock account on a quarterly basis, with the deferred stock units
to be paid out in shares of Solutia common stock following
termination of the director's service on Solutia's board. The
number of shares credited each quarter was determined by dividing
the dollar amount of 1/8 of the retainer by the value of a share of
Solutia common stock on the first trading day in the plan quarter.
Each director was able to elect to receive the other half of the
annual retainer in cash or to defer all or a part into the deferred
stock account, an interest-bearing cash account, or both, with any
deferred stock units to be paid in shares of Solutia common stock.
In April 2003, the board of directors adopted the Solutia Inc. 2003
Non-Employee Director Compensation Plan, which provided for
deferred stock units to be paid in cash, and beginning in May 2003
deferred stock units payable in cash were credited under that plan,
and deferred stock units payable in stock ceased to be granted
under this plan. In 2004, none of the compensation of Solutia's
non-employee directors was deferred into any form of stock units;
all such compensation was paid in cash.
(3) This number includes options to purchase 161,337 shares of Solutia
common stock and 118,484 deferred stock units to be paid out in
shares of Solutia common stock.
(4) This weighted average exercise price of outstanding options
excludes deferred stock units, which do not have an exercise price.
(5) No further grants of deferred stock units will be made under the
Solutia Inc. Non-Employee Director Compensation Plan. In addition,
because of Solutia's Chapter 11 filing, it is unlikely that these
available shares will be used for stock options either.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Hunter, who was the chairman of the board, chief executive
officer, president and a director of Solutia, until May 3, 2004, received
separation pay of $1,840,000 upon his termination. For more details, see
"Separation Agreements with Former Named Executive Officers" on page 113
above.
Mr. Saucier, Mr. Sullivan and one other executive officer, who is
not a "named executive officer" for reporting purposes, have unsecured
claims as creditors in Solutia's Chapter 11 case by virtue of their
participation in Solutia's 401(k) excess benefit plan and/or non-qualified
defined benefit pension plan. Vested amounts owed to them under these plans
at the time that Solutia filed for Chapter 11 are as follows:
- --------------------------------------------------------------------------------------------------
Executive Officer 401(k) Excess Benefit Plan Non-Qualified Pension Plan
- --------------------------------------------------------------------------------------------------
J. F. Saucier 1,040 43,554
- --------------------------------------------------------------------------------------------------
J. M. Sullivan 33,164 6,384
- --------------------------------------------------------------------------------------------------
Other Executive Officer 4,126 --
- --------------------------------------------------------------------------------------------------
Mr. Hunter was an unsecured creditor for the same reason, but as part of his
separation agreement (described on page 113 above), he released all claims
to these benefits.
117
In addition, each non-employee director is an unsecured creditor of
Solutia with respect to deferred compensation that was payable in cash in
the following amounts: Mr. Hatfield, $37,500; each other current director,
$18,750.
Each director and executive officer has also filed a proof of claim
for benefits under Solutia's director and officer and fidelity insurance and
for any right he or she may have to corporate indemnification. Each director
and executive officer also has, by virtue of Solutia's Chapter 11 filing, a
claim for shares of Solutia common stock held by the director and for the
value of deferred stock units that were payable in shares of Solutia's
common stock.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
FEES PAID TO INDEPENDENT AUDITOR
The Audit and Finance Committee of Solutia's board of directors
appointed Deloitte & Touche LLP as principal independent auditors to examine
the consolidated financial statements of Solutia and its subsidiaries for
2004 and 2003. The appointment for 2003 was ratified by Solutia's
shareholders. The following table displays the aggregate fees billed to
Solutia for the fiscal years ended December 31, 2004 and 2003, by Deloitte &
Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their
respective affiliates.
- -------------------------------------------------------------------------
TYPE OF FEE 2004 2003
- -------------------------------------------------------------------------
Audit Fees $2,169,000 $1,372,000
- -------------------------------------------------------------------------
Audit-Related Fees (1) 118,000 494,000
- -------------------------------------------------------------------------
Tax Fees (2) 663,000 498,000
- -------------------------------------------------------------------------
All Other Fees (3) 932,000 679,000
- -------------------------------------------------------------------------
<FN>
(1) Audit-Related Fees include fees for audits of employee benefit
plans; agreed-upon or expanded audit procedures related to
accounting records required to respond to or comply with financial,
accounting or regulatory reporting matters; consultations on the
accounting or disclosure treatment of transactions or events and/or
the actual or potential impact of final or proposed rules,
standards or interpretations by the Securities and Exchange
Commission, FASB or other regulatory or standard-setting bodies;
and attest services not required by statute or regulation.
(2) Tax Fees include fees for domestic tax planning and advice;
domestic tax compliance; international tax planning and advice;
international tax compliance; and review of federal, state, local
and international income, franchise and other tax returns.
(3) All Other Fees include fees for expatriate tax return preparation,
international assignment services and various other permitted
services.
PRE-APPROVAL POLICIES AND PROCEDURES
Consistent with the Sarbanes-Oxley Act of 2002 and the SEC's rules
relating to auditor independence, the Audit and Finance Committee has
adopted a policy to pre-approve all audit and permissible non-audit services
provided by Solutia's independent auditor, Deloitte & Touche LLP. Under this
policy, the committee or its designated member must pre-approve services
before a specified service is begun. Each approval includes a specified
range of fees for the approved service. If approval is by the designated
member, the decision is reported to the committee at its next meeting.
Requests for pre-approval are submitted to the committee or its designated
member by both the independent auditor and either the chief executive
officer, treasurer or controller, with a joint statement as to whether, in
their view, the request is consistent with the Securities and Exchange
Commission's rules on auditor independence.
The Audit and Finance Committee pre-approved all services for which
the fees shown above were paid.
118
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 45 of this report.
2. The following supplemental schedule for the years ended
December 31, 2004, 2003 and 2002
II--Valuation and Qualifying Accounts
3. Exhibits--See the Exhibit Index beginning at page 121 of
this report. 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(a), 10(b), and 10(d) through 10(bb) on
pages 122 and 123 of the Exhibit Index. The following
exhibits listed in the Exhibit Index are filed with this
Form 10-K:
10(z) Letter Agreement, dated June 4, 2003, between
Solutia Inc. and Rosemary L. Klein
10(aa) Retention Agreement, dated as of June 17, 2004, by and
between Solutia Inc. and Rosemary L. Klein
10(bb) Form of Retention Agreement between Solutia Inc. and
Key Employees
10(nn) Agreement, made as of December 30, 2004, by and among
Cytec Industries Inc., Solutia Inc., UCB SA, Solutia
Canada, Inc., Surface Specialties, Inc. and Surface
Specialties S.A.*
12 Computation of the Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant
23(a) 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 using 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 Solutia's Categorical Independence Standards for
Non-Employee Directors
<FN>
*Confidentiality has been requested for a portion of this exhibit.
119
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 9, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
- --------------------------------------------------------------------------------------------
Signature Title Date
- --------------------------------------------------------------------------------------------
/s/ Jeffry N. Quinn
- ------------------------- President, Chief Executive Officer and March 9, 2005
Jeffry N. Quinn Director
- --------------------------------------------------------------------------------------------
/s/ James M. Sullivan
- ------------------------- Senior Vice President and Chief Financial March 9, 2005
James M. Sullivan Officer
- --------------------------------------------------------------------------------------------
/s/ Timothy J. Spihlman
- ------------------------- Vice President and Controller (Principal March 9, 2005
Timothy J. Spihlman Accounting Officer)
- --------------------------------------------------------------------------------------------
*
- ------------------------- Chairman of the Board and Director March 9, 2005
Paul H. Hatfield
- --------------------------------------------------------------------------------------------
*
- ------------------------- Director March 9, 2005
Robert H. Jenkins
- --------------------------------------------------------------------------------------------
*
- ------------------------- Director March 9, 2005
Philip R. Lochner, Jr.
- --------------------------------------------------------------------------------------------
*
- ------------------------- Director March 9, 2005
Frank A. Metz, Jr.
- --------------------------------------------------------------------------------------------
*
- ------------------------- Director March 9, 2005
J. Patrick Mulcahy
- --------------------------------------------------------------------------------------------
*
- ------------------------- Director March 9, 2005
Sally G. Narodick
- --------------------------------------------------------------------------------------------
*
- ------------------------- Director March 9, 2005
John B. Slaughter
- --------------------------------------------------------------------------------------------
<FN>
*Rosemary L. Klein, by signing her name hereto, does sign this document on
behalf of the above noted individuals, pursuant to powers of attorney duly
executed by such individuals which have been filed as an Exhibit to this
Form 10-K.
/s/ Rosemary L. Klein
-----------------------------------
Rosemary L. Klein, Attorney-in-Fact
120
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*
(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) Stock and Asset Purchase Agreement by and between UCB S.A. and
Solutia Inc., dated as of December 2, 2002 (incorporated by
reference to Exhibit 2 of Solutia's Form 8-K filed on February 18,
2003)
3(a) Restated Certificate of Incorporation of Solutia (incorporated by
reference to Exhibit 3(a) of Solutia's Registration Statement on
Form S-1 (333-36355) filed September 25, 1997)
3(b) By-Laws of Solutia Inc., as amended February 26, 2003 (incorporated
by reference to Exhibit 3(b) of Solutia's Form 10-K for the year
ended December 31, 2003)
4(a) Rights Agreement (incorporated by reference to Exhibit 4 of
Solutia's Registration Statement on Form 10 filed on August 7,
1997)
4(b) Amendment to the Rights Agreement (incorporated by reference to
Exhibit 4.4, of Solutia's Registration Statement on Form S-3
(333-75812) filed December 21, 2001)
4(c) 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)
4(d) 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)
4(e) 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)
4(f) 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)
4(g) Terms and Conditions of Euronotes (incorporated by reference to
Exhibit 99.2 of Solutia's Form 8-K filed on February 23, 2004)
4(h) Form of Global Note for Euronotes (incorporated by reference to
Exhibit 99.5 of Solutia's Form 8-K filed on February 23, 2004)
<FN>
- -------------
*Confidential treatment has been granted for a portion of this exhibit.
121
4(i) 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)
4(j) First Supplemental Indenture, dated as if 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)
4(k) 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)
4(l) 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)
4(m) Amended, Restated and Novated Junior Intercreditor Agreement, dated
as of October 8, 2003, among Solutia Inc., Solutia Business
Enterprises, Inc., each of the subsidiary guarantors named therein,
Ableco Finance LLC and HSBC Bank USA (incorporated by reference to
Exhibit 4(a) of Solutia's Form 10-Q for the quarter ended September
30, 2003)
4(n) Amended, Restated and Novated Junior Security Agreement, dated as
of October 8, 2003, among Solutia Inc., Solutia Business
Enterprises, Inc., each of the subsidiary guarantors named therein,
Ableco Finance LLC and HSBC Bank USA (incorporated by reference to
Exhibit 4(b) of Solutia's Form 10-Q for the quarter ended September
30, 2003)
4(o) Terms and Conditions of Euronotes (incorporated by reference to
Exhibit 99.2 of Solutia's Form 8-K filed February 23, 2004)
4(p) Form of Global Note (incorporated by reference to Exhibit 99.5 of
Solutia's Form 8-K filed February 23, 2004)
9 Omitted--Inapplicable
10(a) 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(b) 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(c) 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(d) Solutia Inc. Management Incentive Replacement Plan as amended in
1999 (incorporated by reference to Exhibit 10(2) of Solutia's Form
10-Q for the quarter ended June 30, 1999)
10(e) 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(f) 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(g) 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(h) 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(i) 2004 Solutia Annual Incentive Plan (incorporated by reference to
Exhibit 99.1 of the Solutia's Form 8-K, filed January 18, 2005)
10(j) Solutia Inc. Deferred Compensation Plan, as amended in 2002
(incorporated by reference to Exhibit 10(l) of Solutia's Form 10-K
for the year ended December 31, 2002)
122
10(k) Solutia Inc. 2002-2006 Long-Term Incentive Plan (incorporated by
reference to Appendix A of the Solutia Inc. Notice of Annual
Meeting and Proxy Statement dated March 14, 2002)
10(l) Retention Agreement with John C. Hunter III dated June 30, 2003
(incorporated by reference to Exhibit 10(c) of Solutia's Form 10-Q
for the quarter ended June 30, 2003)
10(m) Retention Agreement with Robert A. Clausen dated June 30, 2003
(incorporated by reference to Exhibit 10(d) of Solutia's Form 10-Q
for the quarter ended June 30, 2003)
10(n) Form of Retention Agreement between Solutia Inc. and other named
Executive Officers (incorporated by reference to Exhibit 10(q) of
Solutia's Form 10-K for the year ended December 31, 2003, filed
March 15, 2004)
10(o) Form of Employment Agreement with certain Named Executive Officers
(incorporated by reference to Exhibit 10(1) of Solutia's Form 10-Q
for the quarter ended March 31, 1998)
10(p) Form of Employment Agreement with other executive officers
(incorporated by reference to Exhibit 10(2) of Solutia's Form 10-Q
for the quarter ended March 31, 1998)
10(q) Change of Control Agreement between Solutia Inc. and Jeffry N.
Quinn dated as of February 26, 2003 (incorporated by reference to
Exhibit 10 of Solutia's Form 10-Q for the quarter ended March 31,
2003)
10(r) Amended and Restated Separation Agreement and Release of Claims by
and between Solutia Inc. and John C. Hunter III dated as of May 19,
2004 (incorporated by reference to Exhibit 10(a) of Solutia's Form
10-Q for the quarter ended June 30, 2004)
10(s) Amended and Restated Separation Agreement and Release of Claims by
and between Solutia Inc. and Robert A. Clausen dated as of May 19,
2004 (incorporated by reference to Exhibit 10(b) of Solutia's Form
10-Q for the quarter ended June 30, 2004)
10(t) Agreement by and between Solutia Inc. and Jeffry N. Quinn dated as
of July 19, 2004 (incorporated by reference to Exhibit 10(c) of
Solutia's Form 10-Q for the quarter ended June 30, 2004)
10(u) Agreement by and between Solutia Inc. and James M. Sullivan dated
as of July 19, 2004 (incorporated by reference to Exhibit 10(d) of
Solutia's Form 10-Q for the quarter ended June 30, 2004)
10(v) Agreement by and between Solutia Inc. and John F. Saucier dated as
of July 19, 2004 (incorporated by reference to Exhibit 10(e) of
Solutia's Form 10-Q for the quarter ended June 30, 2004)
10(w) Agreement by and between Solutia Inc. and Luc De Temmerman dated as
of July 19, 2004 (incorporated by reference to Exhibit 99.2 of
Solutia's Form 8-K filed January 18, 2005)
10(x) 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(y) Retention Agreement by and between Solutia Inc. and Max W. McCombs
dated as of June 21, 2004 (incorporated by reference to Solutia's
Form 10-Q for the quarter ended September 30, 2004)
10(z) Letter Agreement, dated June 4, 2003, between Solutia Inc. and
Rosemary L. Klein
10(aa) Retention Agreement, dated as of June 17, 2004, by and between
Solutia Inc. and Rosemary L. Klein
10(bb) Form of Retention Agreement between Solutia Inc. and Key Employees
10(cc) 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(dd) 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)
123
10(ee) 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(ff) 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(gg) 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(hh) 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 (incorporated by reference to Exhibit 10(y) of
Solutia's Form 10-K for the year ended December 31, 2004)
10(ii) 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 C-Documentation Agent (incorporated by
reference to Exhibit 10(f) of Solutia's Form 10-Q for the quarter
ended June 30, 2004)
10(jj) Fiscal Agency Agreement, dated February 11, 2004, among Solutia
Europe S.A./N.V., Kredietbank S.A. Luxembourgeoise, as fiscal agent
and paying agent, and KBC Bank N.V., as principal paying agent
(incorporated by reference to Exhibit 99.3 of Solutia's Form 8-K
filed on February 23, 2004)
10(kk) Amendment No. 1 to the Fiscal Agency Agreement and Terms and
Conditions of Notes dated as of November 9, 2004 (incorporated by
reference to Solutia's Form 8-K filed November 16, 2004)
10(ll) Collateral Agency Agreement, dated February 11, 2004, among KBC
Bank N.V., as Collateral Agent, Solutia Europe S.A./N.V., and the
Subsidiary Guarantors (incorporated by reference to Exhibit 99.4 of
Solutia's Form 8-K filed on February 23, 2004)
10(mm) Counterpart to the Collateral Agency Agreement dated March 4, 2004
(incorporated by reference to Exhibit 99,8 of Solutia's Form 8-K
filed on March 11, 2004)
10(nn) Agreement, made as of December 30, 2004, by and among Cytec
Industries Inc., Solutia Inc., UCB SA, Solutia Canada, Inc.,
Surface Specialties, Inc. and Surface Specialties S.A.*
11 Omitted--Inapplicable; see "Statement of Consolidated Operations"
on page 48
12 Computation of the Ratio of Earnings to Fixed Charges
14 Solutia Inc. Code of Ethics for Senior Financial Officers
(incorporated by reference to Item 14 of Solutia's Form 10-K for
the year ended December 31, 2003)
16 Omitted--Inapplicable
18 Omitted--Inapplicable
21 Subsidiaries of the Registrant
22 Omitted--Inapplicable
23(a) Consent of Independent Registered Public Accounting Firm
<FN>
- -------------
*Confidentiality has been requested for a portion of this exhibit.
124
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 Solutia's Categorical Independence Standards for Non-Employee
Directors
125
SCHEDULE II
SOLUTIA INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Dollars in Millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------- ------------ --------------------------- ---------- --------------
Additions
---------------------------
(1)
Balance at Charged to (2)
beginning of costs and Charged to Balance at end
Description year expenses other accounts Deductions of period
- --------------------------------- ------------ ---------- -------------- ---------- --------------
YEAR ENDED DECEMBER 31, 2004
Valuation accounts for doubtful
receivables $14 $ 2 $(5) $ - $11
Restructuring reserves 18 22 - 23 17
YEAR ENDED DECEMBER 31, 2003
Valuation accounts for doubtful
receivables $16 $ 5 $(7) $ - $14
Restructuring reserves 4 56 - 42 18
YEAR ENDED DECEMBER 31, 2002
Valuation accounts for doubtful
receivables $20 $ - $(1) $ 3 $16
Restructuring reserves 6 - - 2 4