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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 MARCH 31, 2006
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.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED
FILER, AN ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF
"ACCELERATED FILER AND LARGE ACCELERATED FILER" IN RULE 12b-2 OF THE
EXCHANGE ACT. (CHECK ONE):
LARGE ACCELERATED FILER [ ] ACCELERATED FILER [X]
NON-ACCELERATED FILER: [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).
[ ] YES [X] NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT
CLASS MARCH 31, 2006
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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)
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2006 2005
---- ----
NET SALES...................................................... $ 700 $ 733
Cost of goods sold............................................. 619 626
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GROSS PROFIT................................................... 81 107
Marketing expenses............................................. 34 33
Administrative expenses........................................ 23 24
Technological expenses......................................... 12 11
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OPERATING INCOME .............................................. 12 39
Equity earnings from affiliates................................ 10 14
Interest expense (a)........................................... (23) (22)
Other income, net ............................................. 3 2
Loss on debt modification ..................................... (8) --
Reorganization items, net ..................................... (14) (5)
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INCOME (LOSS) BEFORE INCOME TAX EXPENSE........................ (20) 28
Income tax expense............................................. 2 7
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NET INCOME (LOSS).............................................. $ (22) $ 21
====== ======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE.................... $(0.21) $ 0.20
====== ======
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING.......... 104.5 104.5
===== =====
<FN>
(a) Excludes unrecorded contractual interest expense of $8 in 2006 and 2005.
See accompanying Notes to Consolidated Financial Statements.
1
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2006 2005
---- ----
NET INCOME (LOSS).................................................... $ (22) $ 21
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments..................................... 2 (5)
Net unrealized loss on derivative instruments........................ (1) --
------ -----
COMPREHENSIVE INCOME (LOSS).......................................... $ (21) $ 16
====== =====
See accompanying Notes to Consolidated Financial Statements.
2
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, December 31,
2006 2005
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 342 $ 107
Trade receivables, net of allowances of $7 in 2006 and 2005............... 291 253
Miscellaneous receivables ................................................ 79 96
Inventories............................................................... 302 267
Prepaid expenses and other assets......................................... 35 35
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TOTAL CURRENT ASSETS...................................................... 1,049 758
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$2,575 in 2006 and $2,548 in 2005.................................... 809 804
INVESTMENTS IN AFFILIATES................................................. 200 205
GOODWILL.................................................................. 89 76
IDENTIFIED INTANGIBLE ASSETS, net ........................................ 39 35
OTHER ASSETS.............................................................. 108 106
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TOTAL ASSETS.............................................................. $ 2,294 $ 1,984
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 209 $ 222
Accrued liabilities ...................................................... 236 240
Short-term debt .......................................................... 650 300
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TOTAL CURRENT LIABILITIES ................................................ 1,095 762
LONG-TERM DEBT ........................................................... 251 247
OTHER LIABILITIES ........................................................ 269 253
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TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,615 1,262
LIABILITIES SUBJECT TO COMPROMISE ........................................ 2,154 2,176
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
Issued: 118,400,635 shares in 2006 and 2005............................ 1 1
Additional contributed capital......................................... 56 56
Treasury stock, at cost (13,941,057 shares in 2006 and 2005)........... (251) (251)
Net deficiency of assets at spin-off...................................... (113) (113)
Accumulated other comprehensive loss...................................... (92) (93)
Accumulated deficit....................................................... (1,076) (1,054)
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TOTAL SHAREHOLDERS' DEFICIT............................................... (1,475) (1,454)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $ 2,294 $ 1,984
======= =======
See accompanying Notes to Consolidated Financial Statements.
3
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2006 2005
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss)............................................................ $ (22) $ 21
Adjustments to reconcile to Cash From Operations:
Depreciation and amortization......................................... 29 30
Amortization of deferred credits...................................... (2) (2)
Deferred income taxes................................................. (1) 3
Equity earnings from affiliates, net.................................. (10) (14)
Restructuring expenses and other charges.............................. 18 --
Changes in assets and liabilities:
Income taxes payable............................................. 3 (17)
Trade receivables................................................ (38) (11)
Inventories...................................................... (29) (24)
Accounts payable................................................. (1) (5)
Liabilities subject to compromise................................ (22) (14)
Other assets and liabilities..................................... 10 (37)
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CASH USED IN OPERATIONS........................................................ (65) (70)
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INVESTING ACTIVITIES:
Property, plant and equipment purchases........................................ (25) (14)
Acquisition, net of cash acquired.............................................. (16) --
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CASH USED IN INVESTING ACTIVITIES.............................................. (41) (14)
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FINANCING ACTIVITIES:
Net change in short-term debt obligations...................................... 350 20
Net change in cash collateralized letters of credit............................ -- 15
Deferred debt issuance costs................................................... (9) --
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CASH PROVIDED BY FINANCING ACTIVITIES.......................................... 341 35
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 235 (49)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.............................................................. 107 115
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END OF PERIOD.................................................................. $ 342 $ 66
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for reorganization items......................................... $ (14) $ (12)
====== ======
See accompanying Notes to Consolidated Financial Statements.
4
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO 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; specialties such as water treatment chemicals, heat transfer
fluids and aviation hydraulic fluids; and an integrated family of nylon
products including high-performance polymers and fibers.
Prior to September 1, 1997, Solutia was a wholly-owned subsidiary
of the former Monsanto Company (now known as Pharmacia Corporation, a
wholly-owned subsidiary of Pfizer, Inc. ("Pharmacia")). On September 1,
1997, Pharmacia distributed all of the outstanding shares of common stock of
Solutia as a dividend to Pharmacia stockholders (the "Solutia Spinoff"). As
a result of the Solutia 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 Solutia
Spinoff.
Bankruptcy Proceedings
Overview
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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 (the "Chapter 11 Cases") in the U.S.
Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). 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, 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 DIP credit facility. This DIP facility
consists of (i) a $50 multiple draw term loan; (ii) a $300 single draw term
loan, which was drawn in full on the effective date of the facility; and
(iii) a $175 borrowing-based revolving credit facility, which includes a
$150 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 to $825; (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
5
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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
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 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 fully 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 the Retiree Settlement
Agreement, entered into among Solutia, the Official Committee of Unsecured
Creditors (the "Unsecured Creditors' Committee") and Official Committee of
Retirees appointed in the Debtors' Chapter 11 Cases (the "Retirees'
Committee"), 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 Unsecured Creditors' Committee,
the Retirees' 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.
Solutia also issued a press release on February 14, 2006 announcing
the filing of the Plan and Disclosure Statement with the Bankruptcy Court.
The press release was furnished to the Securities and Exchange Commission in
a Form 8-K filing on February 14, 2006. The Plan, including the Relationship
Agreement and Retiree Settlement Agreement, and the Disclosure Statement
were furnished as exhibits to a Form 8-K filed on February 21, 2006.
The Plan, which incorporates the Relationship Agreement and Retiree
Settlement, is subject to approval by the Bankruptcy Court 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, or as soon thereafter as the Debtors may be heard.
6
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
If confirmed, the Plan will provide Solutia with significant relief
from the Legacy Liabilities Solutia 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 of new investment in 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
reorganized Solutia. Monsanto will backstop the rights offering, meaning it
will commit to purchase up to the entire $250 of stock, to the extent the
stock is not purchased by eligible unsecured creditors in the rights
offering.
Of this $250 new investment, $175 would 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 would be used to fund reorganized Solutia's
environmental remediation commitments in Anniston, Alabama and Sauget,
Illinois, as described below. The remaining $25 would be available for
reorganized Solutia to pay any of the Legacy Liabilities that it is
retaining.
Under the Plan and Relationship Agreement, as between Monsanto and
Solutia, Monsanto would be responsible, with certain exceptions, for all
current and future tort litigation costs arising from the conduct of
Pharmacia's chemical business prior to the Solutia Spinoff, including
litigation arising from exposure to polychlorinated biphenyls ("PCBs") and
other chemicals. In addition, Monsanto would 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. These include 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 would share financial responsibility with
Solutia for off-site remediation costs in Anniston, Alabama and Sauget,
Illinois. Under this cost-sharing mechanism, the first $50 would be paid
from the proceeds of the rights offering (as described above), Monsanto
would pay the next $50 (less amounts it has paid for remediation at these
sites during the Chapter 11 Cases, which totaled over $30 as of January 31,
2006), Solutia would be responsible for the next $325 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 in any calendar year, up to $25 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 PCBs settlement and education fund
obligations relating to the Anniston Partial Consent Decree (as described in
Note 9).
The Plan incorporates the terms of the Retiree Settlement
Agreement, which was negotiated with the 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 from the rights offering that will
be allocated to 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
certain company-provided medical benefits, although the cost to retirees for
such benefits will increase. Many retirees will retain their
company-provided life insurance benefits, although some will experience a
reduction in the benefit provided. The Retiree Settlement Agreement 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 on or after the effective date of the Plan, including the
elimination of company-provided medical benefits for certain groups of
retirees that also are eligible for Medicare coverage.
7
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In consideration of the benefit modifications being accepted by
retirees pursuant to the Retiree Settlement Agreement, the Plan contemplates
that the retirees would receive an allowed unsecured claim in the aggregate
amount of $35 in Solutia's bankruptcy case. The common stock in reorganized
Solutia received on account of this claim would be deposited in the VEBA
Trust and used to pay Retiree Welfare Benefits. This deposit would be in
addition to the $175 that would be 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 also provides for the assumption and extension of certain
commercial and operating agreements between Solutia and Monsanto. The Plan
seeks a release for Monsanto and Pharmacia from certain pre-Solutia Spinoff
liabilities, including those related to Retiree Welfare Benefits.
In the Disclosure Statement, Solutia estimated that the amount of
allowed general unsecured claims in its Chapter 11 case will be
approximately $800 to $1,000, the enterprise value of reorganized Solutia
will be approximately $2,000 to $2,300 and the reorganization equity value
of reorganized Solutia will be approximately $700 to $1,100. However, these
amounts are estimates and it is possible that the actual general unsecured
claims pool, enterprise value and equity value of reorganized Solutia will
be outside of these estimated ranges.
The Plan contains details regarding how the claims of each class of
creditors and interest holders will be treated. The Plan provides for
repayment 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. In consideration for its
contributions under the Plan, resolution of its claim in the Chapter 11
Cases and the settlement of ongoing and potential litigation, among other
things, Monsanto would receive common stock in reorganized Solutia. If
Monsanto is required to make the full new money investment under the rights
offering, Monsanto's equity interest in reorganized Solutia is expected to
range from approximately 45 percent to 49 percent, depending on the actual
amount of allowed general unsecured claims. The holders of allowed general
unsecured claims would receive the remainder of the common stock in
reorganized Solutia, as described below.
Based on the mid-point of the equity value of reorganized Solutia
described above, the Plan provides for distributions of common stock in
reorganized Solutia to holders of allowed unsecured claims in an amount
estimated at between 48 percent and 56 percent of their allowed claims.
However, this is only an estimated range of recoveries. Solutia is unable to
predict precisely what recovery the Plan will provide to these holders of
unsecured claims or how any potential modifications to the Plan will impact
these recoveries. Therefore, actual recoveries may be materially different
from these estimates. Furthermore, the equity interests received by holders
of allowed unsecured claims will be subject to dilution as a result of the
incentive stock option plan that is expected to be adopted by Solutia
pursuant to the Plan. The ultimate ownership interests in 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.
The Plan does not provide for distributions to the holders of
Solutia's existing equity. Under the Plan, 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 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 distribution on the basis of several legal theories.
In order to exit Chapter 11, Solutia must propose and confirm a
plan of reorganization that satisfies the requirements of the U.S.
Bankruptcy Code. As provided by the U.S. Bankruptcy Code, Solutia had the
exclusive right to propose a plan of reorganization for 120 days following
the Chapter 11 filing date. The Bankruptcy Court has subsequently approved
several extensions of the exclusivity period, the most recent of which is
set to expire on October 10, 2006.
8
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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
- ---------------------
These financial statements should be read in conjunction with the
audited consolidated financial statements and notes to consolidated
financial statements included in Solutia's 2005 Annual Report on Form 10-K
("2005 Form 10-K"), filed with the Securities and Exchange Commission
("SEC") on March 15, 2006.
The consolidated financial statements have been prepared in
accordance with Statement of Position 90-7 ("SOP 90-7"), Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code, and on a going
concern basis, which assumes the continuity of operations and reflects the
realization of assets and satisfaction of liabilities in the ordinary course
of business. Continuation of the Company as a going concern is contingent
upon, among other things, Solutia's ability (i) to comply with the terms and
conditions of its DIP financing; (ii) to obtain confirmation of a plan of
reorganization under the U.S. Bankruptcy Code; (iii) to return to
profitability; (iv) to generate sufficient cash flow from operations; and
(v) to obtain financing sources to meet the Company's future obligations.
These matters create uncertainty about the Company's ability to continue as
a going concern. The consolidated financial statements do not reflect any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might
result from the outcome of these uncertainties. Additionally, a confirmed
plan of reorganization could materially change amounts reported in the
consolidated financial statements, which do not give effect to all
adjustments of the carrying value of assets and liabilities that are
necessary as a consequence of reorganization under Chapter 11.
The accompanying unaudited 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 consolidated financial statements. The results of
operations for the three month period ended March 31, 2006 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 2006 presentation.
Condensed Consolidating Financial Statements
- --------------------------------------------
Condensed consolidating financial statements for Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as of
March 31, 2006 and December 31, 2005, and for the three months ended March
31, 2006 and March 31, 2005 are presented below. These condensed
consolidating financial statements include investments in subsidiaries
carried under the equity method.
9
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006
Solutia and Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET SALES................................. $ 557 $ 250 $(107) $ 700
Cost of goods sold........................ 517 215 (113) 619
--------------------------------------------------------------
GROSS PROFIT.............................. 40 35 6 81
Marketing, administrative and
technological expenses................... 53 16 -- 69
--------------------------------------------------------------
OPERATING INCOME (LOSS)................... (13) 19 6 12
Equity earnings (loss) from affiliates.... 25 (1) (14) 10
Interest expense.......................... (18) (5) -- (23)
Other income, net......................... 8 1 (6) 3
Loss on debt modification................. (8) -- -- (8)
Reorganization items, net................. (14) -- -- (14)
--------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE .. (20) 14 (14) (20)
Income tax expense ....................... 2 1 (1) 2
--------------------------------------------------------------
NET INCOME (LOSS)......................... $ (22) $ 13 $ (13) $ (22)
==============================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005
Solutia and Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET SALES................................. $ 593 $ 243 $(103) $ 733
Cost of goods sold........................ 536 202 (112) 626
--------------------------------------------------------------
GROSS PROFIT.............................. 57 41 9 107
Marketing, administrative and
technological expenses................... 52 16 -- 68
--------------------------------------------------------------
OPERATING INCOME.......................... 5 25 9 39
Equity earnings (loss) from affiliates.... 32 (1) (17) 14
Interest expense.......................... (16) (6) -- (22)
Other income, net......................... 6 2 (6) 2
Reorganization items, net................. (5) -- -- (5)
--------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE ......... 22 20 (14) 28
Income tax expense ....................... 1 6 -- 7
--------------------------------------------------------------
NET INCOME................................ $ 21 $ 14 $ (14) $ 21
==============================================================
10
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2006
Solutia and Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
ASSETS
Current assets................................. $ 710 $ 428 $ (89) $ 1,049
Property, plant and equipment, net............. 665 144 -- 809
Investment in subsidiaries and affiliates...... 429 214 (443) 200
Goodwill and identified intangible assets, net 100 28 -- 128
Other assets................................... 62 46 -- 108
--------------------------------------------------------------
TOTAL ASSETS................................ $ 1,966 $ 860 $(532) $ 2,294
==============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities............................ $ 1,086 $ 184 $(175) $ 1,095
Long-term debt................................. -- 251 -- 251
Other liabilities.............................. 201 68 -- 269
--------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE.... 1,287 503 (175) 1,615
LIABILITIES SUBJECT TO COMPROMISE.............. 2,154 -- -- 2,154
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........... (1,475) 357 (357) (1,475)
--------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) .................................... $ 1,966 $ 860 $(532) $ 2,294
==============================================================
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2005
Solutia and Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
ASSETS
Current assets................................ $ 448 $ 383 $ (73) $ 758
Property, plant and equipment, net............ 674 130 -- 804
Investment in subsidiaries and affiliates..... 387 213 (395) 205
Goodwill and identified intangible assets, net 100 11 -- 111
Other assets.................................. 62 44 -- 106
--------------------------------------------------------------
TOTAL ASSETS............................... $ 1,671 $ 781 $(468) $ 1,984
==============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities........................... $ 749 $ 170 $(157) $ 762
Long-term debt................................ -- 247 -- 247
Other liabilities............................. 200 53 -- 253
--------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE... 949 470 (157) 1,262
LIABILITIES SUBJECT TO COMPROMISE............. 2,176 -- -- 2,176
TOTAL SHAREHOLDERS' EQUITY (DEFICIT).......... (1,454) 311 (311) (1,454)
--------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT).................................... $ 1,671 $ 781 $(468) $ 1,984
==============================================================
11
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2006
Solutia and Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities................................. $(84) $ 19 $-- $(65)
Net Cash Used in Investing Activities....... (39) (2) -- (41)
Net Cash Provided by Financing Activities... 338 3 -- 341
--------------------------------------------------------------
Net Increase in Cash and Cash Equivalents... 215 20 -- 235
Cash and Cash Equivalents:
Beginning of year......................... 18 89 -- 107
--------------------------------------------------------------
End of period............................. $233 $109 $-- $342
==============================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005
Solutia and Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities................................. $(75) $ 5 $-- $(70)
Net Cash Used in Investing Activities....... (11) (3) -- (14)
Net Cash Provided by (Used in) Financing
Activities................................. 43 (8) -- 35
--------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents... (43) (6) -- (49)
Cash and Cash Equivalents:
Beginning of year......................... 50 65 -- 115
--------------------------------------------------------------
End of period............................. $ 7 $ 59 $-- $ 66
==============================================================
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 Consolidated Statement of Financial Position as Liabilities
Subject to Compromise as of March 31, 2006 and December 31, 2005 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 March 31, 2006 and December 31,
2005, as applicable.
12
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The amounts subject to compromise consisted of the following items:
MARCH 31, DECEMBER 31,
2006 2005
---- ----
Postretirement benefits (a)............................... $1,078 $1,098
Litigation reserves (b)................................... 136 136
Accounts payable (c)...................................... 116 118
Environmental reserves (d)................................ 82 82
Other miscellaneous liabilities........................... 74 74
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................... $2,154 $2,176
====== ======
<FN>
(a) Postretirement benefits include Solutia's domestic (i) qualified pension
plan liabilities of $494 and $501 as of March 31, 2006 and December 31,
2005, respectively; (ii) non-qualified pension plan liabilities of $19
as of both March 31, 2006 and December 31, 2005; and (iii) other
postretirement benefits liabilities of $565 and $578 as of March 31,
2006 and December 31, 2005, respectively. Pursuant to a bankruptcy court
order, Solutia made payments with respect to other postretirement
obligations of approximately $21 in the three months ended March 31,
2006. Solutia also made a $9 contribution to its pension plan pursuant
to IRS funding requirements in the three months ended March 31, 2006.
(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 March 31, 2006 and December 31, 2005.
(c) Pursuant to bankruptcy court orders, Solutia settled certain accounts
payable liabilities subject to compromise in the first quarter 2006.
(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 9 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 three months ended March 31, 2006 was approximately $8.
(f) Pursuant to a bankruptcy court order, Solutia is required to continue
payments of the contractual interest on its 11.25% notes due 2009 as a
form of adequate protection under the U.S. Bankruptcy Code; provided,
however, that Solutia's official committee of unsecured creditors (the
"Creditors' Committee") has the right at any time, and Solutia has the
right at any time after the payment of the contractual interest due in
July 2005, to seek to terminate Solutia's obligation to continue making
the interest payments. Solutia or the Creditors' Committee could
successfully terminate all or part of Solutia's interest payment
obligations only after a showing that the noteholders are not entitled
to adequate protection, which would depend, among other things, on the
value of the collateral securing the notes as of December 17, 2003, and
whether that value is decreasing during the course of Solutia's
bankruptcy case. The amount of contractual interest paid with respect to
these notes was approximately $13 in the three months ended March 31,
2006, and the accrued interest related to these notes was included in
Accrued Liabilities classified as not subject to compromise as of March
31, 2006 and December 31, 2005.
(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.
13
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Reorganization Items, net
Reorganization items, net are presented separately in the
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
MARCH 31,
---------
2006 2005
---- ----
Professional fees (a)..................................... $ (12) $ (11)
Severance and employee retention costs (b)................ (2) (6)
Adjustments to allowed claim amounts (c).................. 2 (11)
Settlements of pre-petition claims (d).................... -- 29
Other .................................................... (2) (6)
------ ------
TOTAL REORGANIZATION ITEMS, NET........................... $ (14) $ (5)
====== ======
<FN>
(a) Professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization proceedings.
(b) 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.
(c) Adjustments to record certain pre-petition claims at estimated amounts
of the allowed claims.
(d) Represents the difference between the settlement amount of certain
pre-petition obligations and the corresponding amounts previously
recorded.
3. STOCK OPTION PLANS
Solutia has two stock-based incentive plans under which awards are
available for grants to officers and employees; the Solutia Inc. 2000
Stock-Based Incentive Plan ("2000 Plan") and the Solutia Inc. 1997
Stock-Based Incentive Plan ("1997 Plan"). The 2000 Plan authorizes up to
5,400,000 shares and the 1997 Plan up to 7,800,000 shares of Solutia common
stock for grants of non-qualified and incentive stock options, stock
appreciation rights, restricted stock awards and bonus stock awards. The
shares used may be newly issued shares, treasury shares or a combination.
Under both plans, the exercise price of a stock option must be no less than
the fair market value of Solutia's common stock on the option grant date.
Additionally, the plans provide that the term of any stock option granted
may not exceed 10 years. At March 31, 2006, approximately 2,084,060 shares
from the 2000 Plan and 1,769,484 shares from the 1997 Plan remained
available for grants.
During the first quarter of 2006, no options were granted to
current executive officers and other senior executives as a group, or to
other employees. Total shares covered by options granted under the plans to
current executive officers and other senior executives as a group totaled
3,011,000, and those to other employees totaled 10,016,592, through March
31, 2006. The options granted to Solutia's executive officers and other
senior executives are primarily performance options that become exercisable
upon the earlier of achievement of specified share price targets or the
ninth anniversary of the option grant. The options granted to the other
management employees are time-based. They generally become exercisable in
thirds, one-third on each of the first three anniversaries of the option
grant date.
The Solutia Inc. Non-Employee Director Compensation Plan provides
incentives to non-employee members of Solutia's board of directors. This
plan authorizes up to 400,000 shares for grants of non-qualified stock
options and for grants of deferred shares in payment of all or a portion of
the annual retainer for the non-employee directors.
14
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Only treasury shares may be used. Under this plan, the exercise price of a
stock option must be no less than the fair market value of Solutia's common
stock on the grant date and the term of any stock option granted under the
plan may not exceed 10 years. At March 31, 2006, 25,174 shares of Solutia's
common stock remained available for grants under the plan. There were no
options or deferred shares granted in the first quarter of 2006 as all
non-employee director compensation is now paid in cash.
As of January 1, 2006, Solutia adopted SFAS No. 123 (revised 2004),
Share-Based Payment ("SFAS No. 123(R)"), using the modified prospective
method, which requires measurement of compensation cost for all stock-based
awards at fair value on the date of grant and recognition of compensation
over the service period for awards expected to vest. The fair value of stock
options is determined using the Black-Scholes valuation model, which is
consistent with valuation techniques previously utilized for options in
footnote disclosures required under SFAS No. 123, Accounting for Stock Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. Such value is recognized as expense
over the service period, net of estimated forfeitures, using the
straight-line method under SFAS No. 123(R). The estimation of stock awards
that will ultimately vest requires judgment, and to the extent actual
results or updated estimates differ from our current estimates, such amounts
will be recorded as a cumulative adjustment in the period estimates are
revised. Additionally, 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.
There were no options granted or exercised during the three months
ended March 31, 2006. Accordingly, no compensation cost with respect to such
activities was recognized in the Statement of Consolidated Operations in the
three months ended March 31, 2006. However, to the extent that the remaining
service periods of unvested options granted prior to January 1, 2006 extend
past the adoption date of SFAS No. 123(R), the residual unamortized fair
value originally calculated for footnote disclosures required under SFAS No.
123, net of estimated forfeitures, is now recognized on a straight-line
basis over such remaining periods. Compensation cost and all related effects
within the Statement of Consolidated Operations and Statement of
Consolidated Cash Flows associated with these unvested options was less than
$1 during the three months ended March 31, 2006. Additionally, there was
less than $1 of total unrecognized compensation cost related to these
unvested options as of March 31, 2006 to be recognized over a
weighted-average recognition period of less than one year.
Prior to January 1, 2006, Solutia applied SFAS No. 123 as amended
by SFAS No. 148, which allowed Solutia to continue following the guidance of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, for measurement and recognition of stock-based
transactions with employees. Accordingly, no compensation cost was
recognized for Solutia's option plans in the Statement of Consolidated
Operations during such periods, as all options granted under the plans had
an exercise price equal to the market value of Solutia's stock on the date
of the grant. The effect would have been less than $1 on net income and no
change on income per share had the determination of compensation cost for
these plans been based on the fair value at the grant dates for awards under
these plans, consistent with SFAS No. 123, for the three months ended March
31, 2005.
15
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
A summary of Solutia's stock option plans for the three months
ended March 31, 2006 is as follows:
WEIGHTED-AVERAGE AGGREGATE
WEIGHTED-AVERAGE REMAINING INTRINSIC
OPTIONS EXERCISE PRICE CONTRACTUAL LIFE VALUE(a)
-----------------------------------------------------------------------
Outstanding at January 1, 2006....... 17,323,551 $15.80 -- --
Granted........................... -- 0.00 -- --
Exercised......................... -- 0.00 -- --
Expired........................... (947,076) 15.33 -- --
-----------------------------------------------------------------------
Outstanding at March 31, 2006........ 16,376,475 $15.82 1.7 $(253)
=======================================================================
Exercisable at March 31, 2006........ 16,051,168 $16.08 1.6 $(252)
<FN>
(a) Intrinsic value for stock options is calculated based on the
difference between the exercise price of the underlying awards and
the quoted market price of Solutia's common stock as of the
reporting date.
4. ACQUISITION
On March 1, 2006, pursuant to a stock purchase agreement among
Solutia, Vitro S.A. de C.V. ("Vitro") and Vitro Plan S.A. de C.V. ("Vitro
Plan"), a wholly-owned subsidiary of Vitro, Solutia acquired Vitro Plan's 51
percent stake in Quimica M, S.A. de C.V. ("Quimica") (originally formed in
1996 as a joint venture between Vitro, Vitro Plan, and Monsanto) for
approximately $20 in cash. As a result of this acquisition, Solutia became
the sole owner of Quimica and its plastic interlayer plant located in
Puebla, Mexico. Pursuant to the purchase agreement, Solutia also entered
into supply agreements with Vitro Flex S.A. de C.V. and Vitro Automotriz
S.A. de C.V. to provide their requirements for most SAFLEX(R) plastic
interlayer products for up to five years. This acquisition reflects
Solutia's commitment to meet the growing global demand for its SAFLEX(R) and
VANCEVA(R) plastic interlayer products.
The allocation of purchase price to the assets and liabilities
acquired or assumed resulted in Solutia's acquisition or assumption of total
current assets of $18, non-current assets of $32, goodwill of $5,
amortizable contract-based intangible assets of $4, current liabilities of
$11 and non-current liabilities of $7. The contract-based intangible assets
are being amortized over their estimated useful lives of 5 years. Results of
operations for Quimica were included in Solutia's results of operations from
the acquisition date in the Performance Products and Services segment. The
results of operations for the acquired business were not material to
Solutia's consolidated results of operations.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill of $89 and $76 at March 31, 2006 and December 31, 2005,
respectively, was allocated to the Performance Products and Services
segment. This $13 increase in goodwill as of March 31, 2006 was a result of
the Quimica acquisition (as further described in Note 4), of which $5
resulted from the first quarter 2006 acquisition and $8 resulted from the
original acquisition in 1996 that was previously accounted for under the
equity method of accounting.
16
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO 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:
MARCH 31, 2006 DECEMBER 31, 2005
------------------------------------- -----------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
------------------------------------- -----------------------------------
Amortizable intangible assets (a)......... $ 32 $ (20) $ 12 $ 28 $(20) $ 8
Trademarks................................ 27 -- 27 27 -- 27
------------------------------------ ------------------------------------
TOTAL IDENTIFIED INTANGIBLE ASSETS........ $ 59 $ (20) $ 39 $ 55 $(20) $ 35
==================================== ====================================
<FN>
(a) The $4 increase in Gross Carrying Value as of March 31, 2006 as
compared to December 31, 2005 was a result of the Quimica
acquisition (as further described in Note 4). Further, there were no
write downs or disposals of Amortizable Intangible Assets in the
three months ended March 31, 2006.
There have been no changes to amortizable lives or methods during
the three months ended March 31, 2006. In addition, amortization expense for
the net carrying amount of finite-lived intangible assets is estimated to be
$2 annually from 2006 through 2010.
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
INVENTORIES MARCH 31, DECEMBER 31,
2006 2005
---- ----
Finished goods............................... $ 225 $ 238
Goods in process............................. 175 140
Raw materials and supplies................... 107 95
----- -----
Inventories, at FIFO cost.................... 507 473
Excess of FIFO over LIFO cost................ (205) (206)
----- -----
TOTAL INVENTORIES............................ $ 302 $ 267
===== =====
Inventories at FIFO approximate current cost.
ACCRUED LIABILITIES MARCH 31, DECEMBER 31,
2006 2005
---- ----
Wages and benefits........................... $ 37 $ 58
Accrued rebates and sales returns/allowances. 21 22
Accrued interest............................. 12 23
Other........................................ 166 137
----- -----
TOTAL ACCRUED LIABILITIES.................... $ 236 $ 240
===== =====
17
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
7. INVESTMENT IN AFFILIATE
At March 31, 2006, Solutia participated in one principal joint
venture, Flexsys Group, comprised of interests in Flexsys Holding B.V.,
Flexsys America L.P. and Flexsys Rubber Chemicals Ltd. (collectively
"Flexsys"), for which Solutia applies the equity method of accounting.
Summarized financial information for 100 percent of the Flexsys joint
venture is as follows:
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2006 2005
---- ----
Net sales..................................... $155 $160
Gross profit ................................. 46 52
Operating income ............................. 28 31
Net income ................................... 19 24
8. RESTRUCTURING RESERVES
Solutia recorded approximately $2 of decommissioning and
dismantling costs in the three months ended March 31, 2006 as a result of
the shut-down of its acrylic fibers business in 2005, and $1 of asset
write-downs. These costs were all recorded within Reorganization Items, net
in the Integrated Nylon segment. In addition, Solutia recorded $2 of
severance and retraining costs in the first quarter 2006 in Reorganization
Items, net, involving headcount reductions recorded throughout the
organization.
A summary of restructuring activity during the three months ended
March 31, 2006 is as follows:
DECOMMISSIONING/ EMPLOYMENT ASSET WRITE-
DISMANTLING REDUCTIONS DOWNS TOTAL
----------------------------------------------------------------
Balance at December 31, 2005 $ 2 $ 2 $-- $ 4
Charges taken 2 2 1 5
Amounts utilized (2) (3) (1) (6)
----------------------------------------------------------------
BALANCE AT MARCH 31, 2006 $ 2 $ 1 $-- $ 3
================================================================
9. COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
Because of the size and nature of its business, Solutia is a party
to numerous legal proceedings. Most of these proceedings have arisen in the
ordinary course of business and involve claims for money damages. In
addition, at the time of its spinoff from Pharmacia, Solutia assumed the
defense of specified legal proceedings and agreed to indemnify Pharmacia for
obligations arising in connection with those proceedings. Solutia has
determined that these defense and indemnification obligations to Pharmacia
are pre-petition obligations under the U.S. Bankruptcy Code that Solutia is
prohibited from performing, except pursuant to a confirmed plan of
reorganization. As a result, Solutia has ceased performance of these
obligations. Solutia's cessation of performance may give rise to a
pre-petition unsecured claim against Solutia which Pharmacia may assert in
Solutia's Chapter 11 bankruptcy case. This estimated unsecured claim amount
was classified as a liability subject to compromise as of March 31, 2006 and
December 31, 2005 in the amount of $136.
18
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO 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; (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
- ----------------------------------------------
JPMORGAN ADVERSARY PROCEEDING
On May 27, 2005, JPMorgan, as indenture trustee for Solutia's
debentures due 2027 and 2037 (the "Prepetition Indenture"), filed an
adversary proceeding (the "JPM Proceeding") against Solutia in Solutia's
bankruptcy case. In its adversary proceeding, JPMorgan asserted five causes
of action seeking declaratory judgments to establish the validity and
priority of the purported security interest of the holders of the 2027 and
2037 debentures, and one cause of action pursuant to section 363 of the
Bankruptcy Code asserting that the alleged security interests lacked
adequate protection. The JPM Proceeding relates to Solutia's 2002 and 2003
refinancings of its credit facilities. When Solutia refinanced its credit
facilities in 2002, the 2027 and 2037 debentures obtained a pro rata secured
interest in substantially all of Solutia's assets as a result of the
application of the "equal and ratable" provisions of the Prepetition
Indenture. On October 8, 2003, Solutia restructured its credit facilities,
reduced its outstanding secured indebtedness below the threshold level that
initially triggered the "equal and ratable" provisions of the Prepetition
Indenture and, as a result, the 2027 and 2037 debentures returned to their
original unsecured status. JPMorgan alleges that the October 8, 2003
refinancing had no effect on the security interests and liens that were
created in 2002, and argues further that, even if it did, those liens should
be reinstated as a matter of equity. Solutia filed its response to JPMorgan's
complaint on July 5, 2005, denying JPMorgan's allegations based on
the express terms of the Prepetition Indenture. Both Solutia and JPMorgan
filed summary judgment motions with the Bankruptcy Court on April 14, 2006.
The Bankruptcy Court has scheduled a trial of the JPM Proceeding to commence
on May 23, 2006.
EQUITY COMMITTEE ADVERSARY PROCEEDING AGAINST MONSANTO AND PHARMACIA
On March 7, 2005, the Official Committee of Equity Security Holders
("Equity Committee") in Solutia's bankruptcy case filed a complaint against
Pharmacia and Monsanto and objections to the proofs of claim filed by
Pharmacia and Monsanto in Solutia's bankruptcy case (the "Equity Committee
Complaint"). In the Equity Committee Complaint, the Equity Committee seeks
to avoid certain obligations assumed by Solutia at the time of its spinoff
from Pharmacia. The Equity Committee Complaint alleges that the Solutia
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. Pharmacia
and Monsanto filed a motion to dismiss the Equity Committee Complaint for,
among other things, lack of standing or, in the alternative, to stay the
adversary proceeding. On August 4, 2005, the Debtors filed with the
Bankruptcy Court their Statement and Reservation of Rights in Response to
Equity Committee's Complaint and Objection to Claims, in which the Debtors
expressed their view that the issues and disputes raised in the Equity
Committee Complaint would be resolved through the Plan confirmation process.
During a hearing held on April 11, 2006 the Bankruptcy Court issued a bench
ruling denying Pharmacia and Monsanto's motion to dismiss the Equity
Committee Complaint.
19
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
LEGAL PROCEEDINGS OUTSIDE SOLUTIA'S BANKRUPTCY CASE
- ---------------------------------------------------
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, Alabama PCB site, and to pay EPA's past response costs and future
oversight costs related to this work. The decree also provided for the
creation of an educational trust fund of approximately $3 to be funded over
a 12-year period to provide supplemental educational services for school
children in west Anniston.
A subsequent dispute arose between the EPA and Solutia regarding
the scope and application of the automatic stay arising as a result of
Solutia's Chapter 11 filing to the remaining obligations under the Partial
Consent Decree. On April 19, 2004, the District Court held that the Partial
Consent Decree enforces police and regulatory powers under the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and, as a
result, the automatic stay provisions of the U.S. Bankruptcy Code are
inapplicable to Solutia's obligations under the Partial Consent Decree. On
April 30, 2004, the United States Bankruptcy Court for the Southern District
of New York entered a Stipulation and Agreed Order in which the EPA and
Solutia stipulate that the automatic stay is applicable to certain of the
Partial Consent Decree's requirements. Solutia filed a motion asking the
District Court to reconsider its order and to bring it into accord with the
Stipulation and Agreed Order consented to by the EPA and entered by the
Bankruptcy Court. On September 9, 2004, the District Court denied Solutia's
motion and declared that the automatic stay is inapplicable to Solutia's
obligations under the Consent Decree to perform site work. Solutia appealed
this ruling to the Eleventh U.S. Circuit Court of Appeals, which dismissed
the appeal for lack of jurisdiction.
On June 30, 2005, the United States District Court for the Northern
District of Alabama issued an order (the "PCB Order") authorizing
co-defendants Pharmacia and Solutia to "suspend" performance of the PCB
clean-up at the Anniston site under the Anniston Consent Decree, upon the
filing of a motion by either defendant requesting that relief. The PCB Order
found that the defendants entered into the Anniston Consent Decree, and that
the court approved that Anniston Consent Decree, based on the understanding
that the defendants' rights to pursue other liable parties for contribution
would not be impaired by the EPA. The PCB Order further found that the EPA's
planned settlements with certain Anniston foundries would thus deprive the
defendants of one of the material considerations for entering into the
Anniston Consent Decree. Solutia and Pharmacia continue their attempts to
negotiate a global settlement with the EPA and the Anniston site potentially
responsible parties. To date, Solutia and Monsanto (acting as
attorney-in-fact for Pharmacia) have not made a motion to the District Court
to suspend their obligations under the Anniston Consent Decree.
FLEXSYS RELATED LITIGATION
Antitrust authorities in the United States, Europe and Canada are
continuing to investigate past commercial practices in the rubber chemicals
industry. Flexsys, Solutia's joint venture with Akzo Nobel N.V. ("Akzo"),
remains a subject of such investigation and continues to fully cooperate
with the authorities in the ongoing investigation. In addition, a number of
purported civil class actions on behalf of consumers have been filed against
Flexsys and other producers of rubber chemicals.
State court actions against Flexsys. Solutia is presently aware of
nine purported class actions that remain pending in various state courts
against Flexsys and other producers of rubber chemicals seeking actual and
treble damages under state law. Seven of these cases purport to be on behalf
of all retail purchasers of tires in the respective states since as early as
1994 and two of the cases purport to be on behalf of all retail purchasers
of any
20
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
product containing rubber chemicals during the same period. Solutia is not
named as a defendant in any of these cases. All of these cases remain
pending in various procedural stages and no substantive discovery or other
actions have taken place.
Canadian actions against Flexsys. In May 2004, two purported class
actions were filed in the Province of Quebec, Canada, against Flexsys and
other rubber chemical producers alleging that collusive sales and marketing
activities of the defendants damaged all persons in Quebec during the period
July 1995 through September 2001. Plaintiffs seek statutory damages of (CAD)
$14.6 along with exemplary damages of (CAD) $0.000025 per person. In May
2005 a case was filed in Ontario, Canada against Flexsys and other rubber
chemical producers alleging the same claims as in the Quebec cases and
seeking damages of (CAD) $95 on behalf of all persons in Canada injured by
the alleged collusive activities of the defendants. In August 2005, a
similar case was filed in British Columbia seeking unspecified damages under
a variety of theories on behalf of all purchasers of rubber chemicals and
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 named defendant in any of these cases.
Federal court actions by indirect purchasers of rubber chemicals.
On January 14, 2006, Solutia became aware of a newly filed case, Pearman,
Benson and Immerman v. Crompton Corp., Flexsys, Solutia, et al., in the
United States District Court for the Eastern District of Tennessee at
Greenville, purportedly filed on behalf of consumers in 37 states of
products produced with rubber chemicals for the period 1994 through the
present under the Tennessee Trade Practices Act. Solutia was initially named
in the suit but was voluntarily dismissed without prejudice on February 3,
2006. On April 28, 2006, Solutia received notice that this case was
voluntarily dismissed, without prejudice, by the plaintiffs.
Federal court actions alleging violations of federal securities
laws. Between approximately July and September 2003, six purported
shareholder class actions were filed in the U.S. District Court for the
Northern District of California against Solutia, its then and former chief
executive officers and its then chief financial officer. The complaints were
consolidated into a single action called In Re Solutia Securities
Litigation, and a consolidated complaint, which named two additional
defendants, Solutia's then current and past controllers, was filed. The
consolidated complaint alleged that from December 16, 1998 to October 10,
2002, Solutia's accounting practice of incorporating Flexsys's results into
Solutia's financial reports violated federal securities laws by misleading
investors as to Solutia's actual results and causing inflated prices to be
paid by purchasers of Solutia's publicly traded securities during the
period. The plaintiffs sought damages and any equitable relief that the
court deemed proper. The consolidated action was automatically stayed with
respect to Solutia by virtue of Section 362(a) of the U.S. Bankruptcy Code.
In March 2005 the court issued a final order dismissing with prejudice the
complaint against the individual defendants, which became final when the
plaintiffs failed to file an appeal of the dismissal within the applicable
appeals period, and the case was dismissed without prejudice as against
Solutia pending resolution of the bankruptcy case.
Shareholder Derivative Suits. Two purported shareholder derivative
suits were filed in the Missouri Circuit Court for the Twenty-First Judicial
Circuit of St. Louis County against certain of Solutia's current and past
directors, chief executive officers, chief financial officer and former vice
chairman. Solutia is included as a nominal defendant. The plaintiffs seek
damages on behalf of Solutia for the individual defendants' alleged breaches
of fiduciary duty, abuse of control, gross mismanagement, waste of corporate
assets and unjust enrichment, arising out of Flexsys' alleged participation
in the price-fixing of rubber chemicals and Solutia's incorporation of
Flexsys's purportedly inflated financial results arising from the alleged
price-fixing into Solutia's financial statements. These two shareholder
derivative suits were consolidated into a single action, In re Solutia Inc.
Derivative Litigation. On December 29, 2003, the court entered an Order in
the consolidated action staying the litigation with respect to all
defendants, including Solutia. In August 2004, the court involuntarily
dismissed the case for lack of prosecution. In late 2004, plaintiffs' filed
a motion to reinstate the actions which motion remains pending with no
further action yet taken by plaintiffs.
21
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CASH BALANCE PLAN LITIGATION
Since October 2005, three cases have been filed by participants in
the Solutia Inc. Employees' Pension Plan alleging that the Pension Plan: (1)
violates the Employee Retirement Income Security Act of 1974 ("ERISA")
prohibitions on reducing rates of benefit accrual based on age; (2) results
in the impermissible forfeiture of accrued benefits under ERISA; (3)
violates ERISA's present value calculation rules for determining lump sum
distributions; and (4) violates the minimum accrual requirements of ERISA.
The cases were captioned Davis, et. al. v. Solutia, Inc. Employees' Pension
Plan (filed in the United States District Court for the Southern District of
Illinois, Case No. 3:05-CV-00736-DRH & PMF), Scharringhausen, et. al. v.
Solutia, Inc. Employees' Pension Plan, et al. (originally filed in the
United States District Court for the Eastern District of Missouri, Case No.
4:05-CV-02210-HEA and later voluntarily dismissed and refiled in the United
States District Court for the Southern District of Illinois, Case No.
3:06-CV-00099-DRH & PMF) and Juanita Hammond, et. al. v. Solutia, Inc.
Employees' Pension Plan (filed in the United States District Court for the
Southern District of Illinois, Case No. 3:06-000139-DRH & PMF). None of the
Debtors, and, except for the Solutia Inc. Employee Benefits Plans Committee
which was named in the Scharringhausen case, no individual or entity other
than the Pension Plan, has been named as a defendant in any of these cases.
The plaintiffs in each of these cases sought to obtain injunctive and other
equitable relief (including money damages awarded by the creation of a
common fund) on behalf of themselves and the nationwide putative class of
similarly situated current and former participants in the Pension Plan for
whose pension benefits the Pension Plan is responsible. The Pension Plan,
and in the case of the Scharringhausen case, the Employee Benefits Plans
Committee, has moved to dismiss all three actions for plaintiffs' failure to
exhaust administrative remedies and failure to join necessary and
indispensable parties.
The Scharringhausen plaintiffs have moved to intervene in the Davis
action and to consolidate the Davis, Scharringhausen and Hammond cases. The
Hammond plaintiff has moved to consolidate the three cases and the Pension
Plan has responded by agreeing that it should not be required to defend
itself against three cases. The Davis plaintiffs have intervened in the
Scharringhausen and Hammond cases and moved to stay or dismiss those
later-filed cases, rather than consolidating them with the Davis case. The
plaintiffs' counsel in the Davis, Scharringhausen and Hammond cases each
have sought appointment as interim lead class counsel. In response to these
motions, on April 24, 2006 the Scharringhausen plaintiffs voluntarily
dismissed their case. The Pension Plan intends to continue to vigorously
defend itself against any and all claims asserted in the Davis and Hammond
litigation.
22
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
OTHER LEGAL PROCEEDINGS
- -----------------------
Dickerson v. Feldman. On October 7, 2004, a purported class action
captioned Dickerson v. Feldman, et al. was filed in the United States
District Court for the Southern District of New York against a number of
defendants, including former officers and employees of Solutia and Solutia's
Employee Benefits Plans Committee and Pension and Savings Funds Committee.
Solutia was not named as a defendant. The action alleged breach of fiduciary
duty under ERISA and sought to recover alleged losses to the Solutia Inc.
Savings and Investment Plan ("SIP Plan") during the period from December 16,
1998 to the date the action was filed. The investment of SIP Plan assets in
Solutia's common stock is alleged to have been imprudent because of the
risks and liabilities related to Solutia's legacy environmental and
litigation liabilities and because of Flexsys's alleged involvement in the
matters described above under "Flexsys Related Litigation." The action
sought monetary payment to the SIP Plan to recover 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 sought to withdraw the reference of their 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
February 11, 2005, Solutia filed an objection to the motion to withdraw the
reference. On March 11, 2005, the District Court denied without prejudice
Dickerson's motion to withdraw the reference. The Dickerson plaintiffs
subsequently amended their initial complaint to add several current officers
and directors of Solutia as defendants. On July 5, 2005, the defendants
filed motions to dismiss Dickerson's amended complaint. In early September,
2005, Dickerson filed an amended proof of claim against Solutia increasing
Dickerson's claim from $269 to $290, based on his amended complaint.
Dickerson also filed a motion for class certification of his proof of claim.
On March 30, 2006, the District Court granted the defendants'
motion to dismiss on grounds that the Dickerson plaintiffs lacked standing
to sue and that the complaint failed to state a claim on which relief may be
granted. The dismissal of Dickerson's cause of action resulted in dismissal
of the entire purported class action, including claims asserted on behalf of
the unnamed purported class members. On April 3, 2006 Dickerson filed an
appeal of this dismissal with the United States Court of Appeals for the
Second Circuit.
Solutia Inc. v. FMC Corporation. On October 14, 2003, Solutia filed
an action captioned Solutia Inc. v. FMC Corporation ("FMC") in Circuit Court
in St. Louis County, Missouri, against FMC over the failure of purified
phosphoric acid technology provided by FMC to Astaris, the 50/50 joint
venture formed by Solutia and FMC, which was sold to Israeli Chemicals
Limited in 2005. On February 20, 2004, Solutia voluntarily dismissed the
state court action and filed an adversary proceeding against
23
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FMC in the Bankruptcy Court. FMC has filed with the Bankruptcy Court a
motion to withdraw the reference. The motion was granted, and, as a result,
the matter is now pending in the U.S. District Court for the Southern
District of New York. FMC has filed a motion to dismiss Solutia's action
based upon an alleged lack of standing. On October 15, 2004, the court heard
oral arguments on FMC's motion to dismiss. On March 29, 2005, the New York
District Court granted in part and denied in part FMC's motion to dismiss.
Specifically, the court dismissed with prejudice three of Solutia's causes
of action for breach of contract. The New York District Court denied FMC's
motion to dismiss Solutia's other causes of action for breach of warranty,
breach of fiduciary duty, negligent misrepresentation, fraud and fraud in
the inducement. In this action, FMC does not have a counterclaim against
Solutia or Astaris. The parties have completed all fact discovery and have
fully briefed and orally argued their motions for summary judgment and are
awaiting the court's ruling. The sale of substantially all of the assets of
Astaris to Israeli Chemicals Limited, as further described in Solutia's
Annual Report on Form 10-K for the year ended December 31, 2005, did not
affect the claims asserted by Solutia against FMC in this proceeding.
Solutia is vigorously pursuing this action.
Abbatiello v. Monsanto, Pharmacia and Solutia. On January 3, 2006,
Solutia received notice that an action, captioned Michael Abbatiello et al.
v. Monsanto Company, Pharmacia Corporation and Solutia Inc. (the "GE
Litigation"), was filed on December 26, 2005 in the Supreme Court of the
State of New York. The action was filed on behalf of 590 current General
Electric employees who work at its Schenectady, New York plant and states
eleven separate causes of action alleging that General Electric purchased
various PCB containing products from Pharmacia which were used in the
manufacture of a variety of products including electric motors, generators,
gas turbines, wire and cable, insulating materials and microwave tubes. PCBs
were later detected in various locations, including retention ponds, ground
water, and water treatment centers on the approximately 628 acre site. The
plaintiffs are seeking $1,000 in compensatory damages and $1,000 in punitive
damages for each cause of action for a total of $2,000. Solutia is
evaluating the merits of the GE Litigation and the potential liability,
including costs of defense, that might result. The GE Litigation is
automatically stayed as to Solutia pursuant to Section 362 of the U.S.
Bankruptcy Code.
Ferro Antitrust Investigation. 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.
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 $79 and $71 as of March 31, 2006 and December 31, 2005,
respectively, for solid and hazardous waste remediation, which represents
Solutia's best estimate of the underlying obligation. In addition, this
balance also includes post-
24
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
closure costs at certain of Solutia's operating locations. This liability is
not classified as subject to compromise in the Statement of Consolidated
Financial Position because, irrespective of the bankruptcy proceedings,
Solutia will be required to comply with environmental requirements in the
conduct of its business, regardless of when the underlying environmental
contamination occurred. However, Solutia ultimately expects to seek recovery
against other potentially responsible parties at certain of these locations.
Solutia had an accrued liability of $82 as of both March 31, 2006
and December 31, 2005 for properties not owned or operated by Solutia. This
liability is classified as subject to compromise in the Statement of
Consolidated Financial Position as of both March 31, 2006 and December 31,
2005, as Solutia currently believes it constitutes a pre-petition claim that
will be discharged in the bankruptcy process. Under the Plan and
Relationship Agreement, as between Monsanto and Solutia, Monsanto will
accept financial responsibility for environmental remediation obligations at
all sites for which Solutia was required to assume responsibility at 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. The EPA and/or Pharmacia are
currently contesting the enforceability of the automatic stay provisions
with respect to the Anniston, Alabama location (as more fully described in
the Anniston Partial Consent Decree disclosure above). Remediation
activities are currently being funded by Monsanto for certain of these
properties not owned or operated by Solutia. Monsanto's funding of these
remediation activities may give rise to a claim against Solutia which
Monsanto may assert in Solutia's Chapter 11 bankruptcy case. In addition,
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, method
and extent of remediation, existence of other potentially responsible
parties and future changes in technology. Solutia believes that the known
and unknown environmental matters, 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.
Impact of Chapter 11 Proceedings
- --------------------------------
During the reorganization process, substantially all pending
litigation against Solutia and its subsidiaries that filed for
reorganization under Chapter 11 ("Debtors") is stayed, as well as the
majority of all other pre-petition claims. Exceptions would generally
include pre-petition claims addressed by the bankruptcy court, as well as
fully secured claims. Such claims may be subject to future adjustments.
Adjustments may result from actions of the bankruptcy court, negotiations,
assumption or rejection of executory contracts, determination as to the
value of any collateral securing claims, proofs of claims or other events.
Additional pre-filing claims not currently reflected in the consolidated
financial statements may be identified through the proof of claim
reconciliation process. The amount of pre-filing claims ultimately allowed
by the bankruptcy court with respect to contingent claims may be materially
different from the amounts reflected in the 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 a plan of reorganization. The ultimate resolution of all of
these claims may be settled through negotiation as compared to court
proceedings, with the result being that Solutia may retain certain
obligations currently classified as subject to compromise in the Statement
of Consolidated Financial Position.
25
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
For the three months ended March 31, 2006 and 2005, Solutia's
pension and healthcare and other benefit costs were as follows:
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2006 2005 2006 2005
---- ---- ---- ----
Service costs for benefits earned............. $ 1 $ 2 $ 1 $ 1
Interest costs on benefit obligation.......... 16 18 8 9
Assumed return on plan assets................. (15) (17) -- --
Prior service costs .......................... -- -- (3) (3)
Recognized net loss........................... 2 3 1 4
---- ---- ---- ----
TOTAL......................................... $ 4 $ 6 $ 7 $ 11
==== ==== ==== ====
Employer Contributions
According to IRS funding rules, Solutia will be required to make
approximately $179 in pension contributions to its U.S. qualified pension
plan in 2006 assuming Congress extends the interest rate relief provision
currently proposed. If this relief is not granted, required contributions in
2006 would be approximately $195. Approximately $9 of these required 2006
contributions were made in the first quarter 2006. Solutia also expects to
be required to fund approximately $5 in pension contributions for its
foreign pension plans in 2006.
11. DEBT OBLIGATIONS
Solutia amended its DIP financing facility on March 17, 2006 with
bankruptcy court approval. This amendment, among other things, (i) increased
the DIP facility from $525 to $825; (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 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.
Solutia analyzed the modifications of the DIP facility in March
2006 in accordance with the provisions of Emerging Issues Task Force
("EITF") No. 02-04, Determining Whether a Debtor's Modification or Exchange
of Debt Instruments is within the Scope of FASB Statement No. 15, and EITF
No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt
Instruments, and recorded a charge of approximately $8 to record the
write-off of debt issuance costs and to record the DIP facility as modified
at its fair value. In addition, $1 of unamortized debt issuance costs
associated with the DIP facility were written off at the time of
modification in March 2006.
12. SEGMENT DATA
Solutia, together with its subsidiaries, is a global manufacturer
and marketer of a variety of high-performance chemical-based materials,
which are used in a broad range of consumer and industrial applications.
Solutia manages its business in two segments: Performance Products and
Services and Integrated Nylon. The Performance Products and Services segment
is a world leader in performance films for laminated safety glass and
after-market applications, and specialties such as water treatment
chemicals, heat transfer fluids and aviation
26
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
hydraulic fluid. The Integrated Nylon segment consists of an integrated
family of nylon products including high-performance polymers and fibers. The
major products and services by reportable segment are as follows:
PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON
--------------------------------- ----------------
SAFLEX(R) and VANCEVA(R) plastic interlayer Nylon intermediate "building block"
chemicals
Polyvinyl butyral for KEEPSAFE(R) and Nylon resins and polymers, including
KEEPSAFE MAXIMUM(R) laminated window VYDYNE(R) and ASCEND(R)
glass
LLUMAR(R), VISTA(R), GILA(R) and FORMULA Carpet fibers, including the WEAR-
ONE(R) professional and retail window films DATED(R) and ULTRON(R) brands
THERMINOL(R) heat transfer fluids Industrial nylon fibers
DEQUEST(R) water treatment chemicals
SKYDROL(R) aviation hydraulic fluids and
SKYKLEEN(R) brand of aviation solvents
ASTROTURF(R), CLEAN MACHINE(R) and
CLEARPASS(R) entrance matting and
automotive spray suppression flaps
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.
27
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Segment data for the three months ended March 31, 2006 and 2005 are
as follows:
2006 2005
----------------- -----------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products and Services... $308 $ 46 $287 $ 35
Integrated Nylon.................... 392 (14) 446 (1)
---- ---- ---- ----
SEGMENT TOTALS...................... 700 32 733 34
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses.............. (20) (11)
Equity earnings from affiliates. 9 13
Interest expense................ (23) (22)
Other income, net............... -- 1
Loss on debt modification....... (8) --
Reorganization items, net....... (10) 13
CONSOLIDATED TOTALS: ---- ----
NET SALES........................ $700 $733
==== ---- ==== ----
INCOME (LOSS) BEFORE INCOME TAXES $(20) $ 28
==== ====
12. CONDENSED CONSOLIDATING 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 the 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 condensed consolidating 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 March 31, 2006 and
December 31, 2005, and for the three months ended March 31, 2006 and 2005.
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.
28
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES $507 $49 $251 $(107) $700
Cost of goods sold 492 24 216 (113) 619
-------------------------------------------------------------------------
GROSS PROFIT 15 25 35 6 81
Marketing expenses 19 6 9 -- 34
Administrative expenses 14 2 7 -- 23
Technological expenses 11 1 -- -- 12
-------------------------------------------------------------------------
OPERATING INCOME (LOSS) (29) 16 19 6 12
Equity earnings (loss) from affiliates 45 13 (1) (47) 10
Interest expense (18) -- (11) 6 (23)
Other income, net 4 4 8 (13) 3
Loss on debt modification (8) -- -- -- (8)
Reorganization items, net (14) -- -- -- (14)
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE (20) 33 15 (48) (20)
Income tax expense 2 -- 1 (1) 2
-------------------------------------------------------------------------
NET INCOME (LOSS) $(22) $33 $ 14 $ (47) $(22)
=========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2006
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS) $(22) $33 $ 14 $(47) $(22)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments 2 2 2 (4) 2
Net unrealized loss on derivative
instruments (1) -- -- -- (1)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(21) 35 $ 16 $(51) $(21)
=========================================================================
29
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES $551 $40 $244 $(102) $733
Cost of goods sold 518 16 203 (111) 626
-------------------------------------------------------------------------
GROSS PROFIT 33 24 41 9 107
Marketing expenses 19 6 8 -- 33
Administrative expenses 14 2 8 -- 24
Technological expenses 10 -- 1 -- 11
-------------------------------------------------------------------------
OPERATING INCOME (LOSS) (10) 16 24 9 39
Equity earnings (loss) from affiliates 68 13 (1) (66) 14
Interest expense (32) -- (13) 23 (22)
Other income, net 1 20 10 (29) 2
Reorganization items, net (5) -- -- -- (5)
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 22 49 20 (63) 28
Income tax expense 1 -- 6 -- 7
-------------------------------------------------------------------------
NET INCOME $ 21 $49 $ 14 $ (63) $ 21
=========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2005
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME $ 21 $49 $14 $(63) $21
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments (5) (4) (7) 11 (5)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 16 $45 $ 7 $(52) $16
=========================================================================
30
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION
MARCH 31, 2006
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 222 $ 10 $ 110 $ -- $ 342
Trade receivables, net 5 146 140 -- 291
Intercompany receivables 115 749 98 (962) --
Miscellaneous receivables 54 -- 25 -- 79
Inventories 162 33 121 (14) 302
Prepaid expenses and other current assets 21 -- 10 4 35
-------------------------------------------------------------------------
TOTAL CURRENT ASSETS 579 938 504 (972) 1,049
PROPERTY, PLANT AND EQUIPMENT, NET 580 84 145 -- 809
INVESTMENTS IN AFFILIATES 2,354 221 13 (2,388) 200
GOODWILL -- 72 17 -- 89
IDENTIFIED INTANGIBLE ASSETS, NET 2 26 11 -- 39
INTERCOMPANY ADVANCES 128 1,238 710 (2,076) --
OTHER ASSETS 62 -- 46 -- 108
-------------------------------------------------------------------------
TOTAL ASSETS $ 3,705 $2,579 $1,446 $(5,436) $ 2,294
=========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 155 $ 10 $ 44 $ -- $ 209
Intercompany payables 96 10 129 (235) --
Accrued liabilities 138 13 87 (2) 236
Short-term debt 650 -- -- -- 650
Intercompany short-term debt 1 -- 180 (181) --
-------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,040 33 440 (418) 1,095
LONG-TERM DEBT -- -- 251 -- 251
INTERCOMPANY LONG-TERM DEBT -- -- 408 (408) --
OTHER LIABILITIES 200 -- 69 -- 269
-------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 1,240 33 1,168 (826) 1,615
LIABILITIES SUBJECT TO COMPROMISE 3,940 407 21 (2,214) 2,154
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock 1 -- -- -- 1
Additional contributed capital 56 -- -- -- 56
Treasury stock (251) -- -- -- (251)
Net (deficiency) excess of assets at spin-off
and subsidiary capital (113) 2,139 257 (2,396) (113)
Accumulated other comprehensive loss (92) -- -- -- (92)
Accumulated deficit (1,076) -- -- -- (1,076)
-------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (1,475) 2,139 257 (2,396) (1,475)
-------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $ 3,705 $2,579 $1,446 $(5,436) $ 2,294
=========================================================================
31
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2005
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 15 $ 91 $ -- $ 107
Trade receivables, net 6 118 129 -- 253
Intercompany receivables 115 754 89 (958) --
Miscellaneous receivables 67 -- 29 -- 96
Inventories 143 31 107 (14) 267
Prepaid expenses and other assets 23 -- 9 3 35
-------------------------------------------------------------------------
TOTAL CURRENT ASSETS 355 918 454 (969) 758
PROPERTY, PLANT AND EQUIPMENT, NET 589 84 131 -- 804
INVESTMENTS IN AFFILIATES 2,291 209 13 (2,308) 205
GOODWILL -- 72 4 -- 76
IDENTIFIED INTANGIBLE ASSETS, NET 2 26 7 -- 35
INTERCOMPANY ADVANCES 128 1,238 703 (2,069) --
OTHER ASSETS 62 -- 44 -- 106
-------------------------------------------------------------------------
TOTAL ASSETS $ 3,427 $2,547 $1,356 $(5,346) $ 1,984
=========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 167 $ 9 $ 47 $ (1) $ 222
Intercompany payables 108 12 111 (231) --
Accrued liabilities 144 13 83 -- 240
Short-term debt 300 -- -- -- 300
Intercompany short-term debt -- -- 182 (182) --
-------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 719 34 423 (414) 762
LONG-TERM DEBT -- -- 247 -- 247
INTERCOMPANY LONG-TERM DEBT -- -- 402 (402) --
OTHER LIABILITIES 201 -- 52 -- 253
-------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE 920 34 1,124 (816) 1,262
LIABILITIES SUBJECT TO COMPROMISE 3,961 407 21 (2,213) 2,176
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) 2,106 211 (2,317) (113)
Accumulated other comprehensive loss (93) -- -- -- (93)
Accumulated deficit (1,054) -- -- -- (1,054)
-------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (1,454) 2,106 211 (2,317) (1,454)
-------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $ 3,427 $2,547 $1,356 $(5,346) $ 1,984
=========================================================================
32
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS $(79) $(6) $ 20 $-- $(65)
-------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases (13) (2) (10) -- (25)
Acquisition, net of cash acquired (23) -- 7 -- (16)
-------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (36) (2) (3) -- (41)
-------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations 350 -- -- -- 350
Deferred debt issuance costs (9) -- -- -- (9)
Changes in investments and advances from
(to) affiliates (5) 3 2 -- --
-------------------------------------------------------------------------
CASH FROM FINANCING ACTIVITIES 336 3 2 -- 341
-------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 221 (5) 19 -- 235
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 1 15 91 -- 107
-------------------------------------------------------------------------
END OF PERIOD $222 $10 $110 $-- $342
=========================================================================
33
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS $(74) $ -- $ 4 $-- $(70)
-------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases (9) (2) (3) -- (14)
-------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (9) (2) (3) -- (14)
-------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations 20 -- -- -- 20
Net change in cash collateralized letters of
credit 15 -- -- -- 15
Changes in investments and advances from
(to) affiliates 7 -- (7) -- --
-------------------------------------------------------------------------
CASH FROM (USED IN) FINANCING ACTIVITIES 42 -- (7) -- 35
-------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (41) (2) (6) -- (49)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 43 7 65 -- 115
-------------------------------------------------------------------------
END OF PERIOD $ 2 $ 5 $59 $-- $ 66
=========================================================================
34
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, and 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 First Quarter 2006 Events
Senior Management Changes
- -------------------------
In January 2006, Kent Davies joined Solutia as Senior Vice
President and President, CPFilms. Mr. Davies leads Solutia's CPFilms
business with responsibility for all commercial, operational and strategic
aspects of the business. Ken Vickers, the former president of CPFilms, was
named chairman emeritus of CPFilms and will assist Mr. Davies and continue
to play an important role in the CPFilms business.
Reorganization Strategy
- -----------------------
In the first quarter 2006, Solutia continued its stated
reorganization strategy with a focus on the principal objectives of (i)
managing the businesses to enhance Solutia's performance; (ii) making
changes to Solutia's asset portfolio to maximize the value of the estate;
(iii) achieving reallocation of "legacy liabilities"; and (iv) negotiating
an appropriate capital structure. Solutia took steps in 2006 to enhance its
financial performance including using the tools of bankruptcy and making
changes to its asset portfolio, as explained below. Solutia also continues
to pursue a reallocation of legacy liabilities in the bankruptcy proceeding
through negotiations with the other constituents in the bankruptcy case.
Solutia will also be working in 2006 to establish a proper capital structure
upon emergence from bankruptcy. However, as a result of the numerous
uncertainties and complexities inherent in Solutia's bankruptcy proceedings,
its ability and timing of emergence from bankruptcy are subject to
significant uncertainty.
PERFORMANCE ENHANCEMENT
Solutia benefited in the first quarter of 2006 from several actions
implemented during 2004 and 2005 designed to enhance its performance. These
included implementing significant general and administrative expense
reductions; increasing 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.
Solutia amended its DIP financing facility on March 17, 2006 with
bankruptcy court approval. This 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; and included certain
other changes that provide greater flexibility in executing Solutia's
reorganization strategy.
35
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. As part of this strategy, Solutia made several changes to
re-shape its asset portfolio in 2004 and 2005 and continued these efforts in
the first quarter 2006. On March 1, 2006, pursuant to a stock purchase
agreement among Solutia, Vitro S.A. de C.V. ("Vitro") and Vitro Plan S.A. de
C.V. ("Vitro Plan"), a wholly-owned subsidiary of Vitro, Solutia acquired
Vitro Plan's 51 percent stake in Quimica M S.A. de C.V. ("Quimica")
(originally formed in 1996 as a joint venture between Vitro, Vitro Plan, and
Monsanto) for approximately $20 million in cash. As a result of this
acquisition, Solutia became the sole owner of Quimica and its plastic
interlayer plant located in Puebla, Mexico.
REALLOCATION OF LEGACY LIABILITIES
On February 14, 2006, the Debtors filed with the Bankruptcy Court
their Plan of Reorganization (the "Plan") and Disclosure Statement (the
"Disclosure Statement"). The Plan and Disclosure Statement are subject to
Bankruptcy Court approval and the satisfaction of other contingencies. Until
the Plan is confirmed by the Bankruptcy Court, the Plan and Disclosure
Statement are subject to amendment and 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. 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 (the "Unsecured
Creditors' Committee") 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 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. See Note 1
to the accompanying consolidated financial statements for a further summary
of developments in Solutia's ongoing 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.
36
- --------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005
---- ----
Net Sales...................................................................... $700 $733
==== ====
Operating Income (Loss):
Performance Products and Services Segment Profit........................... $ 46 $ 35
Integrated Nylon Segment Loss.............................................. (14) (1)
Less: Corporate Expenses.............................................. (20) (11)
Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense
and Reorganization Items included in Segment Profit (Loss)............ -- 16
---- ----
Operating Income .............................................................. $ 12 $ 39
==== ====
Charges included in Operating Income .......................................... $ (9) $ --
==== ====
- --------------------------------------------------------------------------------------------------
The $33 million, or 5 percent, decrease in net sales as compared to
the first quarter 2005 was primarily a result of lower sales volumes of
approximately 10 percent and unfavorable currency exchange rate fluctuations
of approximately 1 percent, partially offset by higher average selling
prices of approximately 6 percent. The $27 million decrease in operating
income as compared to the first quarter 2005 resulted from lower net sales,
higher raw material and energy costs and higher charges, which are described
in greater detail in the Results of Operations section below.
Financial Information
- ---------------------
Summarized financial information concerning Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as of
and for the three months ended March 31, 2006 is presented as follows:
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
Net sales................................. $ 557 $250 $(107) $ 700
Operating income (loss)................... (13) 19 6 12
Net income (loss)......................... (22) 13 (13) (22)
Total assets.............................. 1,966 860 (532) 2,294
Liabilities not subject to compromise..... 1,287 503 (175) 1,615
Liabilities subject to compromise......... 2,154 -- -- 2,154
Total shareholders' equity (deficit)...... (1,475) 357 (357) (1,475)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the first quarter 2006 with respect
to Solutia's critical accounting policies, as presented on pages 33 through
36 of Solutia's 2005 Form 10-K.
37
RESULTS OF OPERATIONS--FIRST QUARTER 2006 COMPARED WITH FIRST QUARTER 2005
Performance Products and Services
-------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2006 2005
---- ----
Net Sales.............................................................. $308 $287
==== ====
Segment Profit ........................................................ $ 46 $ 35
==== ====
Charges and Reorganization Items included in Segment Profit........ $ (1) $ (7)
==== ====
-------------------------------------------------------------------------------------------------
The $21 million, or 7 percent, increase in net sales as compared to
the first quarter 2005 resulted primarily from higher sales volumes of
approximately 8 percent and higher average selling prices of approximately 3
percent, partially offset by unfavorable currency exchange rate fluctuations
of approximately 4 percent. Higher sales volumes were experienced in
SAFLEX(R) and VANCEVA(R) plastic interlayer products, pharmaceutical
services and LLUMAR(R) and VISTA(R) professional film products. Higher
average selling prices were experienced in SAFLEX(R) and VANCEVA(R) plastic
interlayer products and in THERMINOL(R) heat transfer fluids. The
unfavorable exchange rate fluctuations occurred primarily as a result of the
strengthening U.S. dollar in relation to the euro in comparison to the first
quarter 2005.
The $11 million, or 31 percent, increase in segment profit in
comparison to the first quarter 2005 resulted primarily from higher net
sales, lower reorganization items and favorable manufacturing variances
resulting from cost containment activities, partially offset by higher raw
material costs. The $1 million of reorganization items in the three months
ended March 31, 2006 consisted primarily of employee severance and
retraining costs. Segment profit in 2005 was affected by $7 million of
reorganization items which consisted primarily of adjustments to record
certain pre-petition claims at estimated amounts of the allowed claims.
Integrated Nylon
-------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2006 2005
---- ----
Net Sales.............................................................. $392 $446
==== ====
Segment Loss........................................................... $(14) $ (1)
==== ====
Charges and Reorganization Items included in Segment Profit........ $ (3) $(11)
==== ====
-------------------------------------------------------------------------------------------------
The $54 million, or 12 percent, decrease in net sales as compared
to the first quarter 2005 resulted primarily from lower sales volumes of
approximately 21 percent, partially offset by higher average selling prices
of approximately 9 percent. Sales volumes were impacted as a result of
exiting the unprofitable acrylic fibers operations, as well as a portion of
the nylon industrial fibers operations, both in the second quarter 2005.
Further, lower sales volumes were experienced within the carpet and
intermediate chemicals businesses. Average selling prices increased in all
businesses as a result of favorable market conditions and in response to the
escalating cost of raw materials.
The $13 million increase in segment loss in comparison to the first
quarter 2005 resulted primarily from lower sales and higher manufacturing
costs. These higher costs were precipitated by a manufacturing upset
incurred at the Alvin, Texas facility in the first quarter 2006, resulting
in a significant turnaround being accelerated in its timing, as well as
extended in its duration. The segment incurred higher raw material and
energy costs of approximately $19 million during the quarter, which was more
than offset by the aforementioned selling price increases.
38
Solutia recorded approximately $2 million of decommissioning and
dismantling costs in the three months ended March 31, 2006 as a result of
the shut-down of its acrylic fibers business in 2005 and $1 million of asset
write-downs. In the first quarter 2005, Solutia also experienced
approximately $3 million of one-time business exit benefits in its acrylic
fibers business and its nylon industrial fibers business at its Pensacola
plant in advance of the shut-down of these businesses in the second quarter
2005. In addition, segment loss in the first quarter 2005 included
reorganization items of $11 million comprised of $10 million to shut-down
the acrylic fibers business and $1 million of other restructuring charges.
The shut-down costs included $6 million of asset write-downs and $4 million
of severance and retraining costs.
Corporate Expenses
- ------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2006 2005
---- ----
Corporate Expenses........................................................... $ 20 $ 11
==== ====
Charges included in Corporate Expenses................................... $ (9) $ --
==== ====
- ------------------------------------------------------------------------------------------------------
With the exception of a $9 million environmental charge in the
first quarter 2006, corporate expenses remained relatively consistent in
comparing the first quarter 2006 to the first quarter 2005. The
environmental charge was precipitated by the notification by a third-party
of its intent to terminate a tolling agreement at one of Solutia's
facilities outside the U.S. that will likely result in the cessation of
operations at that site.
Equity Earnings (Loss) from Affiliates
- -------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2006 2005
---- ----
Equity Earnings from Affiliates not included in Reportable Segment Profit
(Loss)...................................................................... $ 9 $13
--- ---
Equity Earnings from Affiliates included in Reportable Segment
Profit (Loss)............................................................... $ 1 $ 1
--- ---
Equity Earnings from Affiliates.............................................. $10 $14
=== ===
Charges included in Equity Earnings from Affiliates..................... $-- $--
=== ===
- -------------------------------------------------------------------------------------------------------
Equity earnings from affiliates decreased by $4 million in the
first quarter 2006 as compared to the first quarter 2005. This decline was
primarily a result of the sale of the Astaris joint venture in the fourth
quarter 2005 and lower selling prices and sales volumes at the Flexsys joint
venture in the first quarter 2006 in comparison to the first quarter 2005.
39
Interest Expense
- -------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2006 2005
---- ----
Interest Expense............................................................. $23 $22
=== ===
Charges included in Interest Expense.................................... $(1) $--
=== ===
- -------------------------------------------------------------------------------------------------------
The $1 million, or 5 percent, increase in interest expense in the
first quarter 2006 in comparison to the first quarter 2005 resulted
principally from the write-off of unamortized debt issuance costs of $1
million in the first quarter 2006 related to the DIP facility amendment in
March 2006. See the below Financial Condition and Liquidity section for
further description of the DIP facility amendment.
Reorganization Items, net
- -------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2006 2005
---- ----
Reorganization Items, net.................................................... $ 14 $ 5
==== ====
Reorganization Items, net included in Reportable Segment Profit (Loss).. $ 4 $ 18
==== ====
- -------------------------------------------------------------------------------------------------------
Reorganization items, net are presented separately in the
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 first quarter 2006 included $12 million of
professional fees for services provided by debtor and creditor professionals
directly related to Solutia's reorganization proceedings; $2 million of net
gain for adjustments to record certain pre-petition claims at estimated
amounts of the allowed claims; $2 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 $2 million of other
reorganization charges primarily involving costs incurred with the shut-down
of Solutia's acrylic fibers business.
Reorganization items incurred in the first quarter 2005 included a
$29 million net gain representing the difference between the settlement
amount of certain pre-petition obligations and the corresponding amounts
previously recorded; $11 million of professional fees for services provided
by debtor and creditor professionals directly related to Solutia's
reorganization proceedings; $11 million of net charges for adjustments to
record certain pre-petition claims at estimated amounts of the allowed
claims; $6 million of expense provisions related to (i) employee severance
costs incurred directly as part of the Chapter 11 reorganization process and
(ii) a retention plan for certain Solutia employees approved by the
bankruptcy court; and $6 million of other reorganization charges primarily
involving costs incurred with the shut-down of Solutia's acrylic fibers
business.
40
Income Tax Expense
- -------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2006 2005
---- ----
Income Tax Expense......................................................... $ 2 $ 7
=== ===
- -------------------------------------------------------------------------------------------------------
Solutia's income tax expense in the first quarter 2006 and 2005 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 three months
ended March 31, 2006 and 2005. Consequently, the changes in federal and
state deferred tax assets were offset by corresponding changes in valuation
allowances. See Note 14 of Solutia's 2005 Form 10-K for additional
information concerning the Company's deferred tax assets and changes in
valuation allowances due to Solutia's Chapter 11 filing. The $5 million
decrease in income tax expense in the first quarter 2006 as compared to the
first quarter 2005 was primarily a result of a non-consolidated equity
affiliate surrendering a prior year loss that will be used to offset a
foreign subsidiary's taxable income in the United Kingdom, as well as lower
foreign income.
Summary of Events Affecting Comparability
In the first quarter 2006 and 2005 certain events affecting
comparability were recorded in Reorganization Items, net in the Statement of
Consolidated Operations. A comparison of reorganization items for these
periods is provided in the above Results of Operations section, as well as
Note 2 to the accompanying consolidated financial statements. Charges
recorded in the first quarter 2006 and other events affecting comparability
recorded outside of reorganization items have been summarized in the table
below (dollars in millions). All events affecting comparability for the
first quarter 2005 were recorded entirely in Reorganization Items, net.
2006
------------------------------------------------------------------
INCREASE/(DECREASE) PERFORMANCE
PRODUCTS AND INTEGRATED CORPORATE/
SERVICES NYLON OTHER CONSOLIDATED
-------- ----- ----- ------------
IMPACT ON:
Cost of goods sold.......................... $ -- $ -- $ 9 $ 9 (a)
------------------------------------------------------------------
OPERATING INCOME IMPACT..................... -- -- (9) (9)
Interest expense ........................... -- -- (1) (1) (b)
Loss on debt modification................... -- -- (8) (8) (b)
------------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT............. $ -- $ -- $(18) (18)
====================================================
Income tax impact........................... 2 (c)
-------------
AFTER-TAX INCOME STATEMENT IMPACT........... $(16)
====
<FN>
2006 EVENTS
-----------
a) Environmental charge precipitated by the notification by a
third-party of its intent to terminate a tolling agreement at one of
Solutia's facilities outside the U.S. that will likely result in the
cessation of operations at that site ($9 million pre-tax and $7
million after-tax).
b) Solutia recorded a charge of approximately $8 million (pre-tax and
after-tax) to record the write-off of debt issuance costs and to
record the DIP facility as modified at its fair value. In addition,
$1 million (pre-tax and after-tax) of unamortized debt issuance
costs associated with the DIP facility were written off at the time
of modification in March 2006. See the below Financial Condition and
Liquidity section for further description of the DIP facility
amendment.
41
c) With the exception of item (a) above, which primarily relates to
ex-U.S. operations, the above items are considered to have like
pre-tax and after-tax impact as the tax benefit or expense realized
from these events is offset by the change in valuation allowance for
U.S. deferred tax assets resulting from uncertainty as to their
recovery due to Solutia's Chapter 11 bankruptcy filing.
FINANCIAL CONDITION AND LIQUIDITY
As discussed in Note 1 to the accompanying 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 in the Chapter 11 bankruptcy process
may be limited.
Financial Analysis
Solutia used its existing cash on-hand to finance operating needs
and capital expenditures during the first quarter 2006. Cash used in
operations was $65 million in the first quarter 2006, a change of $5 million
from $70 million used in operations for the comparable period of 2005. This
change in cash used in operations was primarily attributable to changes in
working capital items in comparing the first quarter 2006 and 2005.
Capital spending increased $11 million to $25 million in the first
quarter 2006, compared to $14 million in the first quarter 2005. The
expenditures in the first quarter 2006 were primarily to fund certain growth
initiatives in the Performance Products and Services segment, as well as
various capital improvements and certain cost reduction projects.
Net cash used for the acquisition of Quimica (as described in Note
4 to the accompanying consolidated financial statements) totaled $16 million
and consisted of approximately $20 million cash paid less approximately $4
million of cash acquired. There were no acquisitions in the three months
ended March 31, 2005.
Total debt of $1,569 million as of March 31, 2006, including $668
million subject to compromise and $901 million not subject to compromise,
increased by $354 million as compared to $1,215 million at December 31,
2005, including $668 million subject to compromise and $547 million not
subject to compromise. This increase in total debt resulted primarily from
$350 million of additional borrowings from Solutia's DIP facility in the
first quarter 2006, of which $300 million resulted from the March 2006
amendment to the DIP facility (as described below). In addition, as a result
of the Chapter 11 filing, Solutia was in default on all its debt agreements
as of March 31, 2006, with the exception of its DIP credit facility and
Euronotes.
Solutia's working capital decreased by $42 million to ($46) million
at March 31, 2006, compared to ($4) million at December 31, 2005. The change
was primarily a result of higher short-term debt, partially offset by higher
cash on-hand and the seasonal increase in working capital as of March 31,
2006.
Solutia had a shareholders' deficit of $1,475 million at March 31,
2006 compared to $1,454 million at December 31, 2005. The $21 million
increase in shareholders' deficit principally resulted from the $22 million
first quarter 2006 net loss; partially offset by the $1 million decrease in
accumulated other comprehensive losses.
The weighted average interest rate on Solutia's total debt
outstanding was approximately 8.7 percent at both March 31, 2006 and
December 31, 2005, respectively. Excluding debt subject to compromise, with
the exception of the 11.25 percent notes due 2009 on which the bankruptcy
court has permitted continued payments of the contractual interest, the
weighted average interest rate on total debt was 9.3 percent at March 31,
2006 compared to 9.8 percent at December 31, 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 in each of
the first quarter 2006 and 2005 was approximately $8 million.
42
At March 31, 2006, Solutia's total liquidity was $426 million in
the form of $84 million of availability under the DIP credit facility and
approximately $342 million of cash on-hand, of which $109 million was cash
of Solutia's subsidiaries that are not parties to the Chapter 11
proceedings. In comparison, Solutia's total liquidity at December 31, 2005
was $238 million in the form of $131 million of availability under the DIP
credit facility and approximately $107 million of cash on-hand, of which $89
million was cash of Solutia's subsidiaries that are not parties to the
Chapter 11 bankruptcy proceedings. The increase in cash on-hand was
primarily a result of the DIP amendment in March 2006 and will be used for
ongoing operations and to fund upcoming mandatory pension contributions as
described below.
According to IRS funding rules, Solutia will be required to make
approximately $179 million in pension contributions to its U.S. qualified
pension plan in 2006 assuming Congress extends the interest rate relief
provision currently proposed. If this relief is not granted, required
contributions in 2006 would be approximately $195 million. Approximately $9
million of these required 2006 contributions were made in the first quarter
2006. Solutia also expects to be required to fund approximately $5 million
in pension contributions for its foreign pension plans in 2006.
DIP Amendment
On March 17, 2006, Solutia amended its DIP financing facility with
bankruptcy court approval. This 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 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.
Solutia analyzed the modifications of the DIP facility in March
2006 in accordance with the provisions of Emerging Issues Task Force
("EITF") No. 02-04, Determining Whether a Debtor's Modification or Exchange
of Debt Instruments is within the Scope of FASB Statement No. 15, and EITF
No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt
Instruments, and recorded a charge of approximately $8 million to record the
write-off of debt issuance costs and to record the DIP facility as modified
at its fair value. In addition, $1 million of unamortized debt issuance
costs associated with the DIP facility were written off at the time of
modification in March 2006.
CONTINGENCIES
See Note 9 to the accompanying consolidated financial statements for a
summary of Solutia's contingencies as of March 31, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
There have been no material changes in market risk exposures during
the first quarter 2006 that affect the disclosures presented in the
information appearing under "Derivative Financial Instruments" on page 47 of
Solutia's Form 10-K for the year-ended December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
During 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) that occurred during the quarterly period ended March 31,
2006 that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting.
43
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Proceedings in Solutia's Bankruptcy Case
- ----------------------------------------------
JPMorgan Adversary Proceeding. As described in Solutia's Annual
Report on Form 10-K for the year ended December 31, 2005 (the "2005 Form
10-K"), on May 27, 2005, JPMorgan, as indenture trustee under the indenture
for Solutia's debentures due 2027 and 2037 (the "Prepetition Indenture"),
filed an adversary proceeding (the "JPM Proceeding") against Solutia in the
Chapter 11 Cases. In its adversary proceeding, JPMorgan asserted five
causes of action seeking declaratory judgments to establish the validity and
priority of the purported security interest of the holders of the 2027 and
2037 debentures, and one cause of action pursuant to section 363 of the
Bankruptcy Code asserting that the alleged security interests lacked
adequate protection. Both Solutia and JPMorgan filed summary judgment
motions with the Bankruptcy Court on April 14, 2006. The Bankruptcy Court
has scheduled a trial of the JPM Proceeding to commence on May 23, 2006.
Equity Committee Adversary Proceeding Against Monsanto and
Pharmacia. As described in the 2005 Form 10-K, on March 7, 2005, the Equity
Committee filed a complaint against Pharmacia and Monsanto and objections to
the proofs of claim filed by Pharmacia and Monsanto in Solutia's bankruptcy
case (the "Equity Committee Complaint"). In the Equity Committee Complaint,
the Equity Committee seeks to avoid certain obligations assumed by Solutia
at the time of its spinoff from Pharmacia. The Equity Committee Complaint
alleges that the Solutia 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. Pharmacia and Monsanto filed a motion to dismiss the
Equity Committee Complaint for, among other things, lack of standing or, in
the alternative, to stay the adversary proceeding. On August 4, 2005, the
Debtors filed with the Bankruptcy Court their Statement and Reservation of
Rights in Response to the Equity Committee's Complaint and Objection to
Claims, in which the Debtors expressed their view that the issues and
disputes raised in the Equity Committee Complaint would be resolved through
the Plan confirmation process. During a hearing on April 11, 2006, the
Bankruptcy Court issued a bench ruling denying Pharmacia and Monsanto's
motion to dismiss the Equity Committee Complaint.
Flexsys Related Litigation
- --------------------------
Solutia's 2005 Form 10-K described a federal court action,
captioned Pearman, Benson and Immerman v. Crompton Corp., Flexsys, Solutia
Inc., et al., by indirect purchasers of rubber chemicals against Solutia,
Flexsys, a 50/50 joint venture between Solutia and Akzo Nobel N.V. and a
number of other companies producing rubber chemicals. On April 28, 2006,
Solutia received notice that this case was voluntarily dismissed, without
prejudice, by the plaintiffs.
Cash Balance Plan Litigation
- ----------------------------
As described in the 2005 Form 10-K, since October 2005, three cases
have been filed by participants in the Solutia Inc. Employees' Pension Plan
alleging that the Pension Plan: (1) violates the Employee Retirement Income
Security Act of 1974 ("ERISA") prohibitions on reducing rates of benefit
accrual based on age; (2) results in the impermissible forfeiture of accrued
benefits under ERISA; (3) violates ERISA's present value calculation rules
for determining lump sum distributions; and (4) violates the minimum accrual
requirements of ERISA. The cases were captioned Davis, et. al. v. Solutia,
Inc. Employees' Pension Plan (filed in the United States District Court for
the Southern District of Illinois, Case No. 3:05-CV-00736-DRH & PMF),
Scharringhausen, et. al. v. Solutia, Inc. Employees' Pension Plan, et al.
(originally filed in the United States District Court for the Eastern
District of Missouri, Case No. 4:05-CV-02210-HEA and later voluntarily
dismissed and refiled in the United States District Court for the Southern
District of Illinois, Case No. 3:06-CV-00099-DRH & PMF) and Juanita Hammond,
et. al. v. Solutia, Inc. Employees' Pension Plan (filed in the United States
District Court for the Southern District of Illinois, Case No.
3:06-000139-DRH & PMF). None of the Debtors, and, except for the Solutia
Inc. Employee Benefits Plans Committee which was named in the
Scharringhausen case, no individual or entity other than the Pension Plan,
has been named as a defendant in any of these cases. The plaintiffs in each
of these cases sought to obtain injunctive and other equitable relief
(including money damages awarded by the creation of a common fund) on behalf
of themselves and the nationwide putative class of similarly situated
current and former participants in the Pension Plan for whose pension
benefits the Pension Plan is responsible. The Pension Plan, and in the case
of the Scharringhausen case, the Employee Benefits Plans Committee, has
moved to dismiss all three actions for plaintiffs' failure to exhaust
administrative remedies and failure to join necessary and indispensable
parties.
The Scharringhausen plaintiffs have moved to intervene in the Davis
action and to consolidate the Davis, Scharringhausen and Hammond cases. The
Hammond plaintiff has moved to consolidate the three cases and the Pension
Plan has responded by agreeing that it should not be required to defend
itself against three cases. The Davis plaintiffs have intervened in the
Scharringhausen and Hammond cases and moved to stay or dismiss those
later-filed cases, rather than consolidating them with the Davis case. The
plaintiffs' counsel in the Davis, Scharringhausen and Hammond cases each
have sought appointment as interim lead class counsel. In response to these
motions, on April 24, 2006, the Scharringhausen plaintiffs voluntarily
dismissed their case. The Pension Plan intends to continue to vigorously
defend itself against any and all claims asserted in the Davis and Hammond
litigation.
44
Other Legal Proceedings
- -----------------------
Dickerson v. Feldman. Solutia's 2005 Form 10-K described a class
action captioned Dickerson v. Feldman, et al., which was filed in the U.S.
District Court for the Southern District of New York against a number of
defendants, including former officers and employees of Solutia and Solutia's
Employee Benefits Plans Committee and Pension and Savings Funds Committee,
alleging breach of fiduciary duty under 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 Bankruptcy
Court.
On March 30, 2006, the District Court granted the defendants'
motion to dismiss on grounds that the Dickerson plaintiffs lacked standing
to sue and that the complaint failed to state a claim on which relief may be
granted. The dismissal of Dickerson's cause of action resulted in dismissal
of the entire purported class action, including claims asserted on behalf of
the unnamed purported class members. On April 3, 2006 Dickerson filed an
appeal of this dismissal with the United States Court of Appeals for the
Second Circuit.
Abbatiello v. Monsanto, Pharmacia and Solutia. As described in the
2005 Form 10-K, on January 3, 2006, Solutia received notice that an action,
captioned Michael Abbatiello et al. v. Monsanto Company, Pharmacia
Corporation and Solutia Inc. (the "GE Litigation"), was filed on December
26, 2005 in the Supreme Court of the State of New York. The action was filed
on behalf of 590 current General Electric employees who work at its
Schenectady, New York plant and states eleven separate causes of action
alleging that General Electric purchased various PCB containing products
from Monsanto which were used in the manufacture of a variety of products
including electric motors, generators, gas turbines, wire and cable,
insulating materials and microwave tubes. PCBs were later detected in
various locations, including retention ponds, ground water, and water
treatment centers on the approximately 628 acre site. The plaintiffs are
seeking $1 billion in compensatory damages and $1 billion in punitive
damages for each cause of action for a total of $2 billion dollars. Solutia
is evaluating the merits of the GE Litigation and the potential liability,
including costs of defense, that might result. The GE Litigation is
automatically stayed as to Solutia pursuant to Section 362 of the U.S.
Bankruptcy Code.
ITEM 6. EXHIBITS
See the Exhibit Index at page 47, of this report.
45
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: May 1, 2006
46
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Form of Agreement by and between Solutia Inc., CPFilms, Inc. and
Kent J. Davies (incorporated by reference to Exhibit 10(y) of
Solutia's Form 10-K filed March 15, 2006)
10.2 Debtors' Joint Plan of Reorganization Pursuant to Chapter 11 of the
Bankruptcy Code (incorporated by reference to Exhibit 99.1 of
Solutia's Form 8-K filed on February 21, 2006)
10.3 Debtors' Disclosure Statement Pursuant to Section 1125 of the
Bankruptcy Code (incorporated by reference to Exhibit 99.2 of
Solutia's Form 8-K filed on February 21, 2006)
10.4 Revised Exhibit D to Debtors' Disclosure Statement Pursuant to
Section 1125 of the Bankruptcy Code (incorporated by reference to
Exhibit 99.1 of Solutia's Form 8-K filed on February 27, 2006)
10.5 Amendment No. 4 to Financing Agreement and Waiver dated as of March
17, 2006 amending the 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 of Solutia's Form 8-K filed on March 17,
2006)
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
47