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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 SEPTEMBER 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
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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
REQUIRED 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 BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES NO X
--- ---
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 SEPTEMBER 30, 2005
----- ------------------
COMMON STOCK, $0.01 PAR VALUE 104,459,578 SHARES
----------------------------- ------------------
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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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
NET SALES ......................................................... $ 676 $ 678 $ 2,156 $2,022
Cost of goods sold................................................. 595 587 1,864 1,816
------ ------ -------- ------
GROSS PROFIT....................................................... 81 91 292 206
Marketing expenses................................................. 36 31 104 105
Administrative expenses............................................ 23 20 72 78
Technological expenses............................................. 11 7 33 33
Amortization expense............................................... 1 -- 1 1
------ ------ -------- ------
OPERATING INCOME (LOSS)............................................ 10 33 82 (11)
Equity earnings (loss) from affiliates............................. 13 (16) 48 (28)
Interest expense (a)............................................... (20) (21) (64) (93)
Other income, net.................................................. 2 1 8 1
Loss on debt modification.......................................... -- -- -- (15)
Reorganization items, net.......................................... (15) (14) (35) (63)
------ ------ -------- ------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE............................ (10) (17) 39 (209)
Income tax expense................................................. 5 1 19 7
------ ------ -------- ------
NET INCOME (LOSS).................................................. $ (15) $ (18) $ 20 $ (216)
====== ====== ======== ======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE........................ $(0.14) $(0.17) $ 0.19 $(2.07)
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 September 30, 2005 and 2004, and $24 for the
nine months ended September 30, 2005 and 2004.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS
THREE MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
NET INCOME (LOSS)................................................ $ (15) $ (18) $ 20 $ (216)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments ................................ (1) 1 (8) --
Net unrealized gain on derivative instruments, net of tax........ 4 -- 4 --
Minimum pension liability adjustments, net of tax ............... -- -- -- 18
----- ------ ---- ------
COMPREHENSIVE INCOME (LOSS)...................................... $ (12) $ (17) $ 16 $ (198)
===== ====== ==== ======
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)
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2005 2004
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 82 $ 115
Trade receivables, net of allowances of $8 and $11 in 2005 and 2004....... 279 286
Miscellaneous receivables ................................................ 59 93
Inventories............................................................... 243 239
Prepaid expenses and other assets......................................... 32 45
------ ------
TOTAL CURRENT ASSETS...................................................... 695 778
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$2,514 in 2005 and $2,511 in 2004.................................... 796 841
INVESTMENTS IN AFFILIATES................................................. 212 177
GOODWILL.................................................................. 76 76
IDENTIFIED INTANGIBLE ASSETS, NET ........................................ 36 38
OTHER ASSETS.............................................................. 127 166
------ ------
TOTAL ASSETS.............................................................. $1,942 $2,076
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 174 $ 198
Accrued liabilities ...................................................... 237 283
Short-term debt .......................................................... 300 300
------ ------
TOTAL CURRENT LIABILITIES ................................................ 711 781
LONG-TERM DEBT ........................................................... 250 285
OTHER LIABILITIES ........................................................ 253 267
------ ------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,214 1,333
LIABILITIES SUBJECT TO COMPROMISE ........................................ 2,156 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...................................... (79) (75)
Accumulated deficit....................................................... (1,042) (1,062)
------ ------
TOTAL SHAREHOLDERS' DEFICIT............................................... (1,428) (1,444)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $1,942 $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)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2005 2004
---- ----
DECREASE IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss).............................................................. $ 20 $ (216)
Adjustments to reconcile to Cash From Operations:
Depreciation and amortization............................................. 88 95
Restructuring expenses and other charges.................................. (1) 139
Amortization of deferred credits.......................................... (6) (30)
Other, net................................................................ (3) 4
Changes in assets and liabilities:
Income and deferred taxes............................................ (8) --
Trade receivables.................................................... 7 (28)
Inventories.......................................................... (4) (7)
Accounts payable..................................................... (22) 80
Liabilities subject to compromise.................................... (31) (47)
Other assets and liabilities......................................... (42) 1
------- -------
CASH USED IN OPERATING ACTIVITIES.............................................. (2) (9)
------- -------
INVESTING ACTIVITIES:
Property, plant and equipment purchases........................................ (51) (32)
Acquisition and investment payments............................................ -- (36)
Other investing activities..................................................... 4 (1)
------- -------
CASH USED IN INVESTING ACTIVITIES.............................................. (47) (69)
------- -------
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 85
Deferred debt issuance costs................................................... (1) (13)
------- -------
CASH PROVIDED BY FINANCING ACTIVITIES.......................................... 16 11
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS.......................................... (33) (67)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.............................................................. 115 159
------- -------
END OF PERIOD.................................................................. $ 82 $ 92
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for reorganization items, net.................................... $ (48) $ (30)
======= =======
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
("Pharmacia"), 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
4
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
will be entitled to distributions. Solutia has not yet fully completed its
analysis of all the proofs of claim. Because 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
5
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
approved several extensions of the exclusivity period, the most recent
of which was set to expire on October 11, 2005. However, the bankruptcy
court entered an order on October 6, 2005 extending the exclusivity period
until the bankruptcy court rules on Solutia's current motion for an
extension of the exclusivity period, which sought to extend the exclusivity
period through January 9, 2006. 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 Solutia 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 Solutia's future obligations. These
matters create substantial doubt about Solutia'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 nine month periods ended September
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
September 30, 2005 and December 31, 2004, and for the three and nine months
ended September 30, 2005 and September 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 STATEMENT OF FINANCIAL POSITION AS OF SEPTEMBER 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
ASSETS
Current assets ................................... $ 402 $374 $ (81) $ 695
Property, plant and equipment, net................ 672 124 -- 796
Investments in subsidiaries and affiliates........ 380 218 (386) 212
Goodwill and identified intangible assets, net.... 101 11 -- 112
Other assets...................................... 82 45 -- 127
-------------------------------------------------------------------------
TOTAL ASSETS................................... $ 1,637 $772 $(467) $ 1,942
=========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities .............................. $ 708 $169 $(166) $711
Long-term debt.................................... 0 250 -- 250
Other liabilities................................. 201 52 -- 253
-------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE....... 909 471 (166) 1,214
LIABILITIES SUBJECT TO COMPROMISE................. 2,156 -- -- 2,156
TOTAL SHAREHOLDERS' EQUITY (DEFICIT).............. (1,428) 301 (301) (1,428)
-------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)........................................ $ 1,637 $772 $(467) $ 1,942
=========================================================================
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION 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
Investments 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 SEPTEMBER 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
NET SALES......................................... $538 $237 $ (99) $676
Cost of goods sold................................ 502 198 (105) 595
-------------------------------------------------------------------------
GROSS PROFIT...................................... 36 39 6 81
Marketing, administrative and technological
expenses......................................... 53 18 (1) 70
Amortization Expense.............................. 1 -- -- 1
-------------------------------------------------------------------------
OPERATING INCOME (LOSS) .......................... (18) 21 7 10
Equity earnings (loss) from affiliates............ 25 (1) (11) 13
Interest expense.................................. (14) (6) -- (20)
Other income, net................................. 7 3 (8) 2
Reorganization items, net......................... (15) -- -- (15)
-------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE........... (15) 17 (12) (10)
Income tax expense ............................... -- 5 -- 5
-------------------------------------------------------------------------
NET INCOME (LOSS)................................ $(15) $ 12 $ (12) $(15)
=========================================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
NET SALES......................................... $1,733 $725 $(302) $2,156
Cost of goods sold................................ 1,578 608 (322) 1,864
-------------------------------------------------------------------------
GROSS PROFIT...................................... 155 117 20 292
Marketing, administrative and technological
expenses......................................... 160 50 (1) 209
Amortization Expense.............................. 1 -- -- 1
-------------------------------------------------------------------------
OPERATING INCOME (LOSS)........................... (6) 67 21 82
Equity earnings (loss) from affiliates............ 89 (3) (38) 48
Interest expense.................................. (46) (18) -- (64)
Other income, net................................. 18 10 (20) 8
Reorganization items, net......................... (33) (2) -- (35)
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE ................. 22 54 (37) 39
Income tax expense................................ 2 17 -- 19
-------------------------------------------------------------------------
NET INCOME ....................................... $ 20 $ 37 $ (37) $ 20
=========================================================================
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 SEPTEMBER 30, 2004
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
NET SALES......................................... $547 $224 $(93) $678
Cost of goods sold................................ 499 185 (97) 587
-------------------------------------------------------------------------
GROSS PROFIT...................................... 48 39 4 91
Marketing, administrative and technological
expenses......................................... 42 16 -- 58
-------------------------------------------------------------------------
OPERATING INCOME ................................. 6 23 4 33
Equity earnings (loss) from affiliates............ (1) (3) (12) (16)
Interest expense.................................. (16) (5) -- (21)
Other income, net................................. 7 (1) (5) 1
Reorganization items, net......................... (14) -- -- (14)
-------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE........... (18) 14 (13) (17)
Income tax expense ............................... -- 1 -- 1
-------------------------------------------------------------------------
NET INCOME (LOSS)................................. $(18) $ 13 $(13) $(18)
=========================================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
NET SALES......................................... $1,645 $656 $(279) $2,022
Cost of goods sold................................ 1,568 544 (296) 1,816
-------------------------------------------------------------------------
GROSS PROFIT...................................... 77 112 17 206
Marketing, administrative and technological
expenses......................................... 170 46 -- 216
Amortization expense.............................. -- 1 -- 1
-------------------------------------------------------------------------
OPERATING INCOME (LOSS)........................... (93) 65 17 (11)
Equity loss from affiliates....................... (5) (3) (20) (28)
Interest expense.................................. (75) (18) -- (93)
Other income (expense), net....................... 20 (3) (16) 1
Loss on debt modification......................... -- (15) -- (15)
Reorganization items, net......................... (63) -- -- (63)
-------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE........... (216) 26 (19) (209)
Income tax expense ............................... -- 7 -- 7
-------------------------------------------------------------------------
NET INCOME (LOSS)................................. $ (216) $ 19 $ (19) $ (216)
=========================================================================
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 NINE MONTHS ENDED SEPTEMBER 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities....................................... $(42) $40 $-- $ (2)
Net Cash Used in Investing Activities............. (34) (13) -- (47)
Net Cash Provided by (Used in) Financing
Activities....................................... 32 (16) -- 16
-------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... (44) 11 -- (33)
Cash and Cash Equivalents:
Beginning of year.............................. 50 65 -- 115
-------------------------------------------------------------------------
End of period.................................. $ 6 $76 $-- $ 82
=========================================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities....................................... $(50) $ 41 $-- $ (9)
Net Cash Used in Investing Activities............. (56) (13) -- (69)
Net Cash Provided by (Used in) Financing
Activities....................................... 15 (4) -- 11
-------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... (91) 24 -- (67)
Cash and Cash Equivalents:
Beginning of year.............................. 125 34 -- 159
-------------------------------------------------------------------------
End of period.................................. $ 34 $ 58 $-- $ 92
=========================================================================
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R replaced Statement of Financial
Accounting Standards 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.
In March 2005, the FASB issued Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations - an interpretation of FASB
Statement No. 143 ("FIN 47"). FIN 47 clarifies that the term "conditional
asset retirement obligation" as used in Statement of Financial Accounting
Standards No.143, Accounting for Asset Retirement Obligations ("SFAS 143"),
refers to a legal obligation to perform an asset retirement activity in
which the timing and (or) method of settlement are conditional on a future
event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even
though uncertainty exists
10
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
about the timing and (or) method of settlement, including those that may be
conditional on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when sufficient information to reasonably
estimate the fair value of an asset retirement obligation is considered
available.
Solutia is currently in the process of evaluating the requirements
of FIN 47. At this time Solutia is unable to provide a meaningful range of
estimates of any conditional asset retirement obligations required to be
recognized in accordance with FIN 47. To the extent any conditional asset
retirement obligations are identified, Solutia will recognize the cumulative
effect of the initial application of FIN 47 as a change in accounting
principle. Solutia plans to continue its evaluation process and complete any
appropriate change in accounting methods prior to the effective date of
FIN 47, which is December 31, 2005.
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error Corrections - a replacement
of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"). SFAS 154
changes the requirements for the accounting and reporting of a change in
accounting principle. SFAS 154 applies to all voluntary changes in
accounting principle as well as changes required by an accounting
pronouncement that do not otherwise include specific transition provisions.
Previously, most changes in accounting principle were required to be
recognized by including in net income of the period in which the change
occurs the cumulative effect of changing to the new accounting principle.
SFAS 154 requires retrospective application to prior periods' financial
statements of a change in accounting principle as if that principle had
always been used. SFAS 154 will be effective for fiscal years beginning
after December 15, 2005. The impact of the adoption of SFAS 154 will depend
upon the nature of accounting changes Solutia may initiate in future
periods, if any.
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 September 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 September 30, 2005 and December 31,
2004, as applicable.
11
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The amounts subject to compromise consisted of the following items:
SEPTEMBER 30, DECEMBER 31,
2005 2004
---- ----
Postretirement benefits (a)............................... $1,077 $1,090
Litigation reserves (b)................................... 136 141
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................... $2,156 $2,187
====== ======
<FN>
(a) Postretirement benefits include Solutia's domestic (i) qualified
pension plan liabilities of $466 and $445 as of September 30, 2005 and
December 31, 2004, respectively; (ii) non-qualified pension plan
liabilities of $19 and $18 as of September 30, 2005 and December 31,
2004, respectively; and (iii) other postretirement benefits liabilities
of $592 and $627 as of September 30, 2005 and December 31, 2004,
respectively. Pursuant to a bankruptcy court order, Solutia made
payments with respect to other postretirement obligations of
approximately $65 in the nine months ended September 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 September 30, 2005 and December 31, 2004.
Pursuant to a bankruptcy court order, Solutia made a scheduled payment
of $5 in the third quarter 2005 with respect to the Anniston litigation
settlement reached in 2003.
(c) Pursuant to bankruptcy court orders, Solutia settled certain accounts
payable liabilities subject to compromise in the nine months ended
September 30, 2005.
(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 nine months ended September 30, 2005 was
approximately $24.
(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. Neither Solutia nor the Creditors' Committee has
sought to terminate Solutia's obligation to continue making the
interest payments. The amount of contractual interest paid with respect
to these notes was approximately $25 in the nine months ended September
30, 2005, and the accrued interest related to these notes was included
in Accrued Liabilities classified as not subject to compromise as of
September 30, 2005 and December 31, 2004.
12
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Professional fees (a) ........................ $(13) $(13) $(37) $(37)
Contract termination costs (b) ............... -- -- -- (20)
Severance and employee retention costs (c).... (2) (1) (10) (8)
Adjustments to allowed claim amounts (d) ..... 1 -- (10) --
Settlements of pre-petition claims (e) ....... -- -- 29 2
Other ........................................ (1) -- (7) --
---- ---- ---- ----
TOTAL REORGANIZATION ITEMS, NET .............. $(15) $(14) $(35) $(63)
==== ==== ==== ====
<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.
13
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 Solutia'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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
NET INCOME (LOSS):
As reported.................................... $ (15) $ (18) $ 20 $ (216)
Deduct: Total stock-based employee
compensation expense determined using the
Black-Scholes option-pricing model for all
awards, net of tax......................... -- (1) -- (3)
------- ------ ----- ------
Pro forma...................................... $ (15) $ (19) $ 20 $ (219)
======= ====== ===== ======
INCOME (LOSS) PER SHARE:
Basic and diluted - as reported................ $( 0.14) $(0.17) $0.19 $(2.07)
Basic and diluted - pro forma.................. $( 0.14) $(0.18) $0.19 $(2.10)
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 September 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 nine months ended September 30, 2005.
14
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:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
--------------------------------- -----------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
--------------------------------- -----------------------------------
Amortizable 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 nine months
ended September 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
SEPTEMBER 30, December 31,
2005 2004
---- ----
INVENTORIES
Finished goods................................................ $ 190 $ 223
Goods in process.............................................. 127 99
Raw materials and supplies.................................... 98 92
----- -----
Inventories, at FIFO cost..................................... 415 414
Excess of FIFO over LIFO cost................................. (172) (175)
----- -----
TOTAL INVENTORIES............................................. $ 243 $ 239
===== =====
Inventories at FIFO approximate current cost.
SEPTEMBER 30, December 31,
2005 2004
---- ----
ACCRUED LIABILITIES
Wages and benefits............................................ $ 53 $ 55
Accrued rebates and sales returns/allowances.................. 24 31
Accrued interest.............................................. 11 25
Other......................................................... 149 172
---- ----
TOTAL ACCRUED LIABILITIES..................................... $237 $283
==== ====
6. RESTRUCTURING RESERVES
Solutia recorded $3 of charges in Reorganization Items, net during
the third quarter 2005, including $2 of decontamination costs incurred as
part of the shut-down of the acrylic fibers business in the Integrated Nylon
segment and $1 of severance and retraining costs involving headcount
reductions primarily in its Performance Products and Services segment and
corporate function.
During the nine months ended September 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. This $10 of
net charges from the closure of these businesses
15
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
included $11 of asset write-downs, $4 of severance and retraining costs and
$4 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 and a $2 million gain from the sale of certain assets. In
addition, Solutia recorded $3 of severance and retraining costs in the nine
months ended September 30, 2005 with $2 recorded in Reorganization 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 nine
months ended September 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
Charges taken...................... 2 -- 1 -- 3
Amounts utilized................... (3) -- (1) -- (4)
-------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2005........ $ 3 $ -- $ 1 $-- $ 4
===============================================================================
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 $136 and $141 as of September 30,
2005 and December 31, 2004, respectively, associated with these obligations
classified as a liability subject to compromise. See Note 1 for further
description as to how these legacy litigation claims would be addressed
under the agreement-in-principle.
16
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Solutia's 2003 Form 10-K/A described a number of legal proceedings
in which Solutia was a named defendant or was defending solely due to its
indemnification obligations referred to above. Solutia is prohibited from
performing with respect to these obligations, and developments, if any, in
these matters are currently managed by other named defendants. Accordingly,
Solutia has ceased reporting on the status of those legal proceedings. The
legal proceedings which are in this category are (i) Owens v. Monsanto; (ii)
Payton v. Monsanto; (iii) other Anniston cases 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, which was not adjudicated by the bankruptcy court but
rather taken under advisement to be addressed in the future. 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. On August 4, 2005, Solutia filed with the
bankruptcy court a Statement of Reservation of Rights in response to the
Equity Committee's complaint, expressing Solutia's view that the issues and
disputes raised by the Equity Committee would be resolved through the
process of confirmation of Solutia's Plan of Reorganization.
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
17
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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
- --------------------------
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, David
Pearman and Pearman Agri Services, Inc. v Akzo Nobel Chemicals, Inc., et.
al., pending in the Circuit Court for Claiborne County, Tennessee, 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 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. Two class actions were filed in the Province of
Quebec, Canada, in May 2004 and one case was filed in Ontario, Canada, in
May 2005 against Flexsys and other rubber chemical producers, each alleging
that collusive sales and marketing activities of the defendants damaged all
persons in Quebec during the period July 1995 through September 2001. In
August 2005, Solutia became aware of a case filed in British Columbia,
Canada against Flexsys and other rubber chemical producers alleging the same
claims as the Quebec and Ontario cases and seeking unspecified damages under
a variety of theories on behalf of all purchasers of products containing
rubber chemicals in British Columbia. No responses are yet due nor have any
been filed by defendants in any of these cases. Solutia is not a defendant
in any of these cases.
Federal court actions alleging violations of federal securities
laws. Six shareholder class actions have been 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 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 and the action was dismissed without prejudice
pending resolution of Solutia's bankruptcy case. The complaint against the
individual defendants was dismissed with prejudice and no appeal was filed
within the applicable appeals period.
Shareholder Derivative Suits. Two shareholder derivative suits have
been 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'
18
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 plaintiff
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 September
1, 2005, the plaintiff filed an amended proof of claim against Solutia
solely to raise the purported amount of the claim to $290. On September 7,
2005 the plaintiff filed a motion in the U.S. Bankruptcy Court for the
Southern District of New York seeking leave to file a single proof of claim
against Solutia on behalf of all members of the class.
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 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 ("BCA") 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
19
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 BCA 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. Solutia's written comments to the Statement of Objections were
submitted on August 31, 2005 and presented at an oral hearing before the BCA
on September 6, 2005. A Reasoned Report to be submitted by the investigator
to the BCA has not yet been received. Solutia is fully cooperating with the
BCA 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.
On October 12, 2005 an action, captioned Davis, et. al. v. Solutia,
Inc. Employees' Pension Plan, was filed in the U.S. District Court for the
Southern District of Illinois against the Solutia Employees' Pension Plan
(the "Plan") by a class of participants in the Plan who allege that the
method of calculating their benefits under the Plan was unlawful.
Specifically, the Davis plaintiffs allege that the Plan violated ERISA by
reducing their accrued benefit as a result of the attainment of a certain
age, reducing their rate of benefit accrual because of the attainment of a
certain age, computing benefits in an unlawful method and, finally, by
"backloading" benefits resulting in accruals occurring slowly over time so
that very little of the accrued benefit is vested prior to the attainment of
age 65. None of the Debtors has been named as a defendant in this case.
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 $75 and $78 as of September 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 September 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 September 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 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.
20
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 nine months ended September 30, 2005 and 2004,
Solutia's pension and healthcare and other benefit costs were as follows:
PENSION BENEFITS
----------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Service costs for benefits earned........ $ 2 $ -- $ 5 $ 13
Interest costs on benefit obligation..... 18 18 53 59
Assumed return on plan assets............ (17) (18) (50) (57)
Prior service costs ..................... -- -- 1 5
Recognized net loss...................... 4 1 10 6
Curtailment and settlement net charges .. 7 7 7 69
---- ---- ---- ----
TOTAL.................................... $ 14 $ 8 $ 26 $ 95
==== ==== ==== ====
HEALTHCARE AND OTHER BENEFITS
-----------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Service costs for benefits earned........ $ 1 $ 1 $ 4 $ 6
Interest costs on benefit obligation..... 9 8 26 32
Prior service costs ..................... (3) (2) (8) (10)
Recognized net loss...................... 4 1 11 6
Curtailment gain......................... (4) (38) (4) (38)
--- ---- ---- ----
TOTAL.................................... $ 7 $(30) $ 29 $ (4)
=== ==== ==== ====
21
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Changes in Solutia's Pension and Other Postretirement Benefit Plans
Solutia amended its U.S. qualified pension plan in the third
quarter 2005 to cease benefit accruals for domestic union participants to be
effective January 1, 2006. This action resulted in a curtailment of the U.S.
qualified pension plan, as defined by SFAS No. 88, Employees Accounting for
Settlements and Curtailments of Defined Pension Plans and for Termination
Benefits, due to the reduction in anticipated future service of union
participants in Solutia's U.S. qualified pension plan. The net result of
this action in the third quarter 2005 was a $7 loss due primarily to the
required recognition of unrecognized losses that were expected to be
amortized into earnings over the estimated future service period of the plan
participants.
Solutia also amended in the third quarter 2005 its U.S.
postretirement plan for union, active employees to be effective January 1,
2006. These changes included discontinuation of all postretirement benefits
after attaining age 65, changes to certain eligibility requirements for
pre-65 postretirement benefits with the eventual elimination of these
benefits by 2016, and significant reduction of retiree life insurance
benefits for future retirees. This action resulted in a curtailment of the
U.S. postretirement plan, as defined by SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, due to the reduction in
anticipated future service of union participants in Solutia's U.S.
postretirement plan. The net result of this action in the third quarter 2005
was a $4 gain due primarily to the required recognition of unrecognized
gains that were expected to be amortized into earnings over the estimated
future service period of the plan participants.
In 2004, Solutia amended its U.S. qualified and non-qualified
pension plans 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 nine
months ended September 30, 2005.
22
9. 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 retail window Carpet fibers, including the WEAR-DATED(R) and
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.
23
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 nine months ended September 30, 2005
and 2004 are as follows:
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2005 2004
---------------------- ---------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products and Services.......... $292 $ 37 $275 $ 27
Integrated Nylon........................... 384 (10) 403 (15)
---- ----- ---- ----
SEGMENT TOTALS............................. 676 27 678 12
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate gain (expenses).............. (16) 22
Equity earnings (loss) from affiliates. 13 (16)
Interest expense....................... (20) (21)
Other expense, net...................... -- (1)
Reorganization items, net.............. (14) (13)
CONSOLIDATED TOTALS:
---- ----
NET SALES.............................. $676 $678
==== ---- ==== ----
LOSS BEFORE INCOME TAXES............... $(10) $(17)
==== ====
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2005 2004
---------------------- ---------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products and Services.......... $ 894 $109 $ 833 $ 79
Integrated Nylon........................... 1,262 3 1,189 (22)
------ ---- ------ ----
SEGMENT TOTALS............................. 2,156 112 2,022 57
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses..................... (41) (67)
Equity earnings (loss) from affiliates. 46 (28)
Interest expense....................... (64) (93)
Other income (expense), net............ 2 (1)
Loss on debt modification.............. -- (15)
Reorganization items, net.............. (16) (62)
CONSOLIDATED TOTALS: ------ ------
NET SALES.............................. $2,156 $2,022
====== ---- ====== -----
INCOME (LOSS) BEFORE INCOME TAXES...... $ 39 $(209)
==== =====
24
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
10. SUBSEQUENT EVENTS
Solutia announced in September 2005 that it and FMC Corporation
("FMC") had reached a definitive agreement to sell Astaris, their 50/50
joint venture. The transaction received bankruptcy court approval and closed
in the fourth quarter 2005. Under the terms of the agreement, Israel
Chemicals Limited ("ICL") purchased substantially all of the operating
assets of Astaris for $255, subject to certain purchase price adjustments.
Solutia expects to receive net proceeds of up to $100, approximately $20 of
which will be distributed in 2006 subject to certain terms and conditions of
the asset purchase agreement. In connection with this sale, Solutia expects
to record a gain in the fourth quarter of 2005. In addition, certain of the
assets and liabilities of Astaris that were not included in the sale to ICL
were transferred to Solutia and FMC. Generally, these assets and liabilities
consisted of property originally contributed to the joint venture by Solutia
and FMC, as well as associated liabilities.
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") 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 September 30, 2005
and December 31, 2004, and for the three and nine months ended September 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.
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 SEPTEMBER 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ -------------
NET SALES................................ $488 $48 $239 $ (99) $676
Cost of goods sold....................... 477 23 200 (105) 595
--------------------------------------------------------------------------
GROSS PROFIT............................. 1 25 39 6 81
Marketing expenses....................... 21 6 9 -- 36
Administrative expenses.................. 14 2 7 -- 23
Technological expenses................... 10 1 -- -- 11
Amortization expenses.................... -- -- 1 -- 1
--------------------------------------------------------------------------
OPERATING INCOME (LOSS).................. (34) 16 22 6 10
Equity earnings (loss) from affiliates... 47 11 (1) (44) 13
Interest expense......................... (15) -- (12) 7 (20)
Other income, net........................ 2 7 8 (15) 2
Reorganization items, net................ (15) -- -- -- (15)
--------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ....... (15) 34 17 (46) (10)
Income tax expense ...................... -- -- 5 -- 5
--------------------------------------------------------------------------
NET INCOME (LOSS)........................ $(15) $34 $ 12 $ (46) $(15)
==========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED SEPTEMBER 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ -------------
NET INCOME(LOSS)......................... $(15) $34 $12 $(46) $(15)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments......... (1) (1) (2) 3 (1)
Net unrealized gain on derivative
instruments, net of tax................. 4 -- 1 (1) 4
--------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS).............. $(12) $33 $11 $(44) $(12)
==========================================================================
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
THREE MONTHS ENDED SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ -------------
NET SALES................................ $506 $40 $225 $(93) $678
Cost of goods sold....................... 477 22 185 (97) 587
--------------------------------------------------------------------------
GROSS PROFIT............................. 29 18 40 4 91
Marketing expenses....................... 18 5 8 -- 31
Administrative expenses.................. 11 1 8 -- 20
Technological expenses................... 6 1 -- -- 7
--------------------------------------------------------------------------
OPERATING INCOME (LOSS).................. (6) 11 24 4 33
Equity earnings (loss) from affiliates... 26 8 (2) (48) (16)
Interest expense......................... (29) (1) (14) 23 (21)
Other income, net........................ 5 18 8 (30) 1
Reorganization items, net................ (14) -- -- -- (14)
--------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ....... (18) 36 16 (51) (17)
Income tax expense ...................... -- -- 1 -- 1
--------------------------------------------------------------------------
NET INCOME (LOSS)........................ $(18) $36 $ 15 $(51) $(18)
==========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ -------------
NET INCOME (LOSS)........................ $(18) $36 $15 $(51) $(18)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments......... 1 1 -- (1) 1
--------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS).............. $(17) $37 $15 $(52) $(17)
==========================================================================
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
NINE MONTHS ENDED SEPTEMBER 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ -------------
NET SALES.................................. $1,589 $140 $729 $(302) $2,156
Cost of goods sold......................... 1,511 64 611 (322) 1,864
--------------------------------------------------------------------------
GROSS PROFIT............................... 78 76 118 20 292
Marketing expenses......................... 60 18 26 -- 104
Administrative expenses.................... 44 6 22 -- 72
Technological expenses..................... 30 2 1 -- 33
Amortization expenses...................... -- -- 1 -- 1
--------------------------------------------------------------------------
OPERATING INCOME (LOSS).................... (55) 50 68 20 82
Equity earnings (loss) from affiliates..... 157 35 (3) (141) 48
Interest expense........................... (47) -- (38) 21 (64)
Other income (expense), net................ 1 18 30 (41) 8
Reorganization items, net.................. (33) -- (2) -- (35)
--------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ................ 2 103 55 (141) 39
Income tax expense ........................ 2 -- 17 -- 19
--------------------------------------------------------------------------
NET INCOME................................. $ 20 $103 $ 38 $(141) $ 20
==========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ -------------
NET INCOME................................. $20 $103 $ 38 $(141) $20
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments........... (8) (11) (17) 28 (8)
Net unrealized gain on derivative
instruments, net of tax................... 4 -- -- -- 4
--------------------------------------------------------------------------
COMPREHENSIVE INCOME....................... $16 $ 92 $ 21 $(113) $16
==========================================================================
28
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
NINE MONTHS ENDED SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ -------------
NET SALES.................................. $1,508 $131 $662 $(279) $2,022
Cost of goods sold......................... 1,501 63 548 (296) 1,816
------------------ -------------- ---------- ---------------- ---------------------
GROSS PROFIT............................... 7 68 114 17 206
Marketing expenses......................... 65 16 24 -- 105
Administrative expenses.................... 50 5 23 -- 78
Technological expenses..................... 30 2 1 -- 33
Amortization expense....................... -- -- 1 -- 1
--------------------------------------------------------------------------
OPERATING INCOME (LOSS).................... (138) 45 65 17 (11)
Equity earnings (loss) from affiliates..... 94 19 (2) (139) (28)
Interest expense........................... (120) (2) (42) 71 (93)
Other income, net.......................... 11 56 22 (88) 1
Loss on debt modification.................. -- -- (15) -- (15)
Reorganization items, net.................. (63) -- -- -- (63)
--------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ......... (216) 118 28 (139) (209)
Income tax expense ........................ -- -- 7 -- 7
--------------------------------------------------------------------------
NET INCOME (LOSS).......................... $ (216) $118 $ 21 $(139) $(216)
==========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
NINE MONTHS ENDED SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS).......................... $(216) $118 $21 $(139) $(216)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments........... -- -- 8 (8) --
Minimum pension liability adjustments, net
of tax................................... 18 -- -- -- 18
--------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)................ $(198) $118 $29 $(147) $(198)
==========================================================================
29
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 1 $ 4 $ 77 $ -- $ 82
Trade receivables, net.......................... 4 141 134 -- 279
Intercompany receivables........................ 99 761 93 (953) --
Miscellaneous receivables....................... 39 -- 20 -- 59
Inventories..................................... 118 30 110 (15) 243
Prepaid expenses and other current assets....... 18 -- 11 3 32
--------------------------------------------------------------------------
TOTAL CURRENT ASSETS............................ 279 936 445 (965) 695
PROPERTY, PLANT AND EQUIPMENT, NET.............. 591 81 124 -- 796
INVESTMENTS IN AFFILIATES....................... 2,308 203 17 (2,316) 212
GOODWILL........................................ -- 72 4 -- 76
IDENTIFIED INTANGIBLE ASSETS, NET............... 3 26 7 -- 36
INTERCOMPANY ADVANCES........................... 128 1,238 719 (2,085) --
OTHER ASSETS.................................... 82 -- 45 -- 127
--------------------------------------------------------------------------
TOTAL ASSETS.................................... $3,391 $2,556 $1,361 $(5,366) $1,942
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................ $ 129 $ 8 $ 38 $ (1) $ 174
Intercompany payables........................... 108 3 115 (226) --
Accrued liabilities............................. 140 12 85 -- 237
Short-term debt................................. 300 -- -- -- 300
Intercompany short-term debt.................... -- -- 190 (190) --
--------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES....................... 677 23 428 (417) 711
LONG-TERM DEBT.................................. -- -- 250 -- 250
INTERCOMPANY LONG-TERM DEBT..................... -- -- 408 (408) --
OTHER LIABILITIES............................... 201 -- 52 -- 253
--------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE..... 878 23 1,138 (825) 1,214
LIABILITIES SUBJECT TO COMPROMISE............... 3,941 408 21 (2,214) 2,156
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) 2,125 202 (2,327) (113)
Accumulated other comprehensive loss............ (79) -- -- -- (79)
Accumulated deficit............................. (1,042) -- -- -- (1,042)
--------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)............ (1,428) 2,125 202 (2,327) (1,428)
--------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT).............................. $3,391 $2,556 $1,361 $(5,366) $1,942
==========================================================================
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 FINANCIAL POSITION
AS OF DECEMBER 30, 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
==========================================================================
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
NINE MONTHS ENDED SEPTEMBER 30, 2005
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS....... $(103) $ 59 $ 42 $ -- $(24)
--------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases..... (30) (7) (14) -- (51)
Other investing activities.................. 3 -- 1 -- 4
--------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES........... (27) (7) (13) -- (47)
--------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in cash collateralized letters
of credit................................. 17 -- -- -- 17
Changes in investments and advances
from (to) affiliates...................... 72 (55) (17) -- --
Deferred debt issuance costs................ (1) -- -- -- (1)
--------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................ 88 (55) (17) -- 16
--------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (42) (3) 12 -- (33)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................... 43 7 65 -- 115
--------------------------------------------------------------------------
END OF PERIOD............................... $ 1 $ 4 $ 77 $ -- $ 82
==========================================================================
32
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
NINE MONTHS ENDED SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS....... $ (67) $ 72 $(14) $ -- $ (9)
--------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases..... (16) (3) (13) -- (32)
Acquisition and investment payments......... (35) -- (1) -- (36)
Other investing activities.................. (1) -- -- -- (1)
--------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES........... (52) (3) (14) -- (69)
--------------------------------------------------------------------------
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................................. 85 -- -- -- 85
Changes in investments and advances from
(to) affiliates........................... (19) (75) 56 -- --
Deferred debt issuance costs................ (9) -- (4) -- (13)
--------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................ 34 (75) 52 -- 11
--------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (85) (6) 24 -- (67)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................... 105 20 34 -- 159
--------------------------------------------------------------------------
END OF PERIOD............................... $ 20 $ 14 $ 58 $ -- $ 92
==========================================================================
33
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 Third Quarter 2005 Events
U.S. Hurricanes
---------------
Hurricanes Katrina and Rita, which affected the gulf coast region
of the U.S. during the third quarter 2005, had a significant impact on
Solutia's manufacturing operations. Although Solutia's manufacturing
facilities did not suffer significant physical damage, the manufacturing
facility in Alvin, Texas was forced to completely shut-down its operations
ahead of Hurricane Rita as a precaution. Further, reduced availability of
key raw material and energy sources affected the ability of certain plants
in the Integrated Nylon segment to operate at normal production rates. As a
result, Solutia has experienced significant costs involved in shutting down
and restarting these operations, significant unabsorbed fixed costs and lost
sales volumes.
Furthermore, Solutia declared force majeure in late September 2005
for certain products within its Integrated Nylon segment as a result of the
aforementioned raw material and utility supply limitations, some of which
are a result of force majeure declarations by certain of Solutia's
suppliers. Solutia has contacted customers and is actively managing the
situation to mitigate the effects of this interruption in supply on its
operations and customer deliveries. However, the duration of the force
majeure period and the potential financial impact of this situation on
Solutia are unknown at this time.
Reorganization Strategy
-----------------------
Solutia continued to take positive actions in the third 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 third quarter 2005 from several actions
implemented during 2004 designed to enhance its performance. These included
implementing significant general and administrative expense reductions;
34
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. In
addition, Solutia continued to use the tools of bankruptcy to renegotiate
various contracts in the third quarter 2005 which are expected to provide
future benefits to Solutia.
In September 2005, each of Solutia's U.S. labor unions ratified new
five-year collective bargaining agreements which set pension and health and
welfare benefits for Solutia's employees who are represented by labor
unions. The agreements, which take effect January 1, 2006, provide for
changes to pension and welfare benefits consistent with those Solutia had
previously implemented for U.S. non-union employees. Specifically, the union
employees have agreed to freeze their pension plan, phase-out
company-provided retiree medical benefits by October 31, 2016, and
participate in a more cost-effective medical insurance program, effective
January 1, 2006. These changes are consistent with previous steps Solutia
has taken to achieve its objective of emerging with a cost-structure that
allows it to compete more effectively in the global environment.
Solutia announced in September 2005 that it is beginning the
construction of a new SAFLEX(R) plastic interlayer plant in China with
production anticipated to commence in mid-2007. The plant will focus on
meeting the growing demands of the Chinese automotive market and the broader
Asia Pacific region for Solutia's plastic interlayer products, as well as
enhance Solutia's overall global cost position. This project demonstrates
Solutia's commitment to a market that is expected to be very important to
Solutia's future growth and Solutia's focus on being a competitive supplier
on a global basis.
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. In employing this strategy, Solutia announced in September 2005
that it and FMC Corporation ("FMC") had reached a definitive agreement to
sell Astaris, their 50/50 joint venture. The transaction received bankruptcy
court approval and closed in the fourth quarter 2005. Under the terms of the
agreement, Israel Chemicals Limited ("ICL") purchased substantially all of
the operating assets of Astaris for $255 million, subject to certain
purchase price adjustments. Solutia expects to receive net proceeds of up to
$100 million, approximately $20 million of which will be deposited into
escrow accounts. Distributions, if any, from the escrow accounts are
expected to be received in 2006, subject to certain terms and conditions of
the asset purchase agreement. In connection with this sale, Solutia expects
to record a gain in the fourth quarter of 2005. In addition, certain of the
assets and liabilities of Astaris that were not included in the sale to ICL
were transferred to Solutia and FMC. Generally, these assets and liabilities
consisted of property originally contributed to the joint venture by Solutia
and FMC, as well as associated liabilities.
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 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. See Note 1 to the accompanying condensed
consolidated financial statements for further description of the
agreement-in-principle.
35
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.
Results of Operations - Third Quarter 2005 Compared with Third Quarter 2004
Net sales and operating income of Solutia for the three months
ended September 30, 2005 and 2004 are as follows:
(dollars in millions) 2005 2004
---- ----
Net Sales............................................................... $676 $678
==== ====
Operating Income:
Performance Products and Services Segment Profit.................... $ 37 $ 27
Integrated Nylon Segment Loss ...................................... (10) (15)
Less: Corporate Gain (Expenses)................................ (16) 22
Less: Equity (Earnings) Loss from Affiliates, Other (Income)
Expense and Reorganization Items included in Segment Profit.... (1) (1)
---- ----
Operating Income........................................................ $ 10 $ 33
==== ====
Net Gains (Charges) included in Operating Income........................ $ (3) $ 25
==== ====
The $2 million, or less than 1 percent, decrease in net sales as
compared to the third quarter 2004 was primarily a result of lower sales
volumes of approximately 8 percent nearly entirely offset by higher average
selling prices of approximately 8 percent. The $23 million, or 70 percent,
decline in operating income as compared to the third quarter 2004 resulted
primarily from the absence of one-time gains incurred in 2004, which are
described in greater detail in the Results of Operations section below,
higher raw material and energy costs, costs incurred as a result of
Hurricanes Katrina and Rita and moderately lower net sales.
36
Results of Operations - Nine Months Ended September 30, 2005 Compared with
Nine Months Ended September 30, 2004
Net sales and operating income (loss) of Solutia for the nine
months ended September 30, 2005 and 2004 are as follows:
(dollars in millions) 2005 2004
---- ----
Net Sales............................................................... $2,156 $2,022
====== ======
Operating Income (Loss):
Performance Products and Services Segment Profit.................... $ 109 $ 79
Integrated Nylon Segment Profit (Loss).............................. 3 (22)
Less: Corporate Expenses....................................... (41) (67)
Less: Equity (Earnings) Loss from Affiliates, Other (Income)
Expense and Reorganization Items included in Segment
Profit (Loss).................................................. 1 (1)
------ ------
Operating Income (Loss)................................................. $ 82 $ (11)
====== ======
Charges included in Operating Income (Loss)............................. $ (4) $ (54)
====== ======
The $134 million, or 7 percent, increase in net sales as compared
to the nine months ended September 30, 2004 was primarily a result of higher
average selling prices of approximately 11 percent and favorable currency
exchange rate fluctuations of approximately 1 percent, partially offset by
lower sales volumes of approximately 5 percent. The $93 million improvement
in operating income as compared to the nine months ended September 30, 2004
resulted primarily from higher net sales and lower charges in 2005, which
are described in greater detail in the Results of Operations section below,
partially offset by higher raw material and energy costs, as well as costs
incurred as a result of Hurricanes Katrina and Rita.
37
Financial Information
Summarized financial information concerning Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as of
and for the three and nine months ended September 30, 2005 is presented as
follows:
SOLUTIA AND SUBSIDIARIES SOLUTIA AND
SUBSIDIARIES IN NOT IN SUBSIDIARIES
(dollars in millions) REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------ ------------
Three Months Ended September 30, 2005:
- --------------------------------------
Net Sales................................. $ 538 $237 $ (99) $ 676
Operating Income (Loss)................... (18) 21 7 10
Net Income (Loss)......................... (15) 12 (12) (15)
Nine Months Ended September 30, 2005:
- -------------------------------------
Net Sales................................. $ 1,733 $725 $(302) $ 2,156
Operating Income (Loss)................... (6) 67 21 82
Net Income (Loss)......................... 20 37 (37) 20
As of September 30, 2005:
- -------------------------
Total Assets.............................. $ 1,637 $772 $(467) $ 1,942
Liabilities not Subject to Compromise..... 909 471 (166) 1,214
Liabilities Subject to Compromise......... 2,156 -- -- 2,156
Total Shareholders' Equity (Deficit)...... (1,428) 301 (301) (1,428)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the nine months ended September 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--THIRD QUARTER 2005 COMPARED WITH THIRD QUARTER 2004
PERFORMANCE PRODUCTS AND SERVICES
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
(dollars in millions) 2005 2004
---- ----
Net Sales.............................................................. $292 $275
==== ====
Segment Profit ........................................................ $ 37 $ 27
==== ====
Charges and Reorganization Items included in Segment Profit............ $ (1) $ (1)
==== ====
The $17 million, or 6 percent, increase in net sales as compared to
the third quarter 2004 resulted primarily from an increase in average
selling prices of approximately 4 percent and higher sales volumes of
approximately 2 percent. Higher average selling prices were experienced
across several product lines, including SAFLEX(R) and VANCEVA(R) plastic
interlayer products, LLUMAR(R) and VISTA(R) professional 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. Higher volumes were experienced in
SAFLEX(R) and VANCEVA(R) plastic interlayer products and LLUMAR(R) and
VISTA(R) professional film products, partially offset by lower volumes due
to the shut-down of Solutia's chlorobenzenes operations in 2004.
The $10 million, or 37 percent, increase in segment profit in
comparison to the third quarter 2004 resulted primarily from higher net
sales, partially offset by higher raw material and energy costs of
approximately $5 million.
38
In addition, segment profit in the third quarter 2005 was affected by $1
million of restructuring charges included within reorganization items, net
while segment profit in the third quarter 2004 was affected by $1 million of
net charges including $2 million of asset write-offs and repairs and
maintenance charges resulting from the impact of Hurricane Ivan at the
Martinsville, Virginia plant, partially offset by $1 million of gain from
the favorable settlement of reserves established in 2003 related to the
closure of non-strategic facilities in Solutia's Pharmaceutical Services
division.
INTEGRATED NYLON
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
(dollars in millions) 2005 2004
---- ----
Net Sales.............................................................. $384 $403
==== ====
Segment Loss .......................................................... $(10) $(15)
==== ====
Charges and Reorganization Items included in Segment Loss.............. $ -- $ (5)
==== ====
The $19 million, or 5 percent, decrease in net sales as compared to
the third quarter 2004 resulted primarily from lower sales volumes of
approximately 16 percent, partially offset by higher average selling prices
of approximately 11 percent. Sales volumes were negatively affected by
Hurricanes Katrina and Rita, which forced certain manufacturing facilities
to reduce production rates due to the shortages of certain raw materials and
in particular Hurricane Rita forced the manufacturing facility in Alvin,
Texas to completely shut-down its operations. This production slowdown did
not allow Solutia to fully meet customer demand during the third quarter
2005. Additionally, certain customers were unable to take product due to
their own operational issues resulting from the hurricanes. Sales volumes
were also adversely affected as a result of Solutia's exit from 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. Average selling prices increased in all businesses primarily in
response to the escalating cost of raw materials.
The $5 million, or 33 percent, improvement in segment loss in
comparison to the third quarter 2004 resulted principally from lower
charges, partially offset by lower net sales and higher raw material and
energy costs of approximately $16 million. In addition, segment loss was
affected by the aforementioned hurricanes experienced in the third quarter
2005. Although Solutia's manufacturing facilities did not suffer significant
physical damage, the manufacturing facility in Alvin, Texas was forced to
completely shut-down its operations ahead of Hurricane Rita as a precaution.
Further, reduced availability of key raw material and energy resources
affected the ability of certain plants to operate at normal production
levels. As a result, Solutia has experienced significant costs involved in
shutting down and restarting these operations, significant unabsorbed fixed
costs and lost sales volumes. Furthermore, Solutia declared force majeure in
late September 2005 for certain products within its Integrated Nylon segment
as a result of the aforementioned raw material and utility supply
limitations some of which are a result of force majeure declarations by
certain of Solutia's suppliers. The duration of the force majeure period and
the potential financial impact of this situation on Solutia are unknown at
this time.
Segment loss in the third quarter 2005 included $2 million of
decontamination costs incurred as part of the shut-down of the acrylic
fibers business, offset by a $2 million gain on the sale of acrylic fibers
assets. Segment loss in the third quarter 2004 was also affected by a
hurricane experienced in the gulf region of the U.S. in the third quarter
2004. In particular, segment loss in the third quarter 2004 included $5
million of charges resulting from the impact of Hurricane Ivan at the
Pensacola, Florida and Foley, Alabama plants involving primarily repairs and
maintenance costs, as well as asset write-offs. In addition to these
charges, segment loss in the third quarter 2004 was affected by unabsorbed
fixed costs and lost sales volumes as a result of temporarily shutting down
certain manufacturing operations at the Pensacola and Foley plants due to
Hurricane Ivan.
39
CORPORATE EXPENSES
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
(dollars in millions) 2005 2004
---- ----
Corporate Expenses (Gain)............................. $16 $(22)
=== ====
Gains (Charges) included in Corporate Expenses........ $(3) $ 31
=== ====
The $38 million change in corporate expenses (gain) in comparison
to the third quarter 2004 was primarily a result of the net gain included in
2004. Charges of $3 million and the net gain of $31 million included in the
third quarter 2005 and 2004 results, respectively, both resulted from
various curtailment and settlement activity due to amendments to Solutia's
various postretirement plans (as more fully described in Note 8 to the
accompanying condensed consolidated financial statements). In addition, the
third quarter 2005 included modest increases in legal costs, partially
offset by the full quarter benefit of cost reduction measures taken in the
second half of 2004.
EQUITY EARNINGS (LOSS) FROM AFFILIATES
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
(dollars in millions) 2005 2004
---- ----
Equity Earnings (Loss) from Affiliates not included
in Reportable Segment Profit........................ $13 $(16)
--- ----
Equity Earnings from Affiliates included in
Reportable Segment Profit........................... $-- $ --
--- ----
Equity Earnings (Loss) from Affiliates................ $13 $(16)
=== ====
Charges included in Equity Earnings
(Loss) from Affiliates......................... $-- $(27)
=== ====
Equity earnings (loss) from affiliates improved by $29 million in
the third quarter 2005 as compared to the third quarter 2004. This
improvement was primarily a result of higher average selling prices and
improved manufacturing performance at both the Astaris and Flexsys joint
ventures. In addition, the third quarter 2004 results included $24 million
in litigation related charges and $2 million in asset impairment and
severance charges at the Flexsys joint venture and $1 million of severance
and contract cancellation charges at the Astaris joint venture.
REORGANIZATION ITEMS, NET
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
(dollars in millions) 2005 2004
---- ----
Reorganization Items, net............................. $(15) $(14)
==== ====
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 third quarter 2005 included $13 million of
professional fees for services provided by debtor and creditor professionals
directly related to Solutia's reorganization proceedings; $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; $1 million net
gain for adjustments to record certain pre-petition claims at estimated
amounts of the allowed claims; and $1 million of other reorganization
charges primarily involving costs incurred with exiting the acrylic fibers
operations. Reorganization items incurred in the third quarter 2004 included
$13 million of professional fees for services provided by debtor and
creditor professionals directly
40
related to Solutia's reorganization proceedings and $1 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.
INCOME TAX EXPENSE
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
(dollars in millions) 2005 2004
---- ----
Income Tax Expense................................... $ 5 $ 1
=== ====
Solutia's income tax expense in the third 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 September 30, 2005 and 2004. 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 Solutia's deferred tax assets and changes in
valuation allowances due to Solutia's Chapter 11 filing.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 2004
PERFORMANCE PRODUCTS AND SERVICES
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(dollars in millions) 2005 2004
---- ----
Net Sales........................................... $894 $833
==== ====
Segment Profit ..................................... $109 $ 79
==== ====
Charges and Reorganization Items included in
Segment Profit................................... $ (9) $(18)
==== ====
The $61 million, or 7 percent, increase in net sales as compared to
the nine months ended September 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 1 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 2004.
Higher average selling prices were experienced across several product lines
including SAFLEX(R) and VANCEVA(R) plastic interlayer products, LLUMAR(R)
and VISTA(R) professional 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 nine months ended September 30, 2004.
The $30 million, or 38 percent, increase in segment profit in
comparison to the nine months ended September 30, 2004 resulted principally
from higher net sales, partially offset by higher raw material and energy
costs of approximately $15 million. In addition, segment profit in the nine
months ended September 30, 2005 was affected by $8 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 not included within reorganization
items. Segment profit in 2004 was affected by $17 million of charges
involving plant closure costs for 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; $2 million of asset write-offs and repairs and
maintenance charges resulting from the impact of Hurricane Ivan at the
Martinsville, Virginia plant, partially offset by $1 million of gain from
the favorable settlement of reserves established in 2003 related to the
closure of non-strategic facilities in Solutia's Pharmaceutical Services
division.
41
INTEGRATED NYLON
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
(dollars in millions) 2005 2004
---- ----
Net Sales........................................... $1,262 $1,189
====== ======
Segment Profit (Loss)............................... $ 3 $ (22)
====== ======
Charges and Reorganization Items included in
Segment Profit (Loss)............................ $ (11) $ (5)
====== ======
The $73 million, or 6 percent, increase in net sales as compared to
the nine months ended September 30, 2004 resulted primarily from higher
average selling prices of approximately 17 percent, partially offset by
lower sales volumes of approximately 11 percent. Average selling prices
increased in all businesses primarily in response to the escalating cost of
raw materials. Sales volumes were negatively affected by Hurricanes Katrina
and Rita, which forced certain manufacturing facilities to reduce production
rates due to the shortages of certain raw materials and in particular
Hurricane Rita forced the manufacturing facility in Alvin, Texas to
completely shut-down its operations. This production slowdown did not allow
Solutia to fully meet customer demand. Additionally, certain customers were
unable to take product due to their own operational issues resulting from
the hurricanes. Sales volumes were also adversely affected as a result of
Solutia's exit from 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. In addition, sales volumes were
negatively impacted in 2005 as a result of contract terminations in the
intermediate chemicals business in 2004.
The $25 million improvement in segment profit in comparison to the
nine months ended September 30, 2004 resulted primarily from higher net
sales, partially offset by higher raw material and energy costs of
approximately $137 million. In addition, segment loss was affected by the
aforementioned hurricanes experienced in the third quarter 2005. Although
Solutia's manufacturing facilities did not suffer significant physical
damage, the manufacturing facility in Alvin, Texas was forced to completely
shut-down its operations ahead of Hurricane Rita as a precaution. Further,
reduced availability of key raw material and energy sources affected the
ability of certain plants to operate at normal production levels. As a
result, Solutia has experienced significant costs involved in shutting down
and restarting these operations, significant unabsorbed fixed costs and lost
sales volumes. Furthermore, Solutia declared force majeure in late September
2005 for certain products within its Integrated Nylon segment as a result of
the aforementioned raw material and utility supply limitations some of which
are a result of force majeure declarations by certain of Solutia's
suppliers. The duration of the force majeure period and the potential
financial impact of this situation on Solutia are unknown at this time.
Segment profit in the nine months ended September 30, 2005 also
included reorganization items of $11 million comprised of $10 million
principally due to the shut-down of 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 $4 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 and a $2 million
gain from the sale of certain acrylic fibers assets.
Segment loss in the nine months ended September 30, 2004 was also
affected by a hurricane experienced in the gulf region of the U.S. in 2004.
In particular, segment loss in the nine months ended September 30, 2004
included $5 million of charges resulting from the impact of Hurricane Ivan
at the Pensacola, Florida and Foley, Alabama plants involving primarily
repairs and maintenance costs, as well as asset write-offs. In addition to
these charges, segment loss in the nine months ended September 30, 2004 was
affected by unabsorbed fixed costs and lost sales volumes as a result of
temporarily shutting down certain manufacturing operations at the Pensacola
and Foley plants due to Hurricane Ivan.
42
CORPORATE EXPENSES
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(dollars in millions) 2005 2004
---- ----
Corporate Expenses.................................... $41 $ 67
=== ====
Charges included in Corporate Expenses................ $(3) $(31)
=== ====
The $26 million, or 39 percent, decrease in corporate expenses in
comparison to the nine months ended September 30, 2004 was primarily a
result of higher charges in 2004. Charges of $3 million and $31 million
included in the nine months ended September 30, 2005 and 2004 results,
respectively, resulted from various curtailment and settlement activities
due to amendments to Solutia's various postretirement plans (as more fully
described in Note 8 to the accompanying condensed consolidated financial
statements). In addition, the nine months ended September 30, 2005 included
a modest increase in legal costs, partially offset by the benefit of cost
reduction measures taken in the second half of 2004.
EQUITY EARNINGS (LOSS) FROM AFFILIATES
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(dollars in millions) 2005 2004
---- ----
Equity Earnings (Loss) from Affiliates not included
in Reportable Segment Profit (Loss)................. $46 $(28)
--- ----
Equity Earnings from Affiliates included in
Reportable Segment Profit (Loss).................... $ 2 $ --
--- ----
Equity Earnings (Loss) from Affiliates................ $48 $(28)
=== ====
Gains (charges) included in Equity Earnings
(Loss) from Affiliates......................... $ 5 $(45)
=== ====
Equity earnings (loss) from affiliates improved by $74 million in
comparison to the nine months ended September 30, 2004. This improvement was
primarily a result of lower charges in 2005, as well as 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 nine months ended September 30, 2005 included a one-time,
non-operational gain of $5 million incurred by the Flexsys joint venture.
Included in the results for the nine months ended September 30, 2004 were
$45 million of charges including $24 million in litigation related charges
and $9 million of asset impairment and severance charges at the Flexsys
joint venture, as well as $6 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.
INTEREST EXPENSE
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(dollars in millions) 2005 2004
---- ----
Interest Expense...................................... $64 $ 93
=== ====
Charges included in Interest Expense.................. $-- $(25)
=== ====
The $29 million, or 31 percent, decrease in interest expense in
2005 in comparison to the nine months ended September 30, 2004 resulted
principally from the write-off of unamortized debt issuance costs of $25
million in 2004.
43
REORGANIZATION ITEMS, NET
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(dollars in millions) 2005 2004
---- ----
Reorganization Items, net............................. $(35) $(63)
==== ====
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 nine months ended September 30, 2005 included $37
million of professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization proceedings; a
$29 million net gain representing the difference between the settlement
amount of certain pre-petition obligations and the corresponding amounts
previously recorded; $10 million of net charges for adjustments to record
certain pre-petition claims at estimated amounts of the allowed claims; $10
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 $7 million of other reorganization charges primarily involving
costs incurred with exiting the acrylic fibers operations.
Reorganization items incurred in the nine months ended September
30, 2004 included $37 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; $8 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
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(dollars in millions) 2005 2004
---- ----
Income Tax Expense ................................... $19 $ 7
=== ====
Solutia's income tax expense in the nine months ended September 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 nine months ended September 30, 2005 and 2004. 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 Solutia's deferred tax
assets and changes in valuation allowances due to Solutia's Chapter 11
filing.
44
SUMMARY OF EVENTS AFFECTING COMPARABILITY
In the nine months ended September 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 three and nine months ended September 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 nine months ended
September 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)
-- -- 3 3 (b)
----------------------------------------------------------------
OPERATING INCOME IMPACT................. (1) -- (3) (4)
Equity earnings from affiliates......... -- -- 5 5 (c)
----------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT......... $(1) $-- $ 2 1
================================================
Income tax impact....................... -- (d)
-----------
AFTER-TAX INCOME STATEMENT IMPACT....... $ 1
===========
<FN>
2005 CHARGES AND OTHER EVENTS
a) Restructuring costs related principally to severance and retraining
costs ($1 million pre-tax and after-tax--see note (d) below).
b) Net pension and other postretirement benefit plan curtailments and
settlements, as more fully described in Note 8 to the accompanying
consolidated financial statements ($3 million pre-tax and
after-tax--see note (d) below).
c) One-time, non-operational gain incurred by the Flexsys joint venture
($5 million pre-tax and after-tax--see note (d) below).
d) 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.
45
2004
--------------------------------------------------------------------
PERFORMANCE
PRODUCTS AND INTEGRATED CORPORATE/
INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED
- ---------------------------------------- ------------ ---------- ---------- ------------
IMPACT ON:
Cost of Goods Sold...................... $ 16 $-- $ -- $ 16 (e)
-- -- 24 24 (f)
2 5 -- 7 (g)
-----------------------------------------------------------------
Total Cost of Goods Sold................ 18 5 24 47
Marketing............................... -- -- 2 2 (f)
Administrative.......................... -- -- 3 3 (f)
Technological........................... -- -- 2 2 (f)
-----------------------------------------------------------------
OPERATING LOSS IMPACT................... (18) (5) (31) (54)
Equity loss from affiliates............. -- -- (45) (45) (h)
Interest Expense........................ -- -- (25) (25) (i)
Loss on debt modification............... -- -- (15) (15) (j)
-----------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT......... $(18) $(5) $(116) (139)
================================================
Income tax benefit impact............... (6) (k)
-----------
AFTER-TAX INCOME STATEMENT IMPACT....... $(133)
===========
<FN>
2004 CHARGES AND OTHER EVENTS
e) 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 ($16 million pre-tax and
after-tax - see note (k) below).
f) Net pension and other postretirement benefit plan curtailments and
settlements, as more fully described in Note 8 to the accompanying
consolidated financial statements ($31 million pre-tax and
after-tax--see note (k) below).
g) Losses incurred directly related to the hurricanes experienced in the
U.S. in the third quarter 2004 resulting in the disruption of
operations and property damage at Solutia's operations in the
Integrated Nylon chain located principally in the Southeastern part of
the U.S. and the CPFilms location in Martinsville, Virginia. These
costs included primarily asset write-offs and repairs and maintenance
costs ($7 million pre-tax and after-tax--see note (k) below).
h) The Flexsys and Astaris joint ventures, in each of which Solutia's has
a fifty percent interest, incurred charges related to litigation
matters and restructuring charges related to contract terminations,
dismantling costs, asset impairments and severance charges ($45 million
pre-tax and after-tax - see note (k) below).
i) Write-off of unamortized debt issuance costs related to the October
2003 and interim DIP credit facilities, both retired in January 2004
with proceeds from the final DIP facility ($25 million pre-tax and
after-tax - see note (k) below).
j) Loss due to the modification of Solutia's Euronotes in January 2004
($15 million pre-tax and $9 million after-tax).
k) With the exception of item (j) 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.
46
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
Solutia's actual liquidity needs and sources at this time. However, based
upon current and anticipated levels of operations during the continuation of
the bankruptcy proceedings, Solutia believes that its liquidity and capital
resources will be sufficient to maintain its normal operations at current
levels. Solutia's access to additional financing while 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 nine months of 2005. Cash
used in operations was $2 million in the first nine months of 2005, a change
of $7 million from $9 million used in operations for the comparable period
of 2004. This change in cash used in operations was primarily attributable
to working capital changes.
Capital spending increased $19 million to $51 million in the first
nine months of 2005, compared to $32 million in the same period in 2004.
Expenditures during the first nine months of 2005 were used primarily to
fund certain growth initiatives, as well as various capital improvements and
certain cost reduction projects.
Under the terms of the previously mentioned Astaris transaction,
Solutia expects to receive net proceeds of up to $100 million, approximately
$20 million of which will be deposited into escrow accounts. Distributions,
if any, from the escrow accounts are expected to be received in 2006,
subject to certain terms and conditions of the asset purchase agreement.
Pursuant to the terms of its DIP financing facility, Solutia is permitted to
retain approximately $30 million of the net proceeds of the Astaris sale.
However, the lenders under the DIP financing facility have agreed to waive
certain prepayment requirements in the DIP financing facility and allow
Solutia to retain the entire proceeds of the Astaris sale. The waiver and
other matters related thereto are subject to bankruptcy court approval.
Solutia has filed a motion for approval of the waiver and the matters
related thereto seeking a hearing before the bankruptcy court on November 17,
2005.
Total debt of $1,218 million as of September 30, 2005, including
$668 million subject to compromise and $550 million not subject to
compromise, decreased by $35 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 nine months of 2005. As
a result of the Chapter 11 filing, Solutia was in default on all its debt
agreements as of September 30, 2005, with the exception of its DIP credit
facility and Euronotes.
Solutia's working capital decreased by $13 million to $(16) million
at September 30, 2005, compared to $(3) million at December 31, 2004. The
change was principally due to lower cash on-hand as of September 30, 2005,
which is primarily the result of increased capital spending.
Solutia had a shareholders' deficit of $1,428 million at September
30, 2005 compared to a deficit of $1,444 million at December 31, 2004. The
$16 million decrease in shareholders' deficit principally resulted from the
$20 million of net income for the nine months ended September 30, 2005,
partially offset by the $4 million increase in accumulated other
comprehensive losses due primarily to currency translation adjustments.
The weighted average interest rate on Solutia's total debt
outstanding was approximately 8.6 percent at September 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. 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 nine months of 2005 and 2004, was approximately $24 million.
At September 30, 2005, Solutia's total liquidity was $208 million
in the form of $126 million of availability under the final DIP credit
facility and approximately $82 million of cash on-hand, of which $76 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.
47
CONTINGENCIES
See Note 7 to the accompanying condensed consolidated financial
statements for a summary of Solutia's contingencies as of September 30,
2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
There have been no material changes in market risk exposures during
the nine months ended September 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 September 30, 2005 that
have materially affected, or are reasonably likely to materially affect,
Solutia's internal controls over financial reporting.
48
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Proceedings in Solutia Bankruptcy Case
- --------------------------------------------
As described in Solutia's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005 (the "First Quarter 10-Q") and Quarterly Report on Form
10-Q for the quarter ended June 30, 2005 (the "Second Quarter 10-Q"), 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 and on May 24, 2005
Pharmacia and Monsanto filed a motion to dismiss the complaint, or in the
alternative, to stay the adversary proceeding, which was not adjudicated by
the bankruptcy court but rather taken under advisement to be addressed in
the future. On August 4, 2005, Solutia filed with the bankruptcy court a
Statement of Reservation of Rights in response to the Equity Committee's
complaint, expressing Solutia's view that the issues and disputes raised by
the Equity Committee would be resolved through the process of confirmation
of Solutia's Plan or Reorganization.
Flexsys Related Litigation
- --------------------------
Solutia's 2004 Form 10-K, First Quarter 10-Q and Second 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, David Pearman and Pearman Agri Services, Inc. v Akzo Nobel Chemicals,
Inc., et. al., pending in the Circuit Court for Claiborne County, Tennessee,
which was automatically stayed as against Solutia. The plaintiffs in 20 of
these cases seek damages under state law on behalf of all retail purchasers
of tires in that state since as early as 1994; plaintiffs in the other three
cases seek damages under state law on behalf of all purchasers of any
product containing rubber chemicals, including tires. Eleven of the cases
remain pending at the trial level in procedural stages or are pending on
appeal following dismissal as to Flexsys 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.
Solutia's 2004 Form 10-K and Second Quarter 10-Q also described
class actions filed in the Provinces of Quebec and Ontario, 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
August 2005 Solutia became aware of a case filed in British Columbia, Canada
against Flexsys and the other rubber chemical producers alleging the same
claims as the Quebec and Ontario cases and seeking unspecified damages under
a variety of theories on behalf of all purchasers of products containing
rubber chemicals in British Columbia. No responses are yet due nor have any
been filed by defendants in any of these cases. Solutia is not a defendant
in any of these cases.
Other Legal Proceedings
- -----------------------
Solutia's 2004 Form 10-K, First Quarter 10-Q and Second Quarter
10-Q 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.
On September 1, 2005, the plaintiff filed an amended proof of claim against
Solutia solely to raise the purported amount of its claim to $290 million.
On September 7, 2005 the plaintiff filed a motion in the U.S. Bankruptcy
Court for the Southern District of New York seeking leave to file a single
proof of claim against Solutia on behalf of all members of the class.
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").
49
One of the BBP producers under investigation by the Belgian Competition
Authority ("BCA") 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 BCA 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.
Solutia's written comments to the Statement of Objections were submitted on
August 31, 2005 and presented at an oral hearing before the BCA on September
6, 2005. A Reasoned Report to be submitted by the investigator to the BCA
has not yet been received. Solutia is fully cooperating with the BCA in this
investigation.
On October 12, 2005 an action, captioned Davis, et. al. v.
Solutia, Inc. Employees' Pension Plan, was filed in the U.S. District Court
for the Southern District of Illinois against the Solutia Employees' Pension
Plan (the "Plan") by a class of participants in the Plan who allege that the
method of calculating their benefits under the Plan was unlawful.
Specifically, the Davis plaintiffs allege that the Plan violated ERISA by
reducing their accrued benefit as a result of the attainment of a certain
age, reducing their rate of benefit accrual because of the attainment of a
certain age, computing benefits in an unlawful method and, finally, by
"backloading" benefits resulting in accruals occurring slowly over time so
that very little of the accrued benefit is vested prior to the attainment of
age 65. None of the Debtors has been named as a defendant in this case.
ITEM 5. OTHER INFORMATION
On October 19, 2005, Solutia Inc. ("Solutia") received Bankruptcy
Court approval of Solutia's entry into an Asset Purchase Agreement, dated as
of September 1, 2005 (the "Purchase Agreement"), among Solutia, a Delaware
corporation, FMC Corporation, a Delaware Corporation ("FMC"), Astaris LLC, a
Delaware limited liability company ("Astaris"), Israel Chemicals Limited, an
Israeli corporation ("ICL") and ICL Performance Products Holding, Inc., a
Delaware corporation and wholly-owned subsidiary of ICL ("Buyer"), for the
sale, assignment and transfer by Astaris to Buyer, or certain other
affiliates of ICL, of substantially all of the operating assets, other than
certain excluded assets, used in the business of Astaris and for the
assumption by Buyer of specified liabilities of Astaris. The sale pursuant
to the Purchase Agreement (the "Closing") was completed on November 4, 2005.
In connection with the Closing, Solutia entered into a long-term
toll manufacturing agreement, dated November 4, 2005 (the "Toll Agreement"),
between Solutia and Phosphorus Derivatives Inc., an affiliate of ICL. At the
time Astaris was formed in 2000, Solutia contributed to Astaris a facility
at its W.G. Krummrich plant in Sauget, Illinois that manufactures P2 S5 (the
"Sauget P2 S5 Facility"). Since the formation of Astaris, Astaris has owned
and Solutia has operated the Sauget P2 S5 Facility. The Sauget P2 S5
Facility is excluded from the assets being sold to Buyer under the Purchase
Agreement and was transferred from Astaris back to Solutia effective upon
closing of the Purchase Agreement, as provided under the Owners Agreement.
Under the Toll Agreement, Solutia will continue to manufacture, package and
supply P2 S5 exclusively for Buyer at the Sauget P2 S5 Facility from raw
materials and packaging provided by Buyer. The Toll Agreement provides for
economic terms that are no less favorable to Solutia than those under the
lease and operating agreement between Solutia and Astaris pursuant to which
Solutia previously operated the Sauget P2 S5 Facility exclusively for
Astaris.
The description of the Toll Agreement contained herein sets forth a
brief summary of certain terms of the Toll Agreement that may be material to
Solutia. However, this description does not purport to be complete and is
qualified in its entirety by reference to the specific terms of the Toll
Agreement. A copy of the Toll Agreement is attached hereto as Exhibit 10.2.
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: November 9, 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 Asset Purchase Agreement by and among FMC Corporation, Solutia Inc.,
Astaris LLC, Israeli Chemicals Limited and ICL Performance Products
Holding Inc. dated as of September 1, 2005
10.2 Toll Manufacturing Agreement by and between Solutia Inc. and
Phosphorus Derivatives Inc. dated November 4, 2005
10.3 Owners Agreement by and between Solutia Inc. and FMC Corporation
dated as of September 1, 2005
10.4 Amendment No. 3 to the $525,000,000 Debtor-in-Possession Financing
Agreement dated January 16, 2004 (as amended) between Solutia Inc.,
Solutia Business Enterprises, Inc. and the other parties thereto
(incorporated by reference to Exhibit 10.1 to Solutia's Form 8-K
filed July 27, 2005)
10.5 Agreement by and between Solutia Inc. and James R. Voss, dated as
of August 1, 2005 (incorporated by reference to Exhibit 10.1 to
Solutia's Form 10-Q for the quarter ended June 30, 2005)
10.6 Agreement by and between Solutia Inc. and Jonathon P. Wright, dated
as of August 1, 2005 (incorporated by reference to Exhibit 10.2 to
Solutia's Form 10-Q for the quarter ended June 30, 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