Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS OVERVIEW
Nature of Operations
Solutia Europe S.A./N.V. ("SESA") is a wholly-owned subsidiary of
Solutia Inc. ("Solutia"). SESA and its subsidiaries make and sell a variety
of high-performance chemical-based materials including performance films for
laminated safety glass and after-market applications; process development
and scale-up services for pharmaceutical fine chemicals; and resale of high
performance polymers and fibers for Solutia's Integrated Nylon segment.
Solutia's Bankruptcy Proceedings
On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries
(the "Debtors") filed voluntary petitions for reorganization under Chapter
11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern
District of New York (the "Chapter 11 Cases"). 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 to
reduce costs, in order to allow Solutia to emerge from Chapter 11 as a
viable going concern, and to obtain relief from the negative financial
impact of liabilities for litigation, environmental remediation and certain
post-retirement benefits (the "Legacy Liabilities") and liabilities under
operating contracts, all of which were assumed at the time of the Solutia
Spinoff. These factors, combined with the weakened state of the chemical
manufacturing sector, general economic conditions and continuing high,
volatile energy and crude oil costs 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 court protection from creditors and
claimants. Since the Chapter 11 filing, all orders sufficient to enable
Solutia to conduct normal business activities, including the approval of
Solutia's DIP financing, have been entered by the bankruptcy court. While
Solutia is subject to Chapter 11, all transactions not in the ordinary
course of business require the prior approval of the bankruptcy court.
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a $525 million DIP credit facility. This DIP
facility consists of (i) a $50 million multiple draw term loan; (ii) a $300
million single draw term loan, which was drawn in full on the effective date
of the facility; and (iii) a $175 million borrowing-based revolving credit
facility, which includes a $150 million letter of credit subfacility. The
DIP credit facility was subsequently amended on March 1, 2004, July 20, 2004
and June 1, 2005. A fourth amendment was entered into on March 17, 2006,
with bankruptcy court approval. The fourth amendment, among other things,
(i) increased the DIP facility from $525 million to $825 million; (ii)
extended the term of the DIP facility from June 19, 2006 to March 31, 2007;
(iii) decreased the interest rate on the term loan component of the DIP
facility from LIBOR plus 425 basis points to LIBOR plus 350 basis points;
(iv) increased certain thresholds allowing the Debtors to retain more of the
proceeds from certain dispositions and other extraordinary receipts; (v)
approved the disposition of certain assets of the Debtors; (vi) allowed
refinancing of, and certain amendments to, Solutia Europe S.A./N.V.'s
outstanding euronotes; and (vii) amended certain financial and other
covenants. The fourth amendment also contains a number of other changes and
other modifications required to make the remaining terms of the DIP facility
consistent with the amendments set forth above.
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-filing
date claims against
the Debtors could file such claims. Any holder of a claim that was required
to file such claim by November 30, 2004, and did not do so may be barred
from asserting such claim against the Debtors and, accordingly, may not be
able to participate in any distribution on account of such claim.
Differences between claim amounts identified by the Debtors and claims filed
by claimants will be investigated and resolved in connection with the
Debtors' claims resolution process, and only holders of claims that are
ultimately allowed for purposes of the Chapter 11 case will be entitled to
distributions. Solutia has not yet completed its analysis of all the proofs
of claim. Since the settlement terms of allowed claims are subject to a
confirmed plan of reorganization, the ultimate distribution with respect to
allowed claims is not presently ascertainable.
On February 14, 2006, the Debtors filed with the Bankruptcy Court
their Joint Plan of Reorganization (the "Plan") and Disclosure Statement
(the "Disclosure Statement"). The Plan and Disclosure Statement along with
the Relationship Agreement (as defined below) and Retiree Settlement
Agreement, entered into among Solutia, the official committee of unsecured
creditors and official committee of retirees appointed in the Chapter 11
Cases, Monsanto, certain retirees and the other parties thereto (the
"Retiree Settlement"), set forth the terms of a global settlement (the
"Global Settlement") between Solutia, the Official Committee of Unsecured
Creditors in the Debtors' Chapter 11 Cases (the "Unsecured Creditors'
Committee"), Monsanto Company ("Monsanto") and Pharmacia. The Global
Settlement provides for, among other things, the reallocation of certain
Legacy Liabilities among Solutia, Monsanto and Pharmacia and the treatment
various constituencies in the Chapter 11 Cases will receive under the Plan.
The Disclosure Statement contains a description of the events that led up to
the Debtors' bankruptcy filings, the actions the Debtors' have taken to
improve their financial situation while in bankruptcy and a current
description of the Debtors' businesses. The reallocation of liabilities
between Solutia and Monsanto is set forth in a Relationship Agreement (the
"Relationship Agreement") to be entered into between Solutia and Monsanto
upon confirmation of the Plan. The Relationship Agreement was filed with the
Bankruptcy Court on February 14, 2006 as an exhibit to the Plan.
The Plan, which incorporates the Relationship Agreement and Retiree
Settlement, is subject to approval by the Bankruptcy Court and the approval
of other constituencies in accordance with the Bankruptcy Code as well as
various other conditions and contingencies, some of which are not within the
control of Solutia, and therefore are subject to change and are not binding
upon any party. The Disclosure Statement remains subject to change pending a
hearing in the Bankruptcy Court to consider the legal adequacy of the
Disclosure Statement. Once the Disclosure Statement is approved by the
Bankruptcy Court, it will be distributed to all constituencies entitled to
vote on the Plan. Solutia cannot provide any assurance that any plan of
reorganization ultimately confirmed by the Bankruptcy Court, or any
disclosure statement ultimately approved by the Bankruptcy Court, will be
consistent with the terms of the Plan and Disclosure Statement. A hearing to
approve the Disclosure Statement is expected to be held before the Honorable
Prudence Carter Beatty, United States Bankruptcy Judge, in Room 701 of the
Bankruptcy Court, Alexander Hamilton Custom House, One Bowling Green, New
York, New York, 10004-1408, on June 7, 2006 at 11:00 a.m. (prevailing Eastern
Time), or as soon thereafter as the Debtors may be heard.
If confirmed, the Plan will provide Solutia with significant relief
from the Legacy Liabilities it was required to assume in the Solutia
Spinoff. These Legacy Liabilities included: (1) retiree medical, retiree
life insurance and retiree disability benefits ("Retiree Welfare Benefits")
for those individuals who retired or became disabled prior to the Solutia
Spinoff ("Pre-Spin Retirees"); (2) environmental remediation costs related
to activities of the chemicals business of Pharmacia that occurred prior to
the Solutia Spinoff; and (3) toxic tort litigation costs relating to
chemical exposure associated with the activities of Pharmacia that occurred
prior to the Solutia Spinoff.
Under the Plan, Solutia would emerge from bankruptcy as an
independent publicly held company ("reorganized Solutia"). The Plan provides
for $250 million of new investment in a reorganized Solutia. This new
investment will be in the form of a rights offering to certain unsecured
creditors, who will be given the opportunity to purchase 22.7 percent of the
common stock in the reorganized company. Monsanto will backstop the rights
offering, meaning it will commit to purchase up to the entire $250
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million of stock, making up for any amount of the rights offering left
unsubscribed by the unsecured creditors.
Of this $250 million new investment, $175 million will be set aside
in a Voluntary Employees' Beneficiary Association ("VEBA") Retiree Trust to
fund the Retiree Welfare Benefits for those Pre-Spin Retirees who receive
these benefits from Solutia, and $50 million will be used to fund Solutia's
environmental remediation commitments in Anniston, Alabama and Sauget,
Illinois, as described below. The remaining $25 million will be available
for Solutia to pay any of the Legacy Liabilities that it is retaining.
Under the Plan and Relationship Agreement, as between Monsanto and
Solutia, Monsanto will be responsible for all current and future tort
litigation costs arising from Pharmacia's chemical business prior to the
Solutia Spinoff, including litigation arising from exposure to PCBs and
other chemicals. In addition, Monsanto will accept financial responsibility
for environmental remediation obligations at all sites for which Solutia was
required to assume responsibility as part of the Solutia Spinoff but which
were never owned or operated by Solutia. This includes more than 50 sites
with active remediation projects and approximately 200 additional known
sites and off-site disposal facilities, as well as sites that have not yet
been identified. Finally, Monsanto will share financial responsibility with
Solutia for off-site remediation costs in Anniston, Alabama and Sauget,
Illinois. Under this cost-sharing mechanism, the first $50 million will be
paid from the proceeds of the rights offering (as described above), Monsanto
would pay the next $50 million (less amounts it has paid for remediation at
these sites during the Chapter 11 Cases, which totaled over $30 million as
of January 31, 2006), Solutia would be responsible for the next $325 million
in costs, and any further costs would be shared equally between Solutia and
Monsanto. Under certain circumstances, Solutia would be able to defer paying
a portion of its shared responsibility with respect to the Anniston and
Sauget sites in excess of $30 million in any calendar year, up to $25
million in the aggregate. Any deferred amounts would be paid by Monsanto,
but subject to repayment by Solutia at a later date. The Plan and
Relationship Agreement provide 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.
The Plan incorporates the terms of the Retiree Settlement
Agreement, which was negotiated with the Official Retirees Committee, which
represents more than 23,000 former employees of Pharmacia and Solutia and
their dependents. Although the Retiree Settlement Agreement includes benefit
modifications, the Plan, through the $175 million from the rights offering
that will be set aside into the VEBA Trust, provides significant current
funding which will greatly improve Solutia's ability to meet these benefit
obligations going forward. Under the Retiree Settlement Agreement, retirees
will retain their company-provided medical benefits, although the cost to
retirees for such benefits will increase. Most retirees will retain their
company-provided life insurance benefits, although some will experience a
modification in the benefit provided. The settlement also maintains
Solutia's rights according to a separate 2001 settlement and a
post-settlement retiree medical plan, under which Solutia intends to make
certain changes effective January 1, 2007, including the elimination of
company-provided medical benefits for certain groups of retirees that also
are eligible for Medicare coverage.
In consideration of the benefit modifications being accepted by
retirees pursuant to the Retiree Settlement Agreement, the Plan contemplates
that the retirees will receive an unsecured claim for $35 million in
Solutia's bankruptcy case. The common stock in the reorganized Solutia
received on account of this claim would be deposited in the VEBA Trust and
used to pay Retiree Welfare Benefits. This would be in addition to the $175
million contributed to the VEBA Trust from the proceeds of the rights
offering. The VEBA Trust would be a bankruptcy-remote entity and would be
managed by an independent trustee.
The Plan 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 Plan 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
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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.
In order to exit Chapter 11 successfully, Solutia must propose and
obtain confirmation by the bankruptcy court of a plan of reorganization that
satisfies the requirements of the U.S. Bankruptcy Code. As provided by the
U.S. Bankruptcy Code, Solutia had the exclusive right to propose a plan of
reorganization for 120 days following the Chapter 11 filing date. The
bankruptcy court has subsequently approved several extensions of the
exclusivity period, the most recent of which was set to expire on April 10,
2006. However, the bankruptcy court entered an order on April 5, 2006
extending the exclusivity period until the later of April 25, 2006 and the
date on which the bankruptcy court rules on Solutia's current motion for an
extension of the exclusivity period, which was filed on March 31, 2006 and
which seeks to extend the exclusivity period through October 10, 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. Moreover, although Solutia has
filed the Plan which provides for Solutia's emergence from bankruptcy as a
going concern, there can be no assurance that the Plan, or any other plan of
reorganization, will be confirmed by the bankruptcy court or that any such
plan will be implemented successfully.
Basis of Presentation
The accompanying unaudited consolidated financial statements
include consolidated and consolidating balance sheets, consolidated and
consolidating statements of operations and consolidated and consolidating
statements of cash flows for SESA and its subsidiaries, each as of and for
the three and twelve months ended December 31, 2005 and 2004, respectively.
The information contained in the consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations is unaudited and is presented in a format prescribed by Section
9(m) of the amended and restated terms and conditions of SESA's (euro) 200
million, 6.25% Euro Notes ("Euronotes"). All significant intercompany
transactions and balances between SESA's subsidiaries have been eliminated
in consolidation. However, intercompany transactions and balances between
SESA's subsidiaries and Solutia's other subsidiaries outside of the
consolidated SESA entity have not been eliminated in consolidation. These
unaudited consolidated financial statements should be read in conjunction
with the audited financial statements and notes to consolidated financial
statements included in the Solutia 2005 Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on March 15, 2006.
The unaudited consolidated financial statements included in Exhibit
99.1 to this Form 8-K have been prepared in accordance with accounting
principles generally accepted in the United States of America and are
presented in U.S. dollars. In addition, the unaudited consolidated financial
statements reflect all adjustments that, in the opinion of management, are
necessary to present fairly the financial position, results of operations,
and cash flows for the interim periods reported. Such adjustments are of a
normal, recurring nature.
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RESULTS OF OPERATIONS-- FOURTH QUARTER 2005 COMPARED WITH FOURTH QUARTER 2004
Net Sales and Earnings Before Interest Expense and Income Taxes ("EBIT")
----------------------------------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
------------
(dollars in millions) 2005 2004
---- ----
Net Sales........................................... $124 $125
==== ====
EBIT................................................ $ 13 $(32)
==== ====
Charges included in EBIT........................ $ -- $(40)
==== ====
----------------------------------------------------------------------------
The $1 million, or 1 percent, decrease in net sales as compared to
the three months ended December 31, 2004 resulted primarily from unfavorable
currency fluctuations of approximately 6 percent, partially offset by higher
sales volumes of approximately 3 percent and higher average selling prices
of approximately 2 percent. The unfavorable currency impact on net sales was
primarily a result of the weakening euro in relation to the U.S. dollar in
comparison to the three months ended December 31, 2004. Higher sales volumes
were experienced primarily in SAFLEX(R) and VANCEVA(R) plastic interlayer
products and the resale of Therminol(R) heat transfer fluids, partially
offset by lower volumes in the resale of products for Solutia's Integrated
Nylon segment. Higher average selling prices were experienced primarily in
SAFLEX(R) and VANCEVA(R) plastic interlayer products and for the resale of
Therminol(R) heat transfer fluids.
The $45 million increase in EBIT in comparison to the three months
ended December 31, 2004 resulted primarily from lower charges and more
favorable currency revaluation for intercompany receivables with Solutia
Inc. EBIT in the fourth quarter 2004 included impairment charges of $40
million within the pharmaceutical services business including approximately
$12 million for the write down of fixed assets and approximately $28 million
for the write down of intangible assets.
RESULTS OF OPERATIONS-- YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR
ENDED DECEMBER 31, 2004
Net Sales and EBIT
---------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------
(dollars in millions) 2005 2004
---- ----
Net Sales........................................... $511 $465
==== ====
EBIT................................................ $ 60 $ (7)
==== ====
Charges included in EBIT........................ $ (1) $(54)
==== ====
---------------------------------------------------------------------------
The $46 million, or 10 percent, increase in net sales as compared
to the year ended December 31, 2004 resulted primarily from higher sales
volumes of approximately 6 percent, higher average selling prices of
approximately 3 percent and favorable currency exchange rate fluctuations of
approximately 1 percent. Higher sales volumes were experienced primarily in
SAFLEX(R) and VANCEVA(R) plastic interlayer products, pharmaceutical
services and Therminol(R) heat transfer fluids, partially offset by lower
volumes in Integrated Nylon products. Higher average selling prices were
experienced primarily in SAFLEX(R) and VANCEVA(R) plastic interlayer
products and
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in Integrated Nylon products. The favorable currency impact was primarily a
result of the strengthening euro in relation to the U.S. dollar in
comparison to the year ended December 31, 2004
The $67 million increase in EBIT in comparison to the year ended
December 31, 2004 resulted primarily from lower charges, higher net sales
and favorable manufacturing variances from cost containment and increased
capacity utilization, partially offset by higher raw materials and energy
costs and higher legal expenses. EBIT in 2005 included a charge of $1
million resulting from severance and retraining costs. In 2004, EBIT
included $54 million of net charges consisting of (i) impairment charges
within the pharmaceutical services business comprised of approximately $12
million for the write down of fixed assets and approximately $28 million for
the write down of intangible assets; (ii) a $15 million charge due to the
modification of SESA's Euronotes in January 2004; and (iii) a $1 million
gain from the favorable settlement of reserves established in 2003 related
to the closure of non-strategic facilities in the pharmaceutical services
business.
Interest Expense
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YEAR ENDED
DECEMBER 31,
------------
(dollars in millions) 2005 2004
---- ----
Interest Expense.................................. $ 23 $ 27
==== ====
-------------------------------------------------------------- ------------
Interest expense decreased by $4 million, or 15 percent,
principally from the elimination of interest expense on SESA's approximate
$150 million, 5% convertible note with Solutia that was converted from debt
to equity in May 2004.
FINANCIAL CONDITION AND LIQUIDITY
Financial Analysis
Total debt of $247 million as of December 31, 2005 decreased by
$39 million as compared to $286 million as of December 31, 2004. This
decrease was principally a result of the weakened Euro as of December 31,
2005 as compared to December 31, 2004, as well as the continued amortization
of the $15 million premium recorded in conjunction with the modification of
SESA's Euronotes. This premium resulting from the modification in January
2004 is being amortized over the remaining term of the Euronotes, which
mature in 2008.
SESA's working capital increased by $20 million to $98 million at
December 31, 2005, compared to $78 million at December 31, 2004. This
increase in the working capital position resulted primarily from increased
cash on-hand at December 31, 2005.
SESA had shareholders' equity of $171 million at December 31, 2005
compared to $168 million at December 31, 2004. This $3 million increase in
shareholders' equity resulted principally from the $26 million cumulative
net income recorded from December 31, 2004 to December 31, 2005, partially
offset by a $23 million decrease due to unfavorable currency exchange rate
fluctuations resulting from the weakening euro in relation to the US dollar.
At December 31, 2005 and 2004, SESA's liquidity was in the form of
cash in the amount of $41 million and $12 million, respectively.
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Contingencies
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, a European subsidiary of Ferro
Corporation ("Ferro"). Ferro's BBP business in Europe was purchased from
Solutia 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 Examiner issued a Statement of Objections regarding
its BBP investigation in which Solutia Europe S.A/N.V. ("Solutia Europe"), a
European non-Debtor subsidiary of Solutia, along with Ferro Belgium sprl and
two other producers of BBP, is identified as a party under investigation
with respect to its ownership of the BBP business from 1997 until the
business was sold to Ferro in 2000. Solutia Europe'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. The Examiner submitted
its Reasoned Report to the BCA on December 22, 2005. Solutia is not named as
a party under investigation in the Reasoned Report. Solutia Europe will have
an opportunity to submit comments to the BCA on the Reasoned Report in
writing and at a subsequent oral hearing on a date that has not yet been
determined by the BCA. Solutia and Solutia Europe are fully cooperating with
the BCA in this investigation.
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