Exhibit 99.1
Exhibit D
SOLUTIA INC.
PROJECTED CONSOLIDATED INCOME STATEMENT
(DOLLARS IN MILLIONS)
Actual Actual Actual Projected Projected Projected Projected Projected
2003 2004 2005 2006 2007 2008 2009 2010
---- ---- ---- ---- ---- ---- ---- ----
NET SALES $ 2,430 $ 2,697 $ 2,825 $ 2,882 $ 2,944 $ 2,717 $ 2,690 $ 2,742
Cost of Goods Sold 2,370 2,474 2,487 2,472 2,443 2,184 2,100 2,129
--------- --------- --------- --------- --------- --------- --------- ---------
GROSS PROFIT 60 223 338 410 501 533 590 613
Marketing, Administrative and
Technological Expenses 351 289 285 293 297 306 317 327
Amortization Expense 3 2 1 1 1 1 1 1
Impairment of Intangible Assets 78 28 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (372) (96) 52 116 203 226 272 286
Equity Earnings (Loss) from
Affiliates (133) (26) 96 42 38 30 30 30
Interest Expense (120) (113) (84) (102) (104) (105) (101) (95)
Other Income, net 11 1 10 6 6 6 5 4
Loss on Debt Modification -- (15) -- -- -- -- -- --
Reorganization Items, net (1) (73) (49) 546 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (615) (322) 25 608 143 157 206 226
Income Tax Expense (Benefit) 365 (6) 14 21 35 47 58 63
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (980) (316) 11 587 108 110 148 163
Loss from Discontinued Operations,
net of tax (2) -- -- -- -- -- -- --
Cumulative Effect of Change in
Accounting Principle, net of tax (5) -- (3) -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (987) $ (316) $ 8 $ 587 $ 108 $ 110 $ 148 $ 163
========= ========= ========= ========= ========= ========= ========= =========
<table>
SOLUTIA INC.
PROJECTED CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
Actual Actual Actual Projected Projected Projected Projected Projected
2003 2004 2005 2006 2007 2008 2009 2010
---- ---- ---- ---- ---- ---- ---- ----
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 159 $ 115 $ 107 $ 25 $ 25 $ 25 $ 25 $ 25
Trade Receivables 281 286 253 281 269 261 263 264
Inventories 240 239 267 265 263 254 256 261
Prepaid Expenses and Other
Assets 124 138 129 112 103 103 104 105
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 804 778 756 683 660 643 648 655
PROPERTY, PLANT AND EQUIPMENT,
net 909 841 804 825 817 799 772 766
INVESTMENTS IN AFFILIATES 206 177 205 220 243 258 274 289
OTHER ASSETS 527 280 217 2,217 2,170 2,106 2,052 2,013
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL ASSETS $ 2,446 $ 2,076 $ 1,982 $ 3,945 $ 3,890 $ 3,806 $ 3,746 $ 3,723
========= ========= ========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable $ 78 $ 198 $ 220 $ 226 $ 237 $ 225 $ 231 $ 243
Accrued Liabilities 304 283 240 210 191 191 190 188
Short-Term Debt 361 300 300 36 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 743 781 760 472 428 416 421 431
LONG-TERM DEBT 294 285 247 1,170 1,142 1,078 964 863
OTHER LIABILITIES 313 267 253 1,296 1,203 1,082 979 880
LIABILITIES SUBJECT TO
COMPROMISE 2,221 2,187 2,176 -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES 3,571 3,520 3,436 2,938 2,773 2,576 2,364 2,174
SHAREHOLDERS' DEFICIT:
Common Stock 1 1 1 -- -- -- -- --
Additional Contributed Capital 56 56 56 1,001 1,003 1,006 1,010 1,014
Treasury Stock, at Cost (251) (251) (251) -- -- -- -- --
Net Deficiency of Assets at
Spin-off (113) (113) (113) -- -- -- -- --
Accumulated Other Comprehensive
Loss (72) (75) (93) (4) (4) (4) (4) (4)
Retained Earnings (Deficit) (746) (1,062) (1,054) 10 118 228 376 539
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY
(DEFICIT) (1,125) (1,444) (1,454) 1,007 1,117 1,230 1,382 1,549
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) $ 2,446 $ 2,076 $ 1,982 $ 3,945 $ 3,890 $ 3,806 $ 3,746 $ 3,723
========= ========= ========= ========= ========= ========= ========= =========
SOLUTIA INC.
PROJECTED CONSOLIDATED CASH FLOW STATEMENT
(DOLLARS IN MILLIONS)
Actual Actual Actual Projected Projected Projected Projected Projected
2003 2004 2005 2006 2007 2008 2009 2010
---- ---- ---- ---- ---- ---- ---- ----
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net Income (Loss) $ (987) $ (316) $ 8 $ 587 $ 108 $ 110 $ 148 $ 163
Adjustments to Reconcile to
Cash from Operations:
Cumulative effect of change
in accounting principle, net
of tax 5 -- 3 -- -- -- -- --
Loss (Income) from
discontinued operations, net
of tax 2 -- -- -- -- -- -- --
Depreciation and amortization 137 127 117 113 110 106 103 102
Amortization of deferred
credits (17) (33) (9) (9) (8) (6) (4) (4)
Settlement of Anniston
litigation and other litigation
matters 99 -- -- -- -- -- -- --
Impairment of intangible assets 78 28 -- -- -- -- -- --
Restructuring expenses and
other charges 300 162 (37) 3 6 -- -- --
Other, net 15 4 (3) -- 2 2 2 2
Changes in assets and
liabilities:
Income and deferred taxes 356 (16) (8) 19 9 5 -- (3)
Trade receivables (11) (5) 33 (19) 12 8 (2) (1)
Inventories 22 1 (28) 8 2 10 (2) (5)
Accounts payable (30) 120 17 1 10 (11) 5 12
Liabilities subject to
compromise 2 (34) (11) (53) -- -- -- --
Other assets and liabilities 4 3 (106) (996) (89) (79) (64) (71)
--------- --------- --------- --------- --------- --------- --------- ---------
CASH PROVIDED BY (USED IN)
OPERATIONS - CONTINUING OPERATIONS (25) 41 (24) (346) 162 145 186 195
CASH USED IN OPERATIONS -
DISCONTINUED OPERATIONS (11) -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
CASH PROVIDED BY (USED IN)
OPERATIONS (36) 41 (24) (346) 162 145 186 195
--------- --------- --------- --------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Property, plant and equipment
purchases (78) (61) (81) (105) (98) (80) (72) (93)
Acquisition and investment
payments, net of cash acquired (63) (36) -- (20) -- -- -- --
Property disposals and investment
proceeds, net 5 -- 81 15 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
CASH USED IN INVESTING ACTIVITIES
- - CONTINUING OPERATIONS (136) (97) -- (110) (98) (80) (72) (93)
CASH PROVIDED BY INVESTING
ACTIVITIES - DISCONTINUED
OPERATIONS 474 -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 338 (97) -- (110) (98) (80) (72) (93)
--------- --------- --------- --------- --------- --------- --------- ---------
Actual Actual Actual Projected Projected Projected Projected Projected
2003 2004 2005 2006 2007 2008 2009 2010
---- ---- ---- ---- ---- ---- ---- ----
FINANCING ACTIVITIES:
Net Change in Short-Term Debt
Obligations 3 (361) -- 382 (64) (65) (114) (102)
Proceeds from issuance of long-
term debt obligations -- 300 -- -- -- -- -- --
Net change in cash
collateralized letter of credit (121) 87 17 -- -- -- -- --
Other, net (37) (14) (1) (8) -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES - CONTINUING
OPERATIONS (155) 12 16 374 (64) (65) (114) (102)
CASH USED IN FINANCING
ACTIVITIES - DISCONTINUED
OPERATIONS (5) -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (160) 12 16 374 (64) (65) (114) (102)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 142 (44) (8) (82) -- -- -- --
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 17 159 115 107 25 25 25 25
--------- --------- --------- --------- --------- --------- --------- ---------
END OF YEAR $ 159 $ 115 $ 107 $ 25 $ 25 $ 25 $ 25 $ 25
========= ========= ========= ========= ========= ========= ========= =========
SOLUTIA INC.
PROJECTED CONSOLIDATED FRESH START BALANCE SHEET
(DOLLARS IN MILLIONS)
Projected Exit Financing Reorganized
June 30, 2006 Debt Discharge & Facility Fresh Start June 30, 2006
Balance Sheet Reclassifications Transactions Adjustments Balance Sheet
------------- ----------------- ------------ ----------- -------------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 95 $ (310) $ 444 $ -- $ 229
Trade Receivables 322 -- -- -- 322
Inventories 261 -- -- -- 261
Prepaid Expenses and Other Assets 105 -- -- -- 105
-------- --------- ------- -------- --------
TOTAL CURRENT ASSETS 783 (310) 444 -- 917
PROPERTY, PLANT AND EQUIPMENT, net 819 -- -- -- 819
INVESTMENTS IN AFFILIATES 201 -- -- -- 201
OTHER ASSETS 204 250 36 1,759 2,249
-------- --------- ------- -------- --------
TOTAL ASSETS $ 2,007 $ (60) $ 480 $ 1,759 $ 4,186
======== ========= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts Payable $ 202 $ -- $ -- $ -- $ 202
Accrued Liabilities 216 17 -- -- 233
Short-Term Debt 370 -- (370) -- --
-------- --------- ------- -------- --------
TOTAL CURRENT LIABILITIES 788 17 (370) -- 435
LONG-TERM DEBT 291 20 850 -- 1,161
OTHER LIABILITIES 256 1,201 -- 133 1,590
LIABILITIES SUBJECT TO COMPROMISE 2,123 (2,123) -- -- --
-------- --------- ------- -------- --------
TOTAL LIABILITIES 3,458 (885) 480 133 3,186
SHAREHOLDERS' DEFICIT:
Common Stock 1 -- -- (1) --
Additional Contributed Capital 56 250 -- 694 1,000
Treasury Stock, at Cost (251) -- -- 251 --
Net Deficiency of Assets at Spin-off (113) -- -- 113 --
Accumulated Other Comprehensive Loss (89) -- -- 89 --
Accumulated Deficit (1,055) 575 -- 480 --
-------- --------- ------- -------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (1,451) 825 -- 1,626 1,000
-------- --------- ------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) $ 2,007 $ (60) $ 480 $ 1,759 $ 4,186
======== ========= ======= ======== ========
NOTES TO FINANCIAL PROJECTIONS
------------------------------
These Notes should be read in conjunction with the Plan, Disclosure
Statement and Plan Supplement in their entirety.(1) Attached is a Projected
Consolidated Income Statement, Projected Consolidated Balance Sheet and
Projected Consolidated Cash Flow Statement, each of which includes the
following: (a) Solutia's consolidated historical financial statement
information for the three year period from 2003 through 2005; (b)
consolidated projected financial statement information (the "Projections")
for Reorganized Solutia's five year period from 2006 through 2010 (the
"Projection Period").(2) Also attached is a Projected Consolidated Fresh
Start Balance Sheet reflecting, in accordance with fresh start reporting,
the assumed effect of Confirmation and consummation of the transactions
contemplated by the Plan on the presumed Effective Date.
THE PROJECTIONS HAVE BEEN PREPARED BY SOLUTIA'S MANAGEMENT WITH THE
ASSISTANCE OF ROTHSCHILD, SOLUTIA'S FINANCIAL ADVISORS. SUCH PROJECTIONS
WERE NOT PREPARED TO COMPLY WITH THE GUIDELINES FOR PROSPECTIVE FINANCIAL
STATEMENTS PUBLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS AND THE RULES AND REGULATIONS OF THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION. SOLUTIA'S INDEPENDENT ACCOUNTANTS HAVE NEITHER
EXAMINED NOR COMPILED THE ACCOMPANYING PROJECTIONS AND, ACCORDINGLY, DO NOT
EXPRESS AN OPINION OR ANY OTHER FORM OF ASSURANCE WITH RESPECT TO THE
PROJECTIONS, ASSUME NO RESPONSIBILITY FOR THE PROJECTIONS AND DISCLAIM ANY
ASSOCIATION WITH THE PROJECTIONS. EXCEPT FOR PURPOSES OF THIS DISCLOSURE
STATEMENT, SOLUTIA DOES NOT PUBLISH PROJECTIONS OF THEIR ANTICIPATED
FINANCIAL POSITION OR RESULTS OF OPERATIONS.
MOREOVER, THE PROJECTIONS CONTAIN CERTAIN STATEMENTS THAT ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE SUBJECT TO A NUMBER OF
ASSUMPTIONS, RISKS, AND UNCERTAINTIES, MANY OF WHICH ARE AND WILL BE BEYOND
THE CONTROL OF REORGANIZED SOLUTIA, INCLUDING THE IMPLEMENTATION OF THE
PLAN, THE CONTINUING AVAILABILITY OF SUFFICIENT BORROWING CAPACITY OR OTHER
FINANCING TO FUND OPERATIONS, ACHIEVING OPERATING EFFICIENCIES, CURRENCY
EXCHANGE RATE FLUCTUATIONS, EXISTING AND FUTURE GOVERNMENTAL REGULATIONS AND
ACTIONS OF GOVERNMENT BODIES, NATURAL DISASTERS AND UNUSUAL WEATHER
CONDITIONS, AND OTHER MARKET AND COMPETITIVE CONDITIONS. HOLDERS OF CLAIMS
ARE CAUTIONED THAT THE FORWARD-LOOKING STATEMENTS SPEAK AS OF THE DATE MADE
AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. ACTUAL RESULTS OR DEVELOPMENTS
MAY DIFFER MATERIALLY FROM THE EXPECTATIONS EXPRESSED OR IMPLIED IN THE
FORWARD-LOOKING STATEMENTS, AND SOLUTIA AND REORGANIZED SOLUTIA UNDERTAKE NO
OBLIGATION TO UPDATE ANY SUCH STATEMENTS.
THE PROJECTIONS, WHILE PRESENTED WITH NUMERICAL SPECIFICITY, ARE
NECESSARILY BASED ON A VARIETY OF ESTIMATES AND ASSUMPTIONS WHICH, THOUGH
CONSIDERED REASONABLE BY SOLUTIA, MAY NOT BE REALIZED AND ARE INHERENTLY
SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC, COMPETITIVE, INDUSTRY,
REGULATORY, MARKET AND FINANCIAL UNCERTAINTIES AND CONTINGENCIES, MANY OF
WHICH ARE AND WILL BE BEYOND REORGANIZED SOLUTIA'S CONTROL. SOLUTIA CAUTIONS
THAT NO REPRESENTATIONS CAN BE MADE OR ARE MADE AS TO THE ACCURACY OF THE
PROJECTIONS OR TO REORGANIZED SOLUTIA'S ABILITY TO ACHIEVE THE PROJECTED
RESULTS. SOME ASSUMPTIONS INEVITABLY WILL BE INCORRECT. MOREOVER, EVENTS AND
CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE DATE ON WHICH THESE PROJECTIONS
WERE PREPARED MAY BE DIFFERENT FROM THOSE ASSUMED, OR, ALTERNATIVELY, MAY
HAVE BEEN UNANTICIPATED, AND THUS THE
<FN>
- --------------------------
(1) Capitalized terms that are not otherwise defined herein shall have the
meaning ascribed to them in the Plan or Disclosure Statement, as applicable.
(2) Because the Projections assume an Effective Date of June 30, 2006, the
Projections for 2006 include six months of projected results for Solutia
(January through June) and 6 months of projected results for Reorganized
Solutia (July through December).
OCCURRENCE OF THESE EVENTS MAY AFFECT FINANCIAL RESULTS IN A MATERIALLY
ADVERSE OR MATERIALLY BENEFICIAL MANNER. SOLUTIA AND REORGANIZED SOLUTIA DO
NOT INTEND AND UNDERTAKE NO OBLIGATION TO UPDATE OR OTHERWISE REVISE THE
PROJECTIONS TO REFLECT EVENTS OR CIRCUMSTANCES EXISTING OR ARISING AFTER THE
DATE THIS DISCLOSURE STATEMENT IS INITIALLY FILED OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. THE PROJECTIONS, THEREFORE, MAY NOT BE
RELIED UPON AS A GUARANTY OR OTHER ASSURANCE OF THE ACTUAL RESULTS THAT WILL
OCCUR. IN DECIDING WHETHER TO VOTE TO ACCEPT OR REJECT THE PLAN, HOLDERS OF
CLAIMS OR INTERESTS MUST MAKE THEIR OWN DETERMINATIONS AS TO THE
REASONABLENESS OF SUCH ASSUMPTIONS AND THE RELIABILITY OF THE PROJECTIONS.
The Projections have been prepared with the assumption that the
Effective Date is June 30, 2006, and are based on, and assume the successful
implementation of, Reorganized Solutia's business plan. Although Solutia
presently intends to cause the Effective Date to occur as soon as practical
following confirmation of the Plan, there can be no assurance as to when the
Effective Date will actually occur given the conditions required for the
Effective Date to occur pursuant to the terms of the Plan. In accordance
with fresh start reporting, the Projections reflect the assets and
liabilities of Reorganized Solutia as of the Effective Date, in accordance
with generally accepted accounting principles and are based upon their
estimated fair market values.
The Projections are based on, among other things: (a) current and
projected market conditions in each of Reorganized Solutia's respective
markets; (b) the ability to maintain sufficient working capital to fund
operations; (c) final approval of the Exit Financing Facility; and (d)
confirmation of the Plan.
The Projections include consolidated results for Reorganized
Solutia's domestic and international operations (Debtor and Non-Debtor
entities).
PROJECTED CONSOLIDATED INCOME STATEMENT ASSUMPTIONS
- ---------------------------------------------------
Operating Revenues
- ------------------
INTEGRATED NYLON REVENUE: Solutia delivered total Nylon revenue of $1,642
million in 2005, and anticipates a modest increase in revenue in 2006. Over
the Projection Period, Solutia expects revenues to peak in 2007, and decline
in the outer years to approximately $1,350 million in 2010. This decline is
due to restructuring and resulting volume reduction within its Nylon
Intermediates product line during 2007 as well as declining raw material and
energy cost assumptions. The Projections assume that a portion of the
revenue generated by Nylon is formula driven, based on key raw material and
energy costs, and as further described below, Solutia anticipates a
declining raw material and energy profile for this segment from 2006 through
2010, which will decrease the revenue of Nylon. Volumes, with the exception
of the Intermediates restructuring will be essentially flat throughout the
Projection Period with improvement in product mix assumed, most notably in
its Nylon polymers product line.
LAMINATED GLAZINGS INTERLAYERS (LGI) REVENUE: Solutia delivered total LGI
revenue of $625 million in 2005, and anticipates modest revenue growth in
2006. Over the Projection Period, Solutia expects revenues to increase at
rates above U.S. GDP due to increasing volumes and pricing improvements
during the early years of the Projection Period. Modest growth from 2005 to
2006 is due to continued strengthening of demand for interlayer products as
overall growth rates in this industry continue to be above 5% and is
partially offset by a decline in the assumed Euro versus the dollar exchange
rate in 2006. In the outer years of the Projection Period, revenue increases
due to increasing volumes, which results in revenue of over $700 million by
the end of the Projection Period. The volume growth assumption is based on
recent growth rates in the industry. During the last four years ending in
2005, the compound average growth rate for the polyvinyl butyral ("PVB")
industry was greater than 6%. Solutia believes this growth rate will
continue throughout the Projection Period, and has premised volume growth
in-line with the assumed industry growth rate. This volume growth is
supported by the strategic investments recently announced by Solutia,
including the building of a new extrusion manufacturing facility in China
and the acquisition of the joint venture partner's interest in the Quimica M
joint venture, which contains the Puebla, Mexico extrusion manufacturing
facility.
CPFILMS REVENUE: Solutia delivered total CPFilms revenue of $200 million in
2005, and anticipates an approximate 5% increase in revenue in 2006. Over
the Projection Period, Solutia expects revenues to continue to increase at a
rate of approximately 3-5% per annum due to increasing volumes and pricing
initiatives. The volume increase in all years of the Projections is a result
of the continuing increase in the demand for these products, in particular
within international markets. This volume growth assumption is based on
growth rates experienced within the window film industry, which has
experienced an approximate 4% increase per year in each of the last seven
years. Solutia expects this business to generate revenue in excess of $270
million by 2010.
SPECIALTY PRODUCTS AND SERVICES REVENUE: The other businesses of Solutia
delivered total revenue of $358 million in 2005, and Solutia projects
minimal change in the collective revenue for these businesses for the period
of 2006 through 2010.
Cost of Goods Sold (COGS)
- -------------------------
RAW MATERIAL AND ENERGY COSTS: Solutia's operations are considerably
impacted by raw material and energy costs, as they comprise approximately
55% of COGS. The vast majority of the cost of raw materials utilized are
derived from oil, including propylene, benzene, cyclohexane, and polyvinyl
alcohol. In addition, the operations, in particular the Nylon manufacturing
chain, utilizes significant quantities of natural gas as its primary energy
source. These costs experienced significant increases in 2005 due to
strengthening global demand for oil and oil derivatives, as well as the
negative impact of the U.S. hurricane season on supply. These costs remain
highly volatile. Recent volatility in oil prices has made efforts to
forecast long-term oil costs challenging. For the Projection Period, Solutia
has utilized external industry sources such as CMAI and ChemData to develop
the projected raw material cost inputs. In general, Solutia has premised the
price of crude oil to decline from an average of approximately $56 per
barrel in 2005 to $40 per barrel by 2010. This declining trend is premised
on additional expected supply entering the markets in the coming years,
which will exceed the global demand and cause softening in pricing. As the
trend in oil declines, the industry is forecasting relatively corresponding
decreases in the derivative raw materials. By 2010, raw material and energy
costs are assumed to be approximately $200 million lower than what Solutia
experienced in 2005. By contrast, in the period of 2002 through 2005, raw
material and energy costs for Solutia increased by approximately $600
million.
OTHER COST OF GOODS SOLD: Other Cost of Goods Sold includes conversion and
fixed costs associated with manufacturing facilities. The significant costs
in this category include payroll and related benefit expenses, repair and
maintenance, and depreciation. Solutia has assumed other cost of goods sold
to be flat in 2006 and 2007 as the inflationary impacts, assumed at 2-3%,
are offset by ongoing cost reduction initiatives. In 2008 and beyond, these
costs are reduced significantly due to restructuring within Nylon, with some
offsetting increasing costs due to capacity expansions premised within the
LGI and CPFilms businesses.
The Projections include depreciation on a straight-line basis over the
estimated remaining useful life of the fixed assets. The estimated remaining
useful life varies between less than one year and over twenty-five years
depending on the specific fixed asset. No amortization expense is recognized
in the Projections with respect to intangible assets with an indefinite
life. The depreciation and amortization expenses included within the
Projected Consolidated Income Statement are based upon the historical cost
basis of the assets. As indicated within the Projected Consolidated Balance
Sheet Assumptions, the fair value adjustment for property, plant and
equipment due to fresh start reporting has not been incorporated into these
Projections.
Included within Other Cost of Goods Sold is $10 million of net one-time
charges across the Projection Period related to restructuring actions
involving certain contract terminations and closure of certain manufacturing
locations. The gross charges assumed aggregate to $32 million, incurred as
$17 million in 2006, $8 million in 2007 and $7 million in 2008. Offsetting
these gross charges within Other Cost of Goods Sold is a $22 million gain
related to a termination of a purchase contract by one of Solutia's
customers. This gain is realized in 2007.
In addition, the 2005 Cost of Goods Sold includes several non-recurring
items relating to Hurricanes Dennis, Katrina and Rita, which impacted the
Southeastern United States in the second and third quarters. 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. In addition, reduced
availability of key raw material and energy sources affected the ability of
certain plants to operate at normal production rates.
As a result, Solutia 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 Nylon segment as a result of the
aforementioned raw material and utility supply limitations, some of which
were a result of force majeure declarations by certain of Solutia's
suppliers, resulting in additional lost sales volumes. The declaration of
force majeure was lifted in late November 2005. In total, the amount of
these aforementioned hurricane related costs was approximately $61 million
in 2005, of which $25 million related to increased raw material and energy
costs, after consideration of recoveries from selling price increases.
Also in 2005, Solutia purchased PVB sheet from a manufacturing facility that
is owned by the Quimica joint venture in which Solutia owns a minority
interest. The Projections assume the purchase by Solutia of the shares of
the majority partner in this joint venture in the first quarter of 2006,
which will reduce Costs of Goods Sold by approximately $7 million in 2006 as
compared to 2005 results.
Marketing, Administrative and Technological Expenses
- ----------------------------------------------------
Over the Projection Period, Marketing, Administrative and Technological
expenses increase at a rate which is slightly above the projected revenue
growth rate. The increase is primarily in the selling and marketing
functions, and is in line with the strategic focus on product mix
improvement and further market penetration in certain world areas within the
Nylon, LGI and CPFilms businesses. Specifically, this increase is due to the
continued investment in the branding programs for products within the LGI
product portfolio, such as SAFLEX(R) and VANCEVA(R), within the CPFilms
product offerings, such as LLUMAR(R), and certain brands in the Specialty
Products and Services category. In addition, Solutia continues to invest
in building the appropriate selling infrastructure in certain international
regions to facilitate expansion. Finally, activities relating to research
and development and intellectual property are premised to grow in-line with
revenue throughout the Projection Period.
Equity Earnings from Affiliates
- -------------------------------
The Projections include results from Flexsys, a 50/50 joint venture between
Solutia and Akzo Nobel N.V. The decline in equity earnings throughout
the Projection Period is based primarily on gradual price erosion in certain
of its product offerings due to anticipated supply expansion by competitors
within the rubber chemical industries. Volumes are expected to continue to
increase at rates consistent with the long term industry growth rates, which
are in the range of 1-3%.
Interest Expense
- ----------------
The Projections assume an increase in the first two years of the Projection
Period, due to an increased debt level assumed as of the Effective Date (as
further described in the Projected Consolidated Balance Sheet Assumptions).
In addition, the Projections assume an increase in LIBOR, which is the
principal pricing mechanism used in Reorganized Solutia's debt structure.
Interest expense declines in the later years of the Projection Period due to
the lower assumed debt levels. Included in the 2006 interest expense balance
is a one-time $3 million charge due to fees incurred as part of the
termination of one of the debt facilities, which is retired with proceeds
from the Exit Financing Facility.
Reorganization Items, net
- -------------------------
Reorganization related expenses included in the Projections represent
expenses incurred by Solutia prior to the Effective Date, as well as the
resulting gain realized due to the application of fresh start accounting (as
further described within the Projected Consolidated Balance Sheet
Assumptions below).
Income Tax Expense (Benefit)
- ----------------------------
Solutia assumes a U.S federal statutory tax rate of 35% throughout the
Projection Period. Solutia anticipates an approximate $800 million of
federal net operating loss carry-forwards ("NOLs") at December 31, 2006
available for use by Reorganized Solutia during the Projection Period. The
Projections assume utilization of these NOLs, subject to statutory
limitations, which reduces Reorganized Solutia's cash burden with respect to
the payment of domestic income taxes.
PROJECTED CONSOLIDATED BALANCE SHEET ASSUMPTIONS
- ------------------------------------------------
Working Capital
- ---------------
Working capital is comprised of cash, accounts receivable, inventories,
other current assets, accounts payable, short-term debt and other accrued
liabilities. Certain working capital balances such as cash and short-term
debt are impacted by the Plan, as highlighted on the Projected Consolidated
Fresh Start Balance Sheet, whereas certain balances such as inventories have
not been adjusted as the determination of fair value of inventories was not
readily available at the time of this filing. Further, it is assumed that
the cash generated during the Projection Period will be used to pay down
outstanding debt. Otherwise, working capital balances are generally
consistent with historical levels. The growth in accounts payable balances
over the Projection Period is due to a return to pre-bankruptcy credit term
levels.
Property, Plant and Equipment
- -----------------------------
The Projections do not include a fair value adjustment for property, plant
and equipment as part of the Projected Consolidated Fresh Start Balance
Sheet, as the determination of fair value of Solutia's property, plant and
equipment was not readily available at the time of this filing. The
Projections assume capital expenditures between approximately $70 million
and $105 million per year in order to support Reorganized Solutia's
operations. Key areas of investment include process control upgrades,
environmental compliance and revenue enhancement projects for the Nylon
business and primarily capacity expansions in the LGI and CPFilms
businesses. The most significant capacity expansion project is the building
of a new extrusion manufacturing facility near Shanghai, China, expected to
be operational in the second half of 2007.
Intangible Assets
- -----------------
The Projections do not include a fair value adjustment for intangible assets
as part of the Projected Consolidated Fresh Start Balance Sheet, as the
determination of fair value of Solutia's intangible assets was not readily
available at the time of this filing. Instead, the excess of reorganization
value over the carrying value of net assets of approximately $1.8 billion
was preliminarily allocated entirely to goodwill included within Other
Assets in the Projected Consolidated Fresh Start Balance Sheet. This is
further described below in the Projected Consolidated Fresh Start Balance
Sheet Assumptions section.
Legacy Liabilities
- ------------------
One of the objectives of Solutia's Chapter 11 Case was to obtain relief from
the Legacy Liabilities. The Projections assume $250 million of new
investment in Reorganized Solutia via the Rights Offering. These proceeds
would be used to pay retiree benefits to those who retired prior to the
Solutia Spinoff, certain environmental remediation obligations of Solutia
and other Legacy Liabilities. The $250 million is reflected within the short
and long term assets as of the Effective Date.
Solutia's liabilities for retiree healthcare, life and disability insurance
benefits related to both legacy and post-spin retirees and disabled
participants is reflected within the Liabilities Subject to Compromise in
the historical periods, and within Other Liabilities throughout the
Projection Period. The reduction in this account throughout the Projection
Period is due to cash outflows being greater than the expense amounts in
each year, a trend that is also present in the historical results. In 2005,
Solutia recorded a net reduction of its Legacy OPEB Liabilities of
approximately $31 million on cash outflows of approximately $58 million, and
expense provisions of $27 million.
The Projections assume that certain environmental remediation projects
related to sites that have never been owned or operated by Solutia, and to
which waste has not been sent by Solutia since the Solutia Spinoff, are not
included in Reorganized Solutia's Projected Consolidated Balance Sheet.
These liabilities aggregated to approximately $20 million as of December 31,
2005, and are eliminated during the fresh start accounting application, as
further described below.
The Projections assume that liabilities associated with Tort Claims and
certain Legacy Liability litigation are not included in Reorganized
Solutia's Projected Consolidated Balance Sheet, and are settled as outlined
in the Plan and Relationship Agreement. The Projections assume Reorganized
Solutia will continue to honor Solutia's annual installment and education
fund obligations relating to the August 2003 Anniston polychlorinated
biphenyls ("PCBs") settlement and the Anniston Partial Consent Decree, and
this liability is recorded on the Projected Consolidated Balance Sheet.
Capital Structure/Long Term Debt
- --------------------------------
The Projections assume that Solutia's capital structure will consist of (in
millions):
$ 400 Revolving Credit Facility - Secured
900 Term Loan - Secured
250 High Yield Bonds - Unsecured
20 Restructured Note for Headquarters Financing
------
$1,570 Total facility
Outstanding Letters of Credit are assumed to be approximately $95 million.
As of December 31, 2006, Reorganized Solutia's projected total debt
outstanding is $1,206 million. The Exit Financing Facility is expected to
contain affirmative, negative and financial covenants customary for such
financings.
Throughout the Projection Period, the long term debt balance decreases as
all cash generated from operations not utilized for investing activities is
assumed to be used to pay down the outstanding debt balance.
Debt Subject to Compromise
- --------------------------
Debt classified as subject to compromise prior to emergence consists of the
following instruments (in millions):
$ 150 6.72% debentures due 2037
300 7.375% debentures due 2027
223 11.25% notes due 2009
43 Headquarters Financing
-----
716
(48) Unamortized debt discount and debt issuance cost (primarily
----- related to the 11.25% notes)
$ 668
It is assumed the 2027 and 2037 series debentures will be terminated upon
emergence and its holders will receive an equity distribution pursuant to
the Plan. The 11.25% notes are assumed terminated upon emergence and its
Holders will receive cash upon emergence pursuant to the Plan. The
Headquarters Financing will be terminated and replaced with a $20 million,
15 year note, at an interest rate of 7.18%.
PROJECTED CONSOLIDATED CASH FLOW ASSUMPTIONS
- --------------------------------------------
Cash Flow From Operating Activities
- -----------------------------------
Cash flow from operating activities is projected to increase from a $36
million cash outflow in 2003 to $195 million cash inflow by 2010. Improved
cash flow is a result of, among other things, (i) improved earnings across
the Projection Period; (ii) funding from the Rights Offering for certain
postretirement payments related to pre-Solutia Spinoff retirees made during
the Projection Period (as further described above); (iii) funding from the
Rights Offering for certain environmental payments made during the
Projection Period (as further described above); and (iv) dividends assumed
to be received from equity affiliates during the Projection Period.
Offsetting these improvements is the assumed funding by Reorganized Solutia
for Solutia's U.S. pension plan of $465 million during the Projection
Period. The significant cash usage in 2006 is primarily related to the
funding of the domestic pension plan, for which Solutia projects a $300
million contribution in 2006, which includes $174 million of mandatory
contributions.
Cash Flow From Investing Activities
- -----------------------------------
Cash flow from investing activities is projected to use net cash totaling
approximately $450 million over the Projection Period. This reflects annual
capital expenditures ranging from $70 million to $105 million in order to
support the Company's operations and assumptions contained within these
Projections. Key areas for investment include process control upgrades,
environmental compliance and revenue enhancement projects for the Nylon
business and primarily capacity expansions in the LGI and CPFilms
businesses.
Cash Flow From Financing Activities
- -----------------------------------
Cash flow from financing activities is projected to use net cash totaling
approximately $390 million over the Projection Period, post the Effective
Date. This cash is principally used to partially repay the Exit Financing
Facility. The Debtors anticipate no cash proceeds during the Projection
Period from the issuance of indebtedness beyond the Exit Financing Facility.
PROJECTED CONSOLIDATED FRESH START BALANCE SHEET ASSUMPTIONS
- ------------------------------------------------------------
Background
- ----------
Fresh start reporting adjustments have been made to reflect the estimated
adjustments necessary to adopt fresh start reporting in accordance with
AICPA Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code ("SOP 90-7"). Fresh start reporting
requires an allocation of the reorganization value of Reorganized Solutia to
the entity's assets in conformity with FASB Statement No. 141, Business
Combinations. As stated above, the Projections do not reflect all of the
assets and liabilities of Reorganized Solutia as of the Effective Date at
their estimated fair market value as the determination of fair value for
certain of these assets and liabilities was not readily available at the
time of this filing. Fresh start reporting also requires that all
liabilities, other than deferred taxes, should be stated at present value of
the amounts to be paid using the appropriate market interest rates.
The balance sheet adjustments set forth in the Projected Consolidated Fresh
Start Balance Sheet in the columns captioned Debt Discharge &
Reclassifications, Exit Financing Facility Transactions, and Fresh Start
Adjustments reflect the assumed effect of Confirmation and the consummation
of the transactions contemplated by the Plan, including the settlement of
various liabilities and securities issuances, incurrence of new
indebtedness, and cash payments as more thoroughly described in the Plan.
Below highlights certain assumptions that were made in one or more of the
aforementioned columns.
Debt Discharge & Reclassifications
- ----------------------------------
In the Debt Discharge & Reclassifications column, certain of the items
included in Liabilities Subject to Compromise are restated and reclassified
to their appropriate balance sheet account, and other liabilities are
discharged at the time of emergence. Solutia expects Liabilities Subject to
Compromise to be approximately $2.1 billion immediately before emergence, of
which (a) $1.1 billion will be reclassified as post-retirement liabilities,
(b) $61 million reclassified as environmental liabilities; (c) $36 million
reclassified as litigation reserves; (d) $20 million reclassified as
long-term debt in settlement of the synthetic lease associated with
Solutia's headquarters building; (e) $45 million of miscellaneous items will
be reclassified between current and long-term liabilities; and (f) $310
million of liabilities will be settled in cash, with the 11.25% notes due
2009 comprising the single largest item and the remaining amount
representing primarily settlement of priority claims pursuant to the Plan.
The remaining net balance of approximately $575 million in Liabilities
Subject To Compromise will be discharged. As part of discharging certain
liabilities, a gain from the extinguishment of debt will be recorded on the
income statement as a non-cash item. This non-cash gain does not represent
new resources available to Reorganized Solutia for its use. In connection
with the establishment of the post-retirement liabilities upon emergence,
Solutia will be reducing the Other Post-Employment Benefit (OPEB) liability
by approximately $150 million due to the implementation of the agreement
reached with the Retiree Committee as further detailed in the Plan.
In addition, pursuant to the Plan, Solutia will receive $250 million of
proceeds from the Rights Offering. The proceeds of the Rights Offering are
intended to settle certain Legacy Liabilities as described in the Plan and
Disclosure Statement.
Fresh Start Adjustments
- -----------------------
The fresh start reporting anticipates that the reorganization value exceeds
the fair value of the Debtors' assets and liabilities. As previously noted,
the fair value of the Debtors' assets and liabilities has not been fully
ascertained at the time of this filing. However, the fair value of these
assets and liabilities will be determined prior to emergence and accordingly
a portion of the approximately $1.8 billion of reorganization value in
excess of fair value currently presented in Other Assets within the
Projected Consolidated Fresh Start Balance Sheet will be allocated as fair
value adjustments for certain assets including property, plant and
equipment, identifiable intangible assets, inventories and certain
liabilities.
The significant fresh start reporting adjustments reflected in the
Projections are summarized as follows:
Working Capital Balances
With the exception of inventories, the Debtors anticipate that current
assets and current liabilities are reflected at current market value. As a
result, no fresh start adjustment has been included in the Projections for
these assets and liabilities.
Other Long-Term Assets
A fresh start adjustment of approximately $1.8 billion was made to Other
Long-Term Assets to record reorganization value in excess of fair value of
assets. As noted above, the fair value of all assets and liabilities has not
been fully completed and therefore a portion of this amount will be
allocated as adjustments to fair value. The remaining value of
reorganization value in excess of fair value of assets will be subject to
annual impairment review under Statement of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assets.
Liabilities Subject to Compromise
The adjustments to Liabilities Subject to Compromise are outlined above
within the Debt Discharge & Reclassifications section.
Other Liabilities
The $133 million net fresh start adjustment was made to Other Liabilities to
record unrecognized prior service costs and unrecognized gains/losses
related to Solutia's postretirement plans, as well as to record certain
environmental liabilities at their estimated fair market value.
Total Shareholders' Equity (Deficit)
Fresh start reporting results in a new reporting entity with no retained
earnings or deficit. All pre-existing common stock is removed and replaced
by the new equity structure based on the Plan. The fresh start adjustments
include an initial shareholders' common equity value of $1 billion, based on
the estimated enterprise value of Reorganized Solutia.