- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
- --------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING TWELVE 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. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES X NO .
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT
CLASS JUNE 30, 2005
----- -------------
COMMON STOCK, $0.01 PAR VALUE 104,459,578 SHARES
----------------------------- ------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
NET SALES ......................................................... $ 747 $ 700 $1,480 $1,344
Cost of goods sold................................................. 643 656 1,269 1,229
----- ------ ------ ------
GROSS PROFIT....................................................... 104 44 211 115
Marketing expenses................................................. 35 40 68 74
Administrative expenses............................................ 25 33 49 58
Technological expenses............................................. 11 16 22 26
Amortization expense............................................... -- 1 -- 1
----- ------ ------ ------
OPERATING INCOME (LOSS)............................................ 33 (46) 72 (44)
Equity earnings (loss) from affiliates............................. 21 (3) 35 (12)
Interest expense (a)............................................... (22) (23) (44) (72)
Other income, net.................................................. 4 -- 6 --
Loss on debt modification.......................................... -- -- -- (15)
Reorganization items, net.......................................... (15) (24) (20) (49)
----- ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE............................ 21 (96) 49 (192)
Income tax expense................................................. 7 2 14 6
----- ------ ------ ------
NET INCOME (LOSS).................................................. $ 14 $ (98) $ 35 $ (198)
===== ====== ====== ======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE........................ $0.13 $(0.94) $ 0.33 $(1.90)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING.............. 104.5 104.5 104.5 104.5
===== ===== ===== =====
<FN>
(a) Interest expense excludes unrecorded contractual interest expense of $8
for the three months ended June 30, 2005 and 2004, and $16 for the six
months ended June 30, 2005 and 2004.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
NET INCOME (LOSS)................................................ $ 14 $ (98) $ 35 $ (198)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments ................................ (2) 1 (7) (1)
Minimum pension liability adjustments, net of tax ............... -- 18 -- 18
----- ------ ---- ------
COMPREHENSIVE INCOME (LOSS)...................................... $ 12 $ (79) $ 28 $ (181)
===== ====== ==== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
1
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 79 $ 115
Trade receivables, net of allowances of $9 and $11 in 2005 and 2004....... 295 286
Miscellaneous receivables ................................................ 73 93
Inventories............................................................... 245 239
Prepaid expenses and other assets......................................... 29 45
--------- --------
TOTAL CURRENT ASSETS...................................................... 721 778
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$2,498 in 2005 and $2,511 in 2004.................................... 802 841
INVESTMENTS IN AFFILIATES................................................. 200 177
GOODWILL.................................................................. 76 76
IDENTIFIED INTANGIBLE ASSETS, net ........................................ 36 38
OTHER ASSETS.............................................................. 131 166
--------- --------
TOTAL ASSETS.............................................................. $ 1,966 $ 2,076
========= ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 176 $ 198
Accrued liabilities ...................................................... 232 283
Short-term debt .......................................................... 300 300
--------- --------
TOTAL CURRENT LIABILITIES ................................................ 708 781
LONG-TERM DEBT ........................................................... 251 285
OTHER LIABILITIES ........................................................ 259 267
--------- --------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,218 1,333
LIABILITIES SUBJECT TO COMPROMISE ........................................ 2,164 2,187
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
Issued: 118,400,635 shares in 2005 and 2004........................... 1 1
Additional contributed capital........................................ 56 56
Treasury stock, at cost (13,941,057 shares in 2005 and 2004).......... (251) (251)
Net deficiency of assets at spinoff....................................... (113) (113)
Accumulated other comprehensive loss...................................... (82) (75)
Accumulated deficit....................................................... (1,027) (1,062)
--------- --------
TOTAL SHAREHOLDERS' DEFICIT............................................... (1,416) (1,444)
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $ 1,966 $ 2,076
========= ========
See accompanying Notes to Condensed Consolidated Financial Statements.
2
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2005 2004
---- ----
DECREASE IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss).............................................................. $ 35 $ (198)
Adjustments to reconcile to Cash From Operations:
Depreciation and amortization............................................. 59 64
Restructuring expenses and other charges.................................. (4) 138
Amortization of deferred credits.......................................... (4) (19)
Other, net................................................................ (1) 3
Changes in assets and liabilities:
Income and deferred taxes............................................ (10) (2)
Trade receivables.................................................... (9) (60)
Inventories.......................................................... (6) (8)
Accounts payable..................................................... (22) 77
Liabilities subject to compromise.................................... (23) (27)
Other assets and liabilities......................................... (41) 28
----- ------
CASH USED IN OPERATING ACTIVITIES.............................................. (26) (4)
----- ------
INVESTING ACTIVITIES:
Property, plant and equipment purchases........................................ (29) (22)
Acquisition and investment payments............................................ -- (36)
Other investing activities..................................................... 2 --
----- ------
CASH USED IN INVESTING ACTIVITIES.............................................. (27) (58)
----- ------
FINANCING ACTIVITIES:
Net change in short-term debt obligations...................................... -- (361)
Proceeds from long-term debt obligations....................................... -- 300
Net change in cash collateralized letters of credit............................ 17 76
Deferred debt issuance costs................................................... -- (13)
Other financing activities..................................................... -- (1)
----- ------
CASH PROVIDED BY FINANCING ACTIVITIES.......................................... 17 1
----- ------
DECREASE IN CASH AND CASH EQUIVALENTS.......................................... (36) (61)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.............................................................. 115 159
----- ------
END OF PERIOD.................................................................. $ 79 $ 98
===== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for reorganization items......................................... $ (30) $ (16)
===== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
3
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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; specialty products 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
(collectively, "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 by Solutia at the time of the spinoff (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.
Under Chapter 11, Solutia is operating its businesses as a
debtor-in-possession ("DIP") under bankruptcy 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 an order of the
bankruptcy court. November 30, 2004 was the last date by which holders of
pre-petition claims against the Debtors could file proofs of claim with
respect to such claims. Any holder of a claim that was required to file a
proof of 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 with respect to such claim. Differences
between claim amounts identified by the Debtors and proofs of claim 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 fully completed its analysis of all the
proofs of claim. Because
4
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
On June 7, 2005, Solutia reached an agreement-in-principle with
Monsanto Company ("Monsanto") and the Official Committee of Unsecured
Creditors in Solutia's Chapter 11 case (the "Unsecured Creditors'
Committee") that will serve as a framework for Solutia's plan of
reorganization. The agreement-in-principle is subject to the negotiation of
definitive documents, approval by Solutia's board of directors and various
other conditions and contingencies, some of which are not within the control
of Solutia, Monsanto or the Unsecured Creditors' Committee. Until a plan of
reorganization consistent with the terms of the agreement-in-principle is
confirmed by the bankruptcy court, the terms of the agreement-in-principle
are not binding upon any party.
Under the agreement-in-principle, Solutia would emerge from
bankruptcy as an independent publicly held company. The
agreement-in-principle provides for $250 of new investment in a reorganized
Solutia which would be used to pay retiree benefits to those who retired
prior to the spinoff, certain environmental remediation obligations of
Solutia and other legacy liabilities. The $250 would be raised in a rights
offering to Solutia's unsecured creditors. Monsanto would be obligated to
backstop the rights offering, exercising any rights not exercised by the
unsecured creditors.
The agreement-in-principle also provides that Monsanto would pay
environmental remediation costs at sites that have not been owned or
operated by Solutia, and to which waste has not been sent, since the
spinoff, provides a mechanism for sharing between Monsanto and Solutia
responsibility for environmental liabilities at certain sites adjacent to
the Anniston, Alabama and Sauget, Illinois plant locations, and provides
that Monsanto would contribute $107, less certain expenses incurred, and
litigation settlement costs paid, by Monsanto during the course of Solutia's
Chapter 11 case, to make distributions to the holders of certain unsecured
claims, including current tort and other legacy litigation claims. The
agreement-in-principle provides that Solutia will continue to pay its annual
installment and education fund obligations relating to the August 2003
Anniston polychlorinated biphenyls ("PCBs") settlement and education fund
obligations relating to the Anniston Partial Consent Decree (as described in
Note 7).
The agreement-in-principle provides for pay-off of Solutia's
secured debt and debtor-in-possession financing from an exit financing
package to be arranged by Solutia and does not require termination of
Solutia's pension plans. However, the agreement-in-principle does not
provide for distributions to the holders of Solutia's existing equity.
Solutia's existing shares of common stock, as well as options and warrants
to purchase its common stock, would be cancelled and holders of Solutia's
common stock, including options and warrants to purchase Solutia's common
stock, would receive no consideration for that stock or those options and
warrants. Although the agreement-in-principle does not provide for any
distributions to holders of Solutia's existing equity, the Official
Committee of Equity Security Holders in Solutia's bankruptcy case has filed
a complaint against Pharmacia and Monsanto and an objection to the proofs of
claim filed by Monsanto and Pharmacia in Solutia's bankruptcy, arguing that
holders of Solutia's existing equity are entitled to some form of
distribution. This complaint is more fully described in Note 7.
Although the agreement-in-principle provides for distributions of
common stock in a reorganized Solutia to holders of allowed unsecured
claims, Solutia is unable to predict what recovery its plan of
reorganization will provide to these holders of unsecured claims. The
ultimate ownership interests in the reorganized Solutia held by Monsanto and
other holders of unsecured claims will depend on, among other factors, the
amount of allowed unsecured claims in the bankruptcy case and the number of
rights exercised by unsecured creditors in the rights offering.
Prior to exiting from Chapter 11, the bankruptcy court must confirm
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
5
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
October 10, 2005. Although Solutia expects to receive further extensions of
the exclusivity period, no assurance can be given that any such future
extension requests will be granted by the bankruptcy court.
Solutia plans to file with the bankruptcy court a plan of
reorganization and disclosure statement consistent with the terms of the
agreement-in-principle that provide for Solutia's emergence from bankruptcy
as a going concern. There can be no assurance, however, that such a plan of
reorganization would be confirmed by the bankruptcy court or that such plan
would be implemented successfully.
Basis of Presentation
- ---------------------
These financial statements should be read in conjunction with the
audited consolidated financial statements and notes to consolidated
financial statements included in Solutia's 2004 Annual Report on Form 10-K
("2004 Form 10-K"), filed with the Securities and Exchange Commission
("SEC") on March 10, 2005.
The condensed 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. Continuation of the Company as a going concern is
contingent upon, among other things, Solutia's ability (i) to comply with
the terms and conditions of its DIP financing; (ii) to obtain confirmation
of a plan of reorganization under the U.S. Bankruptcy Code; (iii) to return
to profitability; (iv) to generate sufficient cash flow from operations; and
(v) to obtain financing sources to meet the Company's future obligations.
These matters create substantial doubt about the Company's ability to
continue as a going concern. The condensed 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 condensed 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.
The accompanying unaudited condensed consolidated financial
statements reflect all adjustments that, in the opinion of management, are
necessary to present fairly the financial position, results of operations,
comprehensive income (loss), and cash flows for the interim periods
reported. Such adjustments are of a normal, recurring nature. In addition,
footnote disclosures which would substantially duplicate the disclosures in
the audited consolidated financial statements have been omitted in the
accompanying unaudited condensed consolidated financial statements. The
results of operations for the three and six month periods ended June 30,
2005 are not necessarily indicative of the results to be expected for the
full year.
Certain reclassifications of prior year's financial information
have been made to conform to the 2005 presentation.
Condensed Consolidating Financial Statements
- --------------------------------------------
Condensed consolidating financial statements for Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as of
June 30, 2005 and December 31, 2004, and for the three and six months ended
June 30, 2005 and June 30, 2004 are presented below. These condensed
consolidating financial statements include investments in subsidiaries
carried under the equity method.
6
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
ASSETS
Current assets ................................... $ 434 $ 369 $ (82) $ 721
Property, plant and equipment, net................ 677 125 -- 802
Investment in subsidiaries and affiliates......... 358 220 (378) 200
Goodwill and identified intangible assets, net.... 101 11 -- 112
Other assets...................................... 85 46 -- 131
---------------------------------------------------------------------------
TOTAL ASSETS................................... $ 1,655 $ 771 $ (460) $ 1,966
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities .............................. $ 700 $ 175 $ (167) $ 708
Long-term debt.................................... -- 251 -- 251
Other liabilities................................. 207 52 -- 259
---------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE....... 907 478 (167) 1,218
LIABILITIES SUBJECT TO COMPROMISE................. 2,164 -- -- 2,164
TOTAL SHAREHOLDERS' EQUITY (DEFICIT).............. (1,416) 293 (293) (1,416)
---------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 1,655 $ 771 $ (460) $ 1,966
===========================================================================
CONDENSED 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
========================================================================
7
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
NET SALES................................. $ 602 $ 245 $ (100) $ 747
Cost of goods sold........................ 540 208 (105) 643
------------------------------------------------------------
GROSS PROFIT.............................. 62 37 5 104
Marketing, administrative and technological
expenses................................ 55 16 -- 71
------------------------------------------------------------
OPERATING INCOME ......................... 7 21 5 33
Equity earnings (loss) from affiliates.... 32 (1) (10) 21
Interest expense.......................... (16) (6) -- (22)
Other income, net......................... 5 5 (6) 4
Reorganization items, net................. (13) (2) -- (15)
------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE ......... 15 17 (11) 21
Income tax expense ....................... 1 6 -- 7
------------------------------------------------------------
NET INCOME ............................... $ 14 $ 11 $ (11) $ 14
============================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
NET SALES................................. $1,195 $488 $(203) $1,480
Cost of goods sold........................ 1,076 410 (217) 1,269
------------------------------------------------------------
GROSS PROFIT.............................. 119 78 14 211
Marketing, administrative and technological
expenses................................ 107 32 -- 139
------------------------------------------------------------
OPERATING INCOME ......................... 12 46 14 72
Equity earnings (loss) from affiliates.... 64 (2) (27) 35
Interest expense.......................... (32) (12) -- (44)
Other income, net......................... 11 7 (12) 6
Reorganization items, net................. (18) (2) -- (20)
------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE ......... 37 37 (25) 49
Income tax expense ....................... 2 12 -- 14
------------------------------------------------------------
NET INCOME ............................... $ 35 $ 25 $ (25) $ 35
============================================================
8
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
NET SALES................................. $ 573 $ 224 $ (97) $ 700
Cost of goods sold........................ 575 184 (103) 656
------------------------------------------------------------
GROSS PROFIT.............................. (2) 40 6 44
Marketing, administrative and technological
expenses................................ 74 15 -- 89
Amortization expense...................... -- 1 -- 1
------------------------------------------------------------
OPERATING INCOME (LOSS)................... (76) 24 6 (46)
Equity earnings (loss) from affiliates.... 13 (2) (14) (3)
Interest expense.......................... (17) (6) -- (23)
Other income, net......................... 6 -- (6) --
Reorganization items, net................. (24) -- -- (24)
------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE .. (98) 16 (14) (96)
Income tax expense ....................... -- 2 -- 2
------------------------------------------------------------
NET INCOME (LOSS)......................... $ (98) $ 14 $ (14) $ (98)
============================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
NET SALES................................. $1,097 $433 $(186) $1,344
Cost of goods sold........................ 1,068 360 (199) 1,229
------------------------------------------------------------
GROSS PROFIT.............................. 29 73 13 115
Marketing, administrative and technological
expenses................................ 128 30 -- 158
Amortization expense...................... -- 1 -- 1
------------------------------------------------------------
OPERATING INCOME (LOSS)................... (99) 42 13 (44)
Equity loss from affiliates............... (4) -- (8) (12)
Interest expense.......................... (59) (13) -- (72)
Other income (expense), net............... 13 (2) (11) --
Loss on debt modification................. -- (15) -- (15)
Reorganization items, net................. (49) -- -- (49)
------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE .. (198) 12 (6) (192)
Income tax expense ....................... -- 6 -- 6
------------------------------------------------------------
NET INCOME (LOSS)......................... $ (198) $ 6 $ (6) $ (198)
============================================================
9
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities................................ $(41) $15 $-- $(26)
Net Cash Used in Investing Activities....... (21) (6) -- (27)
Net Cash Provided by (Used in) Financing
Activities................................ 24 (7) -- 17
------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... (38) 2 -- (36)
Cash and Cash Equivalents:
Beginning of year........................ 50 65 -- 115
------------------------------------------------------------
End of period............................ $ 12 $67 $-- $ 79
============================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities................................ $(16) $ 12 $-- $ (4)
Net Cash Used in Investing Activities....... (48) (10) -- (58)
Net Cash Provided by (Used in) Financing
Activities................................ (9) 10 -- 1
------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... (73) 12 -- (61)
Cash and Cash Equivalents:
Beginning of year........................ 125 34 -- 159
------------------------------------------------------------
End of period............................ $ 52 $ 46 $-- $ 98
============================================================
Recently Issued Accounting Pronouncements
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"). SFAS 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 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. Solutia is required to adopt
SFAS 123R by January 1, 2006. The impact on Solutia's earnings will include
the remaining amortization of the fair value of existing options currently
disclosed as pro-forma expense in Note 3 and is contingent upon the number
of future options granted, the selected transition method and the selection
among acceptable valuation methodologies for valuing options.
10
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2. 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 a debtor-in-possession. These estimated claims are
reflected in the Condensed Consolidated Statement of Financial Position as
Liabilities Subject to Compromise as of June 30, 2005 and December 31, 2004
and are summarized in the table below. Such claims remain subject to future
adjustments. Adjustments may result from actions of the bankruptcy court,
negotiations with claimants, rejection or assumption of executory contracts,
determination of value of any collateral securing claims, reconciliation of
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 June 30, 2005 and December 31, 2004,
as applicable.
The amounts subject to compromise consisted of the following items:
JUNE 30, DECEMBER 31,
2005 2004
---- ----
Postretirement benefits (a)............................... $1,080 $1,090
Litigation reserves (b)................................... 141 141
Accounts payable (c)...................................... 118 130
Environmental reserves (d)................................ 82 82
Other miscellaneous liabilities........................... 75 76
6.72% debentures due 2037(e).............................. 150 150
7.375% debentures due 2027(e)............................. 300 300
11.25% notes due 2009 (f)................................. 223 223
Other (g)................................................. 43 43
------ ------
716 716
Unamortized debt discount and debt issuance costs......... (48) (48)
------ ------
TOTAL DEBT SUBJECT TO COMPROMISE..................... 668 668
------ ------
TOTAL LIABILITIES SUBJECT TO COMPROMISE................... $2,164 $2,187
====== ======
<FN>
(a) Postretirement benefits include Solutia's domestic (i) qualified
pension plan liabilities of $454 and $445 as of June 30, 2005 and
December 31, 2004, respectively; (ii) non-qualified pension plan
liabilities of $19 and $18 as of June 30, 2005 and December 31,
2004, respectively; and (iii) other postretirement benefits
liabilities of $607 and $627 as of June 30, 2005 and December 31,
2004, respectively. Pursuant to a bankruptcy court order, Solutia
made payments with respect to other postretirement obligations of
approximately $41 in the six months ended June 30, 2005.
(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 June 30, 2005 and December 31, 2004.
(c) Pursuant to bankruptcy court orders, Solutia settled certain
accounts payable liabilities subject to compromise in the six
months ended June 30, 2005.
11
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(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. See Note 7 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 due
2037 and its 7.375% debentures due 2027. The amount of contractual
interest expense not recorded in the six months ended June 30, 2005
was approximately $16.
(f) Pursuant to a bankruptcy court order, Solutia is required to
continue payments of the contractual interest on its 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 $13 in the six months
ended June 30, 2005, and the accrued interest related to these
notes was included in Accrued Liabilities classified as not subject
to compromise as of June 30, 2005 and December 31, 2004.
(g) Represents the debt obligation incurred upon 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.
Reorganization Items, Net
Reorganization items, net are presented separately in the Condensed
Consolidated Statement of 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:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
Professional fees (a) ........................ $(13) $(11) $(24) $(24)
Contract termination costs (b) ............... -- (11) -- (20)
Severance and employee retention costs (c)... (2) (4) (8) (7)
Adjustments to allowed claim amounts (d) ..... -- -- (11) --
Settlements of pre-petition claims (e) ....... -- 2 29 2
Other ........................................ -- -- (6) --
---- ---- ---- ----
TOTAL REORGANIZATION ITEMS, NET .............. $(15) $(24) $(20) $(49)
==== ==== ==== ====
<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.
(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) Adjustments to record certain pre-petition claims at estimated
amounts of the allowed claims.
(e) Represents the difference between the settlement amount of certain
pre-petition obligations and the corresponding amounts previously
recorded.
12
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
3. STOCK OPTION PLANS
Solutia applies APB No. 25 for measurement and recognition of
stock-based transactions with employees. Accordingly, no compensation cost
has been recognized for Solutia's option plans in the Condensed Consolidated
Statement of Operations, as all options granted under the plans had an
exercise price equal to the market value of the Company's stock on the date
of the grant. However, see Note 1 for a summary of expected future changes
in accounting practices with respect to Solutia's stock option plans based
upon Solutia's required adoption of SFAS No. 123R no later than January 1,
2006. The following table illustrates the effect on net income (loss) and
income (loss) per share if the fair value based method had been applied to
all outstanding and unvested awards:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
NET INCOME (LOSS):
As reported.................................... $ 14 $ (98) $ 35 $ (198)
Deduct: Total stock-based employee
compensation expense determined using the
Black-Scholes option-pricing model for all
awards, net of tax......................... -- (1) -- (2)
------ ------ ------ ------
Pro forma...................................... $ 14 $ (99) $ 35 $ (200)
====== ====== ====== ======
INCOME (LOSS) PER SHARE:
Basic and diluted - as reported................ $ 0.13 $(0.94) $ 0.33 $(1.90)
Basic and diluted - pro forma.................. $ 0.13 $(0.95) $ 0.33 $(1.92)
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 provide for
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.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill of $76 at both June 30, 2005 and December 31, 2004 was
allocated to the CPFilms reporting unit within the Performance Products and
Services segment. There were no changes to the net carrying amount of
goodwill during the six months ended June 30, 2005.
13
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Identified Intangible Assets
Identified intangible assets generally are comprised of i)
amortizable contract-based intangible assets with finite useful lives, and
ii) indefinite-lived trademarks not subject to amortization. These
intangible assets are summarized in aggregate as follows:
JUNE 30, 2005 DECEMBER 31, 2004
----------------------------------- -----------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
----------------------------------- -----------------------------------
Amortized intangible assets...... $ 29 $ (20) $ 9 $ 31 $ (20) $ 11
Trademarks....................... 27 -- 27 27 -- 27
----------------------------------- -----------------------------------
TOTAL IDENTIFIED INTANGIBLE
ASSETS........................... $ 56 $ (20) $ 36 $ 58 $ (20) $ 38
=================================== ===================================
There were no material acquisitions of intangible assets and there
have been no changes to amortizable lives or methods during the six months
ended June 30, 2005. In addition, amortization expense for the net carrying
amount of finite-lived intangible assets is estimated to be $1 annually from
2005 through 2009.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
JUNE 30, DECEMBER 31,
2005 2004
---- ----
INVENTORIES
Finished goods................................................ $ 201 $ 223
Goods in process.............................................. 129 99
Raw materials and supplies.................................... 88 92
-------- --------
Inventories, at FIFO cost..................................... 418 414
Excess of FIFO over LIFO cost................................. (173) (175)
-------- --------
TOTAL INVENTORIES............................................. $ 245 $ 239
======== ========
Inventories at FIFO approximate current cost.
JUNE 30, December 31,
2005 2004
---- ----
ACCRUED LIABILITIES
Wages and benefits............................................ $ 38 $ 55
Accrued rebates and sales returns/allowances.................. 22 31
Accrued interest.............................................. 23 25
Other......................................................... 149 172
-------- --------
TOTAL ACCRUED LIABILITIES..................................... $ 232 $ 283
======== ========
6. RESTRUCTURING RESERVES
During the first quarter 2005, Solutia announced that it will exit
its acrylic fibers operations and shut down its nylon industrial fiber
manufacturing unit at its plant in Pensacola, Florida during the second
quarter 2005. As a result in the first quarter 2005, Solutia recorded
restructuring charges of $10 in Reorganization Items, net including $6 of
various asset write-downs and $4 of severance and retraining costs. In the
second quarter 2005, Solutia recorded an additional $5 of asset write-downs
and $2 of decontamination costs, offset by a $7 gain from the reversal of
the LIFO reserve associated with the inventory liquidated as part of the
business shut-downs. These actions resulted from Solutia's continued
strategic evaluation of its businesses and the resulting charges were
recorded in the Integrated Nylon segment. In addition, Solutia recorded $1
of severance and retraining costs in the second quarter 2005 in cost of
goods sold involving headcount reductions primarily in its Performance
Products and Services segment and corporate function.
14
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
During the six months ended June 30, 2005, Solutia recorded
restructuring charges of $10 in Reorganization Items, net involving the exit
of its acrylic fibers operations and shut down of its nylon industrial fiber
manufacturing unit at its plant in Pensacola, Florida. These restructuring
costs included $11 of asset write-downs, $4 of severance and retraining
costs and $2 of decontamination costs, partially offset by a $7 gain from
the reversal of the LIFO reserve associated with the inventory liquidated as
part of the business shut-down. In addition, Solutia recorded $2 of
severance and retraining costs in the six months ended June 30, 2005 with $1
recorded in reorganizations items, net and $1 in cost of goods sold
involving headcount reductions within both the Integrated Nylon and
Performance Products and Services segments, as well as the corporate
function.
Solutia cannot forecast the level of future restructuring charges
due to the inherent uncertainty involved in operating as a
debtor-in-possession under Chapter 11 bankruptcy protection.
A summary of restructuring activity during the three and six months
ended June 30, 2005 is presented as follows:
DECOMMISSIONING/ FUTURE LEASE EMPLOYMENT ASSET
DISMANTLING PAYMENTS REDUCTIONS WRITE-DOWNS TOTAL
-------------------------------------------------------------------------------
Balance at December 31, 2004......... $ 5 $ 12 $ -- $ -- $ 17
Charges taken...................... -- -- 5 6 11
Amounts utilized................... -- (12) (1) (6) (19)
-------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2005............ $ 5 $ -- $ 4 $ -- $ 9
Charges taken...................... 2 -- 1 5 8
Amounts utilized................... (3) -- (4) (5) (12)
-------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2005............. $ 4 $ -- $ 1 $ -- $ 5
===============================================================================
7. CONTINGENCIES
Legacy Liabilities
One of the objectives of Solutia's Chapter 11 filing is to obtain
relief from the negative financial impact of legacy liabilities. The
agreement-in-principle, as further described in Note 1, sets forth the
proposed terms for addressing the funding responsibility for these legacy
liabilities, including contingent litigation and environmental obligations,
through Solutia's Chapter 11 proceedings.
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 had a liability of $141 associated with these
obligations classified as a liability subject to compromise as of June 30,
2005 and December 31, 2004. See Note 1 for further description as to how
these legacy litigation claims would be addressed under the
agreement-in-principle.
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
15
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
legal proceedings which are in this category are (i) Owens v. Monsanto; (ii)
Payton v. Monsanto; (iii) other Anniston cases not described in this report;
(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.
Legal Proceedings in Solutia's Bankruptcy Case
- ----------------------------------------------
A complaint was filed on May 27, 2005 against Solutia in its
bankruptcy case by JP Morgan Chase Bank, National Association ("JP Morgan"),
as indenture trustee for Solutia's debentures due in 2027 and 2037 asserting
six causes of action, as follows: (a) five causes of action seeking
declaratory judgments to establish the validity and priority of JP Morgan's
security interests; and (b) one cause of action pursuant to section 363 of
the Bankruptcy Code asserting that JP Morgan's security interests lacked
adequate protection. Solutia filed its response to the JP Morgan complaint
on July 5, 2005, denying the allegations of JP Morgan based on the express
terms of the indentures governing the 2027 and 2037 debentures, and has
responded to JP Morgan's requests for production of documents.
On March 7, 2005, the Official Committee of Equity Security
Holders (the "Equity Committee") in Solutia's bankruptcy case filed a
complaint against Pharmacia and Monsanto and an objection to the proofs of
claim filed by Monsanto and Pharmacia in Solutia's bankruptcy case. The
complaint seeks to avoid certain obligations assumed by Solutia in its
spinoff from Pharmacia. The complaint alleges that the spinoff was a
fraudulent transfer under the Bankruptcy Code because Pharmacia forced
Solutia to assume excessive liabilities and insufficient assets, such that
Solutia was destined to fail from its inception. On May 24, 2005 Pharmacia
and Monsanto filed a motion to dismiss the complaint, or in the alternative,
to stay the adversary proceeding. Neither a discovery schedule nor a trial
date has been set. The Equity Committee has also filed a Motion for Leave to
conduct an examination of the Debtors pursuant to Bankruptcy Rule 2004.
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 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 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. In the fall of 2004, EPA, Solutia and Pharmacia, and other
potentially responsible parties ("PRPs") with respect to the Anniston lead
site began negotiations regarding cleanup on the Anniston lead and PCB
sites. Subsequently, Solutia learned that EPA intended to enter into an
Administrative Order on Consent with the lead site PRPs which would deny
Pharmacia and Solutia contribution rights against the lead site PRPs with
respect to PCB cleanup. An order was issued by the district court on June 2,
2005 requiring the parties to proceed through formal dispute resolution and
preserving the status quo for thirty days. On June 30, 2005, the district
court found that by granting contribution protection to the lead site PRPs,
the EPA would have repudiated the Partial Consent Decree and indicated that,
if such contribution protection were granted, the court would suspend
Solutia's and Pharmacia's obligations under the Partial Consent Decree upon
their motion. Solutia and Pharmacia continue attempts to negotiate a global
settlement with EPA and the Anniston lead site PRPs and have not made a
motion to the district court to suspend their obligations under the Partial
Consent Decree.
16
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 class actions have been filed against Flexsys and other producers
of rubber chemicals.
State court actions. Solutia is aware of 23 class actions filed in
various state courts against Flexsys and other producers of rubber
chemicals. Solutia is only named as a defendant in one of these cases, which
was automatically stayed as against Solutia. 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 three cases, plaintiffs make similar allegations and seek similar
relief on behalf of all consumers of products containing rubber, including
tires. Eleven of these cases remain pending at the trial level in procedural
stages or are pending on appeal following dismissal as to Flexsys either by
plaintiffs or by the trial court on procedural grounds. The remaining cases
have been dismissed voluntarily by plaintiffs or by the court on procedural
grounds and are not on appeal.
Canadian actions. In May 2004, two 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) $0.000025 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. In May 2005, Solutia became
aware of a case filed in Ontario, Canada against Flexsys and other rubber
chemical producers alleging the same claims as the Quebec cases and seeking
on behalf of the citizens of Ontario (CAD) $95 in damages. No response is
yet due nor has any been filed by defendants in the Ontario case. Solutia is
not a defendant in that case.
Federal court actions by purchasers of rubber chemicals. Eight
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 approved by the court on June 21,
2005 releasing 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. As described in Solutia's 2004 Form 10-K and
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, RBX
Industries, Inc. and Parker Hannifin Corporation had filed separate cases
against Flexsys and other rubber chemical producing companies seeking the
same relief as requested by the class in In Re Rubber Chemicals with respect
to RBX's and Parker Hannifin's own purchases of rubber chemicals during the
relevant period. Both RBX and Parker Hannifin elected to join the class in
In re Rubber Chemicals prior to the class settlement. Other than potential
claims by two small direct purchasers of rubber chemicals that elected to
opt out of the settlement and whose purchases from Flexsys were immaterial
in amount, the class settlement resolves all remaining claims against
Solutia and Flexsys under U.S. antitrust laws of direct purchasers of rubber
chemicals whose purchases were made in the United States during the alleged
class period.
Federal court actions alleging violations of federal securities
laws. Six 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' results into Solutia's financial reports
17
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 is automatically stayed with respect to Solutia by
virtue of Section 362(a) of the U.S. Bankruptcy Code. On March 24, 2005, the
court issued a final order dismissing the complaint against the individual
defendants and, on March 29, 2005, issued an order dismissing the case
pending resolution of Solutia's bankruptcy case. Plaintiffs did not file an
appeal within the applicable appeals period.
Shareholder Derivative Suits. Two 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' alleged participation
in the price-fixing of rubber chemicals and Solutia's incorporation of
Flexsys' 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 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 in 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 from December 16, 1998 through 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 compensate for 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 then sought 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 could be considered together by the district
court. On March 11, 2005 the district court denied without prejudice
plaintiff's motion to withdraw the reference. In May of 2005, the plaintiffs
filed an amended and then a second amended complaint. Although the ERISA
violations alleged are very similar to those asserted in the original
complaint, the second amended complaint added new allegations largely
similar to those made in In Re Solutia Securities Litigation described
above. This second amended complaint also adds twelve new defendants,
including former and current directors and officers of Solutia. The
directors are alleged to have breached their fiduciary duties under ERISA by
failing to monitor the plan's fiduciaries, and by failing to recognize that
the fiduciaries were not themselves properly managing the plan.
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 contributed by
FMC to Astaris, a 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 a motion with the bankruptcy court
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 filed a motion to dismiss Solutia's action based upon an
alleged lack of standing. On March 29, 2005 the court granted in part and
denied in part FMC's motion to dismiss. Specifically, the court dismissed
with prejudice two of Solutia's claims for breach of contract. The court
denied FMC's motion to dismiss Solutia's other
18
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
claim for breach of contract and its claims for breach of fiduciary duty,
negligent misrepresentation and fraud and fraud in the inducement. Solutia
is vigorously pursuing this action.
Competition authorities in Belgium and several other European
countries are investigating past commercial practices of certain companies
engaged in the production and sale of butyl benzyl phthalates ("BBP"). One
of the BBP producers under investigation by the Belgian Competition
Authority is Ferro Belgium sprl, the European subsidiary of Ferro
Corporation. Ferro's BBP business in Europe was purchased from Solutia Inc.
in 2000. Solutia received an indemnification notice from Ferro and has
exercised its right, pursuant to the purchase agreement relating to Ferro's
acquisition of the BBP business from Solutia, to assume and control the
defense of Ferro in proceedings relating to these investigations. On July
7, 2005, the Belgian Competition Authority issued a Statement of Objections
regarding its BBP investigation in which Solutia Europe S.A/N.V., a European
subsidiary of Solutia, along with Ferro and two other producers of BBP, is
identified as a party under investigation with respect to its ownership of
the BBP business from 1997 until the business was sold to Ferro in 2000.
Solutia Inc. is not named as a party under investigation in the Statement of
Objections. Written comments to the Statement of Objections are due on
August 31, 2005 and a preliminary oral hearing before the Belgian
Competition Authority is currently scheduled to take place on September 6,
2005. Solutia is fully cooperating with the Belgian Competition Authority in
this investigation. Solutia currently believes that any liability that may
result from the Belgian investigation will not be significant to its results
of operations or financial position. However, Solutia cannot provide any
assurance that the liability assessed against it as a result of this matter
would not have a material adverse effect on Solutia's results of operations
or financial position.
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 $77 and $78 as of June 30, 2005 and December 31, 2004,
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
Condensed Consolidated Statement of 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 as of June 30, 2005 and
December 31, 2004 for properties not owned or operated by Solutia. This
liability is classified as subject to compromise in the Condensed
Consolidated Statement of Financial Position as of both June 30, 2005 and
December 31, 2004. The agreement-in-principle provides that Monsanto will
pay environmental remediation costs at sites that have not been owned or
operated by Solutia, and to which waste has not been sent, since the
spinoff, and provides a mechanism for sharing between Monsanto and Solutia
responsibility for environmental liabilities at certain sites adjacent to
the Anniston, Alabama and Sauget, Illinois plant locations. See Note 1 for
further description as to how these legacy environmental claims would be
addressed under the agreement-in-principle. Remediation activities are
currently being funded by Monsanto for certain of these properties not owned
or operated by Solutia. In addition, Solutia has not adjusted its recorded
environmental liabilities classified as subject to compromise for ongoing
remediation activities at these sites since the inception of Solutia's
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, changes
in method and extent of remediation, existence of other potentially
responsible parties and changes in technology. Solutia believes that the
known and unknown environmental matters, including matters classified as
subject to compromise for which
19
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Solutia may ultimately assume responsibility, 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.
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
with claimants, assumption or rejection of executory contracts,
determination as to the value of any collateral securing claims,
reconciliation of proofs of claim 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 opposed to court proceedings, with the result being that
Solutia may retain certain obligations currently classified as subject to
compromise in the Condensed Consolidated Statement of Financial Position.
See Note 1 for further description of the agreement-in-principle that
outlines Solutia's current proposal for resolution of certain claims.
8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
For the three and six months ended June 30, 2005 and 2004,
Solutia's pension and healthcare and other benefit costs were as follows:
PENSION BENEFITS
----------------
THREE MONTHS SIX MONTHS
------------ ----------
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
Service costs for benefits earned........ $ 1 $ 6 $ 3 $ 13
Interest costs on benefit obligation..... 17 35 35 56
Assumed return on plan assets............ (16) (34) (33) (54)
Prior service costs ..................... 1 2 1 6
Recognized net loss...................... 3 2 6 4
Curtailment and settlement net charges .. -- 62 -- 62
---- ---- ---- ----
TOTAL.................................... $ 6 $ 73 $ 12 $ 87
==== ==== ==== ====
20
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
HEALTHCARE AND OTHER BENEFITS
-----------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
Service costs for benefits earned........ $ 2 $ 2 $ 3 $ 5
Interest costs on benefit obligation..... 8 13 17 24
Prior service costs ..................... (2) (4) (5) (8)
Recognized net loss...................... 3 2 7 5
--- --- --- ---
TOTAL.................................... $11 $13 $22 $26
=== === === ===
Changes in Solutia's Pension and Other Postretirement Benefit Plans
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. Solutia also amended its U.S.
postretirement plan for non-union, active employees effective September 1,
2004. These changes included discontinuation of all postretirement benefits
after attaining age 65, changes to certain eligibility requirements for
pre-65 postretirement benefits and the eventual elimination of these
benefits by 2016, and elimination of retiree life insurance benefits for
future retirees. See Note 16 in Solutia's 2004 Form 10-K for further
information with respect to these actions.
Employer Contributions
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 plan in 2005 in order to minimize future required contributions. No
contributions were made to the U.S. qualified pension plan in the six months
ended June 30, 2005.
9. DEBT OBLIGATIONS
Solutia amended its DIP financing agreement on June 1, 2005 and
received bankruptcy court approval on July 25, 2005. The amendment reduces
the interest rate on the term loan component of the DIP facility to LIBOR
plus 4.25 percent from the previous interest rate of the greater of the
prime rate plus 4.0 percent or 8.0 percent, extends the maturity date of the
current facility to June 19, 2006 from the previous December 19, 2005
maturity date, and makes other minor modifications. No changes were made to
the financial covenants contained in the DIP agreement aside from extending
the financial covenant requirements to be commensurate with the new maturity
date of the DIP agreement. Overall, these changes are expected to reduce
Solutia's interest expense on the term loan component of the DIP facility up
to $7 based upon the new maturity date.
21
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
10. SEGMENT DATA
Solutia's management is organized around two strategic business
platforms: Performance Products and Services and Integrated Nylon. Solutia's
reportable segments and their major products 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 MAXIMUM(R) Merchant polymer and nylon extrusion polymers,
laminated window glass including VYDYNE(R) and ASCEND(R)
LLUMAR(R), VISTA(R) and GILA(R) professional and Carpet fibers, including the WEAR-DATED(R) and
retail window films 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.
22
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Segment data for the three and six months ended June 30, 2005 and
2004 are as follows:
THREE MONTHS ENDED JUNE 30,
---------------------------
2005 2004
------------------------- -----------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products and Services... $315 $ 37 $287 $ 27
Integrated Nylon.................... 432 14 413 5
---- ----- ---- -----
SEGMENT TOTALS...................... 747 51 700 32
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses.............. (14) (78)
Equity earnings (loss) from
affiliates..................... 20 (3)
Interest expense................ (22) (23)
Other income, net............... 1 --
Reorganization items, net....... (15) (24)
CONSOLIDATED TOTALS:
---- ----
NET SALES....................... $747 $700
==== ----- ==== -----
INCOME (LOSS) BEFORE INCOME TAXES $ 21 $ (96)
===== =====
SIX MONTHS ENDED JUNE 30,
-------------------------
2005 2004
------------------------- -----------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products and Services... $ 602 $ 72 $ 558 $ 52
Integrated Nylon.................... 878 13 786 (7)
------ ----- ------ ------
SEGMENT TOTALS...................... 1,480 85 1,344 45
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses.............. (25) (89)
Equity earnings (loss) from
affiliates..................... 33 (12)
Interest expense................ (44) (72)
Other income, net............... 2 --
Loss on debt modification....... -- (15)
Reorganization items, net....... (2) (49)
CONSOLIDATED TOTALS:
------ ------
NET SALES....................... $1,480 $1,344
====== ----- ====== ------
INCOME (LOSS) BEFORE INCOME TAXES $ 49 $ (192)
===== ======
11. 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 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. Solutia's
obligations under the October 2003 facility were paid in full with the
proceeds of a final DIP facility dated 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")
23
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 June 30, 2005 and
December 31, 2004, and for the three and six months ended June 30, 2005 and
2004. 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.
24
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES................................ $ 550 $ 52 $ 246 $ (101) $ 747
Cost of goods sold....................... 516 25 208 (106) 643
-----------------------------------------------------------------------------
GROSS PROFIT............................. 34 27 38 5 104
Marketing expenses....................... 20 6 9 -- 35
Administrative expenses.................. 16 2 7 -- 25
Technological expenses................... 10 1 -- -- 11
-----------------------------------------------------------------------------
OPERATING INCOME (LOSS).................. (12) 18 22 5 33
Equity earnings (loss) from affiliates... 42 11 (1) (31) 21
Interest expense......................... -- -- (13) (9) (22)
Other income (expense), net.............. (2) (9) 12 3 4
Reorganization items, net................ (13) -- (2) -- (15)
-----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES .............. 15 20 18 (32) 21
Income tax expense ...................... 1 -- 6 -- 7
-----------------------------------------------------------------------------
NET INCOME............................... $ 14 $ 20 $ 12 $ (32) $ 14
=============================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME............................... $ 14 $ 20 $ 12 $ (32) $ 14
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments......... (2) (6) (9) 15 (2)
-----------------------------------------------------------------------------
COMPREHENSIVE INCOME..................... $ 12 $ 14 $ 3 $ (17) $ 12
=============================================================================
25
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES................................ $ 519 $ 52 $ 226 $ (97) $ 700
Cost of goods sold....................... 551 23 185 (103) 656
-----------------------------------------------------------------------------
GROSS PROFIT............................. (32) 29 41 6 44
Marketing expenses....................... 26 6 8 -- 40
Administrative expenses.................. 23 2 8 -- 33
Technological expenses................... 15 -- 1 -- 16
Amortization expense..................... -- -- 1 -- 1
-----------------------------------------------------------------------------
OPERATING INCOME (LOSS).................. (96) 21 23 6 (46)
Equity earnings (loss) from affiliates... 53 19 (2) (73) (3)
Interest expense......................... (33) (1) (13) 24 (23)
Other income, net........................ 2 19 8 (29) --
Reorganization items, net................ (24) -- -- -- (24)
-----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ....... (98) 58 16 (72) (96)
Income tax expense ...................... -- -- 2 -- 2
-----------------------------------------------------------------------------
NET INCOME (LOSS)........................ $ (98) $ 58 $ 14 $ (72) $ (98)
=============================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS)........................ $ (98) $ 58 $ 14 $ (72) $ (98)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments......... 1 -- 5 (5) 1
Minimum pension liability adjustments, net
of tax................................. 18 -- -- -- 18
-----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS).............. $ (79) $ 58 $ 19 $ (77) $ (79)
============================================================================
26
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.................................. $1,101 $92 $490 $(203) $1,480
Cost of goods sold......................... 1,034 41 411 (217) 1,269
-----------------------------------------------------------------------------
GROSS PROFIT............................... 67 51 79 14 211
Marketing expenses......................... 39 12 17 -- 68
Administrative expenses.................... 30 4 15 -- 49
Technological expenses..................... 20 1 1 -- 22
-----------------------------------------------------------------------------
OPERATING INCOME (LOSS).................... (22) 34 46 14 72
Equity earnings (loss) from affiliates..... 110 24 (2) (97) 35
Interest expense........................... (32) -- (26) 14 (44)
Other income (expense), net................ (1) 11 22 (26) 6
Reorganization items, net.................. (18) -- (2) -- (20)
-----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ................ 37 69 38 (95) 49
Income tax expense ........................ 2 -- 12 -- 14
-----------------------------------------------------------------------------
NET INCOME................................. $ 35 $69 $ 26 $ (95) $ 35
============================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME................................. $ 35 $ 69 $ 26 $ (95) $ 35
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments........... (7) (10) (16) 26 (7)
-----------------------------------------------------------------------------
COMPREHENSIVE INCOME....................... $ 28 $ 59 $ 10 $ (69) $ 28
=============================================================================
27
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.................................. $1,002 $91 $437 $(186) $1,344
Cost of goods sold......................... 1,024 41 363 (199) 1,229
-------------------------------------------------------------------------------------
GROSS PROFIT............................... (22) 50 74 13 115
Marketing expenses......................... 47 11 16 -- 74
Administrative expenses.................... 39 4 15 -- 58
Technological expenses..................... 24 1 1 -- 26
Amortization expense....................... -- -- 1 -- 1
-------------------------------------------------------------------------------------
OPERATING INCOME (LOSS).................... (132) 34 41 13 (44)
Equity earnings from affiliates............ 68 11 -- (91) (12)
Interest expense........................... (91) (1) (28) 48 (72)
Other income, net.......................... 6 38 14 (58) --
Loss on debt modification.................. -- -- (15) -- (15)
Reorganization items, net.................. (49) -- -- -- (49)
-------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ......... (198) 82 12 (88) (192)
Income tax expense ........................ -- -- 6 -- 6
-------------------------------------------------------------------------------------
NET INCOME (LOSS).......................... $ (198) $82 $ 6 $ (88) $ (198)
=====================================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
SIX MONTHS ENDED JUNE 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS).......................... $ (198) $ 82 $ 6 $ (88) $ (198)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments........... (1) (1) 8 (7) (1)
Minimum pension liability adjustments, net
of tax................................... 18 -- -- -- 18
------------------------------ --------------------------------------------------
COMPREHENSIVE INCOME (LOSS)................ $ (181) $ 81 $ 14 $ (95) $ (181)
=================================================================================
28
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ (3) $ 14 $ 68 $ -- $ 79
Trade receivables, net................................. 2 151 142 -- 295
Intercompany receivables............................... 122 728 82 (932) --
Miscellaneous receivables.............................. 52 1 20 -- 73
Inventories............................................ 120 30 111 (16) 245
Prepaid expenses and other current assets.............. 15 -- 11 3 29
-------------------------------------------------------------------------
TOTAL CURRENT ASSETS................................... 308 924 434 (945) 721
PROPERTY, PLANT AND EQUIPMENT, NET..................... 599 78 125 -- 802
INVESTMENTS IN AFFILIATES.............................. 2,266 193 17 (2,276) 200
GOODWILL............................................... -- 72 4 -- 76
IDENTIFIED INTANGIBLE ASSETS, NET...................... 2 27 7 -- 36
INTERCOMPANY ADVANCES.................................. 128 1,238 725 (2,091) --
OTHER ASSETS........................................... 85 -- 46 -- 131
-------------------------------------------------------------------------
TOTAL ASSETS........................................... $ 3,388 $ 2,532 $ 1,358 $ (5,312) $ 1,966
=========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................... $ 128 $ 9 $ 41 $ (2) $ 176
Intercompany payables.................................. 81 12 112 (205) --
Accrued liabilities.................................... 137 10 85 -- 232
Short-term debt........................................ 300 -- -- -- 300
Intercompany short-term debt........................... -- -- 190 (190) --
-------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES.............................. 646 31 428 (397) 708
LONG-TERM DEBT......................................... -- -- 251 -- 251
INTERCOMPANY LONG-TERM DEBT............................ -- -- 413 (413) --
OTHER LIABILITIES...................................... 207 -- 52 -- 259
-------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............ 853 31 1,144 (810) 1,218
LIABILITIES SUBJECT TO COMPROMISE...................... 3,951 407 21 (2,215) 2,164
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) 2,094 193 (2,287) (113)
Accumulated other comprehensive loss................... (82) -- -- -- (82)
Accumulated deficit.................................... (1,027) -- -- -- (1,027)
-------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)................... (1,416) 2,094 193 (2,287) (1,416)
-------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)... $ 3,388 $ 2,532 $ 1,358 $ (5,312) $ 1,966
=========================================================================
29
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
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.................................. -- 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
==============================================================================
30
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS.... $ (65) $ 24 $ 15 $ -- $ (26)
------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases.. (18) (4) (7) -- (29)
Property disposals and investment
proceeds................................ 1 -- 1 -- 2
------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES........ (17) (4) (6) -- (27)
------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in cash collateralized letters
of credit.............................. 17 -- -- -- 17
Changes in investments and advances from
(to) affiliates........................ 19 (13) (6) -- --
------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.............................. 36 (13) (6) -- 17
------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ (46) 7 3 -- (36)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................ 43 7 65 -- 115
------------------------------------------------------------------------------
END OF PERIOD............................ $ (3) $ 14 $ 68 $ -- $ 79
==============================================================================
31
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS.... $ 24 $ 15 $ (43) $ -- $ (4)
-------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases.. (11) (2) (9) -- (22)
Other investing activities............... (36) -- -- -- (36)
-------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES........ (47) (2) (9) -- (58)
-------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations (361) -- -- -- (361)
Proceeds from long-term debt obligations 300 -- -- -- 300
Net change in cash collateralized letters
of credit.............................. 76 -- -- -- 76
Changes in investments and advances from
(to) affiliates........................ (74) 3 71 -- --
Deferred debt issuance costs............. (8) -- (5) -- (13)
Other financing activities............... (1) -- -- -- (1)
-------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................. (68) 3 66 -- 1
-------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ (91) 16 14 -- (61)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................ 105 20 34 -- 159
-------------------------------------------------------------------------------
END OF PERIOD............................ $ 14 $ 36 $ 48 $ -- $ 98
===============================================================================
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements include
all statements regarding expected future financial position, results of
operations, profitability, cash flows and liquidity. Important factors that
could cause actual results to differ materially from the expectations
reflected in the forward-looking statements herein include, among others,
Solutia's ability to develop, confirm and consummate a Chapter 11 plan of
reorganization; Solutia's ability to reduce its overall leveraged position;
the potential adverse impact of Solutia's Chapter 11 filing on its
operations, management and employees; the risks associated with operating
businesses under Chapter 11 protection; Solutia's ability to comply with the
terms of its debtor-in-possession ("DIP") financing facility; customer
response to Solutia's Chapter 11 filing; general economic, business and
market conditions; customer acceptance of new products; raw material and
energy costs or shortages; limited access to capital resources; currency and
interest rate fluctuations; increased competitive and/or customer pressure;
gain or loss of significant customers; compression of credit terms with
suppliers; exposure to product liability and other litigation; changes in
cost of environmental remediation obligations and other environmental
liabilities; changes in accounting principles generally accepted in the
U.S.; ability to implement cost reduction initiatives in a timely manner;
geopolitical instability; and changes in pension and other postretirement
assumptions.
OVERVIEW
Summary of Significant Second Quarter 2005 Events
Reorganization Strategy
-----------------------
Solutia continued to take positive actions in the second quarter
2005 to achieve its reorganization strategy, which involves 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. Recent actions regarding
achievement of these principle objectives are explained further below. In
addition, Solutia continues to pursue a consensual agreement on the plan of
reorganization 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 benefited in the second quarter 2005 from several actions
implemented during 2004 designed to enhance its performance. These included
implementing significant general and administrative expense reductions;
using more performance-based compensation and benefits programs; enacting
key senior management changes, 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. These
actions have continued to help drive strong revenue growth and expansion of
operating margins. In addition, Solutia continued to use the tools of
bankruptcy to renegotiate and/or reject various contracts in the second
quarter 2005 which will provide future savings to Solutia.
Solutia amended its DIP financing agreement on June 1, 2005 and
received bankruptcy court approval on July 25, 2005. The amendment reduces
the interest rate on the term loan component of the DIP facility to LIBOR
plus 4.25 percent from the previous interest rate of the greater of the
prime rate plus 4.0 percent or 8.0 percent, extends the maturity date of the
current facility to June 19, 2006 from the previous December 19, 2005
maturity date, and makes other minor modifications. No changes were made to
the financial covenants contained in the DIP agreement aside from extending
the financial covenant requirements to be commensurate with the new maturity
date of the DIP agreement. Overall, these changes are expected to reduce
Solutia's interest expense on the term loan component of the DIP facility up
to $7 million based upon the new maturity date.
33
PORTFOLIO EVALUATION
Solutia's stated strategy is to build a portfolio of high-potential
businesses that can consistently deliver returns in excess of Solutia's cost
of capital. Solutia made several changes to re-shape its asset portfolio in
2004 as part of this strategy and continued these efforts in 2005 by exiting
the acrylic fibers operations in the second quarter 2005 due to continued
losses resulting primarily from significant foreign competition. Solutia
also announced that its Greenwood, South Carolina plant will be the primary
production facility for nylon industrial fibers. As a result of this
decision, Solutia shut down its nylon industrial fiber manufacturing unit at
its plant in Pensacola, Florida in the second quarter 2005. In addition,
Solutia has initiated a sales process with respect to Astaris LLC, its 50/50
joint venture with FMC Corporation, and has received bankruptcy court
approval for certain standard buyer protections involved in this sales
process.
REALLOCATION OF LEGACY LIABILITIES
On June 7, 2005, Solutia reached an agreement-in-principle with
Monsanto Company ("Monsanto") and the Official Committee of Unsecured
Creditors in Solutia's Chapter 11 case (the "Unsecured Creditors'
Committee") that will serve as a framework for Solutia's plan of
reorganization. The agreement-in-principle is subject to the negotiation of
definitive documents, approval by Solutia's board of directors and various
other conditions and contingencies, some of which are not within the control
of Solutia, Monsanto or the Unsecured Creditors' Committee. Until a plan or
reorganization consistent with the terms of the agreement-in-principle is
confirmed by the bankruptcy court, the terms of the agreement-in-principle
are not binding upon any party.
Under the agreement-in-principle, Solutia would emerge from
bankruptcy as an independent, publicly held company. The
agreement-in-principle provides for $250 million of new investment in a
reorganized Solutia which would be used to pay retiree benefits to those who
retired prior to the spinoff, certain environmental remediation obligations
of Solutia and other legacy liabilities. The $250 million would be raised in
a rights offering to Solutia's unsecured creditors. Monsanto would be
obligated to backstop the rights offering, exercising any rights not
exercised by the unsecured creditors.
The agreement-in-principle also provides that Monsanto would pay
environmental remediation costs at sites including non-owned property
adjacent to plant sites and certain owned, offsite disposal locations,
provides a mechanism for sharing between Monsanto and Solutia responsibility
for environmental liabilities at certain sites adjacent to the Anniston,
Alabama and Sauget, Illinois plant locations, and provides that Monsanto
would contribute $107 million, less certain expenses incurred, and
litigation settlement costs paid, by Monsanto during the course of Solutia's
Chapter 11 case, to make distributions to the holders of certain unsecured
claims, including current tort and other legacy litigation claims.
Furthermore, 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 agreement-in-principle provides that Solutia will retain a
portion of these legacy liabilities and the extent to which such relief will
be achieved continues to be uncertain.
See Note 1 to the accompanying condensed consolidated financial
statements for further description of the agreement-in-principle.
Bankruptcy Developments
-----------------------
See Note 1 to the accompanying condensed consolidated financial
statements for a summary of developments in Solutia's Chapter 11 bankruptcy
case.
SUMMARY RESULTS OF OPERATIONS
The discussions below and the 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.
34
Results of Operations - Second Quarter 2005 Compared with Second Quarter 2004
Net sales and operating income (loss) of Solutia for the three
months ended June 30, 2005 and 2004 are as follows:
(dollars in millions) 2005 2004
---- ----
Net Sales.................................................................... $ 747 $ 700
===== =====
Operating Income (Loss):
Performance Products and Services Segment Profit......................... $ 37 $ 27
Integrated Nylon Segment Profit ......................................... 14 5
Less: Corporate Expenses............................................ (14) (78)
Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense
and Reorganization Items included in Segment Profit................. (4) --
----- -----
Operating Income (Loss)...................................................... $ 33 $ (46)
===== =====
Charges included in Operating Income (Loss).................................. $ (1) $ (75)
===== =====
The $47 million, or 7 percent, increase in net sales as compared to
the second quarter 2004 was primarily a result of higher average selling
prices of approximately 12 percent and favorable currency exchange rate
fluctuations of approximately 1 percent, partially offset by lower sales
volumes of approximately 6 percent. The $79 million improvement in operating
income as compared to the second quarter 2004 resulted primarily from higher
net sales, and lower charges, which are described in greater detail in the
Results of Operations section below, partially offset by higher raw material
and energy costs.
Results of Operations - Six Months Ended June 30, 2005 Compared with Six Months
Ended June 30, 2004
Net sales and operating income (loss) of Solutia for the six months
ended June 30, 2005 and 2004 are as follows:
(dollars in millions) 2005 2004
---- ----
Net Sales.................................................................... $ 1,480 $ 1,344
======= =======
Operating Income (Loss):
Performance Products and Services Segment Profit......................... $ 72 $ 52
Integrated Nylon Segment Profit (Loss)................................... 13 (7)
Less: Corporate Expenses............................................ (25) (89)
Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense
and Reorganization Items included in Segment Profit (Loss).......... 12 --
------- -------
Operating Income (Loss)...................................................... $ 72 $ (44)
======= =======
Charges included in Operating Income (Loss).................................. $ (1) $ (80)
======= =======
The $136 million, or 10 percent, increase in net sales as compared
to the six months ended June 30, 2004 was primarily a result of higher
average selling prices of approximately 13 percent and favorable currency
exchange rate fluctuations of approximately 1 percent, partially offset by
lower sales volumes of approximately 4 percent. The $116 million improvement
in operating income as compared to the six months ended June 30, 2004
resulted primarily from higher net sales and lower charges, which are
described in greater detail in the Results of Operations section below,
partially offset by higher raw material and energy costs.
35
Financial Information
Summarized financial information concerning Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as of
and for the three and six months ended June 30, 2005 is presented as
follows:
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT SUBSIDIARIES
(dollars in millions) REORGANIZATION IN REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- ----------------- ------------ ------------
Three Months Ended June 30, 2005:
- ---------------------------------
Net Sales................................. $ 602 $ 245 $ (100) $ 747
Operating Income.......................... 7 21 5 33
Net Income................................ 14 11 (11) 14
Six Months Ended June 30, 2005:
- -------------------------------
Net Sales................................. $ 1,195 $ 488 $ (203) $ 1,480
Operating Income.......................... 12 46 14 72
Net Income ............................... 35 25 (25) 35
As of June 30, 2005:
- --------------------
Total Assets.............................. $ 1,655 $ 771 $ (460) $ 1,966
Liabilities not Subject to Compromise..... 907 478 (167) 1,218
Liabilities Subject to Compromise......... 2,164 -- -- 2,164
Total Shareholders' Equity (Deficit)...... (1,416) 293 (293) (1,416)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the six months ended June 30, 2005
with respect to Solutia's critical accounting policies, as presented on
pages 17 through 20 of Solutia's 2004 Form 10-K.
RESULTS OF OPERATIONS--SECOND QUARTER 2005 COMPARED WITH SECOND QUARTER 2004
PERFORMANCE PRODUCTS AND SERVICES
THREE MONTHS ENDED
JUNE 30,
-------------------------
(dollars in millions) 2005 2004
---- ----
Net Sales.............................................................. $315 $287
==== ====
Segment Profit ........................................................ $ 37 $ 27
==== ====
Charges and Reorganization Items included in Segment Profit........ $ (1) $(12)
==== ====
The $28 million, or 10 percent, increase in net sales as compared
to the second quarter 2004 resulted primarily from higher sales volumes of
approximately 5 percent, an increase in average selling prices of
approximately 3 percent and favorable currency exchange rate fluctuations of
approximately 2 percent. Higher volumes were experienced in SAFLEX(R) and
VANCEVA(R) plastic interlayer products and THERMINOL(R) heat transfer
fluids, partially offset by lower volumes due to the shut-down of Solutia's
chlorobenzenes operations in the second quarter 2004. Higher average selling
prices were experienced across several product lines, including SAFLEX(R) and
VANCEVA(R) plastic interlayer products, branded professional and retail film
products, THERMINOL(R) heat transfer fluids and DEQUEST(R) water treatment
chemicals, generally as a result of favorable market conditions and in
response to the escalating cost of raw materials. The favorable exchange
rate fluctuations occurred primarily as a result of the stronger euro in
relation to the U.S. dollar in comparison to the second quarter 2004.
36
The $10 million, or 37 percent, increase in segment profit in
comparison to the second quarter 2004 resulted primarily from higher net
sales, partially offset by higher raw material and energy costs of
approximately $14 million. In addition, segment profit in the second quarter
2005 was affected by $1 million of restructuring charges while segment
profit in the second quarter 2004 was affected by $12 million of plant
closure costs principally related to Solutia's chlorobenzenes operations,
including costs for decommissioning and dismantling activities, asset
write-offs, and severance and retraining costs.
INTEGRATED NYLON
THREE MONTHS ENDED
JUNE 30,
-----------------------
(dollars in millions) 2005 2004
---- ----
Net Sales.............................................................. $ 432 $ 413
===== =====
Segment Profit ........................................................ $ 14 $ 5
===== =====
Charges and Reorganization Items included in Segment Profit........ $ -- $ --
===== =====
The $19 million, or 5 percent, increase in net sales as compared to
the second quarter 2004 resulted primarily from higher average selling
prices of approximately 18 percent, partially offset by lower sales volumes
of approximately 13 percent. Average selling prices increased in all
businesses as a result of favorable market conditions and in response to the
escalating cost of raw materials. The decline in sales volumes resulted
primarily from an unplanned temporary shut-down of a manufacturing unit at
Solutia's operating facility in Alvin, Texas and the competitive pricing
environment which resulted in modest volume declines across most businesses.
In addition, net sales were modestly impacted as a result of exiting the
acrylic fibers operations in the second quarter 2005 but were partially offset
because certain Solutia produced intermediate chemicals previously supplied
to the acrylic fibers operations were sold into the intermediates merchant
market.
The $9 million, or 180 percent, improvement in segment profit in
comparison to the second quarter 2004 resulted principally from higher net
sales, partially offset by higher raw material and energy costs of
approximately $51 million and unfavorable manufacturing variances incurred
as part of the above mentioned temporary shut-down at the Alvin, Texas
operating facility. An unplanned outage was also experienced at the
Pensacola, Florida operating facility in late June 2004 that had a modest
impact on the segment results in the second quarter 2004. In addition, 2005
segment profit included $7 million to shut-down principally the acrylic
fibers operations including $5 million of asset write-downs and $2 million of
decontamination costs, offset by a $7 million gain from the reversal of the
LIFO reserve associated with the inventory sold and/or written off as part
of the business shut-down.
CORPORATE EXPENSES
THREE MONTHS ENDED
JUNE 30,
-----------------------
(dollars in millions) 2005 2004
---- ----
Corporate Expenses........................................................... $ 14 $ 78
===== =====
Charges included in Corporate Expenses................................... $ -- $ (63)
===== =====
The $64 million, or 82 percent, decrease in corporate expenses in
comparison to the second quarter 2004 was primarily a result of higher
charges in 2004. Charges included in the second quarter 2004 were comprised
of net pension curtailment charges of $63 million (as more fully described
in Note 8 to the accompanying condensed consolidated financial statements).
In addition, the second quarter 2005 included the full quarter benefit of
cost reduction measures taken in the second half of 2004, partially offset
by modest increases in legal and environmental costs.
37
EQUITY EARNINGS (LOSS) FROM AFFILIATES
THREE MONTHS ENDED
JUNE 30,
------------------------
(dollars in millions) 2005 2004
---- ----
Equity Earnings from Affiliates not included in Reportable Segment
Profit..................................................................... $ 20 $ (3)
------- -------
Equity Earnings from Affiliates included in Reportable Segment
Profit.................................................................... $ 1 $ --
------- -------
Equity Earnings (Loss) from Affiliates.......................................... $ 21 $ (3)
======= =======
Gains (charges) included in Equity Earnings (Loss) from Affiliates......... $ 5 $ (7)
======= =======
Equity earnings (loss) from affiliates improved by $24 million in
the second quarter 2005 as compared to the second quarter 2004. This
improvement was primarily a result of higher average selling prices,
favorable product mix and improved manufacturing performance at both the
Astaris and Flexsys joint ventures. In addition, the second quarter 2005
results included a one-time, non-operational gain of $5 million incurred by
the Flexsys joint venture. Included in the second quarter 2004 results were
$7 million of charges including $5 million in asset impairment and severance
charges at the Flexsys joint venture and $2 million of severance charges at
the Astaris joint venture.
REORGANIZATION ITEMS, NET
THREE MONTHS ENDED
JUNE 30,
-----------------------
(dollars in millions) 2005 2004
---- ----
Reorganization Items, net.................................................... $ (15) $ (24)
====== ======
Reorganization items, net are presented separately in the Condensed
Consolidated Statement of 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 incurred in the second quarter 2005 included $13 million of
professional fees for services provided by debtor and creditor professionals
directly related to Solutia's reorganization proceedings and $2 million of
expense provisions for (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. Reorganization
items incurred in the second quarter 2004 included $11 million of
professional fees for services provided by debtor and creditor professionals
directly related to Solutia's reorganization proceedings; $11 million of
asset write-offs associated with a contract rejection; $4 million of expense
provisions for (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; and a $2 million gain
representing the difference between the settlement amount of certain
pre-petition obligations and the corresponding amounts previously recorded.
INCOME TAX EXPENSE
THREE MONTHS ENDED
JUNE 30,
-----------------------
(dollars in millions) 2005 2004
---- ----
Income Tax Expense .......................................................... $ 7 $ 2
==== ===
Solutia's income tax expense in the second quarter 2005 and 2004 was
primarily a result of foreign income taxes. As a result of Solutia's Chapter
11 filing, Solutia did not record any U.S. income tax expense or benefit for
domestic operations (including temporary differences) during the quarters
ended June 30, 2005 and 2004.
38
Consequently, the changes in federal and state deferred tax assets were
offset by corresponding changes in valuation allowances. See Note 13 of
Solutia's 2004 Form 10-K for additional information concerning the Company's
deferred tax assets and changes in valuation allowances due to Solutia's
Chapter 11 filing.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2005 COMPARED WITH SIX MONTHS
ENDED JUNE 30, 2004
PERFORMANCE PRODUCTS AND SERVICES
SIX MONTHS ENDED
JUNE 30,
-------------------------
(dollars in millions) 2005 2004
---- ----
Net Sales.............................................................. $602 $558
==== ====
Segment Profit ........................................................ $ 72 $ 52
==== ====
Charges and Reorganization Items included in Segment Profit........ $ (8) $(17)
==== ====
The $44 million, or 8 percent, increase in net sales as compared to
the six months ended June 30, 2004 resulted primarily from higher sales
volumes of approximately 3 percent, an increase in average selling prices of
approximately 3 percent and favorable currency exchange rate fluctuations of
approximately 2 percent. Higher volumes were experienced in SAFLEX(R) and
VANCEVA(R) plastic interlayer products, pharmaceutical services and
THERMINOL(R) heat transfer fluids, partially offset by lower volumes due to
the shut-down of Solutia's chlorobenzenes operations in the second quarter
2004. Higher average selling prices were experienced across several product
lines including SAFLEX(R) and VANCEVA(R) plastic interlayer products,
branded professional and retail film products, THERMINOL(R) heat transfer
fluids and DEQUEST(R) water treatment chemicals generally in response to the
escalating cost of raw materials. The favorable exchange rate fluctuations
occurred primarily as a result of the stronger euro in relation to the U.S.
dollar in comparison to the first quarter 2004.
The $20 million, or 38 percent, increase in segment profit in
comparison to the six months ended June 30, 2004 resulted principally from
higher net sales, partially offset by higher raw material and energy costs
of approximately $27 million. In addition, segment profit in the second
quarter 2005 was affected by $7 million of reorganization items which
consisted primarily of adjustments to record certain pre-petition claims at
estimated amounts of the allowed claims, as well as $1 million of
restructuring charges. Segment profit in 2004 was affected by $17 million of
plant closure costs principally related to Solutia's chlorobenzenes
operations, including costs for decommissioning and dismantling activities,
asset write-offs, future costs for non-cancelable operating leases, and
severance and retraining costs.
INTEGRATED NYLON
SIX MONTHS ENDED
JUNE 30,
-------------------------
(dollars in millions) 2005 2004
---- ----
Net Sales.............................................................. $878 $786
==== ====
Segment Profit (Loss).................................................. $ 13 $ (7)
==== ====
Charges and Reorganization Items included in Segment Loss.......... $(11) $ --
==== ====
The $92 million, or 12 percent, increase in net sales as compared
to the six months ended June 30, 2004 resulted primarily from higher average
selling prices of approximately 20 percent, partially offset by lower sales
volumes of approximately 8 percent. Average selling prices increased in all
businesses as a result of favorable market conditions and in response to the
escalating cost of raw materials. The decline in sales volumes resulted
primarily from contract terminations in the intermediate chemicals business
in 2004, an unplanned temporary shut-down of a manufacturing unit at
Solutia's operating facility in Alvin, Texas and the competitive pricing
environment which resulted in modest volume declines across most businesses.
In addition, net sales were modestly impacted as a result of exiting the
acrylic fibers operations in the second quarter 2005 but were partially offset
because certain
39
Solutia produced intermediate chemicals previously supplied to the acrylic
fibers operations were sold into the intermediates merchant market.
The $20 million improvement in the segment profit in comparison to
the six months ended June 30, 2004 resulted primarily from higher net sales,
partially offset by higher raw material and energy costs of approximately
$122 million and unfavorable manufacturing variances incurred as part of the
above mentioned temporary shut-down at the Alvin, Texas operating facility.
An unplanned outage was also experienced at the Pensacola, Florida operating
facility in late June 2004 that had a modest impact on the segment results
in the second quarter 2004. In addition, 2005 segment profit included
reorganization items of $11 million comprised of $10 million principally to
shut-down the acrylic fibers operations and $1 million of other restructuring
charges. The shut-down costs included $11 million of asset write-downs, $4
million of severance and retraining costs and $2 million of decontamination
costs, partially offset by a $7 million gain from the reversal of the LIFO
reserve associated with the inventory sold and/or written off as part of the
business shut-down.
CORPORATE EXPENSES
SIX MONTHS ENDED
JUNE 30,
-----------------------
(dollars in millions) 2005 2004
---- ----
Corporate Expenses........................................................... $ 25 $ 89
===== =====
Charges included in Corporate Expenses................................... $ -- $ (63)
===== =====
The $64 million, or 72 percent, decrease in corporate expenses in
comparison to the six months ended June 30, 2004 was primarily a result of
higher charges in 2004. Charges included in the second quarter 2004 were
comprised of net pension curtailment charges of $63 million (as more fully
described in Note 8 to the accompanying condensed consolidated financial
statements). In addition, the second quarter 2005 included the full quarter
benefit of cost reduction measures taken in the second half of 2004,
partially offset by modest increases in legal and environmental costs in the
second quarter 2005.
EQUITY EARNINGS (LOSS) FROM AFFILIATES
SIX MONTHS ENDED
JUNE 30,
-----------------------
(dollars in millions) 2005 2004
---- ----
Equity Earnings (Loss) from Affiliates not included in Reportable Segment
Profit (Loss)................................................................ $ 33 $ (12)
------- -------
Equity Earnings from Affiliates included in Reportable Segment Profit (Loss). $ 2 $ --
------- --------
Equity Earnings (Loss) from Affiliates....................................... $ 35 $ (12)
======= =======
Gains (charges) included in Equity Earnings (Loss) from Affiliates...... $ 5 $ (18)
======= =======
Equity earnings (loss) from affiliates improved by $47 million in
comparison to the six months ended June 30, 2004. This improvement was
primarily a result of higher average selling prices, favorable product mix
and improved manufacturing performance at both the Astaris and Flexsys joint
ventures. In addition, the results for the six months ended June 30, 2005
included a one-time, non-operational gain of $5 million incurred by the
Flexsys joint venture. Included in the results for the six months ended June
30, 2004 were $18 million of charges including $5 million in contract
termination costs, $3 million in dismantling charges, $2 million of
severance costs, and $1 million of asset impairments at the Astaris joint
venture, as well as $7 million of asset impairment and severance charges at
the Flexsys joint venture.
40
INTEREST EXPENSE
SIX MONTHS ENDED
JUNE 30,
------------------------
(dollars in millions) 2005 2004
---- ----
Interest Expense............................................................. $ 44 $ 72
===== =====
Charges included in Interest Expense.................................... $ -- $ (25)
===== =====
The $28 million, or 39 percent, decrease in interest expense in
2005 in comparison to the six months ended June 30, 2004 resulted
principally from the write-off of unamortized debt issuance costs of $25
million in 2004.
REORGANIZATION ITEMS, NET
SIX MONTHS ENDED
JUNE 30,
------------------------
(dollars in millions) 2005 2004
---- ----
Reorganization Items, net.................................................... $ (20) $ (49)
====== ======
Reorganization items, net are presented separately in the Condensed
Consolidated Statement of 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 incurred in the six months ended June 30, 2005 included a $29 million
net gain representing the difference between the settlement amount of
certain pre-petition obligations and the corresponding amounts previously
recorded; $24 million of professional fees for services provided by debtor
and creditor professionals directly related to Solutia's reorganization
proceedings; $11 million of net charges for adjustments to record certain
pre-petition claims at estimated amounts of the allowed claims; $8 million
of 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; and $6 million of other reorganization charges primarily involving
costs incurred with exiting the acrylic fibers operations.
Reorganization items incurred in the six months ended June 30, 2004
included $24 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; $7 million of expense provisions for (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; and a $2 million gain
representing the difference between the settlement amount of certain
pre-petition obligations and the corresponding amounts previously recorded.
INCOME TAX EXPENSE (BENEFIT)
SIX MONTHS ENDED
JUNE 30,
-------------------------
(dollars in millions) 2005 2004
---- ----
Income Tax Expense (Benefit) ................................................ $ 14 $ 6
========= ========
Solutia's income tax expense in the six months ended June 30, 2005 and 2004
was primarily a result of foreign income taxes. As a result of Solutia's
Chapter 11 filing, Solutia did not record any U.S. income tax expense or
benefit for domestic operations (including temporary differences) during the
six months ended June 30, 2005 and 2004. Consequently, the changes in
federal and state deferred tax assets were offset by corresponding changes
in
41
valuation allowances. See Note 13 of Solutia's 2004 Form 10-K for additional
information concerning the Company's deferred tax assets and changes in
valuation allowances due to Solutia's Chapter 11 filing.
SUMMARY OF EVENTS AFFECTING COMPARABILITY
In the six months ended June 30, 2005 and 2004, certain events
affecting comparability were recorded in Reorganization Items, net in the
Condensed Consolidated Statement of Operations. A comparison of
reorganization items for the six months ended June 30, 2005 and 2004,
respectively, is provided in the above Results of Operations section, as
well as Note 2 to the accompanying condensed consolidated financial
statements. Charges and gains recorded in the six months ended June 30, 2005
and 2004 and other events affecting comparability recorded outside of
reorganization items have been summarized in the table below (dollars in
millions):
2005
----------------------------------------------------------------
PERFORMANCE
PRODUCTS AND INTEGRATED CORPORATE/
INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED
- ------------------------------------------ -------- ----- ----- ------------
IMPACT ON:
Cost of Goods Sold...................... $ 1 $-- $-- $ 1 (a)
------------------------------------------------------------------
OPERATING INCOME IMPACT................. (1) -- -- (1)
Equity earnings from affiliates......... -- -- 5 5 (b)
------------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT......... $(1) $-- $ 5 4
==================================================
Income tax impact....................... --
---------------
AFTER-TAX INCOME STATEMENT IMPACT....... $ 4
===============
<FN>
2005 CHARGES AND OTHER EVENTS
a) Restructuring costs related principally to severance and retraining
costs ($1 million pre-tax and after-tax).
b) One-time, non-operational gain incurred by the Flexsys joint
venture ($5 million pre-tax and after-tax).
42
2004
------------------------------------------------------------------
PERFORMANCE
PRODUCTS AND INTEGRATED CORPORATE/
INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED
- ------------------------------------------ -------- ----- ----- ------------
IMPACT ON:
Cost of Goods Sold...................... $ 17 $-- $ -- $ 17 (a)
-- -- 47 47 (b)
------------------------------------------------------------------
Total Cost of Goods Sold................ 17 -- 47 64
Marketing............................... -- -- 4 4 (b)
Administrative.......................... -- -- 7 7 (b)
Technological........................... -- -- 5 5 (b)
------------------------------------------------------------------
OPERATING LOSS IMPACT................... (17) -- (63) (80)
Equity loss from affiliates............. -- -- (18) (18) (c)
Interest Expense........................ -- -- (25) (25) (d)
Loss on debt modification............... -- -- (15) (15) (e)
------------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT......... $(17) $-- $(121) (138)
==================================================
Income tax benefit impact............... (6) (f)
---------------
AFTER-TAX INCOME STATEMENT IMPACT....... $(132)
===============
<FN>
2004 CHARGES AND OTHER 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, asset write-offs, future costs for non-cancelable
operating leases, and severance and retraining costs ($17 million
pre-tax and after-tax - see note (f) below).
b) Net pension curtailment charge due to the reduction in anticipated
future service of participants in Solutia's U.S. qualified and
non-qualified pension plans that resulted from Solutia's plan
amendment to cease future benefit accruals for non-union
participants in these plans effective July 1, 2004 ($63 million
pre-tax and after-tax - see note (f) below).
c) The Flexsys and Astaris joint ventures, in each of which the
Company has a fifty percent interest, incurred restructuring
charges related to contract terminations, dismantling costs, asset
impairments and severance charges ($18 million pre-tax and
after-tax - see note (f) below).
d) Write-off of unamortized debt issuance costs related to the October
2003 and interim DIP credit facilities, both retired in January
2004 with proceeds from the final DIP facility ($25 million pre-tax
and after-tax - see note (f) below).
e) Loss due to the modification of the Company's Euronotes in January
2004 ($15 million pre-tax and $9 million after-tax).
f) With the exception of item (e) above, which relates 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 as a result
of the Chapter 11 filing.
43
FINANCIAL CONDITION AND LIQUIDITY
As discussed in Note 1 to the accompanying condensed consolidated
financial statements, 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 the
Company'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 under Chapter 11
protection will likely be very limited.
Financial Analysis
Solutia utilized its existing cash on-hand to finance operating
needs and capital expenditures during the first six months of 2005. Cash
used in operations was $26 million in the first six months of 2005, a change
of $22 million from $4 million used in operations for the comparable period
of 2004. This change in cash used in operations was primarily attributable
to the build-up of post-petition accounts payable balances in the first six
months of 2004 due to the timing of Solutia's Chapter 11 filing in late 2003
and subsequent improvements in vendor terms, resulting in a $99 million
swing in the change in accounts payable in comparing the six months ended
June 30, 2005 to the same period in 2004.
Capital spending increased $7 million to $29 million in the first
six months of 2005, compared to $22 million in the comparable period of
2004. The expenditures during the first six months of 2005 were used
primarily to fund certain growth initiatives, as well as various capital
improvements and certain cost reduction projects.
Total debt of $1,219 million as of June 30, 2005, including $668
million subject to compromise and $551 million not subject to compromise,
decreased by $34 million as compared to $1,253 million at December 31, 2004,
including $668 million subject to compromise and $585 million not subject to
compromise. This decrease in total debt resulted primarily from a decrease
in the recorded amount of Solutia's Euronotes due to foreign currency
translation changes in the first six months of 2005. As a result of the
Chapter 11 filing, Solutia was in default on all its debt agreements as of
June 30, 2005, with the exception of its DIP credit facility and Euronotes.
Solutia's working capital increased by $16 million to $13 million
at June 30, 2005, compared to $(3) million at December 31, 2004. The change
was a result of the seasonal increase in working capital, partially offset
by lower cash on-hand as of June 30, 2005.
Solutia had a shareholders' deficit of $1,416 million at June 30,
2005 compared to a deficit of $1,444 million at December 31, 2004. The $28
million decrease in shareholders' deficit principally resulted from the $35
million of net income for the six months ended June 30, 2005, partially
offset by the $7 million increase in accumulated other comprehensive losses
due to currency translation adjustments.
The weighted average interest rate on Solutia's total debt
outstanding was approximately 8.5 percent at June 30, 2005 as compared to
9.0 percent at December 31, 2004. This decrease is primarily a result of the
change in interest rates on the term loan component of Solutia's DIP
facility in the second quarter 2005, as further explained below. While
operating as a debtor-in-possession during the Chapter 11 proceedings,
Solutia has ceased paying interest on its 6.72% debentures due 2037 and its
7.375% debentures due 2027. The amount of contractual interest expense not
recorded during the first six months of 2005 and 2004, was approximately $16
million.
At June 30, 2005, Solutia's total liquidity was $212 million in the
form of $133 million of availability under the final DIP credit facility and
approximately $79 million of cash on-hand, of which $67 million was cash of
Solutia's subsidiaries that are not parties to the Chapter 11 proceedings.
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.
44
Amendment to DIP Financing Agreement
Solutia amended its DIP financing agreement on June 1, 2005 and
received bankruptcy court approval on July 25, 2005. The amendment reduces
the interest rate on the term loan component of the DIP facility to LIBOR
plus 4.25 percent from the previous interest rate of the greater of the
prime rate plus 4.0 percent or 8.0 percent, extends the maturity date of the
current facility to June 19, 2006 from the previous December 19, 2005
maturity date, and makes other minor modifications. No changes were made to
the financial covenants contained in the DIP agreement aside from extending
the financial covenant requirements to be commensurate with the new maturity
date of the DIP agreement. Overall, these changes are expected to reduce
Solutia's interest expense on the term loan component of the DIP facility up
to $7 million based upon the new maturity date.
CONTINGENCIES
See Note 7 to the accompanying condensed consolidated financial
statements for a summary of Solutia's contingencies as of June 30, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
There have been no material changes in market risk exposures during
the six months ended June 30, 2005 that affect the disclosures presented in
the information appearing under "Derivative Financial Instruments" on page
30 of Solutia's Form 10-K for the year-ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Form 10-Q, Solutia
carried out an evaluation, under the supervision and with the participation
of Solutia's 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 ("Exchange Act")).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this Form
10-Q, 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. There were no changes in Solutia's internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the quarterly period ended June 30, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
45
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Proceedings in Solutia Bankruptcy Case
- --------------------------------------------
A complaint was filed on May 27, 2005 against Solutia in its
bankruptcy case by JP Morgan Chase Bank, National Association, as indenture
trustee for Solutia's debentures due in 2027 and 2037 asserting six causes
of action, as follows: (a) five causes of action seeking declaratory
judgments to establish the validity and priority of JP Morgan's security
interests; and (b) one cause of action pursuant to section 363 of the
Bankruptcy Code asserting that JP Morgan's security interests lacked
adequate protection. Solutia filed its response to the JP Morgan complaint
on July 5, 2005, denying the allegations of JP Morgan based on the express
terms of the indentures governing the 2027 and 2037 debentures, and has
responded to JP Morgan's requests for production of documents.
On March 7, 2005, the Official Committee of Equity Security Holders
(the "Equity Committee") in Solutia's bankruptcy case filed a complaint
against Pharmacia and Monsanto and an objection to the proofs of claim filed
by Monsanto and Pharmacia in Solutia's bankruptcy case. The complaint seeks
to avoid certain obligations assumed by Solutia in its spinoff from
Pharmacia. The complaint alleges that the spinoff was a fraudulent transfer
under the Bankruptcy Code because Pharmacia forced Solutia to assume
excessive liabilities and insufficient assets, such that Solutia was
destined to fail from its inception. On May 24, 2005 Pharmacia and Monsanto
filed a motion to dismiss the complaint, or in the alternative, to stay the
adversary proceeding. Neither a discovery schedule nor a trial date has been
set. The Equity Committee has also filed a Motion for Leave to conduct an
examination of the Debtor pursuant to Bankruptcy Rule 2004.
Anniston Partial Consent Decree
- -------------------------------
Solutia's Annual Report on Form 10-K for the year ended December
31, 2004 ("2004 Form 10-K") described a Partial Consent Decree approved by
the U.S. District Court for the Northern District of Alabama in the case
captioned United States of America v. Pharmacia Corporation (p/k/a Monsanto
Company) and Solutia which requires Pharmacia and Solutia to sample certain
residential properties and remove soils found on those sites if
polychlorinated biphenyls ("PCBs") are above a certain level, conduct a
Remedial Investigation and Feasibility Study to help determine a cleanup
remedy for the Anniston, Alabama PCB site and pay the Environmental
Protection Agency's ("EPA") past response costs and future oversight costs
related to the foregoing work. In the fall of 2004, EPA, Solutia and
Pharmacia, and other potentially responsible parties ("PRPs") with respect
to the Anniston lead site began negotiations regarding cleanup on the
Anniston lead and PCB sites. Subsequently, Solutia learned that EPA intended
to enter into an Administrative Order on Consent with the lead site PRPs
which would deny Pharmacia and Solutia contribution rights against the lead
site PRPs with respect to PCB cleanup. An order was issued by the district
court on June 2, 2005 requiring the parties to proceed through formal
dispute resolution and preserving the status quo for thirty days. On June
30, 2005, the district court found that by granting contribution protection
to the lead site PRPs, the EPA would have repudiated the Partial Consent
Decree and indicated that, if such contribution protection were granted, the
court would suspend Solutia's and Pharmacia's obligations under the Partial
Consent Decree upon their motion. Solutia and Pharmacia continue attempts to
negotiate a global settlement with EPA and the Anniston lead site PRPs and
have not made a motion to the district court to suspend their obligations
under the Partial Consent Decree.
Flexsys Related Litigation
- --------------------------
Solutia's 2004 Form 10-K and Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005 (the "First Quarter 10-Q") described 23 class
actions filed in various state courts against Flexsys, a 50/50 joint venture
between Solutia and Akzo Nobel N.V, and other producers of rubber chemicals.
Solutia is only named as a defendant in one of these cases, which was
automatically stayed as against Solutia. The plaintiffs in these cases seek
damages under state law on behalf of all retail purchasers of tires in that
state since as early as 1994. One of these cases was dismissed for lack of
standing during the second quarter of 2005 and defendants have appealed.
Eleven of the cases remain pending at the trial level in procedural stages
or are pending on appeal following dismissal as to Flexsys either by
plaintiffs or by the trial court on procedural grounds. The remaining cases
have been dismissed voluntarily by plaintiffs or by the trial court on
procedural grounds and are not on appeal.
46
Solutia's 2004 Form 10-K also described two class actions filed in
the Province of Quebec, Canada, against Flexsys and a number of other
companies producing rubber chemicals alleging that collusive sales and
marketing activities of the defendants damaged all persons in Quebec during
the period July 1995 through September 2001. In May 2005 Solutia became
aware of a case filed in Ontario, Canada against Flexsys and the other
rubber chemical producers alleging the same claims as the Quebec cases and
seeking on behalf of the citizens of Ontario (CAD) $95 million in damages.
No response is yet due nor has any been filed by defendants in the Ontario
case. Solutia is not a defendant in that case.
Solutia's 2004 Form 10-K and First Quarter 10-Q described federal
court actions by purchasers of rubber chemicals against Solutia, Flexsys and
a number of other companies producing rubber chemicals alleging
price-fixing. Eight class actions filed in the U.S. District Court for the
Northern District of California were consolidated into a single action
captioned In Re Rubber Chemicals Antitrust Litigation. Another action, RBX
Industries v. Bayer Corp., Flexsys, et al, alleged a conspiracy between 1995
and 2001 among the defendants, which did not include Solutia, to conspire
through common marketing and sales practices to cause plaintiffs to pay
supra-competitive prices for rubber chemicals. This case was originally
filed in July 2004 in federal court in Pennsylvania but was removed to the
U.S. District Court for the Northern District of California. As described in
Solutia's First Quarter 10-Q, in March 2005, Parker Hannifin Corporation
filed an action in the U.S. District Court for the Northern District of Ohio
alleging the same claims and requesting essentially the same relief as the
plaintiffs in RBX Industries, Inc. v. Bayer Corp., Flexsys, et al. On June
21, 2005, the U.S. District Court for the Northern District of California
approved a settlement of the In Re Rubber Chemicals Antitrust Litigation
releasing Solutia, Flexsys, Akzo and their predecessors in interest from any
further liability to the members of the class with respect to the allegation
in the action. Both RBX and Parker Hannifin elected to join the class in In
re Rubber Chemicals prior to the class settlement. Other than potential
claims by two small direct purchasers of rubber chemicals that elected to
opt out of the settlement and whose purchases from Flexsys were immaterial
in amount, the settlement resolves all remaining claims against Solutia and
Flexsys under U.S. antitrust laws of direct purchasers of rubber chemicals
whose purchases were made in the United States during the alleged class
period.
Other Legal Proceedings
- -----------------------
Solutia's 2004 Form 10-K described a consolidated shareholder class
action against Solutia and certain former officers of Solutia filed in the
U.S. District Court for the Northern District of California under the
caption In Re Solutia Securities Litigation alleging violations of federal
securities laws resulting from Solutia's accounting practices regarding
incorporation of Flexsys' results into Solutia's financial reports. On
January 4, 2005 the consolidated complaint against the individual defendants
was dismissed with prejudice. On March 24, 2005, the court issued a final
order dismissing the complaint against the individual defendants and, on
March 29, 2005, issued an order dismissing the case pending resolution of
Solutia's bankruptcy case. Plaintiffs did not file an appeal within the
applicable appeals period.
Solutia's 2004 Form 10-K described a class action captioned
Dickerson v. Feldman, et al., which was filed in the U.S. 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, alleging breach of
fiduciary duty under the Employee Retirement Income Security Act of 1974
("ERISA") and seeking to recover alleged losses in the Solutia Inc. Savings
and Investment Plan ("SIP") arising from the alleged imprudent investment of
SIP assets in Solutia's common stock during the period from December 16,
1998 through the date the action was filed. Solutia was not named as a
defendant, but the plaintiff in Dickerson 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 then sought 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 could be considered together by the
district court. On March 11, 2005 the district court denied without
prejudice plaintiff's motion to withdraw the reference. In May of 2005, the
plaintiffs filed an amended and then a second amended complaint. Although
the ERISA violations alleged are very similar to those asserted in the
original complaint, the second amended complaint added new allegations
largely similar to those made in In Re Solutia Securities Litigation
described above. This second amended complaint also adds twelve new
defendants, including former and current directors and officers of Solutia.
The directors are alleged to have breached their fiduciary duties under
ERISA by failing to monitor the plan's fiduciaries, and by failing to
recognize that the fiduciaries were not themselves properly managing the
plan.
Competition authorities in Belgium and several other European
countries are investigating past commercial practices of certain companies
engaged in the production and sale of butyl benzyl phthalates ("BBP"). One
of the BBP producers under investigation by the Belgian Competition
Authority is Ferro Belgium sprl, the
47
European subsidiary of Ferro Corporation. Ferro's BBP business in Europe was
purchased from Solutia Inc. in 2000. Solutia received an indemnification
notice from Ferro and has exercised its right, pursuant to the purchase
agreement relating to Ferro's acquisition of the BBP business from Solutia,
to assume and control the defense of Ferro in proceedings relating to these
investigations. On July 7, 2005, the Belgian Competition Authority issued a
Statement of Objections regarding its BBP investigation in which Solutia
Europe S.A/N.V., a European subsidiary of Solutia, along with Ferro and two
other producers of BBP, is identified as a party under investigation with
respect to its ownership of the BBP business from 1997 until the business
was sold to Ferro in 2000. Solutia Inc. is not named as a party under
investigation in the Statement of Objections. Written comments to the
Statement of Objections are due on August 31, 2005 and a preliminary oral
hearing before the Belgian Competition Authority is currently scheduled to
take place on September 6, 2005. Solutia is fully cooperating with the
Belgian Competition Authority in this investigation.
48
ITEM 5. OTHER INFORMATION
On July 28, 2005, Solutia received Bankruptcy Court approval to
enter into employment agreements with Mr. James R. Voss, as its Senior Vice
President - Business Operations, and with Mr. Jonathon P. Wright, as its
President Integrated Nylon (each an "Agreement" and together, their
"Agreements").
The term of each of the Agreements (the "Employment Period") is
from August 1, 2005 until the six month anniversary of the Emergence Date
(as hereinafter described). Under the Agreements, Mr. Voss will receive an
annual base salary of not less than $300,000 and Mr. Wright will receive an
annual base salary of not less than $350,000. Both Mr. Voss and Mr. Wright
will participate in Solutia's annual incentive program with a target annual
bonus opportunity of 75% of his annual base salary for Mr. Voss and 100% of
his annual base salary for Mr. Wright. Both Mr. Voss and Mr. Wright will
also be 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 applicable savings, retirement, welfare benefit and
vacation plans. In connection with his employment, Mr. Voss also received a
signing bonus of $250,000.
The Agreements provide that if either Mr. Voss or Mr. Wright,
respectively, is employed by Solutia (or an affiliate of Solutia) on the
six-month anniversary of such time, if ever, at which the Bankruptcy Court
shall have confirmed a plan of reorganization of Solutia under Chapter 11 of
the Bankruptcy Code and such plan shall have become effective (the
"Emergence Date"), or if on or subsequent to the Emergence Date but prior to
the six-month anniversary of the Emergence Date, he shall have been
terminated by Solutia without Cause (as defined in the Agreement), shall
have resigned for Good Reason (as defined in the Agreement), or shall have
died or been terminated for Disability (as defined in the Agreement), then
he will be eligible to receive an emergence bonus of up to $1,000,000, in
the case of Mr. Voss, and up to $1,500,000, in the case of Mr. Wright (in
each case, the "Emergence Bonus"), such amount being the maximum amount of
the bonus pool established under the Agreements for Mr. Voss and Mr. Wright,
respectively, with the actual amount of the Emergence Bonus to be determined
pursuant to and in accordance with the performance measures and payment
terms of the Solutia Inc. Emergence Incentive Bonus Program in which
Solutia's Chief Executive Officer participates. If either Mr. Voss or Mr.
Wright, respectively, voluntarily terminates his employment other than for
Good Reason or is terminated for Cause, in either case between the Emergence
Date and the six-month anniversary thereof, then he shall forfeit his right
to receive the Emergence Bonus.
If Solutia terminates Mr. Voss' or Mr. Wright's employment,
respectively, other than for Cause, or Mr. Voss or Mr. Wright, respectively,
terminates his employment for Good Reason, Solutia will pay him: (a) any
accrued but unpaid 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"), (d) an amount equal to 200% of his annual base
salary ("Severance Payment") and (e) if the Date of Termination is on or
subsequent to the Emergence Date, the Emergence Bonus, provided that he
waives any and all claims against Solutia and its subsidiaries. Mr. Voss and
Mr. Wright 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 he participates (collectively, "Other Benefits").
If Mr. Voss' or Mr. Wright's employment, respectively, terminates because of
death or Disability, he or his estate, as applicable, will receive the
Accrued Obligations and the Other Benefits and, if such termination occurs
on or after the Emergence Date but not later than the six month anniversary
thereof, the Emergence Bonus. If Solutia terminates Mr. Voss' or Mr.
Wright's employment, respectively, for Cause, or Mr. Voss or Mr. Wright,
respectively, terminates his employment other than for Good Reason, Solutia
will be obligated to pay him only the Accrued Obligations and the Other
Benefits.
The Agreements also contain provisions relating to non-competition,
protection of Solutia's confidential information and non-solicitation of
Solutia's employees.
The foregoing descriptions of the Agreements do not purport to be
complete and are qualified in their entireties by reference to the
Agreements, copies of which are attached hereto as Exhibits 10.1 and 10.2.
49
ITEM 6. EXHIBITS
See the Exhibit Index at page 52, of this report.
50
SIGNATURE
Pursuant to the requirements 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.
--------------------------
(Registrant)
/s/ TIMOTHY J. SPIHLMAN
-------------------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: August 1, 2005
51
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Agreement by and between Solutia Inc. and James R. Voss,
dated as of August 1, 2005
10.2 Agreement by and between Solutia Inc. and Jonathon P.
Wright, dated as of August 1, 2005
11 Omitted--Inapplicable; see "Condensed Consolidated
Statement of Operations" on page 1
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
52