UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
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)
Registrant's telephone number, including area code: (314) 674-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
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$.01 par value Common Stock
Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
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).
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 Act). [ ] Yes [X] No
The aggregate market value of the registrant's common stock held by
non-affiliates, as of the last business day of the registrant's most recently
completed second fiscal quarter, June 30, 2006, based upon the value of the
last sales price of these shares as quoted on the OTC Bulletin Board, was
approximately $47.0 million.
NOTE.--If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense,
the aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: 104,459,578 shares of
common stock, $.01 par value, outstanding as of the close of business on
February 28, 2007.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Solutia makes statements in this Annual Report on Form 10-K that are
considered forward-looking statements under the federal securities laws.
Solutia considers all statements regarding anticipated or future matters,
including the following, to be forward-looking statements:
o effects of Solutia's pending bankruptcy proceeding;
o Solutia's expected future financial position, liquidity, results of
operations, profitability and cash flows;
o financing plans;
o competitive position;
o business strategy;
o budgets;
o projected cost reductions;
o results of litigation;
o plans and objectives of management for future operations;
o contractual obligations;
o off-balance sheet arrangements;
o growth opportunities for existing products and services;
o price increases;
o benefits from new technology; and
o effect of changes in accounting standards.
Forward-looking statements are not guarantees of Solutia's future
performance. They represent Solutia's estimates and assumptions only on the
date they are made. There are risks, uncertainties and other important factors
that could cause Solutia's actual performance or achievements to be materially
different from those it may project. These risks, uncertainties and factors
include:
o Solutia's ability to develop, confirm and consummate a Chapter 11
plan of reorganization;
o Solutia's ability to reduce its overall leveraged position;
o 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;
o Solutia's ability to comply with the terms of its
debtor-in-possession ("DIP") credit facility and (euro) 200 million
Facility Agreement or to increase, extend or refinance the facilities;
o customer and vendor response to Solutia's Chapter 11 proceeding;
o general economic, business and market conditions;
o currency fluctuations;
o interest rate fluctuations;
o price increases or shortages of raw materials and energy;
o disruption of operations;
o exposure to product liability and other litigation, environmental
remediation obligations and other environmental liabilities;
o lower prices for Solutia's products or a decline in Solutia's market
share due to competition or price pressure by customers;
o ability to implement cost reduction initiatives in a timely manner;
o ability to divest existing businesses;
o efficacy of new technology and facilities;
o limited access to capital resources;
o changes in U.S. and foreign laws and regulations;
o geopolitical instability; and
o changes in pension and other post-retirement benefit plan
assumptions.
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Solutia Inc., together with its subsidiaries ("Solutia"), is a global
manufacturer and marketer of a variety of high-performance chemical-based
materials that are used in a broad range of consumer and industrial
applications. As used herein, the "Company" and terms such as "we" and "our"
refers to Solutia unless the context requires otherwise.
Solutia reports its business in two segments: Performance Products
and Integrated Nylon.
Solutia's Performance Products segment is comprised of six product
lines. The product lines are generally managed based on the markets into which
these products are sold.
o Solutia's SAFLEX(R) plastic interlayers are used for laminated safety
glass, primarily in automotive manufacturing and architectural
applications. Solutia markets its plastic interlayers to the
automotive industry for use in automobile windshields and side, rear
and roof windows of vehicles. SAFLEX(R) markets its plastic
interlayers to the commercial and residential architectural markets
via several sub-brands.
o Solutia's LLUMAR(R), VISTA(R), GILA(R) and FORMULA ONE PERFORMANCE
AUTOMOTIVE FILM(R) brands of window films are custom coated and used
primarily for aftermarket automotive and architectural applications.
LLUMAR(R) and GILA(R) window films are marketed for both automotive
and architectural applications, with LLUMAR(R) marketed to the
professional aftermarket, and GILA(R) marketed to the do-it-yourself
retail market. VISTA(R) window films are marketed for professional
architectural applications, and FORMULA ONE PERFORMANCE AUTOMOTIVE
FILM(R) automotive window films are marketed to the professional
automotive aftermarket.
o Solutia's DEQUEST(R) water treatment phosphonates are used to enhance
water quality for industrial and domestic use.
o Solutia's THERMINOL(R) heat transfer fluids are used in systems that
provide for indirect heating or cooling of industrial and chemical
processes.
o Solutia's SKYDROL(R) brand aviation hydraulic fluids and SKYKLEEN(R)
brand of aviation solvents are supplied across the aviation industry.
o Solutia's plastic products include entrance matting and automotive
spray suppression flaps sold under the brands ASTROTURF(R), CLEAN
MACHINE(R), and CLEAR PASS(TM).
Solutia's Integrated Nylon segment is comprised of an integrated
family of nylon products.
o Solutia's chemical intermediates are used internally as feedstock for
nylon polymer and fiber production and also are sold in the merchant
market.
o Solutia's VYDYNE(R) and ASCEND(R) nylon polymers are sold to the
engineered thermoplastic, apparel, textile and industrial fiber
markets.
o Solutia's nylon fibers are sold in carpet and industrial markets.
Carpet fibers are sold under the WEAR-DATED(R) brand for residential
carpet and the ULTRON(R) brand for commercial carpet, as well as
under private labels.
Solutia was incorporated in Delaware in April 1997 to hold most of
the chemical businesses of the former Monsanto Company, now known as Pharmacia
Corporation, a wholly owned subsidiary of Pfizer Inc. ("Pharmacia"). On
September 1, 1997, Pharmacia spun off Solutia (the "Solutia Spinoff") by
distributing Solutia's shares as a dividend to its stockholders. Solutia
became an independent publicly held company as a result of the Solutia
Spinoff.
3
CHAPTER 11 PROCEEDINGS
On December 17, 2003, Solutia 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, 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 were 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. Under 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 extensions of this exclusivity period. The exclusivity
period continues until the order disposing of the current motion is entered on
the Bankruptcy Court's docket.
On January 16, 2004, pursuant to authorization from the Bankruptcy
Court, Solutia entered into a DIP credit facility. The DIP credit facility has
subsequently been amended from time to time, with Bankruptcy Court approval.
The DIP credit facility, as amended, currently consists of: (a) a $975 million
fully-drawn term loan; and (b) a $250 million borrowing-based revolving credit
facility, which includes a $150 million letter of credit subfacility. Of the
$1,225 million facility, $150 million must be utilized to acquire Akzo Nobel's
50% interest in the Flexsys joint venture between Solutia and Akzo Nobel. For
additional information regarding the DIP financing and the Flexsys
acquisition, see "Management's Discussion and Analysis" in Item 7 below and
Note 14 to the accompanying consolidated financial statements.
As a consequence of the Chapter 11 filing, pending litigation against
Solutia is generally stayed, and no party may take any action to collect its
pre-petition claims except pursuant to an order of the Bankruptcy Court.
November 30, 2004 was the last date by which holders of pre-petition date
claims against the Debtors could file such claims. Any holder of a claim that
was required to file such claim by November 30, 2004 and did not do so may be
barred from asserting such claim against the Debtors and, accordingly, may not
be able to participate in any distribution on account of such claim.
Differences between claim amounts identified by the Debtors and claims filed
by claimants will be investigated and resolved in connection with the Debtors'
claims resolution process, and only holders of claims that are ultimately
allowed for purposes of the Chapter 11 case will be entitled to distributions.
Solutia has not yet completed its analysis of all the proofs of claim. Since
the settlement terms of allowed claims are subject to a confirmed plan of
reorganization, the ultimate distribution with respect to allowed claims is
not presently ascertainable.
On February 14, 2006, the Debtors filed with the Bankruptcy Court a
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 Creditor's Committee") and Official Committee of Retirees appointed
in the Chapter 11 Cases (the "Retirees' Committee"), Monsanto Company
("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 and Pharmacia. The Global Settlement provides
for, among other things, a reallocation of certain Legacy Liabilities among
Solutia, Monsanto and Pharmacia and the treatment that various constituencies
in the Chapter 11 Cases would receive under the Plan. The reallocation of
liabilities between Solutia and Monsanto is set forth in a Relationship
Agreement (the "Relationship Agreement") which would be entered into between
Solutia and Monsanto upon confirmation of the Plan. Since the February 14,
2006 filing, the Bankruptcy Court has not moved forward with the process to
approve the Disclosure Statement and confirm the Plan.
There are two adversary proceedings ongoing in our Chapter 11 case.
JPMorgan, as indenture trustee of Solutia's debentures due 2027 and 2037,
filed litigation against Solutia claiming that such debentures are entitled to
secured status as
4
opposed to general unsecured status as set forth in the Plan. In addition, the
Official Committee of Equity Security Holders ("Equity Committee") in
Solutia's bankruptcy case has filed litigation against Pharmacia and Monsanto,
arguing that holders of Solutia's existing equity are entitled to a
distribution in the Chapter 11 case. For additional information regarding
these litigation matters, see "Legal Proceedings" in Item 3 below.
Solutia is in discussions with the major stakeholders in our
Chapter 11 case in an effort to modify the Global Settlement and Plan and
achieve a confirmable Plan. In addition, Solutia continues to evaluate and
explore all other reasonable alternatives to reorganize the Company, such as a
sale of the reorganized Company's equity or a sale of certain of its
businesses or assets, that may present a means of maximizing the value of the
estate for stakeholders.
RECENT DEVELOPMENTS
On January 25, 2007, Solutia completed the extension and upsizing of
its debtor-in-possession ("DIP") financing. This amendment increased the size
of the DIP credit facility to $1,225 million, representing a $400 million
increase, and extended the facility one year to March 31, 2008. The increased
availability under the DIP credit facility provides Solutia with additional
liquidity for operations and the ability to fund mandatory pension payments
that are coming due in 2007, as well as funds to partially facilitate the
acquisition of Akzo Nobel's stake in the Flexsys joint venture. The DIP credit
facility can be repaid by Solutia at any time without prepayment penalties.
The Bankruptcy Court entered an order approving this DIP amendment on January
23, 2007.
On February 27, 2007, Solutia reached a definitive agreement to
purchase Akzo Nobel N.V.'s ("Akzo Nobel") stake in Flexsys, the 50/50 rubber
chemical joint venture between Solutia and Akzo Nobel (the "Flexsys joint
venture"). Solutia and Akzo Nobel have entered into a letter agreement
committing the parties to execute the definitive agreement upon completion of
consultation with Dutch employee works council representatives. The proposed
transaction is subject to approval by the United States Bankruptcy Court,
receipt of required regulatory approvals, finalizing the definitive purchase
agreement for Akzo Nobel's Crystex manufacturing operations in Japan and the
fulfillment of other customary closing conditions. Solutia will fund the
purchase via $150 million of funding under the amended DIP credit facility and
additional funding through Flexsys.
SEGMENTS; PRINCIPAL PRODUCTS
Solutia's reportable segments are:
o Performance Products; and
o Integrated Nylon.
The tabular and narrative information contained in Note 22 to the accompanying
consolidated financial statements appearing on pages 94-96 is
incorporated by reference into this section.
5
Performance Products Segment
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Major End-Use
Major End-Use Products & Major Major Raw
Markets Major Products Applications Competitors Materials Major Plants (a)
- --------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION AND HOME SAFLEX(R) laminated Products to DuPont; Butyraldehyde; Ghent, Belgium;
FURNISHINGS window glass; LLUMAR(R) increase the Kuraray; ethanol; polyvinyl Martinsville, VA;
and VISTA(R) safety, security, Sekisui; 3M; alcohol; vinyl Springfield, MA;
professional window sound attenuation, Madico acetate monomer; Trenton, MI;
films and GILA(R) energy efficiency polyester film Puebla, Mexico
retail window films and ultraviolet
protection of
architectural glass
for residential and
commercial
structures;
after-market films
for solar control,
security and safety
- --------------------------------------------------------------------------------------------------------------------------------
ASTROTURF(R) and Entrance matting Sanddud; Polyethylene Ghent, Belgium;
CLEAN MACHINE(R) Baltplast; St. Louis, MO
door mats Time Packaging
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VEHICLES SAFLEX(R) plastic Products to DuPont; Butyraldehyde; Ghent, Belgium;
interlayer for increase the Sekisui; ethanol; Martinsville,
windshields and for safety, security, Bekaert, polyvinyl VA; Puebla,
side, roof and rear sound attenuation Johnson alcohol; vinyl Mexico;
windows of vehicles; and ultraviolet Laminating; acetate monomer; Springfield, MA;
LLUMAR(R), protection of Garware polyester film Trenton, MI
FORMULA ONE automotive glass
PERFORMANCE AUTOMOTIVE and give vehicles a
FILMS(R) and GILA(R) custom appearance
retail window films
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CLEAR PASS(TM) spray Spray suppression Fichet; Wegu; Polyethylene Ghent, Belgium
suppression systems systems for trucks Austi; Ex-Spray
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INDUSTRIAL APPLICATIONS Metallized films; Window films; 3M; ATI; Polyester film Martinsville, VA;
AND ELECTRONICS sputtered films; tapes; automotive Intellicoat; Runcorn, U.K.
release liners and badging; optical Mitsubishi
deep-dyed films and colored
filters; shades;
reprographics;
packaging
- --------------------------------------------------------------------------------------------------------------------------------
Performance films; Computer Bekaert; OCLI; Polyester film; Canoga Park, CA;
conductive and touch-screens; Southwall Indium tin; Martinsville, VA;
anti-reflective coated electroluminescent precious metals Runcorn, U.K.
films displays for
hand-held
electronics and
watches; cathode
ray tube and LCD
monitors
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DEQUEST(R) water Industrial water Bayer; Rhodia Phosphorus Newport, Wales
treatment chemicals treatment; trichloride (U.K.)
detergents;
cleaners; oil field
chemicals
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CAPITAL EQUIPMENT THERMINOL(R) heat Heat transfer fluids Dow Chemical Co. Benzene; phenol Alvin, TX;
transfer fluids Anniston, AL;
Newport, Wales
(U.K.)
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AVIATION/ SKYDROL(R) aviation Hydraulic fluids ExxonMobil Phosphate esters Anniston, AL;
TRANSPORTATION hydraulic fluids; for commercial St. Louis, MO (b)
SKYKLEEN(R) aviation aircraft;
solvents environmentally
friendly solvents
for aviation
maintenance
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<FN>
(a) Major plants are comprised of those facilities at which each of the
identified major products conclude their respective manufacturing
processes. The major products may pass through other of Solutia's plants
prior to the final sale to customers.
(b) Operations in the St. Louis, MO plant were transferred to Anniston,
Alabama in the second quarter of 2006.
6
Integrated Nylon Segment
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Major End-Use
Major End-Use Products &
Markets Major Products Applications Major Competitors Major Raw Materials Major Plants (a)
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CONSTRUCTION AND Nylon carpet WEAR-DATED(R) Invista; Shaw Adipic acid; Foley, AL;
HOME FURNISHINGS staple; nylon bulk residential and Industries; hexamethylenediamine Greenwood, SC;
continuous ULTRON(R) Rhodia Pensacola, FL
filament; ASCEND(R) commercial
nylon polymer carpet;
non-woven
reinforcement
and linings
- ----------------------------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS ASCEND(R) nylon Knit apparel; Invista; Rhodia; Adipic acid; Greenwood, SC;
polymer half-hose; Radici hexamethylenediamine Pensacola, FL
active wear;
apparel; dental
floss; intimate
apparel
- ----------------------------------------------------------------------------------------------------------------------
VEHICLES Nylon filament; Tires; airbags; Acordis; BASF; Adipic acid; Greenwood, SC;
VYDYNE(R) nylon automotive DuPont; Invista; hexamethylenediamine Pensacola, FL;
molding resins; interior, Rhodia Foley, AL
ASCEND(R) nylon exterior and
polymer under-the-hood
molded parts
- ----------------------------------------------------------------------------------------------------------------------
INDUSTRIAL ASCEND(R) nylon Conveyer belts; Kordsa; Invista; Propylene; natural Decatur, AL;
APPLICATIONS polymer; nylon film Shenma gas; cyclohexane; Greenwood, SC;
industrial nylon cooking bags; ammonia Pensacola, FL
fiber specialized food
packaging;
sewing thread;
backpacks; cots;
tents
- ----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE Adipic acid; Nylon and Asahi Chemical; Propylene; natural Alvin, TX;
CHEMICALS hexamethylenediamine acrylic fiber; Invista; Rhodia; gas; cyclohexane; Decatur, AL;
acrylonitrile nylon and ABS BASF; Ineos ammonia Pensacola, FL
plastics;
synthetic resins;
synthetic
lubricants;
paper chemicals;
plasticizers
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(a) Major plants are comprised of those facilities at which each of the
identified major products conclude their respective manufacturing
processes. The major products may pass through other of Solutia's plants
prior to the final sale to customers.
7
PRINCIPAL EQUITY AFFILIATES
As of December 31, 2006, Solutia participated in one principal joint
venture, its Flexsys joint venture with Akzo Nobel. The Flexsys joint venture
is comprised of interests in Flexsys Holding B.V., Flexsys America L.P. and
Flexsys Rubber Chemicals Ltd.
Flexsys, headquartered in Brussels, Belgium, is a leading global
supplier of a broad range of rubber processing chemicals to the rubber
industry used in the production of tires and other general rubber products
such as automotive belts, hoses, bumpers and window seals and in mining,
agriculture and oil refining applications. Its product line includes a number
of performance-enhancing products, including branded accelerators
(SANTOCURE(R), THIOFIDE(TM) and THIOTAX(TM)), pre-vulcanization inhibitors
(SANTOGARD(R) PVI), antidegradants (SANTOFLEX(R)), antioxidants (FLECTOL(R))
and insoluble sulphur (CRYSTEX(TM)). In February 2007, Solutia and Akzo Nobel
reached a definitive agreement for Solutia to purchase Akzo Nobel's interest
in the Flexsys joint venture.
Prior to November 4, 2005, Solutia participated in another joint
venture, Astaris. Astaris was formed in April 2000 as a joint venture between
Solutia and FMC Corporation ("FMC"). Solutia and FMC each held 50 percent of
the equity interests in Astaris. On November 4, 2005, Solutia, FMC and Astaris
sold substantially all of Astaris' assets to Israel Chemicals Limited ("ICL")
for $255 million in cash (subject to certain purchase price adjustments) and
the assumption by ICL of certain related liabilities. Certain of the assets
and liabilities of Astaris that were not included in the sale to ICL were
transferred to Solutia and FMC. Generally, these assets and liabilities
consist of property originally contributed to the joint venture by Solutia and
FMC, as well as certain pre-closing liabilities relating to Astaris, including
certain pre-closing environmental liabilities. In addition, certain
non-operating assets and liabilities remained in the Astaris joint venture as
part of the transaction. Further, the name of the joint venture which holds
these remaining assets and liabilities was changed from Astaris LLC to Siratsa
LLC.
Solutia's equity earnings (loss) from affiliates were $38 million in
2006, $96 million in 2005 and $(26) million in 2004. For additional
information about the Flexsys joint venture and Siratsa, see "Management's
Discussion and Analysis" in Item 7 below and Note 9 to the accompanying
consolidated financial statements.
SALE OF PRODUCTS
Solutia sells its products directly to end users in various
industries, principally by using its own sales force, and, to a lesser extent,
by using distributors.
Solutia's marketing and distribution practices do not result in
unusual working capital requirements on a consolidated basis. Solutia
maintains inventories of finished goods, goods in process and raw materials to
meet customer requirements and Solutia's scheduled production. In general,
Solutia does not manufacture its products against a backlog of firm orders; it
schedules production to meet the level of incoming orders and the projections
of future demand. However, in the Performance Products segment, a large
portion of sales for 2007 will be pursuant to volume commitments. Solutia does
not have material contracts with the government of the United States or any
state, local or foreign government, however, sales to the carpet mill industry
represent a significant portion of Solutia's net sales. In 2006, no single
customer or customer group accounted for 10 percent or more of Solutia's net
sales. However, for the year ended December 31, 2005, Shaw Industries, Inc., a
customer of the Integrated Nylon segment, accounted for approximately 11
percent of Solutia's consolidated net sales. Mohawk Industries, Inc. was a
significant customer of the Integrated Nylon segment in 2006 and 2005,
accounting for approximately 9 percent and 8 percent of Solutia's consolidated
net sales respectively.
Solutia's second and third quarters are typically stronger than its
first and fourth quarters because sales of carpet and window films are
stronger in the spring and fall.
COMPETITION
The global markets in which Solutia's businesses operate are highly
competitive. Solutia expects competition from other manufacturers of the same
products and from manufacturers of different products designed for the same
uses as Solutia's products to continue in both U.S. and international markets.
Depending on the product involved, Solutia encounters various types of
competition, including price, delivery, service, performance, product
innovation, product recognition and quality. Overall, Solutia regards its
principal product groups as competitive with many other products of other
producers and
8
believes that Solutia is an important producer of many of these product
groups. For additional information regarding competition in specific markets,
see the charts under "Segments; Principal Products" above.
RAW MATERIALS AND ENERGY RESOURCES
Solutia buys large amounts of commodity raw materials and energy
resources, including propylene, cyclohexane, benzene, vinyl acetate, polyvinyl
alcohol, 2-ethyl hexanol and natural gas. Solutia typically buys major
requirements for key raw materials pursuant to contracts with average
contractual periods of one to four years. Solutia obtains certain important
raw materials from a few major suppliers. In general, in those cases where
Solutia has limited sources of raw materials, it has developed contingency
plans to the extent practicable to minimize the effect of any interruption or
reduction in supply. However, Solutia also purchases raw materials from some
single source suppliers in the industry and in the event of an interruption or
reduction in supply, might not be able to mitigate any negative effects.
While temporary shortages of raw materials and energy resources may
occasionally occur, these items are generally sufficiently available to cover
Solutia's current and projected requirements. However, their continuing
availability and price may be affected by unscheduled plant interruptions and
domestic and world market conditions, political conditions and governmental
regulatory actions. Due to the significant quantity of some of these raw
materials and energy resources used by Solutia, a minor shift in the
underlying prices for these items can result in a significant impact on
Solutia's consolidated financial position and results of operations.
PATENTS AND TRADEMARKS
Solutia owns a large number of patents that relate to a wide variety
of products and processes and has pending a substantial number of patent
applications. In addition, Solutia is licensed under a small number of patents
owned by others. Solutia owns a considerable number of established trademarks
in many countries under which Solutia markets its products. These patents and
trademarks in the aggregate are of material importance to Solutia's operations
and to Solutia's Performance Products and Integrated Nylon segments. Patents
and trademarks owned by Solutia and its domestic subsidiary CPFilms Inc. have
been pledged as part of the collateral for the DIP credit facility. The
holders of Solutia's 11.25 percent Senior Secured Notes due 2009 have a junior
security interest in these patents and trademarks. Solutia Europe S.A./N.V.'s
("SESA") patents and trademarks of have been pledged to the holders of SESA's
(euro)200 million Facility Agreement. For additional information on the
(euro)200 million Facility Agreement, please see "Management's Discussion and
Analysis" in Item 7 below.
RESEARCH AND DEVELOPMENT
Research and development constitute an important part of Solutia's
activities. Solutia's expenses for research and development amounted to $38
million in 2006, $41 million in 2005 and $40 million in 2004, or about 1.4
percent of sales on average. Solutia focuses its expenditures for research and
development on process improvements and selected product development.
Solutia's research and development programs in the Performance
Products segment include new products and processes for the window glazing and
specialty chemicals markets. Significant progress was achieved in developing a
new acoustic safety interlayer, improved window films that mitigate or enhance
the reception of electronic signals through windows, a new aviation fluid and
environmentally friendly water treatment products. Several process
technologies were developed to support the construction of SAFLEX(R) plants.
Solutia's Integrated Nylon segment continues to focus on internal process
improvements to mitigate increasing raw material prices and to commercialize
new products to address customer needs and improve product mix.
ENVIRONMENTAL MATTERS
The narrative information appearing under "Environmental Matters"
beginning on page 41 below is incorporated here by reference.
9
EMPLOYEE RELATIONS
On December 31, 2006, Solutia had approximately 5,100 employees
worldwide, 632 of whom work in Europe. Approximately 450 of the European
employees are represented by the union delegation. Approximately 14 percent of
Solutia's U.S. workforce is currently represented by various labor unions with
local agreements that expire between November 23, 2007 and March 31, 2010, at
the following Solutia sites: Anniston, Alabama; Sauget, Illinois; Springfield,
Massachusetts; and Trenton, Michigan. In the U.S., local agreements cover
wages and working conditions. Each of Solutia's U.S. labor unions ratified new
five-year collective bargaining agreements in 2005 which set pension and
health and welfare benefits for Solutia's employees who are represented by
labor unions. These agreements expire on December 31, 2010.
INTERNATIONAL OPERATIONS
Solutia and its subsidiaries are engaged in manufacturing, sales and
research and development in areas outside the United States. Approximately 46
percent of Solutia's consolidated sales from continuing operations in 2006
were made into markets outside the United States, including Europe, Canada,
Latin America and Asia. Solutia's Performance Products segment is increasingly
dependent on its international operations as Solutia is currently building a
plant for the manufacturing of SAFLEX(R) in Suzhou, China to provide more
exposure in Asia for Performance Products. The plant in China will also expose
the Performance Products segment to more competition. Approximately 69 percent
of the 2006 sales of the Performance Products segment were made into markets
outside the United States.
Operations outside the United States are potentially subject to a
number of risks and limitations that are not present in domestic operations,
including trade restrictions, investment regulations, governmental instability
and other potentially detrimental governmental practices or policies affecting
companies doing business abroad. Operations outside the United States are also
subject to fluctuations in currency values. The functional currency of each of
Solutia's non-United States operations is generally the local currency.
Exchange rates between these currencies and U.S. dollars have fluctuated
significantly in recent years and may continue to do so. In addition, Solutia
generates revenue from export sales and operations conducted outside the
United States that may be denominated in currencies other than the relevant
functional currency.
INTERNET ACCESS TO INFORMATION
Solutia's Internet address is www.solutia.com. Solutia makes
available free of charge through Solutia's Internet website its annual report
on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K,
and any amendments to these reports as soon as reasonably practicable after
they are electronically filed with, or furnished to, the Securities and
Exchange Commission ("SEC"). All of these materials may be accessed from the
"Investors" section of Solutia's website, www.solutia.com. These materials may
also be accessed through the SEC's website (www.sec.gov) or in the SEC's
Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information
on the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
10
ITEM 1A. RISK FACTORS
IN EVALUATING SOLUTIA, CAREFUL CONSIDERATION SHOULD BE GIVEN TO THE RISK
FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS
ANNUAL REPORT ON FORM 10-K. ALTHOUGH THESE RISK FACTORS ARE MANY, THESE
FACTORS SHOULD NOT BE REGARDED AS CONSTITUTING THE ONLY RISKS ASSOCIATED WITH
OUR BUSINESSES. EACH OF THESE RISK FACTORS COULD ADVERSELY AFFECT OUR
BUSINESS, OPERATING RESULTS AND/OR FINANCIAL CONDITION. IN ADDITION TO THE
FOLLOWING DISCLOSURES, PLEASE REFER TO THE OTHER INFORMATION CONTAINED IN THIS
REPORT INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.
CERTAIN BANKRUPTCY CONSIDERATIONS
PROLONGED CONTINUATION OF THE CHAPTER 11 CASES MAY HARM THE DEBTORS' BUSINESSES
The prolonged continuation of the Chapter 11 Cases could adversely
affect our businesses and operations. So long as the Chapter 11 Cases
continue, our senior management will be required to spend a significant amount
of time and effort dealing with our reorganization instead of focusing
exclusively on business operations. Prolonged continuation of the Chapter 11
Cases may also make it more difficult to attract and retain management and
other key personnel necessary to the success and growth of our businesses. In
addition, the longer the Chapter 11 Cases continue, the more likely it is that
our customers, suppliers, distributors and agents will lose confidence in our
ability to successfully reorganize our businesses and seek to establish
alternative commercial relationships. Furthermore, so long as the Chapter 11
Cases continue, we will be required to incur substantial costs for
professional fees and other expenses associated with the proceedings. The
prolonged continuation of the Chapter 11 Cases may also require us to seek
additional financing, either as part of the DIP credit facility or otherwise,
in order to service our debt and other obligations. We may not be able to
obtain additional financing during the pendency of the Chapter 11 Cases on
commercially favorable terms or at all. If we were to require additional
financing during the Chapter 11 Cases and were unable to obtain the financing
on favorable terms or at all, it is unlikely that we could successfully
reorganize.
WE MAY NOT BE ABLE TO OBTAIN CONFIRMATION OF THE PLAN
To successfully emerge from Chapter 11 bankruptcy protection as a
viable entity, Solutia, like any debtor, must obtain approval of a plan of
reorganization from its creditors, confirmation of the plan through the
Bankruptcy Court and successfully implement this confirmed plan. The foregoing
process requires Solutia to (i) meet certain statutory requirements with
respect to the adequacy of disclosure with respect to any proposed plan, (ii)
solicit and obtain creditor acceptances of the proposed plan, and (iii)
fulfill other statutory conditions with respect to plan confirmation.
With regard to any proposed plan of reorganization we may not receive
the requisite acceptances to confirm a plan. Even if the requisite acceptances
of a proposed plan are received, the Bankruptcy Court may not confirm the plan
as proposed. A dissenting holder of a claim against us could challenge the
balloting procedures and results as not being in compliance with the
Bankruptcy Code. Finally, even if the Bankruptcy Court determined that the
balloting procedures and results were appropriate, the Bankruptcy Court could
still decline to confirm a proposed plan if it found that any of the statutory
requirements for confirmation had not been met. Specifically, section 1129 of
the Bankruptcy Code sets forth the requirements for confirmation and requires,
among other things, a finding by the Bankruptcy Court that (i) the debtor's
plan "does not unfairly discriminate" and is "fair and equitable" with respect
to any non-accepting classes, (ii) confirmation of the debtor's plan is not
likely to be followed by a liquidation or a need for further financial
reorganization, and (iii) the value of distributions to non-accepting holders
of claims within a particular class under the debtor's plan will not be less
than the value of distributions such holders would receive if the debtor was
liquidated under Chapter 7 of the Bankruptcy Code. The Bankruptcy Court may
determine that a proposed plan does not satisfy one or more of these
requirements, in which case the proposed plan would not be confirmed by the
Bankruptcy Court.
If Solutia's Plan filed on February 14, 2006, or an amended version
of that plan is not confirmed by the Bankruptcy Court, it is unclear whether
Solutia would be able to reorganize its businesses and what, if any,
distributions holders of claims against or equity interests in Solutia
ultimately would receive with respect to their claims or equity interests.
There also can be no assurance that Solutia will be able to successfully
develop, prosecute, confirm, and consummate an alternative plan of
reorganization with respect to the chapter 11 cases that is acceptable to the
Bankruptcy Court and Solutia's creditors, equity holders and other parties in
interest. There can be no assurance that such an alternative plan of
reorganization would preserve
11
the reallocation of the Legacy Liabilities that is achieved in the Plan, which
eliminates legacy tort liability exposure, reduces environmental obligations,
and significantly reduces Solutia's exposure with regard to retiree
obligations. Additionally, it is possible that third parties may seek and
obtain approval to terminate or shorten the exclusivity period during which
only Solutia may propose and confirm a plan of reorganization. Finally,
Solutia's emergence from bankruptcy is not assured. While we expect to emerge
from bankruptcy in the future, there can be no assurance that we will
successfully reorganize, or when this reorganization will occur.
THE CHANGE OF CONTROL PRODUCED BY OUR RESTRUCTURING MAY RESULT IN A LIMITATION
ON OR LOSS OF NET OPERATING LOSSES FOR FEDERAL INCOME TAX PURPOSES
Our issuance of common stock in a reorganized Solutia, along with the
cancellation of existing equity interests may cause us to undergo an ownership
change upon emergence from Chapter 11. As a result, Section 382 of the
Internal Revenue Code ("IRC") may apply to limit our use of consolidated net
operating losses upon emergence. Additionally, our ability to use any
remaining capital loss carryforwards and tax credits may be limited. The
annual limitation imposed by the particular provision of Section 382 of the
IRC that reorganized Solutia expects to apply to its ownership change
generally equals the product of (i) the fair market value of the net equity
value of our stock at the time of the ownership change, taking into account
the increase in value of the corporation as a result of the surrender or
cancellation of creditor's claims in the transaction (rather than the value
without taking into account such increases, as is the case under the general
rule for non-bankruptcy ownership changes) multiplied by (ii) the long-term
tax-exempt rate in effect for the month in which the ownership change occurs.
The long-term tax-exempt rate is published monthly by the IRS and is intended
to reflect current interest rates on long-term tax-exempt debt obligations.
Accordingly, under this rule the Section 382 limitation would generally
reflect the increase in the value of reorganized Solutia's stock resulting
from the conversion of debt to equity in the proceeding. Section 383 of the
IRC applies a similar limitation to a capital loss carryforward and tax
credits. Although it is impossible to predict with absolute certainty the net
equity value of reorganized Solutia immediately upon emergence from Chapter
11, reorganized Solutia's use of its net operating losses is expected to be
substantially limited after an ownership change.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
THE PRICES OF RAW MATERIALS AND ENERGY REQUIRED FOR US TO PRODUCE OUR PRODUCTS
ARE VOLATILE AND CANNOT ALWAYS BE PASSED ON TO CUSTOMERS
We purchase large amounts of commodity raw materials, including
natural gas, propylene, cyclohexane and benzene. Temporary shortages of these
raw materials and energy sources may occasionally occur. In addition, we
typically purchase major requirements for key raw materials under medium-term
contracts. Pricing under these contracts may fluctuate as a result of
unscheduled plant interruptions, United States and worldwide market conditions
and government regulation. Given our competitive markets, it is not always
possible to pass all of these increased costs on to our customers. In
addition, natural gas prices and other raw material and energy costs are
currently more than double the average ten-year levels. Elevated raw material
and energy costs could significantly reduce our operating margins in the
future.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY THAT INCLUDES COMPETITORS WITH
GREATER RESOURCES THAN OURS
The markets in which we compete are highly competitive. Competition
in these markets is based on a number of factors, such as price, product
quality and service. Some of our competitors may have greater financial,
technological and other resources than we do and may be better able to
withstand changes in market conditions. In addition, some of our competitors
may be able to respond more quickly to new or emerging technologies and
changes in customer requirements than us. Consolidation of our competitors or
customers may also adversely affect our businesses. Furthermore, global
competition and customer demands for efficiency will continue to make price
increases difficult.
WE OPERATE IN CYCLICAL BUSINESS SEGMENTS AND OUR FINANCIAL RESULTS ARE LIKELY
TO FLUCTUATE ACCORDINGLY
We operate in cyclical business segments. Specifically, a substantial
portion of our sales are to customers involved, directly or indirectly, in the
housing and automotive industries, both of which are, by their nature,
cyclical industries. A downturn in either or both of these industries would
result in lower demand for our products among customers involved in those
industries and a reduced ability to pass on cost increases to those customers.
12
TURNOVER IN THE SENIOR MANAGEMENT TEAM AND LOSSES OF OTHER KEY PERSONNEL COULD
HAVE A SIGNIFICANT ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND ABILITY TO
EMERGE FROM CHAPTER 11
The services of our senior management team, as well as other key
personnel, have been integral in our improving results during the Chapter 11
Cases and will be critical to the implementation of our business strategies
going forward and our success. If our emergence from the Chapter 11 Cases is
delayed, our financial results diminish, the terms of incentive compensation
programs are not adequate or any other adverse events occur in the Chapter 11
Cases, we may have difficulty retaining current senior management and other
key personnel and be unable to hire qualified personnel to fill any resulting
vacancies, which could have a significant adverse effect on our results of
operations and ability to emerge from Chapter 11.
OUR OPERATIONS ARE RESTRICTED BY THE TERMS OF OUR CURRENT CREDIT FACILITIES
Our current credit facilities include a number of significant
restrictive covenants. These covenants could impair our financing and
operational flexibility and make it difficult for us to react to market
conditions and satisfy our ongoing capital needs and unanticipated cash
requirements. Specifically, such covenants restrict our ability and, if
applicable, the ability of our subsidiaries to, among other things:
o incur additional debt;
o make certain investments;
o enter into certain types of transactions with affiliates;
o limit dividends or other payments by Solutia and certain subsidiaries;
o use assets as security in other transactions;
o pay dividends on our common stock or repurchase our equity interests;
o sell certain assets or merge with or into other companies;
o guarantee the debts of others;
o enter into new lines of business;
o make capital expenditures;
o prepay, redeem or exchange our debt;
o form any joint ventures or subsidiary investments.
In addition, our current DIP credit facility requires us to
periodically meet minimum capital expenditures on a consolidated bases and
minimum EBITDA levels on a consolidated basis and for a certain business
segment. Our (euro)200 million Facility Agreement requires us to periodically
meet leverage ratios, interest coverage ratios, capital expenditures, and cash
flow to debt service ratios on a SESA stand alone basis. These financial
covenants and tests could limit our ability to react to market conditions or
satisfy extraordinary capital needs and could otherwise restrict our financing
and operations.
Our ability to comply with the covenants and other terms of our debt
obligations will depend on our future operating performance. If we fail to
comply with such covenants and terms, we would be required to obtain waivers
from our lenders to maintain compliance with our debt obligations. If we are
unable to obtain any necessary waivers and the debt is accelerated, it would
have a material adverse effect on our financial condition and future operating
performance.
13
WE HAVE AND WILL CONTINUE TO HAVE SIGNIFICANT INDEBTEDNESS
We have and will continue to have a significant amount of
indebtedness. Solutia's significant indebtedness could have important
consequences, including the following:
o We will have to dedicate a significant portion of our cash flow to
making interest and principal payments on our indebtedness,
thereby reducing the availability of our cash flow to fund working
capital, capital expenditures, acquisitions or other general
corporate purposes.
o Levels of indebtedness may make us less attractive to potential
acquirors or acquisition targets.
o Levels of indebtedness may limit our flexibility to adjust to
changing business and market conditions, and make us more
vulnerable to downturns in general economic conditions as compared
to competitors that may be less leveraged.
o As described in more detail above, the documents providing for our
indebtedness contain restrictive covenants that may limit our
financing and operational flexibility.
Furthermore, our ability to satisfy our debt service obligations will
depend, among other things, upon our future operating performance and ability
to refinance indebtedness when necessary. These factors depend partly on
economic, financial, competitive and other factors beyond our control. We may
not be able to generate sufficient cash from operations to meet our debt
service obligations as well as fund necessary capital expenditures, pension
funding obligations and investments in research and development. In addition,
if we need to refinance our debt, obtain additional financing or sell assets
or equity, we may not be able to do so on commercially reasonable terms, if at
all.
LEGAL PROCEEDINGS, INCLUDING PROCEEDINGS RELATED TO ENVIRONMENTAL OBLIGATIONS,
COULD IMPOSE SUBSTANTIAL COSTS ON US
As a manufacturer of chemical-based materials, we have been subject
to various lawsuits involving environmental, hazardous waste, personal injury
and product liability claims. We are named in a number of legal proceedings
primarily relating to former operations, including claims for personal injury
and property damage arising out of releases of or alleged exposure to
materials that are classified as hazardous substances under federal
environmental law or alleged to be hazardous by plaintiffs. Adverse judgments
in these legal proceedings, or the filing of additional environmental or other
damage claims against us, may have a negative impact on our future results of
operations. Additionally, administrative and legal costs associated with
defending or settling large claims, or large numbers of claims, could have a
negative impact on our future results of operations. It is possible that the
Bankruptcy Court could disagree with our treatment of those claims. It is also
possible that third parties, including the U.S. federal government, state
regulatory agencies, or others, may challenge the dischargeability of these
claims. If these litigation matters or claims are not treated as contemplated
in our Plan, as filed, or if the actual costs are materially greater than
estimates associated with those claims, it could have a material adverse
effect on our financial condition and future operating performance.
THE APPLICABILITY OF NUMEROUS ENVIRONMENTAL LAWS TO OUR MANUFACTURING
FACILITIES COULD CAUSE US TO INCUR MATERIAL COSTS AND LIABILITIES
We are subject to extensive federal, state, local and foreign
environmental, safety and health laws and regulations concerning, among other
things, emissions to the air, discharges to land and water and the generation,
handling, treatment and disposal of hazardous waste and other materials. Under
certain environmental laws, we can be held strictly liable for hazardous
substance contamination of any real property we have ever owned, operated or
used as a disposal site or for natural resource damages associated with such
contamination. We are also required to maintain various environmental permits
and licenses, many of which require periodic modification and renewal. Our
operations entail the risk of violations of those laws and regulations, many
of which provide for substantial fines and criminal sanctions for violations.
In addition, these requirements and their enforcement may become more
stringent in the future. Non-compliance could subject us to material
liabilities, such as government fines, third-party lawsuits or the suspension
of non-compliant operations. We may also be required to make significant site
or operational modifications at substantial cost. Future developments could
also restrict or eliminate our ability to continue to manufacture certain
products or could require us to make modifications to our products.
14
At any given time, we are involved in litigation, administrative
proceedings and investigations of various types in a number of jurisdictions
involving potential environmental liabilities, including clean-up costs
associated with hazardous waste disposal sites, natural resource damages,
property damages and personal injury. We may be required to spend substantial
sums to defend or settle these actions, to pay any fines levied against us or
satisfy any judgments or other rulings rendered against us.
Liability under environmental laws relating to contaminated sites can
be imposed retroactively and on a joint and several basis. One liable party
could be held responsible for all costs at a site, regardless of fault,
percentage of contribution to the site or the legality of the original
disposal. We may also face liability for violations under environmental laws
occurring prior to the date of our acquisition of properties subject thereto.
We could incur significant costs, including cleanup costs, natural resources
damages, civil or criminal fines and sanctions and third-party claims as a
result of past or future violations of, or liabilities under, environmental
laws.
WE HAVE SUBSTANTIAL ENVIRONMENTAL AND REGULATORY COMPLIANCE COSTS
Due to the nature of our business, we make substantial expenditures
for environmental and regulatory compliance. During 2006, we spent
approximately $9 million on capital projects for various environmental
matters, $60 million for the management of environmental programs, including
the operation and maintenance of facilities for environmental control, and $10
million for remediation activities. Monsanto currently funds a number of the
environmental remediation sites as required under the Plan. However, if the
Plan or any other plan is not approved, we could become responsible for some
of the sites previously funded by Monsanto and these unexpected expenses could
affect our results of operations and financial condition.
The substantial amounts that we may be required to spend on
environmental capital projects and programs could cause substantial cash
outlays and, accordingly, may limit our financial and operating flexibility.
In addition, although we believe that we have correctly budgeted and, to the
extent appropriate under applicable accounting principles, reserved for these
amounts, factors beyond our control may render these budgeted and reserved
amounts inadequate. These factors include changing governmental policies and
regulations, the commencement of new governmental proceedings or third party
litigation regarding environmental remediation, hazardous waste or personal or
property damage resulting from environmentally harmful activity, the discovery
of unknown conditions and unforeseen problems encountered in environmental
remediation programs.
PROBLEMS ENCOUNTERED IN OPERATING OUR PRODUCTION FACILITIES COULD ADVERSELY
IMPACT OUR BUSINESS
Our production facilities are subject to hazards associated with the
manufacture, handling, storage and transportation of chemical materials and
products, including leaks and ruptures, explosions, fires, inclement weather
and natural disasters, unscheduled down time and environmental hazards. From
time to time in the past, we have had incidents that have temporarily shut
down or otherwise disrupted our manufacturing, causing production delays and
resulting in liability for workplace injuries and fatalities. We are dependent
upon the continued safe operation of our production facilities.
In addition, some of our products involve the manufacture or handling
of a variety of reactive, explosive and flammable materials. Use of these
products by our employees, customers and contractors could result in liability
to us if an explosion, fire, spill or other accident were to occur.
LABOR DISRUPTIONS WITH THE UNIONIZED PORTION OF OUR WORKFORCE COULD HAVE A
NEGATIVE EFFECT
As of December 31, 2006, approximately 14 percent of our U.S.
employees located in the Performance Products business segment were unionized.
They are represented by various labor unions with local agreements set to
expire between November 2007 and March 2010. While we believe that our
relations with our employees are good, we may not be able to negotiate these
or other collective bargaining agreements on the same or more favorable terms
as the current agreements, or at all, and without production interruptions,
including labor stoppages. A prolonged labor dispute, which could include a
work stoppage, could impact our ability to satisfy our customers' requirements
and negatively affect our financial condition.
15
WE FACE CURRENCY AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES
We generate revenue from export sales, as well as from operations
conducted outside the United States. For example, approximately 46 percent of
our consolidated sales in 2006 were made into markets outside the United
States, including Europe, Canada, Latin America and Asia. Approximately 69
percent of the sales of the Performance Products segment were made into
markets outside the United States. Operations outside the United States expose
us to risks which would adversely affect our results of operations and
financial conditions including fluctuations in currency values, trade
restrictions, tariff and trade regulations, foreign tax laws, shipping delays,
and economic and political instability.
The functional currency of each of our non-United States operations
is generally the local currency. Exchange rates between some of these
currencies and U.S. dollars have fluctuated significantly in recent years and
may do so in the future. It is possible that fluctuations in foreign exchange
rates will have a negative effect on our results of operations.
MANY OF OUR PRODUCTS AND MANUFACTURING PROCESSES ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGE AND OUR BUSINESS WILL SUFFER IF WE FAIL TO KEEP PACE
Many of our products (and their corresponding manufacturing
processes) participate in markets that are subject to rapid technological
change and new product introductions and enhancements. We must continue to
enhance our existing products and to develop and manufacture new products with
improved capabilities to continue to be a market leader. We must also continue
to make improvements in our manufacturing processes and productivity to
maintain our competitive position. When we invest in new technologies,
processes or production facilities, we will face risks related to construction
delays, cost over-runs and unanticipated technical difficulties related to
start-up. Our inability to anticipate, respond to, capitalize on or utilize
changing technologies could have an adverse effect on our consolidated results
of operations, financial condition and cash flows in any given period.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR SALES AND
FINANCIAL PERFORMANCE COULD BE ADVERSELY AFFECTED
We own a large number of patents that relate to a wide variety of
products and processes and have a substantial number of patent applications
pending. We own a considerable number of established trademarks in many
countries under which we market our products. These patents and trademarks in
the aggregate are of material importance to our operations and to our
Performance Products and Integrated Nylon segments. Our performance may depend
in part on our ability to establish, protect and enforce such intellectual
property and to defend against any claims of infringement, which involve
complex legal, scientific and factual questions and uncertainties.
In the future, we may have to rely on litigation to enforce our
intellectual property rights and contractual rights. In addition, we may face
claims of infringement that could interfere with our ability to use technology
or other intellectual property rights that are material to our business
operations. If litigation that we initiate is unsuccessful, we may not be able
to protect the value of some of our intellectual property. In the event a
claim of infringement against us is successful, we may be required to pay
royalties or license fees to continue to use technology or other intellectual
property rights that we had been using or we may be unable to obtain necessary
licenses from third parties at a reasonable cost or within a reasonable period
of time. If we are unable to obtain licenses on reasonable terms, we may be
forced to cease selling or using any of our products that incorporate the
challenged intellectual property, or to redesign or, in the case of trademark
claims, rename our products to avoid infringing the intellectual property
rights of third parties, which may not be possible and may be time-consuming.
Any litigation of this type, whether successful or unsuccessful, could result
in substantial costs to us and diversions of some of our resources. Our
intellectual property rights may not have the value that we believe them to
have, which could result in a competitive disadvantage or adversely affect our
business and financial performance.
SIGNIFICANT PAYMENTS MAY BE REQUIRED TO MAINTAIN THE FUNDING OF SOLUTIA'S
DOMESTIC QUALIFIED PENSION PLAN
We maintain a qualified pension plan under which certain of our
employees and retirees are entitled to receive benefits. Although we have
frozen future benefit accruals under the U.S. pension plan, significant
liabilities still remain. In order to fund the pension plan, we have made
significant contributions to the pension plan in 2006 amounting to
approximately $179 million and will have to fund more going forward. We may be
unable to obtain financing to make these pension plan contributions. In
addition, even if financing for these contributions is obtained, the funding
obligations and the carrying costs of debt incurred to fund the obligations
could have a significant adverse effect on our results of operations.
16
In addition, we are party to certain litigation with respect to our
domestic pension plan as more fully described in Part I, Item 3 - Legal
Proceedings. It is not known what funding liabilities may be required of
Solutia under the Employee Retirement Income Security Act (ERISA) 26 U.S.C.
ss. 412, 29 U.S.C. ss. 1082 and any other applicable law if a judgment is
entered against our pension plan in this litigation, given that we are the
sponsor of the Solutia Pension Plan. If a final judgment is entered against
the Solutia pension plan, the liability resulting from such judgment could
have a material adverse effect on our financial results and continuing
operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Solutia's general offices are located in St. Louis County, Missouri,
on land owned by Solutia in a facility which is the subject of a synthetic
lease (see Note 11 to the accompanying consolidated financial statements).
Solutia's principal European offices are located in Louvain-la-Neuve, Belgium,
on land leased from the University of Louvain. Information about Solutia's
major manufacturing locations worldwide and segments that used these locations
on February 1, 2007, appears under "Segments; Principal Products" in Item 1 of
this report and is incorporated here by reference.
Solutia's principal plants are suitable and adequate for their use.
Utilization of these facilities varies with seasonal, economic and other
business conditions. None of Solutia's principal plants is substantially idle.
Solutia's facilities generally have sufficient capacity for existing needs and
expected near-term growth.
Solutia owns most of its principal plants. However, at Antwerp,
Belgium and Sao Jose dos Campos, Brazil, both of which are sites belonging to
the current Monsanto Company, Solutia owns certain buildings and production
equipment and leases the underlying land.
Monsanto and Solutia have operating agreements with respect to each
of the two Monsanto facilities listed above and with respect to Solutia's
Chocolate Bayou facility in Alvin, Texas and its facility in Ghent, Belgium.
Under these operating agreements, Solutia is the guest at the facility and
Monsanto is the operator of the facility, except at the Alvin, Texas and Ghent
facilities at which Monsanto is the guest and Solutia is the operator. The
initial term of each of the operating agreements has 11 years remaining. After
the initial term, the operating agreements continue indefinitely unless either
party terminates on at least 24 months' prior written notice. Each of the
operating agreements also provides that, under certain circumstances, either
the operator or the guest may terminate the operating agreement before the
expiration of its initial term. Solutia operates several facilities for other
third parties on its sites, principally within the Alvin, Texas; Sauget,
Illinois; Pensacola, Florida; Newport, Wales (U.K.); and Springfield,
Massachusetts sites under long-term lease and operating agreements.
Mortgages on Solutia's plants at the following locations constitute a
portion of the collateral securing Solutia's DIP credit facility: Decatur,
Alabama; Springfield, Massachusetts; Trenton, Michigan; Greenwood, South
Carolina; Alvin (Chocolate Bayou), Texas; Pensacola, Florida; and
Martinsville, Virginia. The holders of Solutia's 11.25 percent Senior Secured
Notes due 2009 hold second mortgages on each of these plants. Holders of
SESA's (euro)200 million Facility Agreement hold mortgages on Solutia's
facilities in Ghent, Belgium and Louvain-la-Neuve, Belgium.
As a result of the Chapter 11 filing, Solutia has received notices of
mechanics' liens from a number of contractors seeking payment of pre-petition
claims. While contractors are permitted to take certain actions required to
perfect their liens after the commencement of the Chapter 11 case, such as
filing written notice, the automatic stay under Section 362 of the U.S.
Bankruptcy Code prevents them from taking any further action to enforce a lien
against Solutia's property unless they obtain court approval to lift the stay
for that purpose, and Solutia does not expect the filing of these mechanics'
liens to have any adverse effect on the operation of Solutia's plants.
17
ITEM 3. LEGAL PROCEEDINGS
Because of the size and nature of Solutia's 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. The estimated unsecured claim amount was
classified as a liability subject to compromise as of December 31, 2006 and
December 31, 2005 in the amount of $111 million and $136 million,
respectively.
Monsanto also indemnified Pharmacia with respect to a number of legal
proceedings described in Solutia's 2003 Form 10-K/A in which Solutia was a
named defendant or was defending solely due to its Pharmacia related
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; and (iv) premises based
- ------------------
asbestos litigation. Legal proceeding activities are currently being funded by
Monsanto for these matters. Monsanto's funding of these legal activities may
give rise to a claim against Solutia which Monsanto may assert in Solutia's
bankruptcy case.
Following is a summary of legal proceedings that Solutia or its
equity affiliate continue to manage that, if resolved unfavorably, could have
a material adverse effect on Solutia's results of operation and financial
position.
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 against Solutia in Solutia's bankruptcy case. In the 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 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 certain 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.
The Unsecured Creditors' Committee and the Ad Hoc Solutia Trade Claims
Committee have intervened in the proceeding in support of Solutia and the Ad
Hoc Committee of Solutia Noteholders has intervened in the proceeding in
support of JPMorgan.
Trial concluded on July 10, 2006. Post-trial briefs were submitted by
the parties in August 2006. The Bankruptcy Court has not made a ruling.
EQUITY COMMITTEE ADVERSARY PROCEEDING AGAINST MONSANTO AND PHARMACIA
On March 7, 2005, the 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. Solutia
was not named as a defendant. In its complaint, the Equity Committee seeks to
avoid certain obligations assumed by Solutia at the time of its spinoff from
Pharmacia. The complaint alleges, among other things, 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 complaint 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 complaint
and Objection to Claims, in which the Debtors expressed
18
their view that the issues and disputes raised in the 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 complaint. The Ad Hoc Committee of Solutia
Noteholders and the Ad Hoc Solutia Trade Claims Committee have intervened in
this adversary proceeding in support of the Equity Committee. Solutia and the
Unsecured Creditors' Committee have intervened in this adversary proceeding as
neutral parties due to the importance of this proceeding with respect to
Solutia's bankruptcy case. On September 14, 2006, the Court ruled that while
the Equity Committee did not have standing to pursue these claims on behalf of
the Debtors, it had standing to pursue its own objections to the claims of
Monsanto and Pharmacia. This matter was submitted to mediation but the parties
were unable to reach a consensual resolution. The adversary proceeding has
been stayed indefinitely by the parties, subject to certain rights of the
parties to recommence such proceeding.
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 Environmental Protection Agency ("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
million 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 stipulated 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 Solutia and Pharmacia 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.
In July 2006, Solutia and Pharmacia reached an agreement with EPA
that clarifies the extent of remaining obligations under the Anniston Consent
Decree and the coordination of that work with the lead site clean-up being
performed by others, and by which Solutia and Pharmacia will forego the
opportunity to suspend their obligations under the Anniston Consent Decree
pursuant to the PCB Order. Solutia and Pharmacia preserved their rights under
this agreement to continue to argue that the contribution protection afforded
certain other potentially responsible parties performing lead site clean-up
should not be effective as to Solutia and Pharmacia.
19
PENNDOT CASE
Solutia's Annual Report on Form 10-K/A for the year ended December
31, 2003 described a case then pending in the Commonwealth Court of
Pennsylvania by the Commonwealth of Pennsylvania against Pharmacia seeking
damages for PCB contamination in the Transportation and Safety Building ("T&S
Building") in Harrisburg, Pennsylvania, that it claimed necessitated the
demolition of the T&S Building. Solutia was not a named defendant in this
litigation and therefore took no action to stay the litigation in connection
with its Chapter 11 proceedings. Solutia assumed the defense of this
litigation at the time of its spin-off from Pharmacia. Solutia determined that
its obligation to defend and indemnify Pharmacia with regard to this
litigation was a pre-petition obligation that Solutia was prohibited from
performing, except pursuant to a confirmed plan of reorganization. Therefore,
Solutia ceased defending Pharmacia with respect to this litigation. Solutia
did, however, provide a $20 million letter of credit to secure a portion of
Pharmacia's obligations with respect to an appeal bond issued with respect to
the case.
On May 25, 2006 the Supreme Court of Pennsylvania issued its ruling
on the appeal in this case, reversing in whole and remanding in part the
decision of the trial court against Pharmacia. As a result of this ruling, the
$20 million letter of credit that Solutia had committed to partially secure
the appeal bond was released. With the release of the bond, Solutia recognized
a gain in its Consolidated Statement of Operations during the second quarter
2006 from the reversal of a significant portion of the existing litigation
reserve with respect to this matter.
FLEXSYS RELATED LITIGATION
Since 2002, antitrust authorities in the United States, Europe and
Canada are continuing to investigate past commercial practices in the rubber
chemicals industry including the practices of Flexsys, Solutia's joint venture
with Akzo Nobel. The European Commission issued its findings from its
investigation in 2005, without levying any fines against Flexsys.
Investigations regarding the industry may still be on-going in the United
States and Canada, but to date, no findings have been made against Flexsys in
either country.
In addition, a number of purported civil class actions have been
filed against Flexsys and other producers of rubber chemicals on behalf of
indirect purchasers of rubber chemical products. Solutia is aware of a series
of these purported class actions which had been filed against Flexsys in
various state courts in the United States and in at least four courts in
Canada. Except for two cases pending in the United States, all of the
remaining cases have been dismissed, or are currently subject to tentative
settlements.
CASH BALANCE PLAN LITIGATION
Davis v. Solutia Inc. Employees' Pension Plan; Hammond, et al. v.
-----------------------------------------------------------------
Solutia Inc. Employees' Pension Plan. Since October 2005, current or former
- ------------------------------------
participants in the Solutia Inc. Employees' Pension Plan (the "Pension Plan")
have filed three class actions alleging that the Pension Plan is
discriminatory based upon age and that the lump sum values of individual
account balances in the Pension Plan have been, and continue to be,
miscalculated. None of the Debtors, and no individual or entity other than the
Pension Plan, has been named as a defendant in any of these cases. Two of
these cases, captioned Davis, et al. v. Solutia, Inc. Employees' Pension Plan
and Hammond, et al. v. Solutia, Inc. Employees' Pension Plan, are still
pending in the Southern District of Illinois against Monsanto Company and
Monsanto Company Pension Plan (Walker et al. v. The Monsanto Pension Plan, et
al.) and Pharmacia Cash Balance Pension Plan, Pharmacia Corporation, Pharmacia
and Upjohn, Inc., and Pfizer Inc. (Donaldson v. Pharmacia Cash Balance Pension
Plan, et al.). The plaintiffs in the Pension Plan 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.
A Consolidated Class Action Complaint (the "Complaint") was filed by
all of the plaintiffs in the consolidated case on September 4, 2006. The
plaintiffs in the Complaint alleged three separate causes of action against
the Pension Plan: (1) the Pension Plan violates ERISA by terminating interest
credits on prior plan accounts at the age of 55; (2) the Pension Plan is
improperly backloaded in violation of ERISA; and (3) the Pension Plan is
discriminatory on the basis of age.
Motions for class certification were filed in late 2006 by the
plaintiffs against each of the defendants. With respect to the Pension Plan,
plaintiffs moved to certify a class only on their first claim: i.e., that the
Pension Plan discriminated against employees on the basis of their age by only
providing interest credits on prior plan accounts through age 55. Briefing on
the class certification motions was completed in January 2007 and the motion
is still pending before the court.
20
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 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' 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 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 could 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. The parties have fully briefed the appeal, and oral arguments are
expected to be held in mid 2007.
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. On February 20, 2004, Solutia voluntarily dismissed
the state court action and filed an adversary proceeding against FMC in the
Bankruptcy Court. FMC 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 did not
allege a counterclaim against Solutia or Astaris.
FMC filed a motion to dismiss Solutia's action based upon an alleged
lack of standing. 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.
The parties have completed all fact discovery and submitted cross
motions for Summary Judgment. On July 31, 2006, the District Court entered its
Memorandum Opinion and Order on the Motions. It granted portions of FMC's
Motion for Summary Judgment by ruling that Solutia cannot attempt to establish
its breach of fiduciary duty claim by maintaining that the parties were in a
joint venture or had a special relationship prior to April 2000. The District
Court, however, denied FMC's Motion for Summary Judgment on the breach of
fiduciary duty claim and held that Solutia will be permitted to prove at trial
that FMC had special knowledge concerning its technology which can give rise
to a fiduciary duty. The District Court further overruled the parties' Motion
for Summary Judgment on the remaining claims. The District Court ruled Solutia
may still be entitled to punitive damages in addition to its claims for
out-of-pocket and lost profit damages.
A bench trial on the four claims noted above is scheduled to begin in
April 2007.
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 SESA, 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. SESA'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
21
Reasoned Report to the BCA on December 22, 2005. Solutia is not named as a
party under investigation in the Reasoned Report. SESA 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 SESA are fully cooperating with the BCA in this
investigation.
Department of Labor Investigation of Solutia Inc. Savings and
-------------------------------------------------------------
Investment Plan. Solutia was contacted in 2005 by the Department of Labor
- ---------------
("DOL"), through the Employee Benefits Security Administration, informing
Solutia that it wanted to conduct an investigation of Solutia's SIP Plan.
Solutia fully cooperated with the DOL throughout the investigation.
On December 6, 2006, the DOL issued a letter stating that, based on
facts gathered, it appeared that Solutia, through its fiduciaries, breached
its fiduciary obligations and violated provisions of ERISA with respect to the
SIP Plan. Specifically, the DOL stated that it found no evidence that: (1) the
Pension and Savings Funds Committee ("PSFC") sufficiently monitored the Solutia
Stock Fund option within the SIP Plan to determine if the Solutia Stock Fund
continued to be a prudent investment for the SIP Plan prior to December 15,
2003; and (2) the Solutia Board of Directors, CEO, and PSFC, prior to
December 15, 2003, adequately monitored the SIP Plan fiduciaries, including
the PSFC, the Employee Benefits Plan Committee, and the Northern Trust Company
of Connecticut. The DOL did not assert in its letter that the SIP Plan or its
participants had been harmed by these alleged breaches. Further, the DOL did
not find that the offering of the Solutia Stock Fund as an investment option
in the SIP Plan was itself a violation of ERISA, or that it caused any
participant to suffer investment losses. Further, the DOL did not assert any
monetary fines or penalties against the Company based on its findings to date.
The DOL stated in the letter that its findings were subject to the possibility
that additional information could lead the DOL to revise its views.
The DOL did not choose to file suit against the Solutia fiduciaries,
instead offering Solutia the opportunity to voluntarily discuss how the
alleged violations may be corrected. Solutia has submitted additional
information to the DOL to support the Company's request for reconsideration of
the DOL's findings.
Solutia Canada Inc. v. INEOS Americas LLC. Solutia Canada Inc.
-----------------------------------------
("Solutia Canada") filed suit in Quebec Court in December 2006, alleging
breach of contract by INEOS Americas LLC ("INEOS"). In late 2002, Solutia
negotiated a Stock and Asset Sale Agreement for the sale of its Resimenes &
Additives business to UCB S.A ("UCB"). As part of this agreement, Solutia
agreed to exclude the LaSalle assets from the agreement and entered into the
LaSalle Toll Agreement ("LTA") with UCB. The LTA passed through all the
benefits and risks of ownership of the LaSalle operations to UCB, other than
pre-closing environmental liabilities. In the LTA, Solutia Canada agreed to
operate its LaSalle Plant for the benefit of UCB and to provide all the
necessary services to convert UCB's raw materials on a cost-neutral basis.
Thus, UCB would pay Solutia Canada for all of its actual, direct and indirect
costs incurred in connection with the performance or supply of services under
the LTA or in holding itself ready to perform or supply those services. In the
years after its execution, the LTA was assigned by UCB to Cytec Industries,
Inc., then to INEOS.
On January 31, 2006, INEOS notified Solutia Canada of its intention
to terminate the LTA as of January 31, 2008, in compliance with the terms of
the LTA. INEOS' decision to terminate the LTA will likely trigger the shutdown
of all activities at the LaSalle Plant, resulting in termination costs
recoverable by Solutia Canada against INEOS. Solutia Canada estimates that the
overall termination costs associated with the termination of the LTA and the
shutdown of the LaSalle Plant will total approximately $31 million (CAD).
Solutia Canada provided INEOS with an estimate of the expected termination
costs prior to the notice of termination. INEOS has disputed the overall
amount of Solutia Canada's termination costs.
Under the detailed dispute resolution procedures in the LTA, Solutia
Canada and INEOS were required to engage in negotiation and other means of
dispute resolution prior to filing any litigation. In compliance with these
obligations, Solutia Canada and INEOS negotiated extensively throughout 2006
to reach a resolution regarding the termination costs, but were unsuccessful.
After the period for mandatory alternative dispute resolution expired, Solutia
filed suit against INEOS in Quebec Court on December 8, 2006, for breach of
the LTA with respect to termination costs. The case is pending.
22
Texas Commission on Environmental Quality Administrative Enforcement
--------------------------------------------------------------------
Proceeding. On August 11, 2006, the Executive Director of the Texas Commission
- ----------
on Environmental Quality commenced an administrative enforcement proceeding
against Solutia by filing a petition with the Texas Commission on
Environmental Quality. The petition alleges certain violations of the State of
Texas air quality program. The Executive Director requests that an
administrative penalty, the amount of which is immaterial, be assessed and
that Solutia undertake corrective actions to ensure compliance with the Texas
Health and Safety Code and the rules of the Commission in connection with
alleged self-reported unauthorized emission events and deviations of air
permits. Solutia answered the petition on September 1, 2006, asserted
affirmative defenses and requested a contested enforcement case hearing.
Solutia and the Commission have agreed to settle and are negotiating
settlement terms. The hearing date has been continued pending settlement.
For information about certain environmental proceedings involving Solutia, see
"Environmental Matters" on page 41.
RISK MANAGEMENT
Solutia has evaluated risk retention and insurance levels for product
liability, workplace health and safety, property damage and other potential
areas of risk. Solutia's management determines the amount of insurance
coverage to acquire from unaffiliated companies and the appropriate amount of
risk to retain and/or co-insure based on the cost and availability of
insurance and the likelihood of a loss. Management believes that the levels of
risk that Solutia has retained are consistent with those of other companies in
the chemical industry. Solutia shares certain of these policies with
Pharmacia. There can be no assurance that Solutia will not incur losses beyond
the limits, or outside the coverage, of its insurance. For additional
information, see "Self-Insurance" on page 30.
Solutia will continue to devote significant effort to maintaining and
improving safety and internal control programs, which reduce its exposure to
certain risks. Solutia actively participates in the safety and health
Voluntary Protection Program ("VPP") administered by the Occupational Safety
and Health Administration ("OSHA") for most sites in the United States, and
implements the program at most sites outside the United States.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Solutia did not submit any matters to its security holders during
2006.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER'S PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 17, 2003, following Solutia's Chapter 11 bankruptcy
filing, the New York Stock Exchange ("NYSE") halted trading in Solutia's
common stock. On February 27, 2004, Solutia's common stock was delisted from
the NYSE. Solutia's common stock is currently being quoted under the ticker
symbol "SOLUQ" on the Pink Sheets Electronic Quotation Service maintained by
The Pink Sheets LLC and on the OTC Bulletin Board.
Under the Plan, Solutia's existing shares of common stock, as well as
options and warrants to purchase its common stock, will be cancelled and
holders of Solutia's common stock, including options and warrants to purchase
Solutia's common stock, will not receive any consideration for that stock or
those options and warrants.
The following table shows the high and low sales prices for Solutia's
common stock for each quarter during 2006 and 2005 as quoted on the Pink
Sheets Quotation Service or the OTC Bulletin Board, as applicable.
- ---------------------------------------------------------------------------------------------
2006 HIGH LOW 2005 HIGH LOW
- ---------------------------------------------------------------------------------------------
First Quarter $0.50 $0.28 First Quarter $1.69 $0.63
- ---------------------------------------------------------------------------------------------
Second Quarter 0.50 0.35 Second Quarter 1.37 0.33
- ---------------------------------------------------------------------------------------------
Third Quarter 0.52 0.33 Third Quarter 0.86 0.53
- ---------------------------------------------------------------------------------------------
Fourth Quarter 0.75 0.39 Fourth Quarter 0.70 0.34
- ---------------------------------------------------------------------------------------------
On February 28, 2007, Solutia had 28,890 registered shareholders.
No dividends were paid in 2006 or 2005. Solutia is currently
prohibited by both the U.S. Bankruptcy Code and the DIP credit facility from
paying dividends to shareholders.
24
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY
- ------------------------------------------------------------------------------------------------------------------
(Dollars and shares in millions, except
per share amounts)
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
OPERATING RESULTS:
- ------------------
NET SALES $2,905 $2,759 $2,637 $2,379 $2,243
GROSS PROFIT 381 322 221 83 353
As percent of net sales 13% 12% 8% 3% 16%
MARKETING, ADMINISTRATIVE, AND
TECHNOLOGICAL EXPENSES 278 273 279 339 310
As percent of net sales 10% 10% 11% 14% 14%
OPERATING INCOME (LOSS)(1) 102 48 (59) (259) 42
As percent of net sales 4% 2% (2)% (11)% 2%
INCOME (LOSS) BEFORE TAXES (29) 19 (286) (502) (15)
INCOME (LOSS) FROM CONTINUING
OPERATIONS (2) (47) 7 (284) (900) (5)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX 58 4 (32) (82) 21
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX -- (3) -- (5) (167)
NET INCOME (LOSS) 11 8 (316) (987) (151)
PER SHARE DATA:
- ---------------
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE FROM CONTINUING OPERATIONS (2) $(0.45) $0.07 $(2.72) $(8.60) $(0.05)
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 104.5 104.5 104.5 104.6 104.7
DIVIDENDS PER SHARE -- -- -- -- 0.04
COMMON STOCK PRICE:
HIGH 0.75 1.69 1.39 4.89 13.20
LOW 0.28 0.33 0.15 0.23 2.81
CLOSE 0.75 0.45 1.17 0.37 3.63
FINANCIAL POSITION - CONTINUING OPERATIONS:
- -------------------------------------------
TOTAL ASSETS $ 2,055 $ 1,915 $ 1,995 $ 2,339 $ 2,512
LIABILITIES NOT SUBJECT TO COMPROMISE 1,622 1,236 1,306 1,320 3,388
LIABILITIES SUBJECT TO COMPROMISE 1,849 2,176 2,187 2,220 --
LONG-TERM DEBT (3) 210 247 285 294 839
SHAREHOLDERS' DEFICIT (1,417) (1,454) (1,444) (1,125) (249)
OTHER DATA FROM CONTINUING OPERATIONS:
- --------------------------------------
WORKING CAPITAL (4) $ (275) $ (5) $ (7) $ 57 $ (270)
INTEREST EXPENSE (5) 104 84 113 119 82
INCOME TAX EXPENSE (BENEFIT) (6) 18 12 (2) 398 (10)
DEPRECIATION AND AMORTIZATION 111 111 120 127 125
CAPITAL EXPENDITURES 106 77 51 72 51
EMPLOYEES (YEAR-END) 5,100 5,400 5,700 6,300 7,300
- ------------------------------------------------------------------------------------------------------------------
<FN>
(1) Operating income (loss) includes net restructuring (gains)/charges and
other items of ($7 million) in 2006, $14 million in 2005, $62 million in 2004,
$228 million in 2003 and $22 million in 2002.
(2) Income (loss) from continuing operations includes net restructuring
charges and other (gains)/charges of $3 million, or ($0.03) per share in 2006,
($37) million, or ($0.35) per share in 2005, $146 million, or $1.40 per share
in 2004, $793 million, or $7.58 per share in 2003, and $15 million, or $0.14
per share in 2002.
(3) Long-term debt excludes $668 million as of December 31, 2006, 2005 and
2004 and $625 million as of December 31, 2003 of debt classified as subject to
compromise in accordance with Statement of Position 90-7, Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code, as a result of
Solutia's Chapter 11 bankruptcy filing in 2003.
(4) Working capital is defined as total current assets less total current
liabilities.
(5) Interest expense includes the write-off of debt issuance costs of $8
million in 2006, $25 million in 2004 and $14 million in 2003 due to the early
refinancing of the underlying debt facilities.
(6) Income tax expense (benefit) includes an increase in valuation allowances
of $24 million in 2006, $12 million in 2005, $108 million in 2004, and
$542 million in 2003.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 for more information.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and accompanying notes thereto
included in Item 8 of this Form 10-K.
OVERVIEW
Solutia's reportable segments and their major products are as
follows:
PERFORMANCE PRODUCTS
- --------------------
SAFLEX(R) plastic interlayers
LLUMAR(R), VISTA(R), GILA(R) and FORMULA ONE PERFORMANCE AUTOMOTIVE FILM(R)
professional and retail window films
THERMINOL(R) heat transfer fluids
DEQUEST(R) water treatment chemicals
SKYDROL(R) aviation hydraulic fluids and SKYKLEEN(R) brand of aviation
solvents
ASTROTURF(R), CLEAN MACHINE(R) and CLEAR PASS(TM) entrance matting and
automotive spray suppression flaps
INTEGRATED NYLON
- ----------------
Nylon intermediate "building block" chemicals
Nylon polymers, including VYDYNE(R) and ASCEND(R)
Carpet fibers, including the WEAR-DATED(R) and ULTRON(R) brands
Industrial nylon fibers
Solutia evaluates the performance of its reportable segments based on
segment profit, defined as 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 of the segments are excluded. These unallocated items consist
primarily of corporate expenses, 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. See Note 22 to the consolidated financial statements for
further information.
Summary of Significant 2006 Events
Senior Management Changes
- -------------------------
Solutia has continued to restructure its senior management team
during 2006. 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. On February 22, 2006, Jeffry N. Quinn, Solutia's President and
Chief Executive Officer, was elected by the board of directors as Chairman of
the Board of Solutia. In connection with Mr. Quinn's election as Chairman of
the Board, Paul H. Hatfield was named as the lead non-employee director.
26
Reorganization Strategy
- -----------------------
In 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 Chapter 11 and making changes to its asset portfolio, as explained
below. Solutia also continues to pursue a reallocation of legacy liabilities
in the Chapter 11 proceeding through negotiations with the other constituents
in the Chapter 11 case. Solutia continues to work to establish a proper
capital structure upon emergence from Chapter 11. However, as a result of the
numerous uncertainties and complexities inherent in Solutia's Chapter 11
proceedings, its ability and timing of emergence from Chapter 11 are subject
to significant uncertainty.
PERFORMANCE ENHANCEMENT
Solutia benefited in 2006 from several actions implemented earlier in
the Chapter 11 reorganization process designed to enhance its performance.
These included implementing significant general and administrative expense
reductions; increasing performance-based compensation and benefits programs;
making 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 credit facility on March 17, 2006 with
Bankruptcy Court approval. This amendment, among other things, (i) increased
the DIP credit facility from $525 million to $825 million; (ii) extended the
term of the DIP credit facility from June 19, 2006 to March 31, 2007; and
(iii) decreased the interest rate on the term loan component of the DIP credit
facility from LIBOR plus 425 basis points to LIBOR plus 350 basis points.
On July 26, 2006, Solutia's indirect 100% owned subsidiary Solutia
Services International S.C.A./Comm. V.A. ("SSI"), a subsidiary of SESA,
entered into a (euro)200 million Facility Agreement (the "Facility Agreement")
that closed on August 1, 2006. SESA used the proceeds from the Facility
Agreement to refinance all of its (euro)200 million of 10 percent Euronotes
due 2008 (the "Euronotes") on August 1, 2006. The refinancing significantly
reduced the fixed interest rate of 10 percent to a lower adjustable rate
structure of EURIBOR plus 275 basis points, which was 6.31 percent at December
31, 2006.
Solutia expects that both of these refinancings will provide greater
flexibility in executing Solutia's reorganization strategy along with
significant interest savings.
A key element of Solutia's reorganization strategy is a significantly
more proactive commercial approach, one that recognizes that the long-term
success of its customers requires a strong and dependable supplier. This new
commercial perspective strives for a true partnership and is not based on the
premise that the suppliers subsidize investments in materials, technology or
people. Solutia's commercial approach has better managed with customers the
risk of movements in the oil and energy markets, in some cases via formula
pricing, to ensure the value chain remains connected to key raw material and
energy cost inputs. Solutia intends to ensure the long term success of our
customers by pricing its products adequately to fund customer-driven
technology and innovation resulting in a stream of highly innovative and
unique products and services. This commercial approach benefited the Company
significantly in 2006, as the Company was able to expand operating margins,
even though raw materials were approximately $91 million higher than 2005.
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 2006. On March 1, 2006, pursuant to a stock purchase
agreement among Solutia, Vitro and Vitro Plan, a wholly-owned subsidiary of
Vitro, Solutia acquired Vitro Plan's 51 percent stake in 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.
27
In addition, SESA sold its pharmaceutical services business to
Dishman Pharmaceuticals and Chemicals Ltd. ("Dishman") pursuant to a Stock and
Asset Purchase Agreement on August 22, 2006. Under the terms of the agreement,
Dishman purchased 100 percent of the stock of the pharmaceutical services
business, for $77 million.
On February 27, 2007, Solutia reached a definitive agreement to
purchase Akzo Nobel's stake in the Flexsys joint venture. Solutia and Akzo
Nobel have entered into a letter agreement committing the parties to execute
the definitive agreement upon completion of consultation with Dutch employee
works council representatives. The proposed transaction is subject to approval
by the United States Bankruptcy Court, receipt of required regulatory
approvals, finalizing the definitive purchase agreement for Akzo Nobel's
Crystex manufacturing operations in Japan and the fulfillment of other
customary closing conditions. Solutia will fund the purchase via $150 million
of funding under the January 2007 amended DIP credit facility and additional
funding through Flexsys.
In addition, Solutia continues to evaluate its options, including
potential sales, with respect to certain of its non-core businesses and assets
in order to maximize the value of such non-core assets for stakeholders.
REALLOCATION OF LEGACY LIABILITIES
The Plan and Disclosure Statement provide for, among other things,
the reallocation of certain Legacy Liabilities among Solutia, Monsanto and
Pharmacia and sets forth the treatment that various constituencies in the
Chapter 11 Cases would receive under the Plan. See Note 1 to the accompanying
consolidated financial statements for further description of the Plan and
Disclosure Statement, as well as a summary of developments in Solutia's
ongoing Chapter 11 bankruptcy case.
Summary Results of Operations
The discussion below and 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.
Net sales and operating income (loss) of Solutia are as follows for
the years ended December 31:
- ----------------------------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Net Sales.................................................................... $2,905 $2,759 $2,637
====== ====== ======
Operating Income (Loss):
Performance Products Segment Profit (a).................................. $ 133 $ 126 $ 89
Integrated Nylon Segment Profit (Loss) (a)............................... 9 (26) (59)
Add: Corporate Expenses............................................. (45) (64) (89)
Add: Equity (Earnings) Loss from Affiliates, Other (Income) Expense,
and Reorganization Items, net included in Segment Profit (Loss)..... 5 12 --
------ ------ ------
Operating Income (Loss)...................................................... $ 102 $ 48 $ (59)
====== ====== ======
Gains (Charges) included in Operating Income (Loss).......................... $ 7 $ (14) $ (62)
====== ====== ======
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(a) See Note 22 to the accompanying consolidated financial statements for
description of the computation of operating segment profit (loss).
The $146 million, or 5 percent, increase in net sales in 2006
reflects higher average selling prices of approximately 6 percent, partially
offset by lower sales volumes of approximately 1 percent. Solutia's net sales
for 2005 increased by $122 million, or 5 percent, as compared to 2004. This
increase in net sales reflected higher average selling prices of approximately
11 percent, partially offset by lower sales volumes of approximately 6
percent.
As indicated in the preceding table, operating results for each year
were affected by various charges which are described in greater detail in the
"Results of Operations" section below. Operating income improved by $54
million in 2006 as compared to 2005 primarily as a result of higher net sales
and controlled spending, partially offset by higher overall raw
28
material and energy costs of $91 million. The 2005 results as compared to the
2004 results improved by $107 million, primarily as a result of higher net
sales and controlled spending, partially offset by higher raw material and
energy costs of $220 million.
Financial Information
- ---------------------
Summarized financial information concerning Solutia and subsidiaries
in reorganization and subsidiaries not in reorganization as of and for the
year-ended December 31, 2006 is presented as follows:
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
Net sales................................. $ 2,388 $ 975 $ (458) $ 2,905
Operating income.......................... 13 65 24 102
Net income................................ 11 85 (85) 11
Total assets.............................. 1,763 849 (557) 2,055
Liabilities not subject to compromise..... 1,217 470 (64) 1,623
Liabilities subject to compromise......... 1,963 -- (114) 1,849
Total shareholders' equity (deficit)...... (1,417) 379 (379) (1,417)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements and related
footnotes. In preparing these consolidated financial statements, Solutia has
made its best estimates of certain amounts included in these consolidated
financial statements. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ materially from
these estimates. Management has discussed the development, selection and
disclosure of these critical accounting policies and estimates with the Audit
and Finance Committee of Solutia's Board of Directors.
Solutia believes that the estimates, assumptions and judgments
involved in the accounting policies described below have the greatest
potential impact on the consolidated financial statements and require
assumptions that can be highly uncertain at the time the estimate is made.
Solutia considers the following items to be its critical accounting policies:
o Environmental Remediation
o Self-Insurance
o Income Taxes
o Impairment of Long-Lived Assets
o Impairment of Goodwill and Indefinite-Lived Intangible Assets
o Pension and Other Postretirement Benefits
Solutia also has other significant accounting policies. Solutia
believes that, compared to the critical accounting policies listed above, the
other policies either do not generally require estimates and judgments that
are as difficult or as subjective, or are less likely to have a material
impact on the reported results of operations for a given period.
Environmental Remediation
With respect to environmental remediation obligations, Solutia's
policy is to accrue costs for remediation of contaminated sites in the
accounting period in which the obligation becomes probable and the cost is
reasonably estimable. Cost estimates for remediation are developed by
assessing, among other items, (i) the extent of Solutia's contribution to the
environmental matter; (ii) the number and financial viability of other
potentially responsible parties; (iii) the scope of the anticipated
remediation and monitoring plan; (iv) settlements reached with governmental or
private parties; and (v) Solutia's past experience with similar matters.
Solutia's estimates of the environmental remediation reserve requirements
typically fall within a range. If Solutia believes no best estimate exists
within a range of possible outcomes, in accordance with existing
29
accounting guidance, the minimum loss is accrued. Environmental liabilities
are not discounted, and they have not been reduced for any claims for
recoveries from third parties.
These estimates are critical because Solutia must forecast
environmental remediation activity into the future, which is highly uncertain
and requires a large degree of judgment. Therefore, the environmental reserves
may materially differ from the actual liabilities if Solutia's estimates prove
to be inaccurate, which could materially affect results of operations in a
given period. Uncertainties related to recorded environmental liabilities
include changing governmental policy and regulations, judicial proceedings,
the number and financial viability of other potentially responsible parties,
the method and extent of remediation and future changes in technology. Because
of these uncertainties, the potential liability for existing environmental
remediation reserves not subject to compromise may range up to two times the
amounts recorded. These valuations of future environmental costs do not
contemplate the uncertainties inherent in Solutia's bankruptcy proceedings, as
the potential impact of the Chapter 11 proceedings upon future environmental
costs cannot be reasonably determined at this time. Due to these
uncertainties, certain of the environmental liabilities have been classified
as subject to compromise in the Consolidated Statement of Financial Position
as of December 31, 2006, and have been excluded from the aforementioned range
of possible outcomes of existing environmental remediation reserves. The
potential liability for existing environmental remediation reserves classified
as subject to compromise, if ultimately retained by Solutia as part of an
accepted plan of reorganization, could be materially different than amounts
recorded. The estimate for environmental liabilities is a critical accounting
estimate for both reportable segments.
Self-Insurance
Solutia maintains self-insurance reserves to cover its estimated
future legal costs, settlements and judgments related to workers'
compensation, product, general, automobile and operations liability claims
that are less than policy deductible amounts or not covered by insurance.
Self-insured losses are accrued based upon estimates of the aggregate
liability for claims incurred using certain actuarial assumptions followed in
the insurance industry, Solutia's historical experience and certain
case-specific reserves as required, including estimated legal costs. The
maximum extent of the self-insurance provided by Solutia and related insurance
recoveries are dependent upon a number of factors including the facts and
circumstances of individual cases and the terms and conditions of the
commercial policies. Solutia has purchased commercial insurance in order to
reduce its exposure to workers' compensation, product, general, automobile and
property liability claims. Policies for periods prior to the Solutia Spinoff
are shared with Pharmacia. This insurance has varying policy limits and
deductibles. When recovery from an insurance policy is considered probable, a
receivable is recorded. Self-insurance reserve estimates are critical because
changes to the actuarial assumptions used in the development of these reserves
can materially affect earnings in a given period and Solutia must forecast
loss activity into the distant future which is highly uncertain and requires a
large degree of judgment.
Actuarial reserve indications are projections of the remaining future
payments for workers' compensation, product, general, automobile and
operations liability claims for which Solutia is legally responsible. These
projections are made in the context of an uncertain future where variations
between estimated and actual amounts are attributable to many factors,
including changes in operations, changes in judicial environments, shifts in
the types or timing of the reporting of claims, changes in the frequency or
severity of losses and random chance. The actuarial estimates of the reserve
requirements fall within a range. The actuary's best estimate of the liability
is generally near the middle of the actuary's range; accordingly, Solutia has
recorded the liability at this level. The range of outcomes is not material to
the consolidated financial statements for losses that are not stayed by the
Chapter 11 proceedings. These valuations of future self-insurance costs do not
contemplate the uncertainties inherent in Solutia's bankruptcy proceedings, as
the potential impact of the Chapter 11 proceedings upon future self-insurance
costs cannot be reasonably determined at this time. Due to these
uncertainties, certain of the self-insurance liabilities have been classified
as subject to compromise in the Consolidated Statement of Financial Position
as of December 31, 2006, and have been excluded from the range of possible
outcomes of existing self-insurance reserves. The potential liability for
existing self-insurance liabilities classified as subject to compromise, if
ultimately retained by Solutia as part of an accepted plan of reorganization,
could be materially different than amounts recorded. The estimate for
self-insurance liabilities is a critical accounting estimate for both
reportable segments.
Income Taxes
Solutia accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities at enacted rates. Solutia
bases its estimate of deferred tax assets and liabilities on current tax laws
and rates and, in certain cases, business plans and other expectations about
future outcomes. Solutia records a valuation
30
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized. While Solutia has considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need
for the valuation allowance, in the event Solutia were to determine that it
would be able to realize its deferred tax assets in the future in excess of
its net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise, should
Solutia determine that it would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset
would be charged to income in the period such determination was made. The
consolidated financial statements include increases in valuation allowances as
a result of uncertainty created by Solutia's Chapter 11 bankruptcy filing.
Solutia's accounting for deferred tax consequences represents
management's best estimate of future events that can be appropriately
reflected in the accounting estimates. Changes in existing tax laws,
regulations, rates and future operating results may affect the amount of
deferred tax liabilities or the valuation of deferred tax assets over time.
Impairment of Long-Lived Assets
Impairment tests of long-lived assets, including finite-lived
intangible assets, are made when conditions indicate the carrying value may
not be recoverable. The carrying value of a long-lived asset is considered
impaired when the total projected undiscounted cash flows from such asset are
separately identifiable and are less than its carrying value. Solutia's
estimate of the cash flows is based on information available at that time
including these and other factors: sales forecasts, customer trends, operating
rates, raw material and energy prices and other global economic indicators and
factors. If an impairment is indicated, the asset value is written down to its
fair value based upon market prices or, if not available, upon discounted cash
value, at an appropriate discount rate determined by Solutia to be
commensurate with the risk inherent in the business model. These estimates are
critical because changes to Solutia's assumptions used in the development of
the impairment analyses can materially affect earnings in a given period and
Solutia must forecast cash flows into the future which is highly uncertain and
requires a significant degree of judgment. The consolidated financial
statements do not reflect any adjustments for the impairment of long-lived
assets that may result as part of the approval and implementation of a plan of
reorganization to be submitted as part of the Chapter 11 bankruptcy process.
The estimate for impairment of long-lived assets is a critical accounting
estimate for both reportable segments.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are reviewed for
impairment annually under the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 142, Goodwill and Other Intangible Assets. However, as
required by SFAS No. 142, impairment analyses are performed more frequently if
changes in circumstances indicate the carrying value may not be recoverable
during the intervening period between annual impairment tests. Solutia
performs the review for impairment at the reporting unit level. The impairment
assessment is completed by determining the fair values of the reporting units
using income and market multiple approaches and comparing those fair values to
the carrying values of the reporting units. If the fair value of a reporting
unit is less than its carrying value, Solutia then allocates the fair value of
the reporting unit to all the assets and liabilities of that reporting unit.
The excess of the fair value of the reporting unit over the amounts assigned
to its assets and liabilities is the implied fair value of the goodwill. If
the carrying value of the reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized for this
differential. This valuation process involves assumptions based upon
management's best estimates and judgments that approximate the market
conditions experienced at the time the impairment assessment is made. These
assumptions include but are not limited to earnings and cash flow projections,
discount rate and peer company comparability. Actual results may differ from
these estimates due to the inherent uncertainty involved in such estimates.
The consolidated financial statements do not reflect any adjustments for the
impairment of goodwill and indefinite-lived intangible assets that may result
as part of the approval and implementation of a plan of reorganization to be
submitted as part of the Chapter 11 bankruptcy process. The estimate for
impairment of goodwill and indefinite-lived intangible assets is a critical
accounting estimate for the Performance Products reportable segment. The
Integrated Nylon reportable segment does not have goodwill or indefinite-lived
intangible assets.
Pension and Other Postretirement Benefits
Under the provisions of SFAS No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, measurement of the obligations under the defined benefit
pension plans and the other postemployment benefit ("OPEB") plans are subject
to several significant estimates. These estimates include the rate of return
on plan assets, the rate at which the future obligations are discounted to
value the liability and health care cost trend rates. Additionally, the cost
of providing benefits depends on demographic assumptions including
31
retirements, mortality, turnover and plan participation. Solutia typically
uses actuaries to assist it in preparing these calculations and determining
these assumptions. Solutia's annual measurement date is December 31 for both
the pension and OPEB plans.
The expected long-term rate of return on pension plan assets
assumption was 8.75 percent and 9.00 percent in 2006 and 2005, respectively.
The expected long-term rate of return on pension plan assets assumption is
based on the target asset allocation policy and the expected future rates of
return on these assets. A hypothetical 25 basis point change in the assumed
long-term rate of return would result in a change of approximately $2 million
to pension expense.
The discount rate used to remeasure the pension plans was 5.75 in
2006 and 5.50 percent in 2005, and the discount rates to remeasure the other
postretirement benefit plans were 5.75 percent in 2006 and 5.50 percent in
2005. Solutia establishes its discount rate based upon the internal rate of
return for a portfolio of high quality bonds with maturities consistent with
the nature and timing of future cash flows for each specific plan. A
hypothetical 25 basis point change in the discount rate for Solutia's pension
plans results in a change of approximately $19 million in the projected
benefit obligation and less than a $1 million change in pension expense. A
hypothetical 25 basis point change in the discount rate for Solutia's OPEB
plans results in a change of approximately $8 million in the accumulated
benefit obligation and less than $1 million change to OPEB expense.
Solutia estimated the five-year assumed trend rate for healthcare
costs in 2006 to be 9 percent with the ultimate trend rate for healthcare
costs grading by 1 percent each year to 5 percent by 2010 and remaining at
that level thereafter. A 1 percent change in the assumed health care cost
trend rate would have changed the postretirement benefit obligation by $3
million as of December 31, 2006 and would have had a less than $1 million
change to OPEB expense in 2006. Solutia's costs for postretirement medical
benefits are capped for many current retirees and active employees; therefore,
the impact of this hypothetical change in the assumed health care cost trend
rate is limited.
These valuations of future pension and other postretirement costs do
not include the uncertainties inherent in Solutia's Chapter 11 bankruptcy
proceedings, as the potential impact of the Chapter 11 proceedings upon future
spending for these items cannot be reasonably determined at this time. Due to
these uncertainties, all pension and postretirement liabilities related to
Solutia entities that have filed Chapter 11 bankruptcy have been classified as
subject to compromise in the Consolidated Statement of Financial Position as
of December 31, 2006.
RESULTS OF OPERATIONS
Performance Products
- ----------------------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Net Sales.................................................................... $1,174 $1,117 $1,049
====== ====== ======
Segment Profit............................................................... $ 133 $ 126 $ 89
====== ====== ======
Net Charges and Reorganization Items, net included in Segment Profit .... $ (12) $ (10) $ (23)
====== ====== ======
- ----------------------------------------------------------------------------------------------------------------
The $57 million, or 5 percent, increase in 2006 net sales compared to
2005 resulted from higher selling prices of approximately 4 percent and
increased sales volumes of approximately 1 percent. Higher average selling
prices were experienced in SAFLEX(R) plastic interlayer products, LLUMAR(R)
and VISTA(R) professional film products and THERMINOL(R) heat transfer fluids.
Increased sales volumes were experienced in SAFLEX(R) plastic interlayer
products, due to increasing demand and inclusion of sales from the Puebla,
Mexico plant for ten months during 2006 as a result of the Quimica acquisition
as further discussed in Note 4, and, LLUMAR(R) and VISTA(R) professional film
products, partially offset by lower volumes in DEQUEST(R) water treatment
chemicals and THERMINOL(R) heat transfer fluids.
The $68 million, or 6 percent, increase in 2005 net sales compared to
2004 resulted from higher selling prices of approximately 4 percent and
increased sales volumes of approximately 2 percent. Higher average selling
prices were experienced in SAFLEX(R) plastic interlayer products, LLUMAR(R)
and Vista(R) professional window film products and THERMINOL(R) heat transfer
fluids. Increased sales volumes were experienced in SAFLEX(R) plastic
interlayer products and THERMINOL(R) heat transfer fluids, partially offset by
lower volumes due to the cessation of Solutia's chlorobenzenes operations in
2004.
32
The $7 million, or 6 percent, improvement in 2006 segment profit in
comparison to 2005 resulted principally from higher net sales, partially
offset by higher raw material and energy costs of $22 million and higher
charges. Segment profit in 2006 included $8 million of reorganization items,
which consisted primarily of restructuring charges related to the shut down of
operations at the Queeny Plant in St. Louis, Missouri and other non-strategic
operations, as well as $4 million of restructuring charges consisting
principally of severance costs for non-debtor entities that was not included
within reorganization items. Segment profit in 2005 included $8 million of
reorganization items, which consisted primarily of adjustments to record
certain pre-petition claims at estimated amounts of the allowed claims, as
well as $2 million of restructuring charges consisting principally of
severance costs for non-debtor entities that was not included within
reorganization items.
The $37 million improvement in 2005 segment profit in comparison to
2004 resulted principally from lower charges and higher net sales, partially
offset by higher raw material and energy costs. Segment profit in 2005
included $8 million of reorganization items, which consisted primarily of
adjustments to record certain pre-petition claims at estimated amounts of the
allowed claims, as well as $2 million of restructuring charges consisting
principally of severance costs for non-debtor entities that was not included
within reorganization items. Segment profit in 2004 included $21 million of
charges, including $18 million of restructuring costs related principally to
the closure of Solutia's chlorobenzenes operations as well as certain other
non-strategic operations, and $3 million of asset write-offs and repairs and
maintenance charges resulting from the impact of Hurricane Ivan at the
Martinsville, Virginia plant. Segment profit in 2004 also included $2 million
of reorganization items involving primarily severance related costs incurred
as part of Solutia's overall reorganization process.
Integrated Nylon
- ----------------------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Net Sales.................................................................... $1,731 $1,642 $1,588
====== ====== ======
Segment Profit (Loss)........................................................ $ 9 $ (26) $ (59)
====== ====== ======
Net Charges included in Segment Profit (Loss)............................ $ (6) $ (14) $ (5)
====== ====== ======
- ----------------------------------------------------------------------------------------------------------------
The $89 million, or 5 percent, increase in 2006 net sales as compared
to 2005 resulted primarily from higher average selling prices of approximately
8 percent, partially offset by lower sales volumes of approximately 3 percent.
Average selling prices increased in all businesses as a result of favorable
market conditions and in response to the escalating cost of raw materials.
Lower sales volumes were experienced within carpet fibers in 2006 and sales
volumes were impacted by the exit from the unprofitable acrylic fibers
operations in the second quarter 2005. These volume reductions were partially
offset by higher sales volumes in intermediate chemicals and nylon plastics
and polymers.
The $54 million, or 3 percent, increase in 2005 net sales as compared
to 2004 resulted primarily from higher average selling prices of approximately
16 percent, partially offset by lower sales volume of approximately 13
percent. Average selling prices increased in all businesses in response to the
escalating cost of raw materials. Sales volumes were negatively affected by
Hurricanes Dennis, Katrina and Rita, which forced certain manufacturing
facilities to reduce production rates due to the shortages of certain raw
materials. Furthermore, Solutia declared force majeure in late September 2005
for certain products within its Integrated Nylon segment as a result of the
these raw material and utility supply limitations some of which are a result
of force majeure declarations by certain of Solutia's suppliers. The force
majeure declaration was removed by Solutia in late November 2005. In addition,
as a precaution for Hurricane Rita, the manufacturing facility in Alvin, Texas
was forced to completely shut down its operations. This production slowdown
did not allow Solutia to fully meet customer demand while certain customers
were unable to take product due to their own operational issues resulting from
the hurricanes. Sales volumes were also adversely affected as a result of
Solutia's shutdown of the acrylic fibers operations in the second quarter 2005
but were partially offset because certain Solutia produced intermediate
chemicals previously supplied to the acrylic fiber operations were sold into
the intermediates merchant market. In addition, sales volumes were negatively
impacted in 2005 as a result of contract rejections and terminations in the
intermediate chemicals business in 2004.
Segment profit increased $35 million from a segment loss of $26
million in 2005 to a segment profit of $9 million in 2006 primarily as a
result of higher net sales and lower charges, partially offset by higher raw
material and energy costs of approximately $70 million and unfavorable
manufacturing costs. The unfavorable manufacturing costs were precipitated by
33
a manufacturing interruption incurred at the Alvin, Texas facility, resulting
in a significant turnaround being accelerated in its timing, as well as
extended in its duration, during the first quarter of this year. Partially
offsetting this impact is favorable manufacturing variances experienced in the
second half of 2006 due to 2005 operations being negatively impacted by
Hurricanes Katrina and Rita as discussed below.
Segment profit in 2006 also included reorganization items of $6
million comprised of $3 million of decommissioning and dismantling costs
primarily due to the shut-down of the acrylic fibers business in 2005, $2
million of asset write-downs related to the exiting of various unprofitable
businesses within the segment and $1 million of severance and retraining
costs. The reorganization items in 2006 decreased by $8 million from 2005 due
to lower shut-down costs as segment profit in 2005 consisted of $13 million
principally to shut-down the acrylic fibers business as discussed below.
Segment losses decreased $33 million in 2005 as compared to 2004
primarily as a result of higher net sales, partially offset by higher raw
material and energy costs of approximately $176 million. In addition, segment
loss was affected by the aforementioned hurricanes experienced in 2005.
Although Solutia's manufacturing facilities did not suffer significant
physical damage, the manufacturing facility in Alvin, Texas was forced to
completely shut down its operations ahead of Hurricane Rita as a precaution.
Further, reduced availability of key raw material and energy sources affected
the ability of certain plants to operate at normal production levels. As a
result, Solutia experienced significant costs involved in shutting down and
restarting these operations, significant unabsorbed fixed costs and lost sales
volumes. Furthermore, the aforementioned declaration of force majeure by
Solutia and certain of its customers as a result of the hurricanes had a
negative impact on segment profit in 2005. In total, the amount of these
aforementioned hurricane related costs was approximately $36 million in 2005.
The hurricanes also resulted in a significant increase in raw material and
energy prices during 2005. Solutia was successful in passing along a portion
of these increases in raw materials and energy costs; however, approximately
$19 million of these costs were directly absorbed by the Integrated Nylon
segment. Further, it is anticipated segment profit in the first quarter 2006
will be negatively impacted by higher than expected costs experienced as part
of a planned shut-down at the manufacturing facility in Alvin, Texas.
Segment profit in 2005 also included reorganization items of $14
million comprised of $13 million principally due to the shut-down of the
acrylic fibers business and $1 million of other restructuring charges. The
shut-down costs included $12 million of asset write-downs, $7 million of
decontamination and dismantling costs and $4 million of severance and
retraining costs, partially offset by a $7 million gain from the reversal of
the LIFO reserve associated with the inventory sold and/or written off as part
of the business shut-down and a $3 million gain from the sale of certain
acrylic fibers assets. In addition, segment profit in 2004 was affected by $5
million of charges resulting from the impact of Hurricane Ivan at the
Pensacola, Florida and Foley, Alabama manufacturing facilities involving
primarily repairs and maintenance costs, as well as asset write-offs.
Corporate Expenses
- ----------------------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Corporate Expenses........................................................... $ 45 $ 64 $ 89
====== ====== ======
Net Gains (Charges) included in Corporate Expenses....................... $ 11 $ (13) $ (35)
====== ====== ======
- ----------------------------------------------------------------------------------------------------------------
Corporate expenses decreased by $19 million, or 30 percent, in 2006
as compared to 2005 principally due to lower charges. After consideration of
the net gains and charges recorded in 2006 and 2005, the change in corporate
expenses was also impacted by a year over year increase in the Company's LIFO
reserve, partially offset by controlled spending in the corporate function.
Included in 2006 gains were a $20 million gain that resulted from the reversal
of a litigation reserve with respect to a litigation matter that was decided
favorably (as further described in Note 20 of the accompanying consolidated
financial statements), partially offset by a $9 million environmental charge
that 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. The $13
million charge recorded in 2005 resulted from curtailment and settlement
activities as a result of amendments to Solutia's pension and postretirement
plans (as more fully described in Note 16 to the accompanying consolidated
financial statements).
Corporate expenses decreased by $25 million, or 28 percent, in 2005
as compared to 2004 principally due to lower charges and other declines in
corporate spending. Included in 2005 and 2004 corporate expenses were $13
million and $35 million, respectively, of net pension and other postretirement
benefit plan curtailments and settlements (as more fully
34
described in Note 16 to the accompanying consolidated financial statements).
In addition, Solutia experienced continued benefits in 2005 of cost reduction
measures taken in the second half of 2004 as part of implementing its overall
reorganization strategy, partially offset by a modest increase in legal costs.
Equity Earnings (Loss) from Affiliates
- -----------------------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Flexsys Equity Earnings (Loss)...................................................$ 37 $ 35 $ (20)
Astaris LLC Equity Earnings (Loss)............................................... -- 59 (7)
Other Equity Earnings from Affiliates included in Reportable Segment
Profit (Loss).............................................................. 1 2 1
------ ------ ------
Equity Earnings (Loss) from Affiliates...........................................$ 38 $ 96 $ (26)
====== ====== ======
Gains (Charges) included in Equity Earnings (Loss) from Affiliates...........$ (4) $ 52 $ (49)
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------
Equity earnings (loss) from affiliates were affected by various items
in both 2006 and 2005. During 2006, equity earnings from affiliates included
$3 million in restructuring charges related to production asset
rationalization and plant closures and $2 million related to asset impairment
charges, partially offset by a non-operational gain of $1 million due to the
reversal of a litigation reserve related to the Flexsys joint venture. During
2005, equity earnings from affiliates were impacted by a $50 million net gain
realized in the Astaris joint venture from the sale of a majority of its
assets to Israel Chemicals Limited ("ICL"), who purchased substantially all of
the operating assets of Astaris for $255 million. Equity earnings in 2005 also
included $2 million of net gains related to the Flexsys joint venture comprising
a non-operational gain of $5 million, partially offset by $3 million of various
restructuring charges. Flexsys earnings for 2006 were favorably impacted by a
reduction in administrative expenses in comparison to 2005.
Equity earnings (loss) from affiliates were affected by various items
in both 2005 and 2004. During 2005, equity earnings from affiliates were
impacted by a $50 million net gain realized in the Astaris joint venture from
the sale of a majority of its assets. Under the terms of the agreement, ICL
purchased substantially all of the operating assets of Astaris for $255
million, subject to certain purchase price adjustments. Equity earnings in
2005 also included $2 million of net gains related to the Flexsys joint
venture comprising a non-operational gain of $5 million, partially offset by
$3 million of various restructuring charges. During 2004, equity loss from
affiliates was negatively affected by $49 million in restructuring and
litigation charges resulting from (i) restructuring charges related to
production asset rationalization and certain plant closures at both the
Flexsys and Astaris joint ventures; (ii) severance charges at both the Flexsys
and Astaris joint ventures; and (iii) charges recorded by the Flexsys joint
venture related to litigation contingencies. Also included in the 2005 results
compared to 2004 were higher earnings from both Astaris and Flexsys. Astaris'
earnings improved as a result of improved product mix due to the 2004
restructuring activities discussed above and higher average net selling prices.
Flexsys' earnings improved primarily due to higher average net selling prices.
Interest Expense
- -----------------------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Interest Expense............................................................. $ 104 $ 84 $ 113
====== ====== ======
Charges included in Interest Expense..................................... $ (4) $ -- $ (25)
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------
The $20 million, or 24 percent, increase in interest expense in 2006
in comparison to 2005 resulted principally from higher debt outstanding in
2006 than in 2005, partially offset by lower interest rates due to the March
amendment of its DIP credit facility and the July refinancing of the Euronotes
and subsequent partial pay down. In addition, results in 2006 included a $3
million charge related to SESA's Euronotes refinancing and a $1 million charge
related to the amendment of the DIP credit facility. The amount of annual
contractual interest not recorded was $32 million in both 2006 and 2005.
The $29 million, or 26 percent, decrease in interest expense in 2005
in comparison to 2004 resulted principally from the write-off of unamortized
debt issuance costs of $25 million in 2004. In addition, Solutia amended its
DIP financing agreement on June 1, 2005, which reduced the interest rate on
the term loan component of the DIP credit facility to LIBOR
35
plus 4.25 percent from the previous interest rate of the greater of the prime
rate plus 4.0 percent or 8.0 percent. The amount of annual contractual interest
not recorded was $32 million in both 2005 and 2004.
Other Income, net
- -----------------------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Other Income, net............................................................ $ 14 $ 8 $ --
====== ====== ======
Other Income, net included in Reportable Segment Profit (Loss) .......... $ 8 $ 8 $ 1
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------
Other income, net increased $6 million in 2006 as compared to 2005
primarily as a result of increased interest income due to higher cash balances
on hand during 2006. The $8 million increase in other income, net in 2005 as
compared to 2004 primarily resulted from the sale of various non-operating
assets in 2005 coupled with lower currency losses.
Reorganization Items, net
- -----------------------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Reorganization Items, net ................................................... $ 71 $ 49 $ 73
====== ====== ======
Reorganization Items, net included in Reportable Segment Profit (Loss) .. $ 14 $ 22 $ 2
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------
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 2006 included $58 million of professional fees for services
provided by debtor and creditor professionals directly related to Solutia's
reorganization proceedings; $11 million of other reorganization charges
primarily involving costs incurred with exiting certain non-strategic
businesses; $4 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 a $2 million net gain from adjustments to record certain
pre-petition claims at estimated amounts of the allowed claims.
Reorganization items incurred in 2005 included $49 million of
professional fees for services provided by debtor and creditor professionals
directly related to Solutia's reorganization proceedings; a $31 million net
gain representing the difference between the settlement amount of certain
pre-petition obligations and the corresponding amounts previously recorded;
$12 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;
$10 million of net charges for adjustments to record certain pre-petition
claims at estimated amounts of the allowed claims; and $9 million of other
reorganization charges primarily involving costs incurred with exiting the
acrylic fibers operations.
Income Tax Expense (Benefit)
- -----------------------------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Income Tax Expense (Benefit) ................................................ $ 18 $ 12 $ (2)
====== ====== ======
Increase in Valuation Allowances included in Income Tax Expense (Benefit) $ 24 $ 12 $ 108
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------
Solutia's effective income tax expense (benefit) rate was
approximately 64 percent in 2006 compared to approximately 63 percent in 2005.
Decreases in valuation allowances in 2006 were $(7) million, of which $24
million was recorded in Income Tax Expense (Benefit) in the Consolidated
Statement of Operations and $(31) million was recorded in Accumulated Other
Comprehensive Loss in the Consolidated Statement of Comprehensive Income
(Loss), as compared to increases in valuation allowances in 2005 of $21
million, of which $12 million was recorded in Income Tax Expense (Benefit) in
the Consolidated Statement of Operations and $9 million was recorded in Other
Comprehensive Loss in the Consolidated Statement of Comprehensive Income
(Loss). The change in the valuation allowances in both 2006 and 2005 were
provided principally
36
for the U.S. deferred tax assets as a result of Solutia's Chapter 11
bankruptcy filing (as more fully described in Note 13 to the accompanying
consolidated financial statements).
Solutia's effective income tax expense (benefit) rate was
approximately 63 percent in 2005 compared to approximately (1) percent in
2004. The above noted valuation allowance increases in 2005 and 2004 were the
primary differences in comparing the 2005 and 2004 rates.
Discontinued Operations
- ------------------------------------------------------------------------------------------ ----------------------
(dollars in millions) 2006 2005 2004
---- ---- ----
Income (Loss) from Discontinued Operations, net of tax $ 58 $ 4 $ (32)
====== ====== ======
- ------------------------------------------------------------------------------------------ ----------------------
Income from discontinued operations consists of the results of
Solutia's pharmaceutical services business. As described in Note 4 to the
accompanying consolidated financial statements, on August 22, 2006, SESA sold
its pharmaceutical services business to Dishman. Included in the results of
discontinued operations for 2006 is a gain on the sale of $49 million as well
as a tax gain of $5 million. The tax gain resulted from the reversal of a
valuation allowance established as a result of the merger of CarboGen and
AMCIS subsidiaries of the pharmaceutical services business into one legal
entity.
Income from discontinued operations increased $36 million in 2005 as
compared to 2004 primarily as a result of impairments in goodwill, long-lived
assets and indefinite-lived intangible assets in the pharmaceutical services
business in 2004 of $23 million, $12 million and $5 million, respectively.
These charges were precipitated by the declining estimates of forecasted
results given current economic and market conditions within the pharmaceutical
services business environment.
Cumulative Effect of Change in Accounting Principle
Asset Retirement Obligations
- ----------------------------
In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB Statement
No. 143 ("FIN 47"). FIN 47 clarifies that the term "conditional asset
retirement obligation" as used in Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143"), refers
to a legal obligation to perform an asset retirement activity in which the
timing and (or) method of settlement are conditional on a future event that
may or may not be within the control of the entity. The obligation to perform
the asset retirement activity is unconditional even though uncertainty exists
about the timing and (or) method of settlement, including those that may be
conditional on a future event. Accordingly, an entity is required to recognize
a liability for the fair value of a conditional asset retirement obligation if
the fair value of the liability can be reasonably estimated. Uncertainty about
the timing and (or) method of settlement should be factored into the
measurement of the liability when sufficient information exists. FIN 47 also
clarifies when sufficient information to reasonably estimate the fair value of
an asset retirement obligation is considered available.
Upon adoption of SFAS No. 143 as of January 1, 2003, Solutia
identified certain conditional asset retirement obligations; however, these
obligations were not recorded due to uncertainties involved with the
determination of settlement timing. With the clarification outlined by FIN 47
for valuation of conditional asset retirement obligations, Solutia reevaluated
the valuation concerns involving settlement timing for these conditional asset
retirement obligations and accordingly reported an asset retirement obligation
of $7 million as of December 31, 2005. These obligations involve various
federal, state and local regulations and/or contractual obligations to
decontaminate and/or dismantle certain machinery and equipment, buildings, and
leasehold improvements at Solutia's various operating locations.
Asset retirement obligations were estimated for each of the Solutia's
operating locations, where applicable, based upon Solutia's current and
historical experience, adjusted for factors that a third-party would consider,
such as overhead, profit and market risk premium. Estimated obligations were
escalated based upon the anticipated timing of the related cash flows using an
assumed inflation rate, and then were discounted using a credit-adjusted,
risk-free interest rate. The impact of adoption resulted in a charge of $3
million recorded as a cumulative effect of change in accounting principle (net
of tax) in the Consolidated Statement of Operations in 2005.
37
Summary of Events Affecting Comparability
Charges and gains recorded in 2006, 2005 and 2004 and other events
affecting comparability have been summarized and described in the table and
accompanying footnotes below (dollars in millions):
2006
-------------------------------------------------------------
PERFORMANCE INTEGRATED CORPORATE/
INCREASE/(DECREASE) PRODUCTS NYLON OTHER CONSOLIDATED
-------- ----- ----- ------------
IMPACT ON:
Cost of goods sold.......................... $-- $-- $ 9 $ 9 (a)
-- -- (20) (20) (b)
1 -- -- 1 (c)
-------------------------------------------------------------
Total cost of goods sold ................... 1 -- (11) (10)
Marketing .................................. 2 -- -- 2 (c)
Administrative ............................. 1 -- -- 1 (c)
Technological .............................. -- -- -- --
-------------------------------------------------------------
OPERATING INCOME IMPACT..................... (4) -- 11 7
Interest expense............................ -- -- (1) (1) (d)
-- -- (3) (3) (e)
Equity income from affiliates............... -- -- (4) (4) (f)
Loss on debt modification................... -- -- (8) (8) (d)
Reorganization items, net................... (8) (6) (57) (71) (g)
-------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT............. (12) (6) (62) (80)
===============================================
Income tax impact........................... (5) (h)
-----------
AFTER-TAX INCOME STATEMENT IMPACT........... $ (75)
===========
2006 EVENTS
-----------
a) Environmental charge in the first quarter 2006 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 $6 million after-tax).
b) Gain resulting from the reversal of a litigation reserve with
respect to a litigation matter that was decided favorably in the
second quarter 2006, as further described in Note 20 of the
accompanying consolidated financial statements ($20 million pre-tax
and after-tax - see note (h) below).
c) Restructuring costs related principally to severance and retraining
costs ($4 million pre-tax and $3 million after-tax).
d) Solutia recorded a charge of approximately $8 million (pre-tax and
after-tax - see note (h) below) to record the write-off of debt
issuance costs and to record the DIP credit facility as modified at
its fair value. In addition, $1 million (pre-tax and after-tax - see
note (h) below) of unamortized debt issuance costs associated with
the DIP credit facility were written off at the time of modification
in March 2006.
e) Solutia refinanced its Euronotes in July 2006 and recorded early
extinguishment costs at the time of refinancing ($3 million pre-tax
and $2 million after-tax).
f) Net charges at Flexsys, Solutia's 50 percent owned joint venture,
included charges for restructuring and asset impairments of $5
million, partially offset by a non-operational gain of $1 million
related to the reversal of a litigation reserve ($4 million pre-tax
and after-tax - see note (h) below).
g) Reorganization items, net consist of the following: $58 million of
professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization
proceedings; $11 million of other
38
reorganization charges primarily involving costs incurred with
exiting certain non-strategic businesses; $4 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 a $2 million net gain from adjustments to
record certain pre-petition claims at estimated amounts of the
allowed claims. ($71 million pre-tax and after-tax - see note (h)
below)
h) With the exception of items (a), (c) and (e) above, which primarily
relate 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.
2005
-------------------------------------------------------------
PERFORMANCE INTEGRATED CORPORATE/
INCREASE/(DECREASE) PRODUCTS NYLON OTHER CONSOLIDATED
-------- ----- ----- ------------
IMPACT ON:
Cost of goods sold.................. $ 1 $-- $-- $ 1 (a)
-- -- 9 9 (b)
-------------------------------------------------------------
Total cost of goods sold ........... 1 -- 9 10
Marketing .......................... -- -- 1 1 (b)
Administrative ..................... -- -- 2 2 (b)
Technological ...................... -- -- 1 1 (b)
-------------------------------------------------------------
OPERATING INCOME IMPACT............. (1) -- (13) (14)
Equity income from affiliates....... -- -- 52 52 (c)
Reorganization items, net........... (7) (14) (28) (49) (d)
-------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT..... $ (8) $ (14) $ 11 (11)
===============================================
Income tax expense impact........... -- (e)
------------
AFTER-TAX INCOME STATEMENT IMPACT... $ (11)
============
<FN>
2005 EVENTS
-----------
a) Restructuring costs related principally to severance and retraining
costs ($1 million pre-tax and after-tax).
b) Net pension and other postretirement benefit plan curtailments and
settlements, as more fully described in Note 16 to the accompanying
consolidated financial statements ($13 million pre-tax and after-tax
- see note (e) below).
c) Net gains related to Solutia's Flexsys and Astaris joint ventures,
in each of which Solutia has a fifty percent interest. Astaris
included a one-time gain of $50 million related to the sale of
substantially all of its operating assets to ICL, as further
described above. Flexsys included a one-time, non-operational gain
of $5 million, partially offset by $3 million of various
restructuring charges ($52 million pre-tax and after-tax - see note
(e) below).
d) Reorganization items, net consist of the following: $49 million of
professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization
proceedings; a $31 million net gain representing the difference
between the settlement amount of certain pre-petition obligations
and the corresponding amounts previously recorded; $12 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; $10 million of net charges for adjustments to
record certain pre-petition claims at estimated amounts of the
allowed claims; and $9 million of other reorganization charges
primarily involving costs incurred with the exit from the acrylic
fibers business. ($49 million pre-tax and after-tax - see note (e)
below).
e) 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.
39
2004
-------------------------------------------------------------
PERFORMANCE INTEGRATED CORPORATE/
PRODUCTS NYLON OTHER CONSOLIDATED
-------- ----- ----- ------------
INCREASE/(DECREASE)
IMPACT ON:
Cost of goods sold........................... $ 18 $ -- $ -- $ 18 (a)
-- -- 26 26 (b)
3 5 -- 8 (c)
1 -- -- 1 (d)
------------------------------------------------------------
Total cost of goods sold..................... 22 5 26 53
Marketing.................................... -- -- 2 2 (b)
Administrative............................... -- -- 4 4 (b)
Technological................................ -- -- 3 3 (b)
------------------------------------------------------------
OPERATING LOSS IMPACT........................ (22) (5) (35) (62)
Equity loss from affiliates.................. -- -- (49) (49) (e)
Interest expense............................. -- -- (25) (25) (f)
Loss on debt modification.................... -- -- (15) (15) (g)
Reorganization items, net.................... (1) (1) (71) (73) (h)
------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT.............. $(23) $(6) $ (195) $(224)
=============================================
Income tax benefit impact.................... 6 (i)
---------------
AFTER-TAX INCOME STATEMENT IMPACT............ $(218)
===============
<FN>
2004 EVENTS
-----------
a) Restructuring costs related principally to the closure of Solutia's
chlorobenzenes operations as well as certain other non-strategic
operations, including costs for decommissioning and dismantling
activities, future costs for non-cancelable operating leases, and
severance and retraining costs ($18 million pre-tax and after-tax -
see note (i) below).
b) Net pension and other postretirement benefit plan curtailments and
settlements, as more fully described in Note 16 to the accompanying
consolidated financial statements ($35 million pre-tax and after-tax
- see note (i) below).
c) Losses incurred directly related to the hurricanes experienced in
the U.S. in 2004 resulting in the disruption of operations and
property damage at Solutia's operations in the Integrated Nylon
chain located principally in the Southeastern part of the U.S., and
the Performance Products location in Martinsville, Virginia. These
costs included primarily asset write-offs and repairs and
maintenance costs ($8 million pre-tax and after-tax - see note (i)
below).
d) Loss on the sale of the assets of Axio Research Corporation ($1
million pre-tax and after-tax - see note (i) below).
e) Charges related to the Flexsys and Astaris joint ventures associated
with litigation matters and restructuring activities involving
contract rejections and terminations, dismantling costs, asset
impairments and severance charges ($49 million pre-tax and after-tax
- see note (i) below).
f) Write-off of unamortized debt issuance costs related to the October
2003 and interim DIP credit facilities; both were retired in January
2004 with proceeds from the DIP credit facility ($25 million pre-tax
and after-tax - see note (i) below).
g) Loss due to the modification of Solutia's Euronotes in January 2004
($15 million pre-tax and $9 million after-tax).
h) Reorganization items, net consist of the following: $46 million of
professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization
proceedings; $20 million charge for asset write-offs associated with
contract rejections and terminations resulting from the ongoing
reorganization-related evaluation of the financial viability of
Solutia's existing contracts; $9 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 net gains for adjustments to
40
record certain pre-petition claims at estimated amounts of the
allowed claims. ($73 million pre-tax and after-tax - see note (i)
below).
i) With the exception of item (g) 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.
ENVIRONMENTAL MATTERS
Solutia is subject to numerous laws and government regulations
concerning environmental, safety and health matters in the United States and
other countries. U.S. environmental legislation that has a particular impact
on Solutia includes the Toxic Substances Control Act; the Resource
Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the
Safe Drinking Water Act; and the Comprehensive Environmental Response,
Compensation and Liability Act (commonly known as Superfund). Solutia is also
subject to the Occupational Safety and Health Act and regulations of the
Occupational Safety and Health Administration ("OSHA") concerning employee
safety and health matters. The EPA, OSHA and other federal agencies have the
authority to promulgate regulations that have an impact on Solutia's
operations. In addition to these federal activities, various states have been
delegated certain authority under several of these federal statutes and have
adopted environmental, safety and health laws and regulations. State or
federal agencies having lead enforcement authority may seek fines and
penalties for violation of these laws and regulations. Also, private parties
have rights to seek recovery, under the above statutes or the common law, for
civil damages arising from environmental conditions, including damages for
personal injury and property damage.
Expenditures for environmental capital projects were approximately $9
million in 2006 and $8 million in both 2005 and 2004. Expenditures for the
management of environmental programs and remediation activities were
approximately $60 million, $62 million and $69 million in 2006, 2005 and 2004,
respectively. Included in environmental program management is the operation
and maintenance of current operating facilities for environmental control,
which is expensed in the period incurred, and $10 million, $12 million and $19
million in 2006, 2005 and 2004, respectively, for remediation activity, which
was charged against recorded environmental liabilities. Recoveries from third
parties were less than $1 million for both 2006 and 2005 and $2 million in
2004.
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 $78 million and $71 million as of December 31, 2006 and
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-closure costs at certain of Solutia's
operating locations. This liability is not classified as subject to compromise
in the Consolidated Statement of Financial Position because, irrespective of
the bankruptcy proceedings, Solutia will be required to comply with
environmental requirements in the conduct of its business, regardless of when
the underlying environmental contamination occurred. However, Solutia
ultimately expects to seek recovery against other potentially responsible
parties at certain of these locations. Solutia spent $10 million in 2006 for
remediation of these properties. In 2007, Solutia anticipates spending a
similar amount related to these properties currently owned or operated by
Solutia.
Solutia had an accrued liability of $81 million and $82 million as of
December 31, 2006 and 2005, respectively, for properties not owned or operated
by Solutia which was classified as subject to compromise in the Consolidated
Statement of Financial Position. Under the Plan and the Relationship
Agreement, as between Monsanto and Solutia, Monsanto would 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 would share financial responsibility with
Solutia for off-site remediation costs in Anniston, Alabama and Sauget,
Illinois. Remediation activities are currently being funded by Monsanto for
all of these properties not owned or operated by Solutia, with the exception
of one off-site remediation project in Sauget, Illinois. 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 only made minimal adjustments to its recorded environmental
liabilities classified as subject to compromise for ongoing remediation
activities since the inception of Solutia's bankruptcy
41
case to reflect actual cash expenditures incurred by the Company. Any other
adjustments to this liability are not deemed appropriate by the Company at
this time given the uncertainty regarding any potential claim amount to be
asserted by Monsanto.
In addition to the bankruptcy proceedings, Solutia's environmental
liabilities are also subject to changing governmental policy and regulations,
discovery of unknown conditions, judicial proceedings, changes in method and
extent of remediation, existence of other potentially responsible parties and
changes in technology. Solutia believes that the known and unknown
environmental matters, including matters classified as subject to compromise
for which Solutia may ultimately assume responsibility, when ultimately
resolved, which may be over an extended period of time, could have a material
effect on the consolidated financial position, liquidity and profitability of
Solutia.
SELF-INSURANCE
As discussed in Item 3 of this Annual Report, 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 Solutia's
spinoff from Pharmacia, Solutia assumed the defense of specified legal
proceedings and agreed to indemnify Pharmacia 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.
Since the spinoff, Solutia has been responsible for bearing the costs
associated with various toxic tort lawsuits related to PCBs, premises-based
asbestos and other chemical exposures from the conduct of the historic
chemical business of Pharmacia. At the time of the Chapter 11 bankruptcy
filing, Solutia was defending approximately 520 asbestos actions (involving an
estimated 3,500 to 4,500 plaintiffs) brought against Pharmacia. In addition,
notwithstanding the settlement of cases relating to the Anniston plant site,
Solutia was defending approximately 30 cases involving alleged exposure from
PCB's manufactured by Pharmacia prior to the spinoff. Solutia was also
defending approximately 100 general and product liability claims brought
against Pharmacia.
Claims for legal matters arising prior to Solutia's Chapter 11
bankruptcy filing will be addressed in the bankruptcy proceedings. As a result
of the Chapter 11 petition, 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 pre-petition accrued
liability for litigation of $111 million and $136 million as of December 31,
2006 and 2005, respectively, has been classified as subject to compromise in
the Consolidated Statement of Financial Position. In general, all claims
against Solutia that seek a recovery of assets of Solutia's estate will be
addressed in the Chapter 11 bankruptcy process and paid only pursuant to the
terms of a confirmed plan of reorganization. However, pursuant to a Bankruptcy
Court order, Solutia made a $5 million payment with respect to pre-petition
legal proceedings in both 2006 and 2005. Solutia cannot forecast the level of
future pre-petition self-insurance spending and anticipated levels of
recoveries based upon the inherent uncertainty underlying the bankruptcy
proceedings.
Solutia had an accrued liability of $11 million and $9 million as of
December 31, 2006 and 2005, respectively, for post-petition self-insurance
liabilities including workers' compensation, product, general, automobile and
operations liability claims. Self-insurance expense was $5 million in 2006 and
$4 million in both 2005 and 2004. Cash payments for self-insurance matters
were $9 million in 2006, $8 million in 2005, and $9 million in 2004, whereas
recoveries from insurance carriers were less than $1 million in 2006, $1
million in 2005, and $7 million in 2004. Included in the 2006, 2005 and 2004
payments was a $5 million scheduled payment with respect to the 2003 Anniston
PCB litigation settlement paid pursuant to a Bankruptcy Court order.
EMPLOYEE BENEFITS
Employee benefits include noncontributory defined benefit pension
plans and OPEB that provide certain health care and life insurance benefits.
Solutia also has stock option plans covering officers and employees and a
non-employee director compensation plan for non-employee members of Solutia's
board of directors.
42
Solutia amended its U.S. qualified pension plan in 2004 for non-union
participants and in 2005 for union participants to cease future benefit
accruals effective July 1, 2004 and January 1, 2006, respectively. Further,
Solutia amended its U.S. postretirement plan in 2004 for non-union, active
employees and in 2005 for union, active employees to discontinue all
postretirement benefits after attaining age 65, make changes to certain
eligibility requirements for pre-65 postretirement benefits with the eventual
elimination of these benefits by 2016, and eliminate retiree life insurance
benefits for future retirees. In addition, Solutia amended its U.S.
postretirement plan in 2006 for retiree participants to terminate medical
benefits for certain retirees who are Medicare eligible, and if not Medicare
eligible, to terminate medical benefits on the earlier of (a) the date such
retirees or participants become Medicare eligible if such date is on or after
January 1, 2007 or (b) October 19, 2016.
Pension expense in accordance with SFAS No. 87 was $23 million in
2006 and $29 million in both 2005 and 2004, and expense for OPEB was $30
million in 2006, $42 million in 2005 and $44 million in 2004. In addition,
Solutia did not record any charges resulting from pension and postretirement
benefit plan curtailments and settlements in 2006, while the Company recorded
charges of $13 million in 2005 and $35 million in 2004 (as more fully
described in Note 16 to the accompanying consolidated financial statements).
Pension Plan Funded Status
The majority of Solutia's employees are covered under noncontributory
defined benefit pension plans. The pension plans are funded in accordance with
Solutia's long-range projections of the plan's financial conditions. These
projections take into account benefits earned and expected to be earned,
anticipated returns on pension plan assets and income tax and other
regulations. The amount of pension plan underfunding in the pension plans
decreased to $353 million as of December 31, 2006 from $540 million as of
December 31, 2005.
Solutia actively manages funding of its domestic qualified pension
plan in order to meet the requirements of the IRS and the Pension Benefits
Guarantee Corporation (a U.S. federal agency). Solutia contributed $179
million in 2006 to the qualified pension plan in accordance with IRS funding
rules and made a discretionary contribution of $11 million in 2004 to the
qualified pension plan in order to minimize future required contributions and
to utilize available tax benefits. No contributions were made during 2005 to
the qualified pension plan. According to current IRS funding rules, Solutia
estimates that it will be required to make approximately $100 million in
pension contributions to its U.S. qualified pension plan in 2007. In addition,
Solutia contributed $6 million in 2006, $5 million in 2005 and $4 million in
2004, respectively, to fund its foreign pension plans. Moreover, Solutia
expects to be required to fund a like amount in pension contributions for its
foreign pension plans in 2007.
DERIVATIVE FINANCIAL INSTRUMENTS
Solutia's business operations give rise to market risk exposures that
result from changes in currency exchange rates, interest rates and certain
commodity prices. To manage the volatility relating to these exposures,
Solutia enters into various hedging transactions that enable it to alleviate
the adverse effects of financial market risk. Solutia's hedging transactions
are carried out under policies and procedures approved by the Audit and
Finance Committee of the Board of Directors, which does not permit the
purchase or holding of any derivative financial instruments for trading
purposes. Notes 2 and 8 to the accompanying consolidated financial statements
include further discussion of Solutia's accounting policies for derivative
financial instruments.
Foreign Currency Exchange Rate Risk
Solutia manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. Solutia uses foreign currency hedging instruments to
manage the volatility associated with foreign currency purchases of materials
and other assets and liabilities created in the normal course of business.
Solutia primarily uses forward exchange contracts and purchased options with
maturities of less than 18 months to hedge these risks. Solutia also enters
into certain foreign currency derivative instruments primarily to protect
against exposure related to intercompany financing transactions. Corporate
policy prescribes the range of allowable hedging activity and what hedging
instruments Solutia is permitted to use. Because the counterparties to these
contracts are major international financing institutions, credit risk arising
from these contracts is not significant, and Solutia does not anticipate any
counterparty losses. Currency restrictions are not expected to have a
significant effect on Solutia's cash flows, liquidity or capital resources.
Major currencies affecting Solutia's business are the U.S. dollar, British
pound sterling, Euro, Canadian dollar, Swiss franc, Brazilian real, Chinese
yuan and the Japanese yen.
At December 31, 2006, Solutia had currency forward contracts to
purchase and sell $181 million of currencies, principally the Euro, Swiss
franc, and U.S. dollar, with average remaining maturities of four months.
Based on Solutia's
43
overall currency rate exposure at December 31, 2006, including derivatives and
other foreign currency sensitive instruments, a 10 percent adverse change in
quoted foreign currency rates of these instruments would result in a change in
fair value of these instruments of $15 million. This is consistent with the
overall foreign currency exchange rate exposure at December 31, 2005.
Interest Rate Risk
Interest rate risk is primarily related to changes in interest
expense from floating rate debt. Solutia believes its current debt structure
mitigates some of the risk associated with changes in interest rates due to
the combination of fixed versus floating rate debt instruments. Further,
periodically, the Company does enter into contracts to further mitigate
interest rate risk. A 1 percent increase in the LIBOR and EURIBOR would have
increased interest expense by approximately $9 million during 2006, assuming
the debt composition at December 31, 2006 was consistent throughout the year.
This is consistent with the overall interest rate exposure at December 31,
2005.
Commodity Price Risk
Certain raw materials and energy resources used by Solutia are
subject to price volatility caused by weather, crude oil prices, supply
conditions, political and economic variables and other unpredictable factors.
Solutia uses forward and option contracts to manage a portion of the
volatility related to anticipated energy purchases. Solutia had commodity
forward contracts with notional amounts of $2 million associated with future
natural gas purchases as of December 31, 2006. Based on Solutia's overall
energy market rate exposure at December 31, 2006, including derivatives and
other commodity sensitive instruments, a 10 percent adverse change in quoted
market rates of these instruments would result in a less than $1 million
decrease in fair value of these instruments. This is consistent with the
overall commodity price exposure at December 31, 2005. In addition, Solutia
mitigates some of its commodity price risks through formula based contractual
pricing for certain products within the Integrated Nylon segment. The use of
these types of arrangements has increased in 2006 compared to previous years.
RESTRUCTURING ACTIVITIES
During 2006, Solutia recorded $3 million of decommissioning and
dismantling costs primarily as a result of the shut-down of its acrylic fibers
business in 2005, and $3 million of asset write-downs. Solutia also recorded
$3 million of future contractual payments related to the termination of a
third party manufacturing agreement. These costs were all recorded within
Reorganization Items, net with $4 million in the Integrated Nylon segment and
$5 million in the Performance Products segment. In addition, Solutia recorded
$8 million of severance and retraining costs in 2006 with $4 million recorded
in Reorganization Items, net and $4 million in Marketing and Administrative
expenses involving headcount reductions within the Integrated Nylon and
Performance Products, as well as the corporate function. Cash outlays
associated with the restructuring actions were funded from operations.
During 2005, Solutia recorded restructuring charges of $13 million in
Reorganization Items, net involving the shut-down of its acrylic fiber
operations and shut-down of its nylon industrial fiber manufacturing unit at
its plant in Pensacola, Florida. This $13 million of net charges from the
closure of these businesses included $12 million of asset write-downs, $7
million of decontamination and dismantling costs and $4 million of severance
and retraining costs, partially offset by a $7 million gain from the reversal
of the LIFO reserve associated with the inventory sold and/or written off as
part of the business shut-down and a $3 million gain from the sale of certain
acrylic fibers assets. In addition, Solutia recorded $5 million of severance
and retraining costs in 2005 with $3 million recorded in Reorganization Items,
net and $2 million in Cost of Goods Sold involving headcount reductions within
the Integrated Nylon and Performance Products segments, as well as the
corporate function. Cash outlays associated with the restructuring actions
were funded from operations.
During 2004, Solutia recorded restructuring and severance charges of
$18 million to Cost of Goods Sold principally related to the closure of
Solutia's chlorobenzenes operations as well as certain other non-strategic
operations, including $10 million for decommissioning and dismantling costs,
$3 million of severance and retraining costs; $2 million related to operating
leases where the underlying services and properties are no longer providing
benefit; and $3 million of various other restructuring charges. In addition,
Solutia recorded $4 million of severance and retraining costs during 2004 in
Reorganization Items, net principally related to workforce reduction
initiatives of management positions within the corporate function directly
associated with the bankruptcy reorganization process. Cash outlays associated
with the restructuring actions were funded from operations.
44
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. 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 2006. Cash used in continuing operations was $186
million in 2006 compared to cash used by continuing operations of $34 million
in 2005. The increase in 2006 as compared to 2005 in cash used in continuing
operations was primarily attributable to higher pension contributions and
increases in working capital items, including a significant increase in trade
receivables resulting from higher net sales and an increase in days sales
outstanding due to a shift in sales mix within the Integrated Nylon segment.
Partially offsetting these uses was the receipt of a dividend from Flexsys in
2006 as compared to no dividend received in the prior year. In 2005, cash used
by continuing operations was $34 million compared to cash provided by
continuing operations of $35 million in 2004. The change in 2005 as compared
to 2004 was primarily attributable to changes in working capital items
including a significant change in accounts payable in 2005 due to the relative
stabilization in accounts payable terms in 2005 compared to 2004 when terms
significantly improved due to Solutia's filing of Chapter 11 bankruptcy in
late 2003.
Solutia's working capital, defined as current assets less current
liabilities, decreased by $314 million to ($276) million at December 31, 2006,
compared to $38 million at December 31, 2005. The change was primarily a
result of higher short-term debt from additional DIP credit facility
borrowings as well as a decrease of $44 million related to the sale of the
pharmaceutical services business, partially offset by higher cash on-hand and
an increase in trade receivables.
Capital spending increased $29 million to $106 million in 2006 as
compared to $77 million in 2005. The expenditures in 2006 were primarily to
fund certain strategic initiatives in the Performance Products and Integrated
Nylon segments, as well as various capital improvements and certain cost
reduction projects. Capital spending increased by $26 million in 2005 as
compared to $51 million in 2004. Expenditures during 2005 were used primarily
to fund certain growth initiatives, as well as various capital improvements
and certain cost reduction projects. In addition, included in 2004 was $5
million of capital spending incurred as a result of damage from Hurricane
Ivan. In 2007, Solutia expects capital spending will be approximately $120
million and will focus on growth initiatives including the continued
expenditures on the new SAFLEX(R) plastic interlayer plant in China expected
to be completed in 2007, the addition of a third SAFLEX(R) line in the plant
in Ghent, Belgium expected to be completed in 2008, and the transformation of
staple carpet lines to plastic polymer lines. Approximately $16 million of
estimated capital requirements were committed at December 31, 2006.
Solutia continued to divest certain non-strategic businesses in order
to focus resources on core businesses. The proceeds from these and other asset
sales generated $77 million in 2006 and $81 million in 2005. Proceeds from
divestitures in 2004 were less than $1 million. During 2006, net proceeds were
primarily comprised of $69 million received from the pharmaceutical services
business divestiture. During 2005, net proceeds included $76 million received
from the Astaris transaction with an additional approximately $20 million
deposited into escrow accounts. Distributions, if any, from the escrow
accounts are expected to be received in 2007, subject to certain terms and
conditions of the asset purchase agreement and the escrow agreements. Solutia
lenders under the DIP credit facility agreed to waive certain prepayment
requirements and allowed Solutia to retain the entire proceeds of the Astaris
sale. In addition, $3 million of proceeds were received in 2005 from the sale
of assets associated with the closure of Solutia's acrylic fibers business in
2005.
Total debt of $1,528 million as of December 31, 2006, including $668
million subject to compromise and $860 million not subject to compromise,
increased by $313 million as compared to $1,215 million at December 31, 2005,
which included $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 credit facility in 2006,
of which $300 million resulted from the March 2006 amendment to the DIP credit
facility (as described below), partially offset by a $51 million payment on
SESA's Facility Agreement (as described below).
45
The weighted average interest rate on Solutia's total debt
outstanding at December 31, 2006 was 8.4 percent compared to 8.7 percent at
December 31, 2005. 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 8.9 percent at December 31, 2006 compared to 9.8
percent at December 31, 2005. The reductions in weighted average rates in 2006
are due to the refinancing of the Euronotes and the amendment to the
DIP Financing Agreement. While operating as a debtor-in-possession during the
Chapter 11 proceedings, Solutia has ceased paying interest on its 6.72 percent
debentures due 2037 and its 7.375 percent debentures due 2027. The amount of
annual contractual interest expense not recorded in each of 2006 and 2005 was
approximately $32 million.
As a result of the Chapter 11 bankruptcy filing, Solutia was in
default on all its debt agreements as of December 31, 2006, with the exception
of its DIP credit facility and SESA's Facility Agreement. In addition,
subsequent to Solutia's bankruptcy filing, Moody's Investors Ratings Services
and Standard & Poor's withdrew all ratings for Solutia and its related debt
securities.
Solutia had a shareholders' deficit of $1,417 million at December 31,
2006, compared to a shareholders' deficit of $1,454 million at December 31,
2005. Shareholders' deficit decreased principally due to a $24 million
decrease in additional minimum pension liability and net income of $11
million.
At December 31, 2006, Solutia's total liquidity was $245 million in
the form of $95 million of availability under the final DIP credit facility
and approximately $150 million of cash on-hand, of which $112 million was cash
of Solutia's subsidiaries that are not parties to the Chapter 11 bankruptcy
proceedings. In comparison, at December 31, 2005 Solutia's total liquidity was
$238 million in the form of $131 million of availability under the final 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.
Solutia contributed $179 million to its U.S. qualified domestic
pension plan in 2006 in accordance with IRS funding rules. According to
current IRS funding rules, Solutia will be required to make approximately $100
million in pension contributions to its U.S. qualified pension plan in 2007.
In addition, Solutia contributed $6 million in 2006 to fund its foreign
pension plans and expects to be required to fund a like amount in pension
contributions for its foreign pension plans in 2007.
Astaris Financing Activities
On October 8, 2003 Solutia and Astaris, a 50/50 joint venture with
FMC Corporation ("FMC"), amended Astaris' external financing agreement to
release the Astaris lenders' security interests in certain Solutia assets in
exchange for Solutia's posting of a $67 million letter of credit, representing
fifty percent of the Astaris lenders' outstanding commitments to Astaris.
Solutia used approximately $36 million in 2004 for investment payments
("keepwell payments") to keep the Astaris joint venture in compliance with its
financial covenants. There were no keepwell payments made in 2005. The
remaining commitment to Astaris was $10 million as of December 31, 2004, which
was subsequently terminated as part of Astaris' refinancing of its credit
facility on February 8, 2005.
Solutia and FMC had also agreed to allow Astaris to defer up to $27
million of payment obligations to each of Solutia and FMC under existing
operating agreements and certain other agreements. The deferral amount
outstanding from Astaris to Solutia was $16 million as of December 31, 2004.
In February 2005, this deferral agreement was terminated and all amounts
outstanding were paid in full in conjunction with the Astaris refinancing.
Amendments to DIP Financing Agreement
On March 17, 2006, Solutia amended its DIP credit facility with
Bankruptcy Court approval. This amendment, among other things, (i) increased
the DIP credit facility from $525 million to $825 million; (ii) extended the
term of the DIP credit facility from June 19, 2006 to March 31, 2007; (iii)
decreased the interest rate on the term loan component of the DIP credit
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, SESA's outstanding Euronotes; and
(vii) amended certain financial and other covenants. The amendment contained a
number of other changes and other modifications required to make the remaining
terms of the DIP credit facility consistent with the amendments set forth
above.
46
On January 25, 2007, Solutia completed the extension and upsizing of
its $1,225 million of DIP credit facility, maturing March 31, 2008 with
Bankruptcy Court approval. This represents a $400 million increase and a one
year extension over Solutia's current DIP credit facility. The increased
availability under the DIP credit facility provides Solutia with additional
liquidity for operations and the ability to fund mandatory pension payments
that are coming due in 2007, as well as funds to partially facilitate the
acquisition of Akzo Nobel's stake in the 50/50 rubber chemical joint venture
Flexsys Holding B.V. The DIP credit facility can be repaid by Solutia at any
time without prepayment penalties.
Euronotes Refinancing
On July 26, 2006, Solutia's indirect 100% owned subsidiary SSI, a
subsidiary of SESA, entered into a Facility Agreement guaranteed by SESA and
CPFilms Vertriebs GmbH, a subsidiary of SESA. Closing of the Facility
Agreement occurred on August 1, 2006. SESA used the proceeds of the Facility
Agreement to refinance all of the Euronotes on August 1, 2006, at a prepayment
premium of 3 percent, as required pursuant to the Euronotes, for a total
redemption amount of approximately (euro)215 million, including accrued
interest. The Euronotes were refinanced to reduce the interest rate, extend
the term of the indebtedness and facilitate certain dispositions by Solutia,
including the sale of its pharmaceutical services business described below.
The Facility Agreement has a five-year term, with a termination date
of July 31, 2011 and an adjustable rate structure of EURIBOR plus 275 basis
points. The margin is subject to adjustment upon the occurrence of certain
events specified in the Facility Agreement or upon SESA and its subsidiaries
attaining certain financial benchmarks. The Facility Agreement consists of a
(euro)160 million term loan and a (euro)40 million term loan. The (euro)40
million term loan was repaid from the proceeds of the sale of Solutia's
pharmaceutical services business during the third quarter 2006 (as further
described in Note 4 to the accompanying consolidated financial statements).
The Facility Agreement is secured by substantially all of the assets of SESA
and its subsidiaries. The Facility Agreement also contains other customary
terms and conditions, including certain financial covenants relating to the
performance of SESA and its subsidiaries.
PENNDOT Letter of Credit
As a result of the favorable ruling in the PENNDOT litigation matter
described in Note 20 to the accompanying consolidated financial statements, in
August 2006, Monsanto released the $20 million letter of credit that Solutia
posted to secure a portion of Pharmacia's obligations with respect to an
appeal bond issued in relation to this case.
Off-Balance Sheet Arrangements
See Note 20 to the accompanying consolidated financial statements for
a summary of off-balance sheet arrangements.
Contingencies
See Note 20 to the accompanying consolidated financial statements for
a summary of Solutia's contingencies as of December 31, 2006.
Commitments
Solutia has entered into agreements with certain customers to supply
a guaranteed quantity of certain products annually at prices specified in the
agreements. In return, the customers have advanced funds to Solutia to cover
the costs of expanding capacity to provide the guaranteed supply. Solutia has
recorded the advances as deferred credits and amortizes the amounts to income
as the customers purchase the associated products. The unamortized deferred
credits were $91 million at December 31, 2006, and $100 million at December
31, 2005.
The obligations of Solutia and Solutia Business Enterprises, Inc., as
borrowers under Solutia's DIP credit facility, are guaranteed by Solutia's
other domestic subsidiaries which own substantially all of Solutia's domestic
assets. These subsidiaries are Axio Research Corporation, Beamer Road
Management Company, CPFilms Inc., Monchem, Inc., Monchem International, Inc.,
Solutia Greater China, Inc., Solutia Inter-America, Inc., Solutia
International Holding, LLC, Solutia Investments, LLC, Solutia Management
Company, Inc., Solutia Overseas, Inc., Solutia Systems, Inc. and Solutia
Taiwan, Inc. The obligations also must be guaranteed by each of Solutia's
subsequently acquired or organized domestic subsidiaries,
47
subject to certain exceptions. In addition, Solutia and Solutia Business
Enterprises, Inc. are jointly and severally liable with respect to their
obligations under the final DIP credit facility, thus in effect each
guaranteeing the other's debt.
The following table summarizes Solutia's contractual obligations and
commercial commitments that are not subject to compromise as of December 31,
2006. Payments associated with liabilities subject to compromise have been
excluded from the table below, as Solutia cannot accurately forecast its
future level and timing of spending given the inherent uncertainties
associated with the ongoing Chapter 11 bankruptcy process. See Note 3 to the
accompanying consolidated financial statements for further disclosure
concerning liabilities subject to compromise.
- ----------------------------------------------------------------------------------------------------------------------
OBLIGATIONS DUE BY PERIOD (DOLLARS IN MILLIONS)
-------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
2010- 2012 AND
TOTAL 2007 2008 2009 2011 THEREAFTER
- ----------------------------------------------------------------------------------------------------------------------
Credit Facility (a) $650 $650 $ -- $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------
Interest Payments Related to Credit Facility (a) 15 15 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Debt 210 -- -- -- 210 --
- ----------------------------------------------------------------------------------------------------------------------
Interest Payments Related to Long-Term Debt 61 13 13 13 22 --
- ----------------------------------------------------------------------------------------------------------------------
Operating Leases 13 6 4 2 1 --
- ----------------------------------------------------------------------------------------------------------------------
Unconditional Purchase Obligations 8 4 2 1 1 --
- ----------------------------------------------------------------------------------------------------------------------
Standby Letters of Credit (b) 76 74 1 -- -- 1
- ----------------------------------------------------------------------------------------------------------------------
Postretirement Obligations(c) 52 6 6 6 13 21
- ----------------------------------------------------------------------------------------------------------------------
Environmental Remediation 78 14 13 13 12 26
- ----------------------------------------------------------------------------------------------------------------------
Other Commercial Commitments(d) 91 8 6 4 8 65
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL OBLIGATIONS $1,254 $790 $45 $39 $267 $113
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(a) The DIP credit facility was amended on January 25, 2007 and increased
the term loan to $975 million and is payable upon the earlier of
emergence from Chapter 11 or March 31, 2008. The interest rate on the
amended DIP credit facility is LIBOR plus 300 basis points. The $15
million of interest payments related to credit facility assumes the
maturity of the current DIP credit facility on March 31, 2007.
(b) Standby letters of credit contractually expiring in 2007 are
generally anticipated to be renewed or extended by extensions with
existing standby letters of credit providers.
(c) Represents estimated future minimum funding requirements for funded
pension plans classified as not subject to compromise and estimated
future benefit payments for unfunded pension and other postretirement
plans classified as not subject to compromise.
(d) Other commercial commitments represent agreements with Solutia's
customers to supply a guaranteed quantity of certain products
annually at prices specified in the underlying agreements.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 to the accompanying consolidated financial statements for
a summary of recently issued accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under "Derivative Financial Instruments" on
page 43 is incorporated here by reference.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL SECTION - TABLE OF CONTENTS
Page Number
---------------
Report of Independent Registered Public Accounting Firm -
Deloitte & Touche LLP 50
Consolidated Statement of Operations 51
Consolidated Statement of Comprehensive Income (Loss) 51
Consolidated Statement of Financial Position 52
Consolidated Statement of Cash Flows 53
Consolidated Statement of Shareholders' Deficit 54
Notes to Consolidated Financial Statements 55
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Solutia Inc.:
We have audited the accompanying consolidated statements of financial
position of Solutia Inc. and subsidiaries (Debtor-In-Possession) (the
"Company") as of December 31, 2006 and 2005, and the related consolidated
statements of operations, comprehensive income (loss), cash flows and
shareholders' deficit for each of the three years in the period ended December
31, 2006. Our audits also included the financial statement schedule in the
Index at Item 15. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 2006 and 2005, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company has filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. The accompanying financial statements do not purport to
reflect or provide for the consequences of the bankruptcy proceedings. In
particular, such financial statements do not purport to show (1) as to assets,
their realizable value on a liquidation basis or their availability to satisfy
liabilities; (2) as to pre-petition liabilities, the amounts that may be
allowed for claims or contingencies, or the status and priority thereof; (3)
as to shareholder accounts, the effect of any changes that may be made in the
capitalization of the Company; or (4) as to operations, the effect of any
changes that may be made in its business.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, negative
working capital, and shareholders' deficit raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also discussed in Note 1 to the financial statements. The
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 2 and Note 12, respectively, to the consolidated
financial statements, the Company adopted Statement of Financial Accounting
Standard No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, and Financial Accounting Standards Board Interpretation
No. 47, Accounting for Conditional Retirement Obligations - an interpretation
of FASB Statement No. 143, effective December 31, 2006 and December 31, 2005,
respectively.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2006,
based on criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO") in Internal Control-Integrated Framework and
our report dated March 1, 2007 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of
the Company's internal control over financial reporting.
St. Louis, Missouri
March 1, 2007
50
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2006 2005 2004
---- ---- ----
NET SALES....................................................... $2,905 $2,759 $2,637
Cost of goods sold.............................................. 2,524 2,437 2,416
--------- --------- ---------
GROSS PROFIT.................................................... 381 322 221
Marketing expenses.............................................. 136 136 139
Administrative expenses......................................... 97 92 96
Technological expenses.......................................... 45 45 44
Amortization of intangible assets............................... 1 1 1
--------- --------- ---------
OPERATING INCOME (LOSS)......................................... 102 48 (59)
Equity earnings (loss) from affiliates.......................... 38 96 (26)
Interest expense (a)............................................ (104) (84) (113)
Other income, net............................................... 14 8 --
Loss on debt modification....................................... (8) -- (15)
Reorganization items, net....................................... (71) (49) (73)
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT).............................................. (29) 19 (286)
Income tax expense (benefit).................................... 18 12 (2)
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................ (47) 7 (284)
Income (Loss) from Discontinued Operations, net of tax.......... 58 4 (32)
--------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................................... 11 11 (316)
Cumulative Effect of Change in Accounting Principle, net of tax. -- (3) --
--------- --------- ---------
NET INCOME (LOSS)............................................... $ 11 $ 8 $ (316)
========= ========= =========
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Income (Loss) from Continuing Operations.......................... $ (0.45) $ 0.07 $ (2.72)
Net Income (Loss)................................................. $ 0.11 $ 0.08 $ (3.02)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 104.5 104.5 104.5
<FN>
(a) Interest expense excludes unrecorded contractual interest expense of $32
in 2006, 2005 and 2004.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2006 2005 2004
---- ---- ----
NET INCOME (LOSS)................................................ $ 11 $ 8 $ (316)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments................................. (12) (11) 15
Net unrealized gain (loss) on derivative instruments............. 1 (1) --
Minimum pension liability adjustments, net of tax of $4 in 2006,
$(2) in 2005 and $3 in 2004...................................... 24 (6) (18)
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS)...................................... $ 24 $ (10) $ (319)
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
51
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AS OF DECEMBER 31,
-------------------------------------
2006 2005
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 150 $ 107
Trade receivables, net of allowances of $7 in 2006 and 2005............... 288 246
Miscellaneous receivables ................................................ 105 95
Inventories............................................................... 274 254
Prepaid expenses and other assets......................................... 31 34
Assets of discontinued operations......................................... -- 69
------ ------
TOTAL CURRENT ASSETS...................................................... 848 805
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$2,518 in 2006 and $2,482 in 2005.................................... 795 770
INVESTMENTS IN AFFILIATES................................................. 193 205
GOODWILL.................................................................. 89 76
IDENTIFIED INTANGIBLE ASSETS, NET ........................................ 31 28
OTHER ASSETS.............................................................. 99 100
------ ------
TOTAL ASSETS.............................................................. $2,055 $1,984
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 228 $ 218
Accrued liabilities ...................................................... 245 223
Short-term debt .......................................................... 650 300
Liabilities of discontinued operations ................................... 1 26
------ ------
TOTAL CURRENT LIABILITIES ................................................ 1,124 767
LONG-TERM DEBT ........................................................... 210 247
OTHER LIABILITIES ........................................................ 289 248
------ ------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,623 1,262
LIABILITIES SUBJECT TO COMPROMISE ........................................ 1,849 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 spinoff....................................... (113) (113)
Accumulated other comprehensive loss...................................... (67) (93)
Accumulated deficit....................................................... (1,043) (1,054)
------ ------
TOTAL SHAREHOLDERS' DEFICIT............................................... (1,417) (1,454)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $2,055 $1,984
====== ======
See accompanying Notes to Consolidated Financial Statements.
52
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED
DECEMBER 31,
--------------------------------------
2006 2005 2004
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 11 $ 8 $ (316)
Adjustments to reconcile to Cash From Operations:
Cumulative effect of change in accounting principle, net of tax........ -- 3 --
(Income) Loss from discontinued operations, net of tax................. (58) (4) 32
Depreciation and amortization.......................................... 111 111 120
Amortization of deferred credits....................................... (9) (9) (33)
Deferred income taxes.................................................. 4 8 (4)
Equity (earnings) loss from affiliates, net............................ (38) (46) 26
Gain on sale of Astaris assets......................................... -- (50) --
Restructuring expenses and other charges .............................. 5 15 103
Other, net............................................................. (2) (3) 4
Changes in assets and liabilities:
Income taxes payable......................................... 4 (17) (7)
Trade receivables............................................ (43) 33 (8)
Inventories.................................................. (14) (32) 6
Accounts payable............................................. 12 19 118
Other assets and liabilities................................. 138 (59) 28
Liabilities subject to compromise:
Pension plan liabilities........................... (196) 56 20
Other postretirement benefits liabilities.......... (102) (48) (83)
Other liabilities subject to compromise............ (9) (19) 29
--------- --------- ---------
CASH PROVIDED BY (USED IN) OPERATIONS--CONTINUING OPERATIONS.................... (186) (34) 35
CASH PROVIDED BY OPERATIONS--DISCONTINUED OPERATIONS............................ 2 10 6
--------- --------- ---------
CASH PROVIDED BY (USED IN) OPERATIONS........................................... (184) (24) 41
--------- --------- ---------
INVESTING ACTIVITIES:
Property, plant and equipment purchases......................................... (106) (77) (51)
Acquisition and investment payments, net of cash acquired....................... (16) -- (36)
Investment proceeds and property disposals, net................................. 5 81 (1)
--------- --------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES--CONTINUING OPERATIONS.......... (117) 4 (88)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES--DISCONTINUED OPERATIONS........ 69 (4) (9)
--------- --------- ---------
CASH USED IN INVESTING ACTIVITIES............................................... (48) -- (97)
--------- --------- ---------
FINANCING ACTIVITIES:
Net change in short-term debt obligations....................................... 350 -- (361)
Proceeds from issuance of long-term debt obligations............................ -- -- 300
Payments on long-term debt obligations.......................................... (51) -- --
Net change in cash collateralized letters of credit............................. -- 17 87
Deferred debt issuance costs.................................................... (17) (1) (14)
Other, net...................................................................... (7) -- --
--------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES--CONTINUING OPERATIONS.................... 275 16 12
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 43 (8) (44)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR............................................................... 107 115 159
--------- --------- ---------
END OF YEAR..................................................................... $ 150 $ 107 $ 115
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
53
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
2006 2005 2004
----------------------------------------------
COMMON STOCK:
BALANCE, JANUARY 1.................................................. $ 1 $ 1 $ 1
--------- --------- ---------
BALANCE, DECEMBER 31................................................ $ 1 $ 1 $ 1
--------- --------- ---------
ADDITIONAL CONTRIBUTED CAPITAL:
BALANCE, JANUARY 1.................................................. $ 56 $ 56 $ 56
--------- --------- ---------
BALANCE, DECEMBER 31................................................ $ 56 $ 56 $ 56
--------- --------- --------
NET DEFICIENCY OF ASSETS AT SPINOFF:
BALANCE, JANUARY 1.................................................. $ (113) $ (113) $ (113)
--------- --------- ---------
BALANCE, DECEMBER 31................................................ $ (113) $ (113) $ (113)
--------- --------- ---------
TREASURY STOCK:
BALANCE, JANUARY 1.................................................. $ (251) $ (251) $ (251)
Shares purchased under employee stock plans - (0 shares in 2006
and 2005 and (102,340) shares in 2004)........................ -- -- --
--------- --------- ---------
BALANCE, DECEMBER 31................................................ $ (251) $ (251) $ (251)
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
ACCUMULATED CURRENCY ADJUSTMENT:
BALANCE, JANUARY 1............................................. $ 40 $ 51 $ 36
Accumulated currency adjustments............................... (12) (11) 15
--------- --------- ---------
BALANCE, DECEMBER 31........................................... $ 28 $ 40 $ 51
--------- --------- ---------
PENSION AND OTHER POSTRETIREMENT ITEMS:
BALANCE, JANUARY 1............................................. $ (132) $ (126) $ (108)
Minimum pension liability adjustments.......................... 24 (6) (18)
Incremental effect of adopting SFAS No. 158.................... 13 -- --
--------- --------- ---------
BALANCE, DECEMBER 31........................................... $ (95) $ (132) $ (126)
--------- --------- ---------
DERIVATIVE INSTRUMENTS:
BALANCE, JANUARY 1............................................. $ (1) $ -- $ --
Net unrealized gains (losses) on derivative instruments........ 1 (1) --
--------- --------- ---------
BALANCE, DECEMBER 31........................................... $ -- $ (1) $ --
--------- ---------- ---------
BALANCE, DECEMBER 31................................................ $ (67) $ (93) $ (75)
--------- --------- ---------
ACCUMULATED DEFICIT:
BALANCE, JANUARY 1.................................................. $ (1,054) $ (1,062) $ (746)
Net income (loss)............................................... 11 8 (316)
--------- --------- ---------
BALANCE, DECEMBER 31................................................ $ (1,043) $ (1,054) $ (1,062)
--------- --------- ---------
TOTAL SHAREHOLDERS' DEFICIT......................................... $ (1,417) $ (1,454) $ (1,444)
--------- --------- ---------
See accompanying Notes to Consolidated Financial Statements.
54
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS
Nature of Operations
Solutia 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 100% owned
subsidiary of Pfizer, Inc.). On September 1, 1997, Pharmacia distributed all
of the outstanding shares of common stock of Solutia as a dividend to
Pharmacia stockholders (the "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
--------
On December 17, 2003, Solutia 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, to
streamline operations and to reduce costs, in order to allow Solutia to emerge
from Chapter 11 as a viable going concern. The filing was also made 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 were 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. Under 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 extensions of this exclusivity period. The exclusivity
period continues until the order disposing of the current motion is entered on
the Bankruptcy Court's docket.
On January 16, 2004, pursuant to authorization from the Bankruptcy
Court, Solutia entered into a DIP credit facility. The DIP credit facility has
subsequently been amended from time to time, with Bankruptcy Court approval.
The DIP credit facility, as amended, currently consists of: (a) a $975 million
fully-drawn term loan; and (b) a $250 million borrowing-based revolving credit
facility, which includes a $150 million letter of credit subfacility. Of the
$1,225 million facility, $150 million must be utilized to acquire Akzo Nobel's
50% interest in the Flexsys joint venture between Solutia and Akzo Nobel. For
additional information regarding the DIP financing and the Flexsys
acquisition, see Note 14 to the accompanying consolidated financial
statements.
As a consequence of the Chapter 11 filing, pending litigation against
Solutia is generally stayed, and no party may take any action to collect its
pre-petition claims except pursuant to an order of the Bankruptcy Court.
November 30, 2004 was the last date by which holders of pre-petition 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
55
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
connection with the Debtors' claims resolution process, and only holders of
claims that are ultimately allowed for purposes of the Chapter 11 case will be
entitled to distributions. Solutia has not yet completed its analysis of all
the proofs of claim. Since the settlement terms of allowed claims are subject
to a confirmed plan of reorganization, the ultimate distribution with respect
to allowed claims is not presently ascertainable.
On February 14, 2006, the Debtors filed with the Bankruptcy Court a
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 Creditor's Committee") and Official Committee of Retirees appointed
in the Chapter 11 Cases (the "Retirees' Committee"), Monsanto Company
("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 and Pharmacia. The Global Settlement provides
for, among other things, a reallocation of certain Legacy Liabilities among
Solutia, Monsanto and Pharmacia and the treatment that various constituencies
in the Chapter 11 Cases would receive under the Plan. The reallocation of
liabilities between Solutia and Monsanto is set forth in a Relationship
Agreement (the "Relationship Agreement") which would be entered into between
Solutia and Monsanto upon confirmation of the Plan. Since the February 14,
2006 filing, the Bankruptcy Court has not moved forward with the process to
approve the Disclosure Statement and confirm the Plan.
There are two adversary proceedings ongoing in our Chapter 11 case.
JPMorgan, as indenture trustee of Solutia's debentures due 2027 and 2037,
filed litigation against Solutia claiming that such debentures are entitled to
secured status as opposed to general unsecured status as set forth in the
Plan. In addition, the Official Committee of Equity Security Holders ("Equity
Committee") in Solutia's bankruptcy case has filed litigation against
Pharmacia and Monsanto, arguing that holders of Solutia's existing equity are
entitled to a distribution in the Chapter 11 case. For additional information
regarding these litigation matters, see Note 20 to the accompanying
consolidated financial statements.
Solutia is in discussions with the major stakeholders in our Chapter
11 case in an effort to modify the Global Settlement and Plan and achieve a
confirmable Plan. In addition, Solutia continues to evaluate and explore all
other reasonable alternatives to reorganize the Company, such as a sale of the
reorganized Company's equity or a sale of certain of its businesses or assets
that may present a means of maximizing the value of the estate for
stakeholders.
Going Concern
- -------------
Solutia is currently operating under Chapter 11 of the U.S.
Bankruptcy Code and continuation of Solutia as a going concern is contingent
upon, among other things, Solutia's ability to (i) comply with the terms and
conditions of its DIP financing; (ii) obtain confirmation of a plan of
reorganization under the U.S. Bankruptcy Code; (iii) return to profitability;
(iv) generate sufficient cash flow from operations; and (v) obtain financing
sources to meet Solutia's future obligations. These matters create substantial
doubt about Solutia's ability to continue as a going concern. The consolidated
financial statements do not reflect any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties. Additionally, a plan of reorganization could materially change
amounts reported in the 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 bankruptcy.
Consolidating Financial Statements
- ----------------------------------
Consolidating financial statements for Solutia and subsidiaries in
reorganization and subsidiaries not in reorganization as of December 31, 2006
and 2005 and for the years ended December 31, 2006, 2005 and 2004 are
presented below. These consolidating financial statements include investments
in subsidiaries carried under the equity method.
56
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
NET SALES ................................ $ 2,388 $ 975 $ (458) $ 2,905
Cost of goods sold........................ 2,159 846 (481) 2,524
-----------------------------------------------------------
GROSS PROFIT ............................. 229 129 23 381
Marketing, administrative and technological
expenses................................. 215 63 -- 278
Amortization of intangible assets......... 1 1 (1) 1
-----------------------------------------------------------
OPERATING INCOME.......................... 13 65 24 102
Equity earnings (loss) from affiliates.... 129 (7) (84) 38
Interest expense.......................... (83) (21) -- (104)
Other income, net......................... 37 3 (26) 14
Loss on debt modification................. (8) -- -- (8)
Reorganization items, net................. (70) (1) -- (71)
-----------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE.............. 18 39 (86) (29)
Income tax expense........................ 8 11 (1) 18
-----------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS.. 10 28 (85) (47)
Income from discontinued operations,
net of tax............................... 1 57 -- 58
-----------------------------------------------------------
NET INCOME................................ $ 11 $ 85 $ (85) $ 11
===========================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
NET SALES ................................ $ 2,266 $ 894 $ (401) $ 2,759
Cost of goods sold........................ 2,106 759 (428) 2,437
-----------------------------------------------------------
GROSS PROFIT ............................. 160 135 27 322
Marketing, administrative and technological
expenses................................. 213 60 -- 273
Amortization of intangible assets......... 1 -- -- 1
-----------------------------------------------------------
OPERATING INCOME (LOSS) .................. (54) 75 27 48
Equity earnings (loss) from affiliates.... 150 (6) (48) 96
Interest expense.......................... (61) (23) -- (84)
Other income, net......................... 26 7 (25) 8
Reorganization items, net................. (45) (4) -- (49)
-----------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAX EXPENSE....................... 16 49 (46) 19
Income tax expense........................ 4 8 -- 12
-----------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 12 41 (46) 7
Income (Loss) from discontinued operations,
net of tax............................... (3) 7 -- 4
-----------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE.................. 9 48 (46) 11
Cumulative effect of change in accounting
principle, net of tax.................... (1) (2) -- (3)
-----------------------------------------------------------
NET INCOME................................ $ 8 $ 46 $ (46) $ 8
===========================================================
57
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
NET SALES................................. $ 2,180 $ 832 $ (375) $2,637
Cost of goods sold........................ 2,110 701 (395) 2,416
-----------------------------------------------------------
GROSS PROFIT.............................. 70 131 20 221
Marketing, administrative and technological
expenses................................. 222 58 (1) 279
Amortization of intangible assets......... 1 -- -- 1
-----------------------------------------------------------
OPERATING INCOME (LOSS)................... (153) 73 21 (59)
Equity loss from affiliates............... (33) (14) 21 (26)
Interest expense.......................... (89) (24) -- (113)
Other income (expense), net............... 29 (8) (21) --
Loss on debt modification................. -- (15) -- (15)
Reorganization items, net................. (73) -- -- (73)
-----------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE (BENEFIT)...... (319) 12 21 (286)
Income tax expense (benefit).............. (5) 3 -- (2)
-----------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS.. (314) 9 21 (284)
Loss from discontinued operations,
net of tax............................... (2) (30) -- (32)
-----------------------------------------------------------
NET LOSS ................................. $ (316) $ (21) $ 21 $ (316)
===========================================================
58
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2006
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
ASSETS
Current assets............................ $ 497 $ 436 $ (85) $ 848
Property, plant and equipment, net........ 660 135 -- 795
Investment in subsidiaries and affiliates. 448 216 (471) 193
Goodwill and identified intangible assets,
net...................................... 100 20 -- 120
Other assets.............................. 58 42 (1) 99
-----------------------------------------------------------
TOTAL ASSETS........................... $ 1,763 $ 849 $ (557) $ 2,055
===========================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities....................... $ 1,019 $ 169 $ (64) $ 1,124
Long-term debt............................ -- 210 -- 210
Other liabilities......................... 198 91 -- 289
-----------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 1,217 470 (64) 1,623
LIABILITIES SUBJECT TO COMPROMISE......... 1,963 -- (114) 1,849
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,417) 379 (379) (1,417)
-----------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................ $ 1,763 $ 849 $ (557) $ 2,055
===========================================================
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2005
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
ASSETS
Current assets............................ $ 447 $ 430 $ (72) $ 805
Property, plant and equipment, net........ 674 96 -- 770
Investment in subsidiaries and affiliates. 388 213 (396) 205
Goodwill and identified intangible assets,
net...................................... 100 4 -- 104
Other assets.............................. 62 38 -- 100
-----------------------------------------------------------
TOTAL ASSETS........................... $ 1,671 $ 781 $ (468) $ 1,984
===========================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities....................... $ 644 $ 176 $ (53) $ 767
Long-term debt............................ -- 247 -- 247
Other liabilities......................... 201 47 -- 248
-----------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 845 470 (53) 1,262
LIABILITIES SUBJECT TO COMPROMISE......... 2,280 -- (104) 2,176
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,454) 311 (311) (1,454)
-----------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................ $ 1,671 $ 781 $ (468) $ 1,984
===========================================================
59
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2006
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. (241) $ 57 $ -- $ (184)
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................. (90) 42 -- (48)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................. 351 (76) -- 275
-----------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS... 20 23 -- 43
CASH AND CASH EQUIVALENTS:
Beginning of year......................... 18 89 -- 107
-----------------------------------------------------------
End of year............................... $ 38 $ 112 $ -- $ 150
===========================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2005
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. $ (87) $ 63 $ -- $ (24)
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................. 20 (20) -- --
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................. 35 (19) -- 16
-----------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (32) 24 -- (8)
CASH AND CASH EQUIVALENTS:
Beginning of year......................... 50 65 -- 115
-----------------------------------------------------------
End of year............................... $ 18 $ 89 $ -- $ 107
===========================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2004
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. $ (17) $ 58 $ -- $ 41
NET CASH USED IN INVESTING ACTIVITIES....... (73) (24) -- (97)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................. 15 (3) -- 12
-----------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ (75) 31 -- (44)
CASH AND CASH EQUIVALENTS:
Beginning of year......................... 125 34 -- 159
-----------------------------------------------------------
End of year............................... $ 50 $ 65 $ -- $ 115
===========================================================
2. SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
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. However, as a result of the Chapter 11 bankruptcy proceedings,
such realization of assets and satisfaction of liabilities are subject to a
significant number of uncertainties that have not been reflected in the
consolidated financial statements.
60
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Basis of Consolidation
The consolidated financial statements include the accounts of Solutia
and its majority-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation. Companies in which Solutia
has a significant interest but not a controlling interest are accounted for
under the equity method of accounting and included in Investments in
Affiliates in the Consolidated Statement of Financial Position. Solutia's
proportionate share of these companies' net earnings or losses is reflected in
Equity Earnings (Loss) from Affiliates in the Consolidated Statement of
Operations. In accordance with Financial Accounting Standards Board ("FASB")
Interpretation No. 46, Consolidation of Variable Interest Entities, as
amended, variable interest entities in which Solutia is the primary
beneficiary are consolidated within the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements which affect revenues and expenses
during the period reported. Estimates are adjusted when necessary to reflect
actual experience. Significant estimates were used to account for
restructuring reserves, environmental reserves, self-insurance reserves,
employee benefit plans, intangible assets, income taxes, asset impairments and
contingencies. Actual results, particularly with respect to those matters
affected by the Chapter 11 bankruptcy proceedings, could materially differ
from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and temporary investments
with maturities of three months or less when purchased.
Inventory Valuation
Inventories are stated at cost or market, whichever is less. Actual
cost is used to value raw materials and supplies. Standard cost, which
approximates actual cost, is used to value finished goods and goods in
process. Standard cost includes direct labor and raw materials, and
manufacturing overhead based on practical capacity. The cost of inventories in
the United States, excluding supplies and CPFilms' inventory in the United
States (73 percent as of both December 31, 2006, and 2005) is determined by
the last-in, first-out ("LIFO") method, which generally reflects the effects
of inflation or deflation on cost of goods sold sooner than other inventory
cost methods. The cost of inventories outside the United States, as well as
supplies inventories in the United States, is determined by the first-in,
first-out ("FIFO") method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The cost of plant
and equipment is depreciated over 5 to 35 years for buildings and improvements
and 3 to 15 years for machinery and equipment, by the straight-line method.
Periodically, Solutia conducts a complete shutdown of certain manufacturing
units ("turnaround") to perform necessary inspections, repairs and
maintenance. Costs associated with significant turnarounds, which include
estimated costs for material, labor, supplies and contractor assistance, are
accrued ratably during the period between each planned activity, which
generally occurs every 2 to 3 years.
Intangible Assets
Intangible assets that have finite useful lives are amortized on a
straight-line basis over their useful lives, generally periods ranging from 5
to 20 years. Goodwill and indefinite-lived intangible assets are assessed
annually for impairment in the fourth quarter, or more frequently if changes
in the circumstances indicate they may not be recoverable.
61
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Impairment of Long-Lived Assets
Impairment tests of long-lived assets are made when conditions
indicate a possible loss. Impairment tests are based on a comparison of
undiscounted cash flows to the recorded value of the asset. If an impairment
is indicated, the asset value is written down to its fair value based upon
market prices or, if not available, upon discounted cash value, at an
appropriate discount rate.
Environmental Remediation
Costs for remediation of waste disposal sites are accrued in the
accounting period in which the obligation is probable and when the cost is
reasonably estimable. Environmental liabilities are not discounted, and they
have not been reduced for any claims for recoveries from third parties. In
those cases where third-party indemnitors have agreed to pay any amounts and
management believes that collection of such amounts is probable, the amounts
are reflected as receivables in the consolidated financial statements.
Self-Insurance and Insurance Recoveries
Solutia maintains self-insurance reserves to reflect its estimate of
uninsured losses. Self-insured losses are accrued based upon estimates of the
aggregate liability for claims incurred using certain actuarial assumptions
followed in the insurance industry, Solutia's historical experience and
certain case specific reserves as required, including estimated legal costs.
The maximum extent of the self-insurance provided by Solutia is dependent upon
a number of factors including the facts and circumstances of individual cases
and the terms and conditions of the commercial policies. Solutia has purchased
commercial insurance in order to reduce its exposure to workers' compensation,
product, general, automobile and property liability claims. Policies for
periods prior to the spinoff are shared with Pharmacia. This insurance has
varying policy limits and deductibles.
Insurance recoveries are estimated in consideration of expected
losses, coverage limits and policy deductibles. When recovery from an
insurance policy is considered probable, a receivable is recorded.
Revenue Recognition
Solutia's primary revenue-earning activities involve producing and
delivering goods. Revenues are considered to be earned when Solutia has
completed the process by which it is entitled to such revenues. The following
criteria are used for revenue recognition: persuasive evidence that an
arrangement exists, delivery has occurred, selling price is fixed or
determinable and collection is reasonably assured.
Allowance for Doubtful Accounts
The provisions for losses on uncollectible trade receivables are
determined primarily on the basis of past collection experience applied to
ongoing evaluations of Solutia's receivables and evaluations of the risks of
uncollectibility.
Distribution Costs
Solutia includes inbound freight charges, purchasing and receiving
costs, inspection costs, warehousing costs, internal transfer costs and the
other costs of its distribution network in Cost of Goods Sold in the
Consolidated Statement of Operations.
Shipping and Handling Costs
Amounts billed for shipping and handling are included in Net Sales
and the costs incurred for these activities are included in Cost of Goods Sold
in the Consolidated Statement of Operations.
62
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Derivative Financial Instruments
In accordance with Statement of Financial Accounting Standard
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"), as amended, all derivatives, whether designated for hedging
relationships or not, are recognized in the Consolidated Statement of
Financial Position at their fair value.
Currency forward and option contracts are used to manage currency
exposures for financial instruments denominated in currencies other than the
entity's functional currency. Solutia has chosen not to designate these
instruments as hedges and to allow the gains and losses that arise from
marking the contracts to market to be included in Other Income, net in the
Consolidated Statement of Operations.
Natural gas forward and option contracts are used to manage some of
the exposure for the cost of natural gas. These market instruments are
designated as cash flow hedges. The mark-to-market gain or loss on qualifying
hedges is included in Accumulated Other Comprehensive Loss in the Consolidated
Statement of Financial Position to the extent effective, and reclassified into
Cost of Goods Sold in the Consolidated Statement of Operations in the period
during which the hedged transaction affects earnings. The mark-to-market gains
or losses on ineffective portions of hedges are recognized in Cost of Goods
Sold immediately.
Income Taxes
Solutia accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities at enacted rates. Solutia
determines the appropriateness of valuation allowances in accordance with the
"more likely than not" recognition criteria outlined in SFAS No. 109,
Accounting for Income Taxes.
Currency Translation
The local currency has been used as the functional currency for
nearly all worldwide locations. The financial statements for most of Solutia's
ex-U.S. operations are translated into U.S. dollars at current or average
exchange rates. Unrealized currency translation adjustments are included in
Accumulated Other Comprehensive Loss in the Consolidated Statement of
Financial Position.
Earnings (Loss) per Share
Basic earnings (loss) per share is a measure of operating performance
that assumes no dilution from securities or contracts to issue common stock.
Diluted earnings (loss) per share is a measure of operating performance by
giving effect to the dilution that would occur if securities or contracts to
issue common stock were exercised or converted.
Stock Option Plans
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's existing shares of common stock, as well as options and warrants to
purchase its common stock will be cancelled upon our emergence from Chapter
11. It is highly unlikely that holders of options to purchase Solutia's common
stock will receive any consideration in our Chapter 11 Cases for their equity
based compensation.
63
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Recently Issued Accounting Standards
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, ("FIN 48"). FIN 48 creates a single model to
address uncertainty in tax positions and clarifies the accounting for income
taxes by prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition. In
addition, FIN 48 eliminates income taxes from the scope of SFAS No. 5,
Accounting for Contingencies.
FIN 48 is effective for fiscal years beginning after December 15,
2006. Differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the amounts reported
after adoption will be accounted for as a cumulative effect adjustment
recorded to the beginning balance of retained earnings. The cumulative effect
adjustment would not apply to those items that would not have been recognized
in earnings, such as the effect of adopting FIN 48 on tax positions related to
business combinations. Solutia is currently evaluating the impact of FIN 48 on
the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosure requirements
regarding fair value measurement. Where applicable, SFAS No. 157 simplifies
and codifies fair value related guidance previously issued within generally
accepted accounting principles (GAAP). Although, SFAS No. 157 does not require
any new fair value measurements, its application may, for some entities,
change current practice. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. Solutia is currently evaluating the impact of SFAS
No. 157 on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans ("SFAS
No. 158"). SFAS No. 158 requires the recognition of the funded status of
pension and other postretirement benefit plans on the balance sheet. The
overfunded or underfunded status would be recognized as an asset or liability
on the balance sheet with changes occurring during the current year reflected
through the comprehensive income portion of equity. Further, SFAS No. 158
requires the unrecognized transition asset or obligation, gains or losses, and
prior service costs to be recognized as a component of other comprehensive
income, net of tax. SFAS No. 158 will also require the measurement of the
funded status of a plan to match that of the date of the Company's
fiscal-year-end financial statements, eliminating the use of earlier
measurement dates previously permissible. The portions of SFAS No. 158
relating to the recognition of the funded status of a plan and the
unrecognized components of net periodic benefit cost are effective for fiscal
years ending after December 15, 2006. See Note 16 for the impact of SFAS No.
158 on the consolidated financial statements.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1,
Accounting For Planned Major Maintenance Activities ("FSP AUG AIR-1"), that
eliminates the acceptability of the accrue-in-advance method of accounting for
planned major maintenance activities. This staff position is effective for
fiscal years beginning after December 15, 2006 and requires retrospective
application to all prior period results presented. The Company has been
accruing for certain major maintenance activities associated with periodic
major overhauls and maintenance of equipment under the accrue-in-advance
method. The anticipated impact upon adoption of FSP AUG AIR-1 on Solutia's
consolidated financial statements is estimated to be an approximate $13
increase in beginning retained earnings.
3. 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 debtor-in-possession. These estimated claims are reflected in the
Consolidated Statement of Financial Position as Liabilities Subject to
Compromise as of December 31, 2006 and 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 acceptance of executory contracts, determination of value of any
collateral securing claims, reconciliation of proofs of claim or other events.
64
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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 December 31, 2006 and 2005, as applicable.
The amounts subject to compromise consisted of the following items:
DECEMBER 31,
------------
2006 2005
---- ----
Postretirement benefits (a)........................... $ 800 $1,098
Litigation reserves (b)............................... 111 136
Accounts payable (c).................................. 116 118
Environmental reserves (d)............................ 81 82
Other miscellaneous liabilities....................... 73 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............... $1,849 $2,176
====== ======
<FN>
(a) Postretirement benefits include Solutia's domestic (i) qualified
pension plan of $305 and $501 as of December 31, 2006 and December
31, 2005, respectively; (ii) non-qualified pension plan of $19 as of
both December 31, 2006 and 2005; and (iii) other postretirement
benefits of $476 and $578 as of December 31, 2006 and December 31,
2005, respectively. Pursuant to a Bankruptcy Court order, Solutia
made payments with respect to other postretirement obligations of $96
and $85 in 2006 and 2005, respectively. Solutia also made
contributions of $179 to its qualified pension plan pursuant to IRS
funding requirements in 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 December 31, 2006 and 2005. During the
second quarter 2006, Solutia transferred out of liabilities subject
to compromise $20 of litigation reserves related to the PENNDOT
litigation matter that were no longer deemed uncertain as a result of
a favorable court ruling (as further described in Note 20). Pursuant
to a Bankruptcy Court order, Solutia made annual scheduled payments
of $5 in both 2006 and 2005 with respect to the Anniston litigation
settlement reached in 2003.
(c) Pursuant to Bankruptcy Court orders, Solutia settled certain accounts
payable liabilities subject to compromise in 2006 and 2005.
(d) Represents remediation obligations related primarily to properties that
are not owned or operated by Solutia, including non-owned properties
adjacent to plant sites and certain owned offsite disposal locations.
See Note 20 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 annual contractual
interest expense not recorded was approximately $32 in both 2006
and 2005.
(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 made 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
65
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
bankruptcy case. The amount of annual contractual interest paid with
respect to these notes was approximately $25 in both years ended
December 31, 2006 and 2005, and the accrued interest related to these
notes was included in Accrued Liabilities classified as not subject to
compromise as of December 31, 2006 and 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 represents the synthetic
lease arrangement with respect to Solutia's headquarters building.
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:
YEAR ENDED DECEMBER 31,
-----------------------
2006 2005 2004
---- ---- ----
Professional fees (a)............................................. $ 58 $ 49 $ 46
Contract rejection and termination costs (b)...................... -- -- 20
Severance and employee retention costs (c)........................ 4 12 9
Adjustments to allowed claim amounts (d) ......................... (2) 10 --
Settlement of pre-petition claims (e)............................. -- (31) (2)
Other............................................................. 11 9 --
------ ------ ------
TOTAL REORGANIZATION ITEMS, NET................................... $ 71 $ 49 $ 73
====== ====== ======
<FN>
(a) Professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization
proceedings.
(b) Asset write-offs associated with contract rejections and terminations
resulting from the ongoing reorganization-related evaluation of the
financial viability of Solutia's existing contracts.
(c) Expense provisions related to (i) employee severance costs incurred
directly as part of the Chapter 11 reorganization process and (ii) a
retention plan for certain Solutia employees approved by the
Bankruptcy Court.
(d) Adjustments to record certain pre-petition claims at estimated
amounts of the allowed claims.
(e) Represents the difference between the settlement amount of certain
pre-petition obligations and the corresponding amounts previously
recorded.
4. ACQUISITIONS AND DIVESTITURES
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 100% 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) plastic interlayer products.
The allocation of purchase price to the assets acquired and
liabilities 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 segment. The results of
operations for the acquired business were not material to Solutia's
consolidated results of operations.
Astaris, a 50/50 joint venture with FMC Corporation ("FMC"), divested
substantially all of its operating assets in the fourth quarter 2005. Under
the terms of the agreement, Israel Chemicals Limited ("ICL") purchased
substantially all of the operating assets of Astaris for $255, subject to
certain purchase price adjustments. As a result of this divestiture of assets,
66
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Solutia realized a $50 net gain on sale recorded in Equity Earnings (Loss)
from Affiliates in the Consolidated Statement of Operations. In addition,
certain of the assets and liabilities of Astaris that were not included in the
sale to ICL were transferred to Solutia and FMC. Generally, these assets and
liabilities consist of property originally contributed to the joint venture by
Solutia and FMC, as well as associated liabilities.
In December 2004, Solutia sold the assets of Axio Research
Corporation ("Axio") for less than $1, resulting in a loss on sale of $1.
Discontinued Operations
On August 22, 2006, Solutia's 100% owned subsidiary Solutia Europe
S.A./N.V. ("SESA"), sold its pharmaceutical services business to Dishman
Pharmaceuticals & Chemicals Ltd. ("Dishman"). Under the terms of the sale,
Dishman purchased 100 percent of the stock of the pharmaceutical services
business, as well as certain other assets used in the pharmaceutical services
business, for $77, subject to certain purchase price adjustments. Dishman also
assumed substantially all of the liabilities relating to the pharmaceutical
services business, other than certain liabilities that arose prior to the
closing of the transaction and liabilities under certain employment
agreements. SESA agreed, subject to certain exceptions, that for a period of
three years after the closing of the transaction neither it nor its affiliates
will compete with the pharmaceutical services business or solicit for
employment certain employees of the pharmaceutical services business and their
current affiliates.
The pharmaceutical services business was a component of the
Performance Products segment prior to the classification as discontinued
operations. Solutia recorded a gain on the sale of the pharmaceutical services
business of $49. Further, Solutia used $51 of the proceeds from the sale to
pay down SESA's (euro)200 million credit facility (as described in Note 14).
The carrying amounts of assets and liabilities from discontinued
operations have been classified as current in the Consolidated Statement of
Financial Position and consisted of the following:
DECEMBER 31, DECEMBER 31,
2006 2005
---- ----
ASSETS:
Trade receivables............................................ $ -- $ 7
Miscellaneous receivables.................................... -- 1
Inventories.................................................. -- 13
Prepaid expenses and other assets............................ -- 1
Property, plant and equipment, net........................... -- 34
Identified intangible assets, net............................ -- 7
Other assets................................................. -- 6
----- ----
Assets of discontinued operations................... $ -- $ 69
===== ====
LIABILITIES:
Accounts payable............................................. $ -- $ 4
Accrued liabilities.......................................... 1 17
Other liabilities............................................ -- 5
----- ----
Liabilities of discontinued operations.............. $ 1 $ 26
===== ====
67
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The operating results of the pharmaceutical services business have
been reported separately as discontinued operations, net of tax, in the
Consolidated Statement of Operations for each period presented. Net sales and
income from discontinued operations are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2006 2005 2004
---- ---- ----
Net sales .................................... $ 42 $66 $ 60
Income (loss) before income taxes............. 54 5 (36)
Income tax expense (benefit) ................. (4) 1 (4)
---- --- ----
INCOME (LOSS) FROM DISCONTINUED OPERATIONS ... $ 58 $ 4 $(32)
==== === ====
Solutia recorded a gain on the sale of the pharmaceutical services
business of $49. The gain on sale was exempt from tax outside the United
States and no gain was realized for United States tax purposes.
5. INCOME (LOSS) PER SHARE
YEAR ENDED DECEMBER 31,
-----------------------
2006 2005 2004
---- ---- ----
Income (Loss) from Continuing Operations.......................... $ (47) $ 7 $ (284)
Income (Loss) from Discontinued Operations, net of tax............ 58 4 (32)
------ ------ ------
Income (Loss) Before Cumulative Effect of Change in Accounting
Principle........................................................ 11 11 (316)
Cumulative Effect of Change in Accounting Principle, net of tax... -- (3) --
------ ------ ------
Net Income (Loss)................................................. $ 11 $ 8 $ (316)
====== ====== ======
Basic and Diluted Income (Loss) per Share:
Income (Loss) from Continuing Operations.......................... $(0.45) $ 0.07 $(2.72)
Income (Loss) from Discontinued Operations, net of tax............ 0.56 0.04 (0.30)
------ ------ ------
Income (Loss) Before Cumulative Effect of Change in Accounting
Principle........................................................ 0.11 0.11 (3.02)
Cumulative Effect of Change in Accounting Principle, net of tax... -- (0.03) --
------ ------ ------
Basic and Diluted Income (Loss) per Share......................... $ 0.11 $ 0.08 $(3.02)
------ ------ ------
Basic and Diluted Weighted Average Shares Outstanding (in millions) 104.5 104.5 104.5
----- ----- -----
6. RESTRUCTURING RESERVES
During 2006, Solutia recorded $3 of decommissioning and dismantling
costs primarily as a result of the 2005 shut-down of its acrylic fibers
business, and $3 of asset write-downs. Solutia also recorded $3 of future
contractual payments related to the termination of a third party manufacturing
agreement. These costs were all recorded within Reorganization Items, net with
$4 in the Integrated Nylon segment and $5 in the Performance Products segment.
In addition, Solutia recorded $8 of severance and retraining costs in 2006
with $4 recorded in Reorganization Items, net and $3 in Marketing and
Administrative expenses and $1 in Cost of Goods Sold involving headcount
reductions within the Integrated Nylon and Performance Products segments. Cash
outlays associated with the restructuring actions were funded from operations.
During 2005, Solutia recorded restructuring charges of $13 in
Reorganization Items, net involving the shut-down of its acrylic fiber
operations at its plant in Decatur, Alabama and the shut-down of its nylon
industrial fiber manufacturing unit at its plant in Pensacola, Florida. This
$13 of net charges from the closure of these businesses included $12 of asset
write-downs, $7 of decontamination and dismantling costs and $4 of severance
and retraining costs, partially offset by a $7 gain from the reversal of the
LIFO reserve associated with the inventory sold and/or written off as part of
the business shut-down
68
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
and a $3 gain from the sale of certain acrylic fibers assets. In addition,
Solutia recorded $4 of severance and retraining costs in 2005 with $2 recorded
in Reorganization Items, net and $2 in Cost of Goods Sold involving headcount
reductions within the Integrated Nylon and Performance Products segments, as
well as the corporate function. Cash outlays associated with the restructuring
actions were funded from operations.
The following table summarizes the above noted restructuring charges,
amounts utilized to carry out those plans and amount remaining at December 31,
2006:
DECOMMISSIONING/ FUTURE CONTRACTUAL EMPLOYMENT ASSET
DISMANTLING PAYMENTS REDUCTIONS WRITE-DOWNS TOTAL
---------------------------------------------------------------------------------
Balance at January 1, 2005.......... $ 5 $ 12 $ -- $ -- $ 17
Charges taken..................... 7 -- 8 12 27
Amounts utilized.................. (10) (12) (6) (12) (40)
---------------------------------------------------------------------------------
Balance at December 31, 2005........ $ 2 $ -- $ 2 $ -- $ 4
CHARGES TAKEN..................... 3 3 8 3 17
AMOUNTS UTILIZED.................. (4) (1) (8) (3) (16)
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2006........ $ 1 $ 2 $ 2 $ -- $ 5
=================================================================================
Restructuring reserves of less than $1 as of December 31, 2006 were
included in Liabilities Subject to Compromise in the Consolidated Statement of
Financial Position. See Note 3 for further description of Solutia's
Liabilities Subject to Compromise. In addition, Solutia expects the majority
of the $5 of restructuring liabilities classified as not subject to compromise
as of December 31, 2006 to be utilized within the next twelve months. Given
the inherent uncertainties associated with the bankruptcy process, Solutia
cannot forecast its level of future spending for restructuring reserves
classified as subject to compromise.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill of $89 and $76 at December 31, 2006 and 2005, respectively,
was allocated to the Performance Products segment. This $13 increase in
goodwill was a result of the Quimica acquisition (as further described in Note
4), of which $5 resulted from the 2006 acquisition and $8 resulted from the
original acquisition in 1996 that was previously accounted for under the
equity method of accounting. There were no impairments to the net carrying
amount of goodwill during the year ended December 31, 2006.
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:
DECEMBER 31,
-----------------------------------------------------------------------------
2006 2005
------------------------------------- ------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
------------------------------------- ------------------------------------
Amortizable intangible assets (a)......... $ 12 $ (7) $ 5 $ 8 $ (6) $ 2
Trademarks................................ 26 -- 26 26 -- 26
------------------------------------- ------------------------------------
TOTAL IDENTIFIED INTANGIBLE ASSETS........
$ 38 $ (7) $ 31 $ 34 $ (6) $ 28
===================================== ====================================
<FN>
(a) The $4 increase in Gross Carrying Value 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 2006.
69
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
There were no changes to amortizable lives or methods during the year
ended December 31, 2006. In addition, amortization expense for the net
carrying amount of finite-lived intangible assets is estimated to be $1
annually from 2007 through 2010 and less than $1 in 2011.
8. RISK MANAGEMENT ACTIVITIES
Solutia's business operations give rise to market risk exposures that
result from changes in currency exchange rates, interest rates and certain
commodity prices. To manage the volatility relating to these exposures,
Solutia enters into various hedging transactions that enable it to alleviate
the adverse effects of financial market risk. Designation is performed on a
specific exposure basis to support hedge accounting. The changes in fair value
of these hedging instruments are offset in part or in whole by corresponding
changes in the fair value or cash flows of the underlying exposures being
hedged. Solutia's hedging transactions are carried out under policies and
procedures approved by the Audit and Finance Committee of the Board of
Directors, which does not permit the purchase or holding of any derivative
financial instruments for trading purposes.
Foreign Currency Exchange Rate Risk
Solutia manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. Solutia uses foreign currency hedging instruments to
manage the volatility associated with foreign currency purchases of materials
and other assets and liabilities created in the normal course of business.
Solutia primarily uses forward exchange contracts and purchased options to
hedge these risks with maturities of less than 18 months.
Solutia also enters into certain foreign currency derivative
instruments primarily to protect against exposure related to intercompany
financing transactions. Solutia has chosen not to designate these instruments
as hedges and to allow the gains and losses that arise from marking the
contracts to market to be recorded in Other Income, net in the period. There
was a net loss of $3, $1, and $3 recorded in the years ended December 31,
2006, 2005 and 2004. Solutia had currency forward and option contracts to
purchase and sell $181 and $365 of currencies as of December 31, 2006 and
2005, respectively, comprised principally of the Euro, British Pound-Sterling,
Swiss Franc and U.S. Dollar.
Interest Rate Risk
Interest rate risk is primarily related to changes in interest
expense from floating rate debt. Solutia believes its current debt structure
mitigates some of the risk associated with changes in interest rates due to
the combination of fixed versus floating rate debt instruments. Further,
periodically, the Company does enter into contracts to further mitigate
interest rate risk.
Commodity Price Risk
Certain raw materials and energy resources used by Solutia are
subject to price volatility caused by weather, crude oil prices, supply
conditions, political and economic variables and other unpredictable factors.
Solutia uses forward and option contracts to manage a portion of the
volatility related to anticipated energy purchases with maturities up to 6
months. These market instruments are designated as cash flow hedges. The
mark-to-market gain or loss on qualifying hedges is included in Accumulated
Other Comprehensive Loss to the extent effective, and reclassified into Cost
of Goods Sold in the period during which the hedged transaction is settled.
The mark-to-market gains or losses on ineffective portions of hedges are
recognized in Cost of Goods Sold immediately.
As of December 31, 2006, less than $1 of after-tax unrealized net
losses on derivative instruments was recorded in Accumulated Other
Comprehensive Loss and is expected to be reclassified into Cost of Goods Sold
in the first quarter of 2007. The actual purchases of energy, which are
expected to occur during the next 3 months, will necessitate the
reclassification of the derivative losses into Cost of Goods Sold. There were
no gains or losses recorded in Cost of Goods Sold as a result of the
ineffectiveness of any hedging contacts, and no cash flow hedges were
discontinued during 2006 or 2005 due to changes in expectations on the
original forecasted transactions. Solutia had commodity forward contracts with
notional amounts of $2 and $9 as of December 31, 2006 and 2005, respectively.
70
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Credit Risk
Credit risk arising from the inability of a counterparty to meet the
terms of Solutia's financial instrument contracts is generally limited to the
amounts, if any, by which the counterparty's obligations exceed the
obligations of Solutia. It is Solutia's policy to enter into financial
instruments with a number of creditworthy counterparties. Therefore, Solutia
does not expect to incur material credit losses on its risk management or
other financial statement instruments.
9. INVESTMENTS IN AFFILIATES
As further described in Note 4, Astaris divested substantially all of
its operating assets in the fourth quarter 2005. Pursuant to this transaction,
there were certain assets and liabilities of Astaris that were not included in
the sale to ICL which were transferred to Solutia and FMC. Generally, these
assets and liabilities consisted of property originally contributed to the
joint venture by Solutia and FMC, as well as certain pre-closing liabilities
relating to Astaris, including certain pre-closing environmental liabilities.
In addition, certain non-operating assets and liabilities remained in the
Astaris joint venture as part of the transaction. Further, the name of the
joint venture which holds these remaining assets and liabilities was changed
from Astaris LLC to Siratsa LLC.
At December 31, 2006, Solutia's investments in affiliates consisted
principally of its 50 percent interests in the Flexsys and Siratsa joint
ventures for which Solutia applies the equity method of accounting. Summarized
combined financial information for 100 percent of the Flexsys and Siratsa
joint ventures is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2006 2005 2004
---- ---- ----
RESULTS OF OPERATIONS:
Net sales............................ $606 $963 $878
Gross profit ........................ 155 233 140
Operating income (loss).............. 91 108 (18)
Net income (loss).................... 66 192 (46)
DECEMBER 31,
------------
2006 2005
---- ----
FINANCIAL POSITION:
Current assets....................... $267 $271
Non-current assets................... 355 368
Current liabilities.................. 170 143
Non-current liabilities.............. 72 133
Solutia's investment in Flexsys as of December 31, 2006 and 2005
exceeded Solutia's proportionate share of the underlying equity of Flexsys by
$5 and $1, respectively, primarily due to goodwill recorded by Solutia at
inception of the joint venture. Solutia received a $25 dividend from Flexsys
during the third quarter 2006, while there were no dividends from either
Flexsys or Siratsa during 2005.
71
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
10. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
DECEMBER 31,
------------
INVENTORIES 2006 2005
---- ----
Finished goods................................................ $ 226 $ 236
Goods in process.............................................. 165 131
Raw materials and supplies.................................... 92 93
------ ------
Inventories, at FIFO cost..................................... 483 460
Excess of FIFO over LIFO cost................................. (209) (206)
------ ------
TOTAL......................................................... $ 274 $ 254
====== ======
Inventories at FIFO approximate current cost.
DECEMBER 31,
------------
PROPERTY, PLANT AND EQUIPMENT 2006 2005
---- ----
Land.......................................................... $ 18 $ 19
Leasehold improvements........................................ 37 37
Buildings..................................................... 435 412
Machinery and equipment....................................... 2,757 2,734
Construction in progress...................................... 66 50
------ ------
Total property, plant and equipment........................... 3,313 3,252
Less accumulated depreciation................................. (2,518) (2,482)
------ ------
TOTAL......................................................... $ 795 $ 770
====== ======
DECEMBER 31,
------------
ACCRUED LIABILITIES 2006 2005
---- ----
Wages and benefits............................................ $ 61 $ 54
Accrued selling expenses...................................... 32 34
Accrued interest.............................................. 20 23
Other......................................................... 132 112
------ ------
TOTAL......................................................... $ 245 $ 223
====== ======
11. VARIABLE INTEREST ENTITIES
Solutia has a synthetic lease related to its corporate headquarters
in St. Louis, Missouri, entered into in 1999, that qualifies as a variable
interest entity ("VIE"). Based on the terms of the lease agreement and the
residual value guarantee Solutia provides to the lessor, Solutia concluded it
is the primary beneficiary of the VIE and is consolidated in accordance with
FASB Interpretation No. 46, Consolidation of Variable Interest Entities. As a
result, the property, plant and equipment of $32 and long-term debt of $43
held by the VIE are included in the Consolidated Statement of Financial
Position.
12. ASSET RETIREMENT OBLIGATIONS
In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB Statement
No. 143 ("FIN 47"). FIN 47 clarifies that the term "conditional asset
retirement obligation" as used in SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS No. 143"), refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and (or)
method of settlement, including those that may be conditional on a future
event. Accordingly, an entity is required to recognize a liability for the
fair value of a conditional
72
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
asset retirement obligation if the fair value of the liability can be
reasonably estimated. Uncertainty about the timing and (or) method of
settlement should be factored into the measurement of the liability when
sufficient information exists. FIN 47 also clarifies when sufficient
information to reasonably estimate the fair value of an asset retirement
obligation is considered available.
Upon adoption of SFAS No. 143 as of January 1, 2003, Solutia
identified certain conditional asset retirement obligations; however, these
obligations were not recorded due to uncertainties involved with the
determination of settlement timing. With the clarification outlined by FIN 47
for valuation of conditional asset retirement obligations, Solutia reevaluated
the valuation concerns involving settlement timing for these conditional asset
retirement obligations and accordingly reported an asset retirement obligation
of $7 as of December 31, 2005. These obligations involve various federal,
state and local regulations and/or contractual obligations to decontaminate
and/or dismantle certain machinery and equipment, buildings, and leasehold
improvements at Solutia's various operating locations.
Asset retirement obligations were estimated for each of Solutia's
operating locations, where applicable, based upon Solutia's current and
historical experience, adjusted for factors that a third-party would consider,
such as overhead, profit and market risk premium. Estimated obligations were
escalated based upon the anticipated timing of the related cash flows using an
assumed inflation rate, and then were discounted using a credit-adjusted,
risk-free interest rate. The impact of adoption resulted in a charge of $3
recorded as a cumulative effect of change in accounting principle (net of tax
of $1) in the Consolidated Statement of Operations in 2005.
The pro-forma effects of the application of FIN 47 for the years
ended December 31, 2005 and 2004 for these specific conditional asset
retirement obligations are presented below:
AS OF AND FOR THE YEAR
----------------------
ENDED DECEMBER 31,
------------------
Pro-forma amounts assuming the accounting change is applied 2005 2004
retroactively net of tax: ---- ----
Net income (loss).................................................. $ 8 $ (317)
Net income (loss) per basic and diluted share...................... $ 0.08 $(3.03)
Pro-forma amounts of liability for asset retirement obligation at
beginning of period............................................... $ 4 $ 4
------ ------
Pro-forma amounts of liability for asset retirement obligation at
end of period..................................................... $ 5 $ 4
------ ------
At December 31, 2006 and 2005, the Company had a liability pertaining
to the asset retirement obligation in Other Liabilities on the Consolidated
Statement of Financial Position. The following is a reconciliation of the
beginning and ending carrying amount of the Company's asset retirement
obligation and the related assets:
2006 2005
---- ----
Asset retirement obligation, beginning of period................... $ 5 $ --
Cumulative effect of change in accounting principle................ -- 7
Asset retirement obligation reclassed to liabilities of
discontinued operations........................................... -- (2)
Accretion expense.................................................. -- --
------ ------
Asset retirement obligation, end of period......................... $ 5 $ 5
====== ======
The net book value of the related long-lived assets is less than $1
for both 2006 and 2005.
73
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
13. INCOME TAXES
The components of income (loss) from continuing operations before
income taxes were:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2006 2005 2004
---- ---- ----
United States.................................. $ (66) $ (30) $ (300)
Outside United States.......................... 37 49 14
------- ------- -------
TOTAL.......................................... $ (29) $ 19 $ (286)
======= ======= =======
The components of income tax expense (benefit) recorded in continuing
operations were:
YEAR END DECEMBER 31,
-----------------------------------------------
2006 2005 2004
---- ---- ----
Current:
U.S. federal............................... $ -- $ -- $ (5)
U.S. state................................. -- -- (1)
Outside United States...................... 13 4 10
------- ------- -------
13 4 4
Deferred:
U.S. federal............................... -- -- --
U.S. state................................. -- -- --
Outside United States...................... 5 8 (6)
------- ------- -------
5 8 (6)
------- ------- -------
Total.......................................... $ 18 $ 12 $ (2)
======= ======= =======
Income tax (benefit) expense differed from the amounts computed by
applying the U.S. Federal income tax rate of 35% to income from continuing
operations before income taxes as a result of the following:
YEAR END DECEMBER 31,
-----------------------------------------------
2006 2005 2004
---- ---- ----
DOLLARS IN MILLIONS
Income Tax at federal statutory rate........... $ (10) $ 7 $ (100)
Increase (reduction) in income taxes due to:
U.S. state income taxes..................... (3) (3) (11)
Export tax benefit.......................... (2) (3) (3)
Taxes related to foreign earnings........... 6 8 1
Valuation allowances........................ 24 12 108
Income from equity affiliates............... (10) (9) (3)
Surrendered losses from equity affiliate (a) (4) (11) --
Reorganization costs........................ 12 13 13
Tax contingency adjustment.................. 8 -- (6)
Other....................................... (3) (2) (1)
------- ------- -------
INCOME TAX EXPENSE (BENEFIT) .................. $ 18 $ 12 $ (2)
======= ======= =======
<FN>
(a) During 2006, a non-consolidated equity affiliate surrendered a prior year
loss that was used to offset a foreign subsidiary's taxable income in the
United Kingdom. During 2005, a non-consolidated equity affiliate
surrendered prior years losses that were used to offset a foreign
subsidiary's taxable income in the United Kingdom.
74
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Deferred income tax balances were related to:
DECEMBER 31,
--------------------------------
2006 2005
---- ----
Postretirement benefits.................................... $ 318 $ 421
Environmental liabilities.................................. 53 51
Inventory.................................................. 16 16
Insurance reserves......................................... 43 50
Miscellaneous accruals..................................... 15 18
Equity affiliates.......................................... 8 15
Net operating losses....................................... 412 295
Other...................................................... 51 48
------ ------
TOTAL DEFERRED TAX ASSETS 916 914
Less: Valuation allowances................................. (698) (705)
------ ------
DEFERRED TAX ASSETS LESS VALUATION ALLOWANCES 218 209
------ ------
Property................................................... (146) (159)
Accrued interest........................................... (39) (26)
Other...................................................... (20) (15)
------ ------
TOTAL DEFERRED TAX LIABILITIES (205) (200)
------ ------
NET DEFERRED TAX ASSETS.................................... $ 13 $ 9
====== ======
At December 31, 2006, research and development tax credit
carryforwards available to reduce possible future U.S. income taxes amounted
to approximately $5, all of which will expire in 2019 through 2022. At
December 31, 2006, various federal, state and foreign net operating loss
carryforwards are available to offset future taxable income. These net
operating losses expire from 2007 through 2026 or have an indefinite
carryforward period. Valuation allowances have been provided for the tax
credit and net operating loss carryforwards that are not likely to be
utilized. Income taxes and remittance taxes have not been recorded on $87 of
undistributed earnings of subsidiaries because Solutia intends to reinvest
those earnings indefinitely.
Solutia reduced the valuation allowances by $(7) in 2006 of which $24
was recorded in Income Tax Expense (Benefit) in the Consolidated Statement of
Operations and $(31) was recorded in Accumulated Other Comprehensive Loss in
the Consolidated Statement of Comprehensive Income (Loss). The valuation
allowances are principally provided for the U.S. deferred tax assets as
Solutia continues to no longer believe that the "more likely than not"
recognition criteria outlined in SFAS No. 109, Accounting for Income Taxes,
were appropriate given a combination of factors surrounding Solutia's Chapter
11 bankruptcy filing including: (i) the possibility that all or a substantial
portion of the loss and credit carryforwards and tax bases of assets could be
reduced to the extent of cancellation of indebtedness occurring as part of a
reorganization plan; (ii) the possibility that all or a substantial portion of
the loss and credit carryforwards could become limited if a change in
ownership occurs as a result of a reorganization plan; and (iii) updated
expectations regarding near-term taxable income.
As of December 31, 2006, the Internal Revenue Service ("IRS") had
completed its examination of the income tax returns of Solutia through 2001.
No other years are currently being examined by the IRS. In addition, Solutia
is subject to audits in several state and foreign jurisdictions. Solutia
believes that it has adequate contingency reserves established for probable
adjustments resulting from these audits. During 2006, Solutia increased its
tax contingency reserves by $8 based on expected outcomes of income tax audits
in various jurisdictions. The tax contingency reserves were adjusted by less
than $(1) in 2005.
14. DEBT OBLIGATIONS
As of December 31, 2006, Solutia's debt obligations include
borrowings from its DIP credit facility, notes and debentures. The weighted
average interest rate on Solutia's total debt outstanding at December 31, 2006
was 8.4 percent compared to 8.7 percent at December 31, 2005. 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 (see
75
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Note 3 for further description of these notes due 2009), the weighted average
interest rate on total debt was 8.9 percent at December 31, 2006, compared to
9.8 percent at December 31, 2005. The weighted average interest rate on
Solutia's short-term debt outstanding at December 31, 2006, was 9.0 percent as
compared to 8.5 percent at December 31, 2005. As a result of the Chapter 11
filing, Solutia was in default on all its debt agreements as of December 31,
2006, with the exception of its DIP credit facility and SESA's (euro)200
million Facility Agreement ("Facility Agreement"). While operating as a
debtor-in-possession during the Chapter 11 bankruptcy proceedings, Solutia has
ceased recording interest on all unsecured pre-petition indebtedness in
accordance with SOP 90-7, with the exception of the 11.25 percent notes due
2009. The amount of contractual interest not recorded was $32 in 2006, 2005
and 2004. Contractual interest is payable semiannually in January and July for
the 11.25 percent notes due 2009. The DIP credit facility had $650 of
borrowings at December 31, 2006 and $300 at December 31, 2005 and was
classified as a current liability at both reporting dates. At both December
31, 2006 and 2005, Solutia had $95 and $131, respectively, of availability
under the DIP credit facility due to borrowings and amounts outstanding under
letter of credit facilities.
Long-term debt consisted of the following as of December 31,
2006 2005
---- ----
6.72% debentures due 2037........................ 150 150
10.00% Euro notes due 2008 ...................... -- 247
Facility Agreement due 2011 ..................... 210 --
11.25% notes due 2009............................ 223 223
7.375% debentures due 2027....................... 300 300
Other............................................ 43 43
------ ------
Total principal amount..................... 926 963
Unamortized net discount (a)..................... -- --
------ ------
926 963
Less amounts subject to compromise (Note 3)...... (716) (716)
------ ------
TOTAL............................................ $ 210 $ 247
====== ======
<FN>
(a) Unamortized net discount of $48 as of both December 31, 2006 and
December 31, 2005 is included in liabilities subject to compromise,
as further described in Note 3.
Amendments to DIP Financing Agreement
Solutia amended its DIP credit facility on March 17, 2006 with
Bankruptcy Court approval. This amendment, among other things, (i) increased
the DIP credit facility from $525 to $825; (ii) extended the term of the DIP
credit facility from June 19, 2006 to March 31, 2007; (iii) decreased the
interest rate on the term loan component of the DIP credit 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, SESA's outstanding Euronotes; and (vii) amended certain
financial and other covenants. Note 23 describes an additional amendment to
the DIP financing agreement made subsequent to December 31, 2006.
Solutia analyzed the modifications of the DIP credit 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 credit facility as modified at its fair
value. In addition, $1 of unamortized debt issuance costs associated with the
DIP credit facility were written off at the time of modification in March
2006.
Solutia amended its DIP financing agreement on June 1, 2005 and
received Bankruptcy Court approval on July 25, 2005. The amendment reduced the
interest rate on the term loan component of the DIP credit facility to LIBOR
plus 4.25 percent from the previous interest rate of the greater of the prime
rate plus 4.0 percent or 8.0 percent, extended the maturity date of the
current facility to June 19, 2006 from the previous December 19, 2005 maturity
date, and made other minor
76
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
modifications. No changes were made to the financial covenants contained in
the DIP agreement aside from extending the financial covenant requirements to
be commensurate with the new maturity date of the DIP agreement.
Euronotes Refinancing
On July 26, 2006, Solutia's indirect 100% owned subsidiary Solutia
Services International S.C.A./Comm. V.A ("SSI"), a subsidiary of SESA, entered
into a Facility Agreement guaranteed by SESA and CPFilms Vertriebs GmbH, a
subsidiary of SESA. Closing of the Facility Agreement occurred on August 1,
2006. SESA used the proceeds of the Facility Agreement to refinance all of its
(euro)200 million of 10 percent Senior Secured Notes (the "Euronotes") on
August 1, 2006 at a prepayment premium of 3 percent, as required pursuant to
the Euronotes, for a total redemption amount of approximately (euro)215
million, including accrued interest. The Euronotes were refinanced to reduce
the interest rate, extend the term of the indebtedness and facilitate certain
dispositions by Solutia, including the sale of its pharmaceutical services
business as described in Note 4.
The Facility Agreement has a five-year term, with a termination date
of July 31, 2011 and an adjustable rate structure which is EURIBOR plus 275
basis points. The margin is subject to adjustment upon the occurrence of
certain events specified in the Facility Agreement or upon SESA and its
subsidiaries attaining certain financial benchmarks. The Facility Agreement
consists of a (euro)160 million term loan and a (euro)40 million term loan.
The (euro)40 million term loan was repaid from the proceeds of the sale of
Solutia's pharmaceutical services business (as further described in Note 4).
The Facility Agreement is secured by substantially all of the assets of SESA
and its subsidiaries. The Facility Agreement also contains other customary
terms and conditions, including certain financial covenants relating to the
performance of SESA and its subsidiaries.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, trade receivables, third-party
guarantees, accounts payable and short-term debt approximate their fair values
at both December 31, 2006 and 2005, respectively.
The estimated fair value of Solutia's long-term debt not subject to
compromise was $214 at December 31, 2006 and $248 as of December 31, 2005.
These estimates compare with the recorded amount of $210 in 2006 and $247 in
2005. Fair value of the debt subject to compromise cannot be fairly determined
due to the inherent uncertainties underlying the valuation assumptions
affected by the Chapter 11 bankruptcy proceedings.
The estimated fair value of Solutia's foreign currency forward and
option contracts on intercompany financing transactions was $1 at December 31,
2006 and less than $1 at December 31, 2005. Notional amounts for these forward
and option contracts to purchase and sell foreign currencies were $181 at
December 31, 2006, and $365 at December 31, 2005.
The estimated fair value of Solutia's commodity forward contracts was
less than a $1 and an approximate $1 loss at December 31, 2006 and 2005,
respectively. Notional amounts for these commodity forward contracts were $2
and $9 at December 31, 2006 and 2005, respectively.
Fair values are estimated by the use of quoted market prices;
estimates obtained from brokers and other appropriate valuation techniques and
are based upon information available as of both December 31, 2006, and
December 31, 2005. The fair-value estimates do not necessarily reflect the
values Solutia could realize in the current market.
16. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension benefits generally are based on the employee's age, years of
service and/or compensation level. The domestic qualified pension plan is
funded in accordance with Solutia's long-range projections of the plan's
financial conditions. These projections take into account benefits earned and
expected to be earned, anticipated returns on pension plan assets and income
tax and other regulations. Solutia amended its U.S. qualified pension plan in
2005 for union participants and in 2004 for non-union participants to cease
future benefit accruals effective January 1, 2006 and July 1, 2004,
respectively (as further described below). Prior to the spinoff, the majority
of Solutia's employees participated in
77
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Pharmacia's noncontributory pension plans. In conjunction with the spinoff,
Solutia assumed pension liabilities and received related assets from those
plans for its applicable active employees and for certain former employees who
left Pharmacia in earlier years. Further, Solutia terminated certain domestic,
non-qualified pension plans in 2005.
Certain employees also participate in benefit programs that provide
certain health care and life insurance benefits for retired employees. All
regular, full-time U.S. employees and certain employees in other countries who
were employed by Solutia on or before December 31, 1998, may become eligible
for these benefits if they reach retirement age while employed by Solutia and
have the required years of service. These postretirement benefits are unfunded
and are generally based on the employee's age, years of service and/or
compensation level. The costs of postretirement benefits are accrued by the
date the employees become eligible for the benefits. Solutia amended its U.S.
postretirement plan in 2005 for union, active employees and in 2004 for
non-union, active employees (as further described below). In connection with
the Solutia Spinoff, Solutia assumed retiree medical liabilities for its
applicable active employees and for approximately two-thirds of the retired
U.S. employees of Pharmacia.
Solutia uses a measurement date of December 31 for the majority of
its pension and other postretirement benefit plans. The amounts disclosed
below do not reflect the impact of any changes to the benefit plans that might
be contemplated as a result of the bankruptcy filing. In addition, the accrued
liabilities for domestic pension and other postretirement obligations have
been classified as liabilities subject to compromise as of December 31, 2006
and 2005 (see Note 3).
Net Periodic Cost
For the years ended December 31, 2006, 2005, and 2004, Solutia's
pension and healthcare and other benefit costs were as follows:
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2006 2005 2004 2006 2005 2004
---- ---- ---- ---- ---- ----
Service costs for benefits earned.............. $ 4 $ 6 $ 14 $ 5 $ 5 $ 8
Interest cost on benefit obligation............ 65 68 77 29 33 42
Assumed return on plan assets.................. (60) (61) (75) -- -- --
Prior service costs ........................... -- 2 6 (11) (10) (13)
Actuarial net (gain)/loss...................... 14 14 7 7 14 7
Net curtailment and settlement charges/(gains). -- 17 73 -- (4) (38)
----- ------ ------ ------ ------ ------
TOTAL.......................................... $ 23 $ 46 $ 102 $ 30 $ 38 $ 6
===== ====== ====== ====== ====== ======
Curtailments and Settlements
----------------------------
Solutia amended its U.S. postretirement plan in 2006 for retiree
participants to be effective January 1, 2007. The changes terminate medical
benefits for certain retirees who are Medicare eligible, and if not Medicare
eligible, to terminate medical benefits on the earlier of (a) the date such
retirees or participants become Medicare eligible if such date is on or after
January 1, 2007 or (b) October 19, 2016. This action resulted in a curtailment
of the U.S. postretirement plan, as defined by SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, due to the
termination of medical benefits provided to retiree participants in Solutia's
U.S. postretirement plan. The net result of this action in 2006 was a $40 gain
due primarily to the required recognition of prior service gains that were
expected to be amortized into earnings over the estimated future service
period of the plan participants.
Solutia amended its U.S. qualified pension plan in 2005 to cease
benefit accruals for domestic union participants to be effective January 1,
2006. This action resulted in a curtailment of the U.S. qualified pension
plan, as defined by SFAS No. 88, Employees Accounting for Settlements and
Curtailments of Defined Pension Plans and for Termination Benefits, due to the
reduction in anticipated future service of union participants in Solutia's
U.S. qualified pension plan. The net result of this action in 2005 was a $7
loss due primarily to the required recognition of unrecognized losses that
were expected to be amortized into earnings over the estimated future service
period of the plan participants.
Solutia also amended in 2005 its U.S. postretirement plan for union,
active employees to be effective January 1, 2006. These changes included
discontinuation of all postretirement benefits after attaining age 65, changes
to certain
78
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
eligibility requirements for pre-65 postretirement benefits with the eventual
elimination of these benefits by 2016, and significant reduction of retiree
life insurance benefits for future retirees. This action resulted in a
curtailment of the U.S. postretirement plan, as defined by SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, due to
the reduction in anticipated future service of union participants in Solutia's
U.S. postretirement plan. The net result of this action in 2005 was a $4 gain
due primarily to the required recognition of unrecognized gains that were
expected to be amortized into earnings over the estimated future service
period of the plan participants.
Solutia terminated certain domestic, non-qualified pension plans in
2005, which were effectively frozen since Solutia's bankruptcy filing on
December 17, 2003. The termination of these plans resulted in a pension
settlement in accordance with SFAS No. 88. However, no adjustments were made
to the recorded amount of $19 for these plans since this amount represents the
best proxy for the allowed claim amount in accordance with SOP 90-7. An
adjustment to this amount will be made if the allowed claim is deemed to be
different through the claims resolution process. The amount has been presented
as a reduction to the overall pension obligation in 2005, as the amount no
longer represent a pension obligation, but instead general unsecured claims
against Solutia.
Solutia amended its U.S. qualified and non-qualified pension plans in
2004 to cease future benefit accruals effective July 1, 2004 for non-union
participants in these plans. As a result, Solutia recorded a pension
curtailment net loss of $63 in 2004 due to the reduction in anticipated future
service of participants in Solutia's U.S. qualified and non-qualified pension
plans. In addition, Solutia recorded a pension settlement net gain of $1
resulting from the significant reduction in the number of participants in
Solutia's non-qualified pension plan principally resulting from workforce
reduction initiatives.
Solutia amended its U.S. postretirement plan for non-union, active
employees during 2004. These changes, effective September 1, 2004, include
discontinuation of all postretirement benefits after attaining age 65, changes
to certain eligibility requirements for pre-65 postretirement benefits with
the eventual elimination of these benefits by 2016, and elimination of retiree
life insurance benefits for future retirees. As a result, Solutia recorded a
curtailment gain of $38 in 2004 due to the reduction in anticipated future
service of non-union participants in Solutia's U.S. postretirement plan.
Solutia recorded pension settlement charges of $10 in both 2005 and
2004 resulting principally from the significant amount of lump sum
distributions from Solutia's U.S. qualified pension plan during each of those
years relating primarily to headcount reductions. In addition, Solutia
recorded a curtailment loss of $1 during 2004 due to the reduction in
anticipated future service of participants in Solutia's Canadian pension plan
resulting from headcount reductions.
Actuarial Assumptions
---------------------
The significant actuarial assumptions used to determine net periodic
cost for Solutia's principal pension, healthcare and other benefit plans were
as follows:
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2006 2005 2006 2005
---- ---- ---- ----
Discount rate.................................... 5.50% 5.50% 5.50% 5.25%
Expected return on plan assets................... 8.75% 9.00% N/A N/A
Rate of compensation increase (a)................ 4.00% 4.00% N/A N/A
Assumed trend rate for healthcare costs ......... N/A N/A 9.00% 8.00%
Ultimate trend rate for healthcare costs......... N/A N/A 5.00% 5.00%
<FN>
(a) The rate of compensation increase in 2006 and 2005 relates
specifically to Solutia's foreign pension plans. The rate of
compensation increase is not applicable to the valuation of U.S.
pension plans as of December 31, 2006 and 2005 due to the
aforementioned cessation of future benefit accruals in 2005 and 2004
for participants in the U.S. pension plans.
Solutia establishes its discount rate based upon the internal rate of
return for a portfolio of high quality bonds with maturities consistent with
the nature and timing of future cash flows for each specific plan. The
expected long-term rate of return on pension plan assets assumption is based
on the target asset allocation policy and the expected future rates of return
on these assets.
79
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
A 1 percent change in the assumed health care cost trend rates would
have the following effect as of December 31, 2006:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on postretirement benefit obligation................... $ 3 $ (3)
Effect on total service and interest cost components ......... -- --
Solutia's costs for postretirement medical benefits are capped for
many current retirees and for active employees; therefore, the impact of this
hypothetical change in the assumed health care cost trend rate is limited.
Benefit Obligations
Components of the changes in the benefit obligation of Solutia's
principal pension, healthcare and other benefit plans were as follows:
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2006 2005 2006 2005
---- ---- ---- ----
CHANGES IN BENEFIT OBLIGATION
Benefit obligation at January 1............... $1,240 $1,319 $ 579 $ 717
Service costs................................. 4 6 5 5
Interest cost................................. 65 68 29 33
Contributions................................. 2 1 21 23
Actuarial (gain) losses....................... -- 44 (6) (81)
Foreign currency ............................. 17 (14) -- --
Plan amendments .............................. -- (19) (40) (10)
Federal subsidy on benefits paid ............. -- -- 7 --
Benefits paid................................. (148) (165) (110) (108)
------ ------ ------ ------
BENEFIT OBLIGATION AT DECEMBER 31............. $1,180 $1,240 $ 485 $ 579
====== ====== ====== ======
The accumulated benefit obligation was $1,157 and $1,217 as of
December 31, 2006 and 2005, respectively.
The significant actuarial assumptions used to estimate the projected
benefit obligation for Solutia's principal pension, healthcare and other
benefit plans were as follows:
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2006 2005 2006 2005
---- ---- ---- ----
Discount rate................................... 5.75% 5.50% 5.75% 5.50%
Expected return on plan assets.................. 8.75% 9.00% N/A N/A
Rate of compensation increase (a)............... 4.00% 4.00% N/A N/A
Assumed trend rate for healthcare costs ........ N/A N/A 8.00% 9.00%
Ultimate trend rate for healthcare costs........ N/A N/A 5.00% 5.00%
<FN>
(a) The rate of compensation increase in 2006 and 2005 relates
specifically to Solutia's foreign pension plans. The rate of
compensation increase is not applicable to the valuation of U.S.
pension plans as of December 31, 2006 and 2005 due to the
aforementioned cessation of future benefit accruals in 2005 and 2004
for participants in the U.S. pension plans.
80
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Plan Assets
Components of the changes in fair value of plan assets of Solutia's
pension plans were as follows:
PENSION BENEFITS
----------------
2006 2005
---- ----
CHANGES IN FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at January 1.......... $ 700 $ 811
Actual return on plan assets.................... 76 59
Contributions................................... 186 5
Foreign currency................................ 13 (10)
Benefits paid................................... (148) (165)
------ ------
FAIR VALUE OF PLAN ASSETS AT DECEMBER 31........ $ 827 $ 700
------ ------
The other postretirement benefits plans are unfunded as of December
31, 2006 and 2005.
The asset allocation for Solutia's pension plans as of December 31,
2006 and 2005, and the target allocation for 2007, by asset category, follows.
PERCENTAGE OF PLAN ASSETS AT DECEMBER 31,
-----------------------------------------
ASSET CATEGORY 2007 TARGET ALLOCATION 2006 2005
-------------- ---------------------- ---- ----
Equity securities 67% 68% 67%
Debt securities 30 29 29
Other 3 3 4
--- --- ---
Total 100% 100% 100%
The Solutia defined benefit plan investment strategy is to maintain
an asset allocation that is diversified among multiple asset classes, and
among multiple managers within each asset class, in order to minimize the risk
of large losses and to maximize the long-term risk-adjusted rate of return.
Funded Status
The funded status of Solutia's principal pension, healthcare and
other benefit plans at December 31, 2006, and 2005 and the related amounts
recognized in the Consolidated Statement of Financial Position was as follows:
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2006 2005 2006 2005
---- ---- ---- ----
Fair value of plan assets....................... $ 827 . $ 700 $ -- $ --
Projected benefit obligation.................... 1,180 1,240 485 579
------ ------ ------ -----
FUNDED STATUS................................... $ (353) $ (540) $ (485) $ (579)
Unrecognized actuarial loss..................... N/A . 167 N/A 54
Unrecognized prior service costs (gains)........ N/A 1 N/A (59)
------ ------ ------ -------
ACCRUED NET LIABILITY AT DECEMBER 31............ N/A $ (372) N/A $ (584)
====== ====== ====== =======
81
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2006 2005 2006 2005
---- ---- ---- ----
Prepaid benefit cost............................ N/A $ 18 N/A $ --
Current liability............................... -- N/A (79) N/A
Long-term liability............................. (353) N/A (405) N/A
Accrued benefit cost............................ N/A (530) N/A (584)
Intangible asset................................ N/A 1 N/A N/A
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Minimum pension liability....................... N/A 139 N/A N/A
Net actuarial (gain)/loss....................... 143 N/A 40 N/A
Prior service (gain)/cost....................... 1 N/A (88) N/A
------ ------ ------ ------
ACCRUED NET LIABILITY........................... N/A $ (372) N/A $ (584)
====== ====== ====== ======
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plans with projected benefit
obligation in excess of plan assets and for the pension plans with accumulated
benefit obligations in excess of plan assets were as follows as of December
31:
PROJECTED BENEFIT OBLIGATION ACCUMULATED BENEFIT
EXCEEDS THE FAIR VALUE OF OBLIGATION EXCEEDS THE FAIR
PLAN ASSETS VALUE OF PLAN ASSETS
----------- --------------------
2006 2005 2006 2005
---- ---- ---- ----
Projected benefit obligation.................... $1,180 $ 1,240 1,142 1,204
Accumulated benefit obligation.................. 1,157 1,217 1,126 1,187
Fair value of plan assets....................... 827 700 790 668
The accumulated postretirement benefit obligation exceeds plan assets
for all of Solutia's other postretirement benefit plans.
Solutia actively manages funding of its domestic qualified pension
plan in order to meet the requirements of the IRS and the Pension Benefits
Guarantee Corporation (a U.S. federal agency). Solutia contributed $179 in
2006 to the qualified pension plan in accordance with IRS funding rules and
made a discretionary contribution of $11 in 2004 to the qualified pension plan
in order to minimize future required contributions and to utilize available
tax benefits. No contributions were made during 2005 to the qualified pension
plan. According to current IRS funding rules, Solutia estimates that it will
be required to make approximately $100 in pension contributions to its U.S.
qualified pension plan in 2007. In addition, Solutia contributed $6 in 2006,
$5 in 2005 and $4 in 2004, respectively, to fund its foreign pension plans.
Moreover, Solutia expects to be required to fund a like amount in pension
contributions for its foreign pension plans in 2007.
Effects of Adopting SFAS No. 158
The following table illustrates the incremental effect of applying
SFAS No. 158 on individual line items in the Consolidated Statement of
Financial Position at December 31, 2006:
- ----------------------------------------------------------------------------------------------------------------
Before Application of After Application of
SFAS No. 158 Adjustments SFAS No. 158
------------ ----------- ------------
- ----------------------------------------------------------------------------------------------------------------
Investments in affiliates $ 211 $ (18) $ 193
- ----------------------------------------------------------------------------------------------------------------
Other assets 112 (13) 99
- ----------------------------------------------------------------------------------------------------------------
Other liabilities 283 6 289
- ----------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise 1,899 (50) 1,849
- ----------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss 80 (13) 67
- ----------------------------------------------------------------------------------------------------------------
82
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Estimated Future Benefit Payments
Estimated benefit payments expected to be made over the next five
years and the cumulative five year period thereafter are as follows:
PENSION HEALTHCARE AND
BENEFITS OTHER BENEFITS
-------- --------------
2007............................. $ 114 $ 71
2008............................. 112 65
2009............................. 107 61
2010............................. 107 58
2011............................. 101 55
2012-2016........................ 455 203
17. EMPLOYEE SAVINGS PLANS
Substantially all U.S. employees of Solutia are eligible to
participate in the Solutia Savings and Investment Plan ("SIP"), a 401(k) plan.
Effective December 15, 2003, all matching contributions are invested in
the same manner as participants' personal SIP contributions. Company cash
contributions related to the employer match were $15 in 2006 and 2005,
respectively, and $10 in 2004, and were invested in accordance with
participants' personal investment elections. In addition, effective January 1,
2005, Solutia increased its SIP matching contribution percentage to 100
percent on the first 7 percent of a participant's qualified contributions from
60 percent on the first 8 percent, previously.
18. 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
December 31, 2006, approximately 2,240,193 shares from the 2000 Plan and
2,414,464 shares from the 1997 Plan remained available for grants.
During 2006, no options were granted to named 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 December 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. 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 December
31, 2006 and 2005, 25,174 shares of Solutia's common stock remained available
for grants under the plan. There were no options or deferred shares granted in
2006 as all non-employee director compensation is paid in cash.
83
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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's existing shares of common stock, as well as options and warrants to
purchase its common stock will be cancelled upon our emergence from Chapter
11. It is highly unlikely that holders of options to purchase Solutia's common
stock will receive any consideration in our Chapter 11 Cases for their equity
based compensation.
There were no options granted or exercised during 2006. Accordingly,
no compensation cost with respect to such activities was recognized in the
Consolidated Statement of Operations. 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 Consolidated Statement of Operations and Consolidated Statement of
Cash Flows associated with these unvested options was less than $1 during
2006. Additionally, there was less than $1 of total unrecognized compensation
cost related to these unvested options as of December 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 Consolidated Statement of 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 2006.
A summary of the status of Solutia's stock option plans for years
ended December 31, 2006, 2005 and 2004 follows:
OUTSTANDING
-----------------------------------------------
EXERCISABLE WEIGHTED-AVERAGE
OPTIONS OPTIONS EXERCISE PRICE
----------------------------------------------------------------------
December 31, 2003............. 20,838,155 23,500,239 $15.31
----------------------------------------------------------------------
Granted.................... -- $0.00
Exercised.................. -- 0.00
Expired.................... (3,886,064) 13.41
----------------------------------------------------------------------
December 31, 2004............. 18,646,490 19,614,175 $15.69
----------------------------------------------------------------------
Granted.................... -- $0.00
Exercised.................. -- 0.00
Expired.................... (2,290,624) 14.84
----------------------------------------------------------------------
December 31, 2005............. 16,938,707 17,323,551 $15.80
----------------------------------------------------------------------
Granted.................... -- $0.00
Exercised.................. -- 0.00
Expired.................... (4,924,321) 16.57
======================================================================
December 31, 2006............. 12,236,430 12,399,230 $15.49
======================================================================
84
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes information about stock options
outstanding at December 31, 2006:
OPTIONS OUTSTANDING:
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------
$ 0 to 2.99................. 707,500 5.8 $ 1.26
3 to 7.99................. 49,233 6.0 3.89
8 to 11.99................. 1,140,667 3.0 10.32
12 to 15.99................. 2,402,530 2.3 13.83
16 to 18.99................. 4,508,343 0.1 16.39
19 to 22.99................. 3,441,809 1.0 19.73
23 to 29.99................. 149,148 0.9 27.87
-----------------------------------------------------------------------
$ 0 to 29.99................. 12,399,230 1.4 $15.49
=======================================================================
OPTIONS EXERCISABLE:
RANGE OF WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER EXERCISE PRICE
- --------------------------------------------------------------------------------
$ 0 to 2.99................. 620,700 $ 1.26
3 to 7.99................. 9,233 3.87
8 to 11.99................. 1,128,667 10.32
12 to 15.99................. 2,378,530 13.83
16 to 18.99................. 4,508,343 16.39
19 to 22.99................. 3,441,809 19.73
23 to 29.99................. 149,148 27.87
----------------------------------------------
$ 0 to 29.99................. 12,236,430 $15.64
==============================================
19. CAPITAL STOCK
On December 17, 2003, following the announcement that Solutia had
filed for Chapter 11 bankruptcy protection, the New York Stock Exchange
("NYSE") halted trading in Solutia's common stock. Solutia's common stock was
delisted from the NYSE on February 24, 2004. Solutia's common stock is
currently being quoted under the ticker symbol SOLUQ on the Pink Sheets
Electronic Quotation Service maintained by The Pink Sheets LLC and on the OTC
Bulletin Board.
No dividends were paid in 2006 or 2005. Solutia is currently
prohibited by both the U.S. Bankruptcy Code and the DIP credit facility from
paying dividends to shareholders.
Solutia's board of directors declared a dividend of one preferred
stock purchase right for each share of Solutia's common stock issued in the
distribution of shares by Pharmacia to its shareholders on the effective date
of the spinoff and authorized the issuance of one right for each share of
common stock issued after the effective date of the spinoff until the earlier
of the date the rights become exercisable or the termination date of the
rights plan. If a person or group acquires beneficial ownership of 20 percent
or more, or announces a tender offer that would result in beneficial ownership
of 20 percent or more, of Solutia's outstanding common stock, the rights
become exercisable. Then, for every right held, the owner will be entitled to
purchase one one-hundredth of a share of a series of preferred stock for
$.000125. If Solutia is acquired in a business combination transaction while
the rights are outstanding, for every right held the holder will be entitled
to purchase, for $.000125, common shares of the acquiring company having a
market value of $.000250. In addition, if a person or group acquires
beneficial ownership of 20 percent or more of Solutia's outstanding common
stock, for every right held, the holder (other than such person or members of
such group) will be entitled to purchase, for $.000125, a number of shares of
Solutia's common stock having a market value of $.000250. Furthermore, at any
time after a person or group acquires beneficial ownership of 20 percent or
more (but less than 50 percent) of Solutia's outstanding common stock,
Solutia's board of directors may, at its option, exchange part or all of the
rights (other than rights held by the acquiring person or group) for shares of
Solutia's common stock on a one-share-for-every-one-right basis. At any time
prior to the acquisition
85
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
of such a 20 percent position, Solutia can redeem each right for
$.00000001. The board of directors is also authorized to reduce the 20 percent
thresholds described above to not less than 10 percent. The rights expire in
the year 2007. However, Solutia believes that its plan of reorganization will
result in 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 Solutia's common stock, including options and warrants to purchase
Solutia's common stock, will receive any consideration for that stock or those
options and warrants in such a plan of reorganization. Consequently, this
preferred stock purchase right plan would be cancelled if the underlying
common stock were to be cancelled.
Solutia has 10 million shares of preferred stock, par value $0.01 per
share, authorized. As of December 31, 2006, there were no preferred shares
issued or outstanding.
20. COMMITMENTS AND CONTINGENCIES
Commitments
Commitments, principally in connection with uncompleted additions to
property, were approximately $16 at December 31, 2006 and 2005. In addition,
as of December 31, 2006 and 2005, Solutia was contingently liable under
letters of credit totaling $76 and $98, respectively, of which $2 and $1,
respectively, were cash collaterized, primarily related to environmental
remediation and various insurance related activities. The cash underlying
these collateralized letters of credit is contractually restricted and
accordingly is excluded from cash and cash equivalents and recorded in Other
Assets within the Consolidated Statement of Financial Position as of December
31, 2006 and 2005.
Solutia's future minimum payments under operating leases and various
unconditional purchase obligations are $10 for 2007, $6 for 2008, $3 for 2009,
$2 for 2010, and $0 for 2011 and thereafter. The amounts of these commitments
have not been adjusted to reflect any potential impact that the bankruptcy
proceedings may have upon the timing and valuation of such commitments.
Solutia has entered into agreements with certain customers to supply
a guaranteed quantity of certain products annually at prices specified in the
agreements. In return, the customers have advanced funds to Solutia to cover
the costs of expanding capacity to provide the guaranteed supply. Solutia has
recorded the advances as deferred credits and amortizes the amounts to income
as the customers purchase the products. The unamortized deferred credits were
$91 at December 31, 2006 and $100 at December 31, 2005.
No single customer or customer group accounted for 10 percent or more
of Solutia's net sales for the years ended December 31, 2006 and 2004. For the
year ended December 31, 2005, Shaw Industries, Inc., a single customer within
the Integrated Nylon segment, accounted for approximately 11 percent of
Solutia's consolidated net sales.
The more significant concentrations in Solutia's trade receivables at
December 31, 2006 and 2005 were:
2006
---------------------------------------------------------
NORTH EUROPE/ LATIN ASIA
AMERICA AFRICA AMERICA PACIFIC TOTAL
------- ------ ------- ------- -----
Glass..................... $13 $65 $15 $15 $108
Nylon Polymers............ 25 10 -- 32 67
Chemicals................. 37 16 1 7 61
2005
---------------------------------------------------------
NORTH EUROPE/ LATIN ASIA
AMERICA AFRICA AMERICA PACIFIC TOTAL
------- ------ ------- ------- -----
Glass..................... $19 $58 $9 $14 $100
Nylon Polymers............ 15 4 -- 19 38
Chemicals................. 29 15 1 6 51
Management does not anticipate losses on its trade receivables in
excess of established allowances.
86
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Contingencies
Litigation
----------
Because of the size and nature of Solutia's 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. The estimated unsecured claim amount was
classified as a liability subject to compromise as of December 31, 2006 and
December 31, 2005 in the amount of $111 and $136, respectively.
Monsanto also indemnified Pharmacia with respect to a number of legal
proceedings described in Solutia's 2003 Form 10-K/A in which Solutia was a
named defendant or was defending solely due to its Pharmacia related
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; and (iv) premises based
asbestos litigation. Legal proceeding activities are currently being funded by
Monsanto for these matters. Monsanto's funding of these legal activities may
give rise to a claim against Solutia which Monsanto may assert in Solutia's
bankruptcy case.
Following is a summary of legal proceedings that Solutia or its
equity affiliate continue to manage that, if resolved unfavorably, could have
a material adverse effect on Solutia's results of operation and financial
position.
LEGAL PROCEEDINGS IN SOLUTIA'S BANKRUPTCY CASE
- ----------------------------------------------
JP MORGAN 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 against Solutia in Solutia's bankruptcy case. In the 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 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 certain 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.
The Unsecured Creditors' Committee and the Ad Hoc Solutia Trade Claims
Committee have intervened in the proceeding in support of Solutia and the Ad
Hoc Committee of Solutia Noteholders has intervened in the proceeding in
support of JPMorgan.
Trial concluded on July 10, 2006. Post-trial briefs were submitted by
the parties in August 2006. The Bankruptcy Court has not made a ruling.
EQUITY COMMITTEE ADVERSARY PROCEEDING AGAINST MONSANTO AND PHARMACIA
On March 7, 2005, the 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. Solutia
was not named as a defendant in its complaint, the Equity Committee seeks to
avoid certain obligations assumed by Solutia at the
87
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
time of its spinoff from Pharmacia. The complaint alleges, among other things,
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 complaint 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 complaint and Objection to Claims, in which the Debtors
expressed their view that the issues and disputes raised in the 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 complaint. The Ad Hoc Committee
of Solutia Noteholders and the Ad Hoc Solutia Trade Claims Committee have
intervened in this adversary proceeding in support of the Equity Committee.
Solutia and the Unsecured Creditors' Committee have intervened in this
adversary proceeding as neutral parties due to the importance of this
proceeding with respect to Solutia's bankruptcy case. On September 14, 2006,
the Court ruled that while the Equity Committee did not have standing to
pursue these claims on behalf of the Debtors, it had standing to pursue its
own objections to the claims of Monsanto and Pharmacia. This matter was
submitted to mediation but the parties were unable to reach a consensual
resolution. The adversary proceeding has been stayed indefinitely by the
parties, subject to certain rights of the parties to recommence such
proceeding.
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 Environmental Protection Agency ("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 stipulated 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 Solutia and Pharmacia 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.
In July 2006, Solutia and Pharmacia reached an agreement with EPA
that clarifies the extent of remaining obligations under the Anniston Consent
Decree and the coordination of that work with the lead site clean-up being
performed by others, and by which Solutia and Pharmacia will forego the
opportunity to suspend their obligations under the Anniston Consent Decree
pursuant to the PCB Order. Solutia and Pharmacia preserved their rights under
this agreement to continue to
88
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
argue that the contribution protection afforded certain other potentially
responsible parties performing lead site clean-up should not be effective as
to Solutia and Pharmacia.
PENNDOT CASE
Solutia's Annual Report on Form 10-K/A for the year ended December
31, 2003 described a case then pending in the Commonwealth Court of
Pennsylvania by the Commonwealth of Pennsylvania against Pharmacia seeking
damages for PCB contamination in the Transportation and Safety Building ("T&S
Building") in Harrisburg, Pennsylvania, that it claimed necessitated the
demolition of the T&S Building. Solutia was not a named defendant in this
litigation and therefore took no action to stay the litigation in connection
with its Chapter 11 proceedings. Solutia assumed the defense of this
litigation at the time of its spin-off from Pharmacia. Solutia determined that
its obligation to defend and indemnify Pharmacia with regard to this
litigation was a pre-petition obligation that Solutia was prohibited from
performing, except pursuant to a confirmed plan of reorganization. Therefore,
Solutia ceased defending Pharmacia with respect to this litigation. Solutia
did, however, provide a $20 letter of credit to secure a portion of
Pharmacia's obligations with respect to an appeal bond issued with respect to
the case.
On May 25, 2006 the Supreme Court of Pennsylvania issued its ruling
on the appeal in this case, reversing in whole and remanding in part the
decision of the trial court against Pharmacia. As a result of this ruling, the
$20 letter of credit that Solutia had committed to partially secure the appeal
bond was released. With the release of the bond, Solutia recognized a gain in
its Consolidated Statement of Operations during the second quarter 2006 from
the reversal of a significant portion of the existing litigation reserve with
respect to this matter.
FLEXSYS RELATED LITIGATION
Since 2002, antitrust authorities in the United States, Europe and
Canada are continuing to investigate past commercial practices in the rubber
chemicals industry including the practices of Flexsys, Solutia's joint venture
with Akzo Nobel. The European Commission issued its findings from its
investigation in 2005, without levying any fines against Flexsys.
Investigations regarding the industry may still be on-going in the United
States and Canada, but to date, no findings have been made against Flexsys in
either country.
In addition, a number of purported civil class actions have been
filed against Flexsys and other producers of rubber chemicals on behalf of
indirect purchasers of rubber chemical products. Solutia is aware of a series
of these purported class actions which had been filed against Flexsys in
various state courts in the United States and in at least four courts in
Canada. Except for two cases pending in the United States, all of the
remaining cases have been dismissed, or are currently subject to tentative
settlements.
CASH BALANCE PLAN LITIGATION
Davis v. Solutia Inc. Employees' Pension Plan; Hammond, et al. v.
-----------------------------------------------------------------
Solutia Inc. Employees' Pension Plan. Since October 2005, current or former
- ------------------------------------
participants in the Solutia Inc. Employees' Pension Plan (the "Pension Plan")
have filed three class actions alleging that the Pension Plan is
discriminatory based upon age and that the lump sum values of individual
account balances in the Pension Plan have been, and continue to be,
miscalculated. None of the Debtors, and no individual or entity other than the
Pension Plan, has been named as a defendant in any of these cases. Two of
these cases, captioned Davis, et al. v. Solutia, Inc. Employees' Pension Plan
and Hammond, et al. v. Solutia, Inc. Employees' Pension Plan, are still
pending in the Southern District of Illinois against Monsanto Company and
Monsanto Company Pension Plan (Walker et al. v. The Monsanto Pension Plan, et
al.) and Pharmacia Cash Balance Pension Plan, Pharmacia Corporation, Pharmacia
and Upjohn, Inc., and Pfizer Inc. (Donaldson v. Pharmacia Cash Balance Pension
Plan, et al.). The plaintiffs in the Pension Plan 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.
A Consolidated Class Action Complaint (the "Complaint") was filed by
all of the plaintiffs in the consolidated case on September 4, 2006. The
plaintiffs in the Complaint alleged three separate causes of action against
the Pension Plan: (1) the Pension Plan violates ERISA by terminating interest
credits on prior plan accounts at the age of 55; (2) the Pension Plan is
improperly backloaded in violation of ERISA; and (3) the Pension Plan is
discriminatory on the basis of age.
89
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Motions for class certification were filed in late 2006 by the
plaintiffs against each of the defendants. With respect to the Pension Plan,
plaintiffs moved to certify a class only on their first claim: i.e., that the
Pension Plan discriminated against employees on the basis of their age by only
providing interest credits on prior plan accounts through age 55. Briefing on
the class certification motions was completed in January 2007 and the motion
is still pending before the court.
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 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' 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 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 could 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. The parties have fully briefed the appeal, and oral argument will be
held on February 12, 2007.
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. On February 20, 2004, Solutia voluntarily dismissed
the state court action and filed an adversary proceeding against FMC in the
Bankruptcy Court. FMC 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 did not
allege a counterclaim against Solutia or Astaris.
FMC filed a motion to dismiss Solutia's action based upon an alleged
lack of standing. 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.
The parties have completed all fact discovery and submitted cross
motions for Summary Judgment. On July 31, 2006, the District Court entered its
Memorandum Opinion and Order on the Motions. It granted portions of FMC's
Motion for Summary Judgment by ruling that Solutia cannot attempt to establish
its breach of fiduciary duty claim by maintaining that the parties were in a
joint venture or had a special relationship prior to April 2000. The District
Court, however, denied FMC's Motion for Summary Judgment on the breach of
fiduciary duty claim and held that Solutia will be permitted to prove at trial
that FMC had special knowledge concerning its technology which can give rise
to a fiduciary duty. The District Court further overruled the parties' Motion
for Summary Judgment on the remaining claims. The District Court ruled Solutia
may still be entitled to punitive damages in addition to its claims for
out-of-pocket and lost profit damages.
A bench trial on the four claims noted above is scheduled to begin in
April 2007.
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
90
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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 SESA, 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. SESA'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. SESA 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 SESA are fully cooperating with the BCA in this
investigation.
Department of Labor Investigation of Solutia Inc. Savings and
-------------------------------------------------------------
Investment Plan. Solutia was contacted in 2005 by the Department of Labor
- ---------------
("DOL"), through the Employee Benefits Security Administration, informing
Solutia that it wanted to conduct an investigation of Solutia's SIP Plan.
Solutia fully cooperated with the DOL throughout the investigation.
On December 6, 2006, the DOL issued a letter stating that, based on
facts gathered, it appeared that Solutia, through its fiduciaries, breached
its fiduciary obligations and violated provisions of ERISA with respect to the
SIP Plan. Specifically, the DOL stated that it found no evidence that: (1) the
Pension and Savings Funds Committee ("PSFC") sufficiently monitored the Solutia
Stock Fund option within the SIP Plan to determine if the Solutia Stock Fund
continued to be a prudent investment for the SIP Plan prior to December 15,
2003; and (2) the Solutia Board of Directors, CEO, and PSFC, prior to
December 15, 2003, adequately monitored the SIP Plan fiduciaries, including
the PSFC, the Employee Benefits Plan Committee, and the Northern Trust Company
of Connecticut. The DOL did not assert in its letter that the SIP Plan or its
participants had been harmed by these alleged breaches. Further, the DOL did
not find that the offering of the Solutia Stock Fund as an investment option
in the SIP Plan was itself a violation of ERISA, or that it caused any
participant to suffer investment losses. Further, the DOL did not assert any
monetary fines against the Company based on its findings to date. The DOL
stated in the letter that its findings were subject to the possibility that
additional information could lead the DOL to revise its views.
The DOL did not choose to file suit against the Solutia fiduciaries,
instead offering Solutia the opportunity to voluntarily discuss how the
alleged violations may be corrected. Solutia has submitted additional
information to the DOL to support the Company's request for reconsideration of
the DOL's findings.
Solutia Canada Inc. v. INEOS Americas LLC. Solutia Canada Inc.
-----------------------------------------
("Solutia Canada") filed suit in Quebec Court in December 2006, alleging
breach of contract by INEOS Americas LLC ("INEOS"). In late 2002, Solutia
negotiated a Stock and Asset Sale Agreement for the sale of its Resimenes &
Additives business to UCB S.A ("UCB"). As part of this agreement, Solutia
agreed to exclude the LaSalle assets from the agreement and entered into the
LaSalle Toll Agreement ("LTA") with UCB. The LTA passed through all the
benefits and risks of ownership of the LaSalle operations to UCB, other than
pre-closing environmental liabilities. In the LTA, Solutia Canada agreed to
operate its LaSalle Plant for the benefit of UCB and to provide all the
necessary services to convert UCB's raw materials on a cost-neutral basis.
Thus, UCB would pay Solutia Canada for all of its actual, direct and indirect
costs incurred in connection with the performance or supply of services under
the LTA or in holding itself ready to perform or supply those services. In the
years after its execution, the LTA was assigned by UCB to Cytec Industries,
Inc., then to INEOS.
On January 31, 2006, INEOS notified Solutia Canada of its intention
to terminate the LTA as of January 31, 2008, in compliance with the terms of
the LTA. INEOS' decision to terminate the LTA will likely trigger the shutdown
of all activities at the LaSalle Plant, resulting in termination costs
recoverable by Solutia Canada against INEOS. Solutia Canada estimates that the
overall termination costs associated with the termination of the LTA and the
shutdown of the LaSalle Plant will total approximately $31 (CAD). Solutia
Canada provided INEOS with an estimate of the expected termination costs prior
to the notice of termination. INEOS has disputed the overall amount of Solutia
Canada's termination costs.
Under the detailed dispute resolution procedures in the LTA, Solutia
Canada and INEOS were required to engage in negotiation and other means of
dispute resolution prior to filing any litigation. In compliance with these
obligations, Solutia
91
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Canada and INEOS negotiated extensively throughout 2006 to reach a resolution
regarding the termination costs, but were unsuccessful. After the period for
mandatory alternative dispute resolution expired, Solutia filed suit against
INEOS in Quebec Court on December 8, 2006, for breach of the LTA with respect
to termination costs. The case is pending.
Texas Commission on Environmental Quality Administrative Enforcement
--------------------------------------------------------------------
Proceeding. On August 11, 2006, the Executive Director of the Texas Commission
- ----------
on Environmental Quality commenced an administrative enforcement proceeding
against Solutia by filing a petition with the Texas Commission on
Environmental Quality. The petition alleges certain violations of the State of
Texas air quality program. The Executive Director requests that an
administrative penalty, the amount of which is immaterial, be assessed and
that Solutia undertake corrective actions to ensure compliance with the Texas
Health and Safety Code and the rules of the Commission in connection with
alleged self-reported unauthorized emission events and deviations of air
permits. Solutia answered the petition on September 1, 2006, asserted
affirmative defenses and requested a contested enforcement case hearing.
Solutia is pursuing settlement discussions with the Commission. No date has
yet been set for a hearing.
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 $78 and $71 as of December 31, 2006 and 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-closure costs at certain of Solutia's operating
locations. This liability is not classified as subject to compromise in the
Consolidated Statement of Financial Position because, irrespective of the
bankruptcy proceedings, Solutia will be required to comply with environmental
requirements in the conduct of its business, regardless of when the underlying
environmental contamination occurred. However, Solutia ultimately intends to
seek recovery against other potentially responsible parties at certain of
these locations.
Solutia had an accrued liability of $81 and $82 as of December 31,
2006 and 2005, respectively, for properties not owned or operated by Solutia
which was classified as subject to compromise in the Consolidated Statement of
Financial Position. Under the Plan and the 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.
Remediation activities are currently being funded by Monsanto for all of these
properties not owned or operated by Solutia, with the exception of one
off-site remediation project in Sauget, Illinois. 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
only made minimal adjustments to its recorded environmental liabilities
classified as subject to compromise for ongoing remediation activities since
the inception of Solutia's bankruptcy case to reflect actual cash expenditures
incurred by the Company. Any other adjustments to this liability are not
deemed appropriate by the Company at this time given the uncertainty regarding
any potential claim amount to be asserted by Monsanto.
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.
Astaris Joint Venture
- ---------------------
On October 8, 2003 Solutia and Astaris, a 50/50 joint venture with
FMC, amended Astaris' external financing agreement to release the Astaris
lenders' security interests in certain Solutia assets in exchange for
Solutia's posting of a $67 letter of credit, representing fifty percent of the
Astaris lenders' outstanding commitments to Astaris. Solutia used
92
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
approximately $36 in 2004 for investment payments ("keepwell payments") to
keep the Astaris joint venture in compliance with its financial covenants.
There were no keepwell payments made in 2005. The remaining commitment to
Astaris was $10 as of December 31, 2004, which was subsequently terminated as
part of Astaris' refinancing of its credit facility on February 8, 2005.
Solutia and FMC had also agreed to allow Astaris to defer up to $27
of payment obligations to each of Solutia and FMC under existing operating
agreements and certain other agreements. The deferral amount outstanding from
Astaris to Solutia was $16 as of December 31, 2004. In February 2005, this
deferral agreement was terminated and all amounts outstanding were paid in
full in conjunction with the Astaris refinancing.
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-petition claims not
currently reflected in the consolidated financial statements may be identified
through the proof of claim reconciliation process. The amount of pre-petition
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 the 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
Consolidated Statement of Financial Position.
93
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
21. SUPPLEMENTAL DATA
Supplemental income statement and cash flow data from continuing
operations were:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
Income Statement: 2006 2005 2004
- ---------------- ------------------------------------------------------------------
Raw material and energy costs ......................... $1,652 $1,540 $1,418
Employee compensation and benefits .................... 523 502 588
Depreciation expense .................................. 101 101 108
Amortization of capitalized computer software.......... 9 10 11
Taxes other than income................................ 67 58 75
Rent expense .......................................... 19 20 21
Provision for doubtful accounts (net of recoveries).... 1 5 1
Research and development .............................. 38 41 40
Interest expense:
Total interest cost ................................ $108 $87 $116
Less capitalized interest .......................... 4 3 3
------------------------------------------------------------------
Net interest expense .................................. $104 $84 $113
Cash Flow:
- ---------
Cash payments for interest (net of amounts capitalized) $102 $84 $86
Cash payments for income taxes......................... 4 10 11
Cash payments for reorganization items (a)............. 65 65 44
The effect of exchange rate changes on cash and cash equivalents was not
significant.
<FN>
(a) Cash payments for reorganization items were included in Cash Provided by
(Used in) Operations in the Consolidated Statement of Cash Flows in 2006,
2005 and 2004.
22. SEGMENT AND GEOGRAPHIC 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 three operating segments: CPFilms, Other Performance Products
("OPP") and Integrated Nylon. The CPFilms and OPP operating segments are
aggregated into the Performance Products reportable segment pursuant to SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
The Performance Products reportable 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 hydraulic fluid. The Integrated Nylon reportable 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:
94
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PERFORMANCE PRODUCTS
--------------------
SAFLEX(R) plastic interlayer
LLUMAR(R), VISTA(R), GILA(R) and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS(R)
professional and retail window films
THERMINOL(R) heat transfer fluids
DEQUEST(R) water treatment chemicals
SKYDROL(R) aviation hydraulic fluids and SKYKLEEN(R) brand of aviation
solvents
ASTROTURF(R), CLEAN MACHINE(R), and CLEAR PASS(TM). entrance matting and
automotive spray suppression flaps
INTEGRATED NYLON
----------------
Nylon intermediate "building block" chemicals
Nylon polymers, including VYDYNE(R) and ASCEND(R)
Carpet fibers, including the WEAR-DATED(R) and ULTRON(R) brands
Industrial nylon fibers
Solutia evaluates the performance of its operating segments based on
segment profit, defined as 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, equity earnings (losses) 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. Solutia's 2006, 2005 and 2004 segment information follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2006 2005 2004
----------------------------------------------------------------------
NET NET PROFIT NET PROFIT
SALES PROFIT SALES (LOSS) SALES (LOSS)
----- ------ ----- ------ ----- ------
SEGMENT:
Performance Products......... $1,174 $ 133 $1,117 $ 126 $1,049 $ 89
Integrated Nylon............. 1,731 9 1,642 (26) 1,588 (59)
------ ------ ------ ------ ------ ------
SEGMENT TOTALS.................. 2,905 142 2,759 100 2,637 30
RECONCILIATION TO
CONSOLIDATED TOTALS:
Corporate expenses.......... (45) (64) (89)
Equity earnings (loss)
from affiliates............ 37 94 (27)
Interest expense............ (104) (84) (113)
Other income (expense),
net........................ 6 -- (1)
Loss on debt modification... (8) -- (15)
Reorganization items, net... (57) (27) (71)
CONSOLIDATED TOTALS: ------ ------ ------
NET SALES................... $2,905 $2,759 $2,637
====== ------ ====== ------ ====== ------
INCOME (LOSS) BEFORE
INCOME TAXES ............. $ (29) $ 19 $ (286)
====== ====== ======
95
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------------------------------------------------------------------------------
DEPRECIATION DEPRECIATION DEPRECIATION
CAPITAL AND CAPITAL AND CAPITAL AND
ASSETS EXPENDITURES AMORTIZATION ASSETS EXPENDITURES AMORTIZATION ASSETS EXPENDITURES AMORTIZATION
------ ------------ ------------ ------ ------------ ------------ ------ ------------ ------------
SEGMENT:
Performance Products..... $ 814 $ 52 $ 43 $ 770 $ 48 $ 38 $ 788 $ 34 $ 38
Integrated Nylon......... 717 50 63 668 26 69 713 15 76
------ ------ ------ ------ ------ ------ ------ ------ ------
SEGMENT TOTALS............... $1,531 $ 102 $ 106 $1,438 $ 74 $ 107 $1,501 $ 49 $ 114
RECONCILIATION TO
CONSOLIDATED TOTALS:
Discontinued Operations -- 69 81
Unallocated amounts ..... 524 4 5 477 3 4 494 2 6
------ ------ ------ ------ ------ ------ ------ ------ ------
CONSOLIDATED TOTALS.......... $2,055 $ 106 $ 111 $1,984 $ 77 $ 111 $2,076 $ 51 $ 120
====== ====== ====== ====== ====== ====== ====== ====== ======
Solutia's geographic information for the year ended December 31,
2006, 2005 and 2004 follows:
PROPERTY, PLANT AND
NET SALES EQUIPMENT, NET
------------------------------------ ------------------------
2006 2005 2004 2006 2005
---- ---- ---- ---- ----
North America.................... $1,612 $1,695 $1,606 $ 665 $ 683
Europe/Africa.................... 610 552 520 80 74
Asia Pacific..................... 587 420 416 27 6
Latin America.................... 96 92 95 23 7
------ ------ ------ ------ ------
CONSOLIDATED TOTALS.............. $2,905 $2,759 $2,637 $ 795 $ 770
====== ====== ====== ====== ======
23. SUBSEQUENT EVENTS
On January 25, 2007, Solutia completed the extension and upsizing of
its $1,225 of debtor-in-possession ("DIP") financing, maturing March 31, 2008.
This represents a $400 increase and a one year extension over Solutia's
current DIP credit facility. The increased availability under the DIP credit
facility provides Solutia with additional liquidity for operations and the
ability to fund mandatory pension payments that are coming due in 2007, as
well as funds to partially facilitate the acquisition of Akzo Nobel's stake in
the 50/50 rubber chemical joint venture Flexsys Holding B.V. The DIP credit
facility can be repaid by Solutia at any time without prepayment penalties.
The Bankruptcy Court entered an order approving this amendment on January 23,
2007.
On February 27, 2007, Solutia reached a definitive agreement to
purchase Akzo Nobel's stake in the Flexsys joint venture. Solutia and Akzo
Nobel have entered into a letter agreement committing the parties to execute
the definitive agreement upon completion of consultation with Dutch employee
works council representatives. The proposed transaction is subject to approval
by the United States Bankruptcy Court, receipt of required regulatory
approvals, finalizing the definitive purchase agreement for Akzo Nobel's
Crystex manufacturing operations in Japan and the fulfillment of other
customary closing conditions. Solutia will fund the purchase via $150 of
funding under the January 2007 amended DIP credit facility (as described above)
and additional funding through Flexsys.
96
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
24. QUARTERLY DATA -- UNAUDITED
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------------------------------------------------------------------------------------------------
Net Sales........................................ 2006 $678 $765 $738 $724 $2,905
2005 $714 $730 $661 $654 $2,759
Gross Profit..................................... 2006 74 130 103 74 381
2005 102 101 77 42 322
Income (Loss) from Continuing Operations......... 2006 (26) 24 (6) (39) (47)
2005 19 13 (16) (9) 7
Income from Discontinued Operations, net of tax.. 2006 4 4 50 -- 58
2005 2 1 1 -- 4
Income (Loss) before Cumulative Effect of Change
in Accounting Principle......................... 2006 (22) 28 44 (39) 11
2005 21 14 (15) (9) 11
Cumulative Effect of Change in Accounting
Principle, net of tax........................... 2005 -- -- -- (3) (3)
Net Income (Loss)................................ 2006 (22) 28 44 (39) 11
2005 21 14 (15) (12) 8
Basic and Diluted Income (Loss) per share:
Income (Loss) from Continuing Operations......... 2006 (0.25) 0.23 (0.06) (0.37) (0.45)
2005 0.18 0.12 (0.15) (0.09) 0.07
Income from Discontinued Operations, net of tax.. 2006 0.04 0.04 0.48 -- 0.56
2005 0.02 0.01 0.01 -- 0.04
Cumulative Effect of Change in Accounting
Principle, net of tax........................... 2005 -- -- -- (0.03) (0.03)
Net Income (Loss)................................ 2006 (0.21) 0.27 0.42 (0.37) 0.11
2005 0.20 0.13 (0.14) (0.11) 0.08
Common Stock Price:
2006............................... HIGH 0.50 0.50 0.52 0.75 0.75
LOW 0.28 0.35 0.33 0.39 0.28
2005............................... High 1.69 1.37 0.86 0.70 1.69
Low 0.63 0.33 0.53 0.34 0.33
In 2006 and 2005 certain events affecting comparability were recorded
in Reorganization Items, net in the Consolidated Statement of Operations. A
comparison of reorganization items for these periods respectively is provided
in Note 3. Charges and gains recorded in 2006 and 2005 and other events
affecting comparability recorded outside of reorganization items have been
summarized below.
97
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net loss in the first quarter of 2006 included charges of $9 for an
environmental charge at one of Solutia's facilities outside the U.S. and $9
for the write-off of debt issuance costs and recording of the DIP credit
facility as modified at its fair value. Net income in the second quarter of
2006 included a gain of $20 resulting from the reversal of a litigation
reserve; charges of $1 related principally to severance and retraining costs
and $1 for restructuring charges at the Flexsys joint venture. Net income in
the third quarter of 2006 included charges of $3 from early extinguishment
costs for the refinancing of SESA's Euronotes, $1 related principally to
severance and retraining costs and $1 for restructuring charges at the Flexsys
joint venture. Net loss in the fourth quarter of 2006 included $2 for
restructuring charges related principally to severance and retraining costs.
The Flexsys joint venture had net charges comprised of $2 for asset
impairments and $1 for restructuring, partially offset by a $1 non-operational
gain related to the reversal of a litigation reserve.
In the first quarter of 2005, there were no events, other than those
recorded in Reorganization Items, net within the Consolidated Statement of
Operations that significantly affected comparability. Net income in the second
quarter of 2005 included charges of $1 for various restructuring charges
principally related to the closure of Solutia's chlorobenzenes operations as
well as certain other non-strategic operations; and $5 for a non-operational
gain incurred by the Flexsys joint venture. Net loss in the third quarter of
2005 included a $3 loss from the net pension and other postretirement benefit
plan curtailments and settlements. Net loss in the fourth quarter of 2005
included $1 for restructuring charges related principally to severance and
retraining costs; $3 for restructuring charges at the Astaris and Flexsys
joint ventures; a $50 net gain on sale as a result of the Astaris joint
venture divestiture of assets; and $10 of net pension settlement charges.
Under SFAS No. 128, Earnings per Share, the quarterly and total year
calculations of basic and diluted loss per share are based on weighted average
shares outstanding for that quarterly or total year period, respectively. As a
result, the sum of basic and diluted income (loss) per share for the quarterly
periods may not equal total year income (loss) per share.
25. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CPFilms, Inc., Monchem International, Inc., Monchem, Inc., Solutia
Systems, Inc., Solutia Investments, LLC and Solutia Business Enterprises,
Inc., 100% 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 credit facility
dated January 16, 2004, which payment did not affect the Guarantors'
obligations in respect of the Notes. Certain other 100% owned subsidiaries of
Solutia (the "DIP Guarantors") guaranteed the final DIP credit facility (as
well as a smaller, interim DIP credit 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 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 December 31, 2006 and December 31, 2005, and for the
years ended December 31, 2006, 2005 and 2004. The eliminating adjustments
primarily reflect intercompany transactions, such as interest income and
expense, accounts receivable and payable, advances, short and long-term debt,
royalties and profit in inventory eliminations. Solutia has not presented
separate financial statements and other disclosures concerning the Guarantors
as such information is not material and would substantially duplicate
disclosures included elsewhere in this report.
98
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
NET SALES............................... $2,191 $ 192 $ 980 $ (458) $2,905
Cost of goods sold...................... 2,058 97 850 (481) 2,524
------------------------------------------------------------------------
GROSS PROFIT............................ 133 95 130 23 381
Marketing expenses...................... 75 24 37 -- 136
Administrative expenses................. 65 9 23 -- 97
Technological expenses.................. 39 2 4 -- 45
Amortization of intangible assets....... -- -- 1 -- 1
------------------------------------------------------------------------
OPERATING INCOME (LOSS)................. (46) 60 65 23 102
Equity earnings (loss) from affiliates.. 174 80 (7) (209) 38
Interest expense........................ (84) -- (55) 35 (104)
Other income, net....................... 20 15 38 (59) 14
Loss on debt modification............... (8) -- -- -- (8)
Reorganization items, net............... (68) (2) (1) -- (71)
------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT).................. (12) 153 40 (210) (29)
Income tax expense (benefit)............ (23) 30 12 (1) 18
------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... 11 123 28 (209) (47)
Income from discontinued operations, net
of tax............................. -- -- 58 -- 58
------------------------------------------------------------------------
NET INCOME.............................. $ 11 $ 123 $ 86 $ (209) $ 11
========================================================================
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2006
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
NET INCOME.............................. $ 11 $ 123 $ 86 $ (209) $ 11
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments........ (12) (19) (16) 35 (12)
Net realized gain on derivative
instruments........................ 1 -- -- -- 1
Minimum pension liability adjustments,
net of tax......................... 24 -- (9) 9 24
------------------------------------------------------------------------
COMPREHENSIVE INCOME.................... $ 24 $ 104 $ 61 $ (165) $ 24
========================================================================
99
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
NET SALES............................... $2,084 $ 176 $ 899 $ (400) $2,759
Cost of goods sold...................... 2,017 83 763 (426) 2,437
------------------------------------------------------------------------
GROSS PROFIT............................ 67 93 136 26 322
Marketing expenses...................... 80 23 33 -- 136
Administrative expenses................. 60 8 24 -- 92
Technological expenses.................. 40 3 2 -- 45
Amortization of intangible assets....... -- -- 1 -- 1
------------------------------------------------------------------------
OPERATING INCOME (LOSS)................. (113) 59 76 26 48
Equity earnings (loss) from affiliates.. 195 44 (7) (136) 96
Interest expense........................ (62) -- (49) 27 (84)
Other income, net....................... 10 15 35 (52) 8
Loss on debt modification............... (1) -- -- 1 --
Reorganization items, net............... (44) -- (5) -- (49)
------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT).................. (15) 118 50 (134) 19
Income tax expense (benefit)............ (27) 30 9 -- 12
------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 12 88 41 (134) 7
Income (loss) from discontinued
operations, net of tax............. (3) -- 8 (1) 4
Cumulative effect of change in accounting
principle, net of tax ............. (1) -- (2) -- (3)
------------------------------------------------------------------------
NET INCOME.............................. $ 8 $ 88 $ 47 $ (135) $ 8
========================================================================
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31, 2005
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
NET INCOME.............................. $ 8 $ 88 $ 47 $ (135) $ 8
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments........ (11) (14) (20) 34 (11)
Net realized loss on derivative
instruments........................ (1) -- -- -- (1)
Minimum pension liability adjustments,
net of tax......................... (6) -- 4 (4) (6)
------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) ............ $ (10) $ 74 $ 31 $ (105) $ (10)
========================================================================
100
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
NET SALES............................... $2,008 $ 164 $ 839 $ (374) $2,637
Cost of goods sold...................... 2,019 85 707 (395) 2,416
------------------------------------------------------------------------
GROSS PROFIT (LOSS)..................... (11) 79 132 21 221
Marketing expenses...................... 86 22 31 -- 139
Administrative expenses................. 62 8 26 -- 96
Technological expenses.................. 40 2 2 -- 44
Amortization of intangible assets....... 1 -- -- -- 1
------------------------------------------------------------------------
OPERATING INCOME (LOSS)................. (200) 47 73 21 (59)
Equity earnings (loss) from affiliates.. 43 (22) (14) (33) (26)
Interest expense........................ (153) -- (53) 93 (113)
Other income, net....................... 18 75 22 (115) --
Loss on debt modification............... -- -- (15) -- (15)
Reorganization items, net............... (73) -- -- -- (73)
------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT).................. (365) 100 13 (34) (286)
Income tax expense (benefit)............ (51) 45 4 -- (2)
------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... (314) 55 9 (34) (284)
Loss from Discontinued Operations, net
of tax............................. (2) -- (30) -- (32)
------------------------------------------------------------------------
NET INCOME (LOSS)....................... $ (316) $ 55 $ (21) $ (34) $ (316)
========================================================================
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31, 2004
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
NET INCOME (LOSS)....................... $ (316) $ 55 $ (21) $ (34) $ (316)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments........ 15 14 28 (42) 15
Minimum pension liability adjustments,
net of tax......................... (18) -- (9) 9 (18)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)............. $ (319) $ 69 $ (2) $ (67) $ (319)
=========================================================================
101
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2006
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 23 $ 14 $ 113 $ -- $ 150
Trade receivables, net.................... 2 144 142 -- 288
Intercompany receivables.................. 157 782 134 (1,073) --
Miscellaneous receivables................. 69 1 35 -- 105
Inventories............................... 148 28 114 (16) 274
Prepaid expenses and other assets......... 20 1 7 3 31
Assets of discontinued operations......... -- -- -- -- --
----------------------------------------------------------------------
TOTAL CURRENT ASSETS................... 419 970 545 (1,086) 848
PROPERTY, PLANT AND EQUIPMENT, NET........ 578 82 135 -- 795
INVESTMENTS IN AFFILIATES................. 2,394 266 7 (2,474) 193
GOODWILL.................................. -- 72 17 -- 89
IDENTIFIED INTANGIBLE ASSETS, NET......... 2 26 3 -- 31
INTERCOMPANY ADVANCES..................... 128 1,238 994 (2,360) --
OTHER ASSETS.............................. 57 -- 42 -- 99
----------------------------------------------------------------------
TOTAL ASSETS........................... $3,578 $2,654 $1,743 $(5,920) $2,055
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................... $ 177 $ 8 $ 45 $ (2) $ 228
Intercompany payables..................... 177 13 156 (346) --
Accrued liabilities....................... 154 14 77 -- 245
Short-term debt........................... 650 -- -- -- 650
Intercompany short-term debt.............. 1 -- 195 (196) --
Liabilities of discontinued operations.... 1 -- -- -- 1
----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES................. 1,160 35 473 (544) 1,124
LONG-TERM DEBT............................ -- -- 210 -- 210
INTERCOMPANY LONG-TERM DEBT............... -- -- 669 (669) --
OTHER LIABILITIES......................... 196 1 92 -- 289
----------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 1,356 36 1,444 (1,213) 1,623
LIABILITIES SUBJECT TO COMPROMISE......... 3,639 413 20 (2,223) 1,849
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) 2,205 279 (2,484) (113)
Accumulated other comprehensive loss...... (67) -- -- -- (67)
Accumulated deficit....................... (1,043) -- -- -- (1,043)
------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,417) 2,205 279 (2,484) (1,417)
------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)............................... $3,578 $2,654 $1,743 $(5,920) $2,055
========================================================================
102
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2005
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 1 $ 15 $ 91 $ -- $ 107
Trade receivables, net.................... 7 118 121 -- 246
Intercompany receivables.................. 115 754 89 (958) --
Miscellaneous receivables................. 67 -- 28 -- 95
Inventories............................... 142 31 94 (13) 254
Prepaid expenses and other assets......... 23 -- 8 3 34
Assets of discontinued operations......... -- -- 69 -- 69
----------------------------------------------------------------------
TOTAL CURRENT ASSETS................... 355 918 500 (968) 805
PROPERTY, PLANT AND EQUIPMENT, NET........ 589 84 97 -- 770
INVESTMENTS IN AFFILIATES................. 2,291 209 13 (2,308) 205
GOODWILL.................................. -- 72 4 -- 76
IDENTIFIED INTANGIBLE ASSETS, NET......... 2 26 -- -- 28
INTERCOMPANY ADVANCES..................... 128 1,238 704 (2,070) --
OTHER ASSETS.............................. 62 -- 38 -- 100
----------------------------------------------------------------------
TOTAL ASSETS........................... $3,427 $2,547 $1,356 $(5,346) $1,984
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................... $ 167 $ 9 $ 43 $ (1) $ 218
Intercompany payables..................... 108 12 111 (231) --
Accrued liabilities....................... 143 13 67 -- 223
Short-term debt........................... 300 -- -- -- 300
Intercompany short-term debt.............. -- -- 182 (182) --
Liabilities of discontinued operations.... 1 -- 25 -- 26
----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES................. 719 34 428 (414) 767
LONG-TERM DEBT............................ -- -- 247 -- 247
INTERCOMPANY LONG-TERM DEBT............... -- -- 402 (402) --
OTHER LIABILITIES......................... 201 -- 47 -- 248
----------------------------------------------------------------------
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
======================================================================
103
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
CASH PROVIDED BY (USED IN) OPERATIONS..... $ (277) $ 35 $ 58 $ -- $ (184)
------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases... (66) (6) (37) -- (109)
Acquisition and investment payments....... (23) -- 7 -- (16)
Property disposals and investment proceeds 5 -- 72 -- 77
------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.............................. (84) (6) 42 -- (48)
------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations 350 -- -- -- 350
Payments on long-term debt obligations.... -- -- (51) -- (51)
Deferred debt issuance costs.............. (8) -- (9) -- (17)
Other financing activities................ -- -- (7) -- (7)
Changes in investments and advances from
(to) affiliates......................... 41 (30) (11) -- --
------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.............................. 383 (30) (78) -- 275
------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. 22 (1) 22 -- 43
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR......................... 1 15 91 -- 107
------------------------------------------------------------------------
END OF YEAR............................... $ 23 $ 14 $ 113 $ -- $ 150
========================================================================
104
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
CASH PROVIDED BY (USED IN) OPERATIONS..... $ (150) $ 62 $ 64 $ -- $ (24)
------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases... (46) (13) (22) -- (81)
Property disposals and investment proceeds 79 -- 2 -- 81
------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.............................. 33 (13) (20) -- --
------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in cash collateralized letters
of credit............................... 17 -- -- -- 17
Changes in investments and advances from
(to) affiliates......................... 59 (41) (18) -- --
Deferred debt issuance costs ............. (1) -- -- -- (1)
-------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.............................. 75 (41) (18) -- 16
------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. (42) 8 26 -- (8)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR......................... 43 7 65 -- 115
------------------------------------------------------------------------
END OF YEAR............................... $ 1 $ 15 $ 91 $ -- $ 107
========================================================================
105
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
Parent Only Non- Consolidated
Solutia Guarantors Guarantors Eliminations Solutia
------- ---------- ---------- ------------ -------
CASH PROVIDED BY (USED IN) OPERATIONS..... $ (53) $ 91 $ 3 $ -- $ 41
----------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases... (27) (10) (24) -- (61)
Acquisition and investment payments, net
of cash acquired........................ (36) -- -- -- (36)
----------------------------------------------------------- ----------------
CASH USED IN INVESTING ACTIVITIES......... (63) (10) (24) -- (97)
----------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations. (361) -- -- -- (361)
Proceeds from issuance of long-term debt
obligations............................. 300 -- -- -- 300
Net change in cash collateralized letters
of credit............................... 87 -- -- -- 87
Changes in investments and advances from
(to) affiliates......................... 37 (94) 57 -- --
Deferred debt issuance costs.............. (9) -- (5) -- (14)
----------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.............................. 54 (94) 52 -- 12
----------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. (62) (13) 31 -- (44)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR......................... 105 20 34 -- 159
----------------------------------------------------------------------------
END OF YEAR............................... $ 43 $ 7 $ 65 $ -- $ 115
============================================================================
106
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2006, 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 December 31, 2006,
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. The Chief Executive Officer and Chief Financial Officer also
concluded that, as of December 31, 2006, Solutia's disclosure controls and
procedures are effective to provide reasonable assurance that Solutia records,
processes, summarizes, and reports the required disclosure information within
the specified time periods. Further, 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 last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Company's internal controls over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
MANAGEMENT REPORT
Management of Solutia Inc. and its subsidiaries (the "Company") is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. Solutia's internal control over financial
reporting is a process designed by, or under the supervision of, Solutia's
principal executive and principal financial officers and effected by Solutia's
board of directors, management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Solutia's internal control over financial
reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of Solutia;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that
receipts and expenditures of Solutia are being made only in
accordance with authorizations of management and directors of
Solutia; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
Solutia's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Solutia's internal control
over financial reporting as of December 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework. Based on our assessment and those criteria,
management believes that Solutia maintained effective internal control over
financial reporting as of December 31, 2006.
Solutia's independent auditors have issued an attestation report on
management's assessment of Solutia's internal control over financial
reporting. This report appears on page 108.
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Solutia Inc.:
We have audited management's assessment, included in the accompanying
Management Report, that Solutia Inc. and subsidiaries (Debtor-In-Possession)
(the "Company") maintained effective internal control over financial reporting
as of December 31, 2006, based on criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive
and principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation
of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2006,
is fairly stated, in all material respects, based on criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in
Internal Control-Integrated Framework. Also in our opinion, the Company
maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")
in Internal Control-Integrated Framework.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended
December 31, 2006 of the Company and our report dated March 1, 2007,
expressed an unqualified opinion on those financial statements and financial
statement schedule, and included explanatory paragraphs regarding the
Company's filing for reorganization under Chapter 11 of the United States
Bankruptcy Code, substantial doubt about the Company's ability to continue as
a going concern, and change in accounting principle for the adoption of
Statement of Financial Accounting Standard No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, effective December 31,
2006.
St. Louis, Missouri
March 1, 2007
108
ITEM 9B. OTHER INFORMATION
On February 27, 2007, Solutia announced that it had reached a
definitive agreement (the "Transaction Agreement") to purchase Akzo Nobel's
stake in Flexsys, the 50%/50% rubber chemicals joint venture between Akzo
Nobel and Solutia. Solutia and Akzo Nobel have entered into a letter
agreement, attached hereto as Exhibit 10(ss), committing the parties to
execute the definitive agreement upon completion of consultation with Dutch
employee works council representatives.
The following description of the Transaction Agreement sets forth a
brief summary of certain material terms of that agreement. However, this
description does not purport to be complete and is qualified in its entirety
by reference to the specific terms of the Transaction Agreement, attached to
this Annual Report on Form 10-K as Exhibit 10(rr).
The Transaction Agreement provides for the sale by Akzo Nobel of its
interest in the Flexsys joint venture to Solutia for an initial purchase price
of $212.5 million subject to various adjustments. The purchase will make
Solutia the sole owner of Flexsys.
This transaction is subject to approval by the Bankruptcy Court,
receipt of required regulatory approvals, finalizing the purchase agreement
for Akzo Nobel's Crystex manufacturing operations in Japan and the fulfillment
of other customary closing conditions. Solutia will fund the purchase through
a combination of sources, including a portion of its DIP financing package as
described in "Management's Discussion and Analysis" in Item 7 above.
Pursuant to the Transaction Agreement, Akzo Nobel has agreed, subject
to certain limitations and exclusions, to indemnify, defend and hold harmless
Flexsys, Solutia, their affiliates and representatives from and in respect of
any losses and liabilities arising out of any breaches of the representations,
warranties or covenants contained in the Transaction Agreement. Solutia and
Flexsys have agreed, subject to certain limitations and exclusions, to
indemnify, defend and hold harmless Akzo Nobel and its affiliates from and in
respect of any losses and liabilities arising out of any breaches of the
representations, warranties or covenants contained in the Transaction
Agreement.
Akzo Nobel has agreed, subject to certain exceptions, that for a
period of five years after the closing of the Transaction Agreement, neither
it nor its affiliates will compete with the Flexsys business and for a period
of three years after the closing of the Transaction Agreement, Akzo Nobel will
not solicit for employment certain employees of Flexsys.
In addition to customary termination rights, the Transaction
Agreement may be terminated prior to closing by Akzo Nobel or Solutia if the
closing has not occurred on or before May 25, 2007.
109
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS
The following table shows information about Solutia's directors on
March 1, 2007:
- ----------------------------------------------------------------------------------------------------------------------------------
Name, Age, Year First Became Principal Occupation and Other Business
a Solutia Director Other Directorships Experience Since At Least January 1, 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Jeffry N. Quinn, 48 None President, Chief Executive Officer and Director since May 2004.
2004 Named Chairman of the Board on February 22, 2006. Mr. Quinn
previously served as Solutia's Senior Vice President, General Counsel
and Chief Restructuring Officer from 2003 to 2004. Prior to joining
Solutia, Mr. Quinn served from 2000 to 2002 as Executive Vice
President, Chief Administrative Officer and General Counsel of
Premcor Inc., one of the largest independent petroleum refiners and
suppliers of unbranded transportation fuels, heating oil,
petrochemical feedstocks, petroleum coke and other petroleum products
in the United States. Premcor Inc. is now owned by Valero Energy
Corp.
- ----------------------------------------------------------------------------------------------------------------------------------
Paul H. Hatfield, 71 Bunge Limited; Maritz, Principal of Hatfield Capital Group, a private investment company.
1997 Inc.; Penford Corporation Previously, Mr. Hatfield served as Chairman of the Board, President
and Chief Executive Officer of Petrolite Corporation, a specialty
chemical company offering integrated technologies with products and
services which are used primarily in energy-related industries,
including chemical treatment programs, performance-enhancing
additives, process equipment, engineering services and polymers used
as additives in a wide range of industrial and consumer product
applications, from 1995 through 1997. Petrolite Corporation is now
known as Baker Petrolite, a division of Baker Hughes.
- ----------------------------------------------------------------------------------------------------------------------------------
Robert H. Jenkins, 63 AK Steel Holdings Retired Chairman of the Board and Chief Executive Officer, Sundstrand
1997 Corporation; CLARCOR Corporation. Previously, Mr. Jenkins served as Chairman of the Board
Inc.; Jason Inc.; and Chief Executive Officer of Sundstrand Corporation, a multinational
ACCO Brands organization engaged in the design, manufacture, and sale of a
variety of proprietary, technology-based components and systems for
diversified international markets, from 1997 through 1999.
- ----------------------------------------------------------------------------------------------------------------------------------
Frank A. Metz, Jr., 73 None Retired Senior Vice President, Finance and Planning and Chief
1997 Financial Officer, International Business Machines Corporation.
Previously served as Senior Vice President, Finance and Planning and
Chief Financial Officer, International Business Machines Corporation
(IBM), the world's largest information technology company, business
and technology services company, consulting services organization,
information technology research organization, and financier of
information technology, from 1986 through 1993 and as a Director of
IBM from 1991 through 1993.
- ----------------------------------------------------------------------------------------------------------------------------------
J. Patrick Mulcahy, 63 Energizer Holdings, Chairman, Energizer Holdings, Inc., one of the world's largest
1999 Inc.; Hanesbrands Inc. manufacturers of primary batteries, flashlights and men's and women's
wet-shave products. Mr. Mulcahy previously served as Chief Executive
Officer of Energizer Holdings, Inc. from 2000 through 2005.
- ----------------------------------------------------------------------------------------------------------------------------------
Sally G. Narodick, 61 Cray Inc.; Penford Retired President, Narodick Consulting, an educational technology and
2000 Corporation; Puget e-learning consulting firm, from 2000 through 2004. Ms. Narodick
Energy, Inc., and its previously served as Chief Executive Officer of Apex Learning, Inc.,
wholly owned subsidiary, an educational software company, from its founding in 1998 until 2000.
Puget Sound Energy,
Inc.; SumTotal Systems,
Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
John B. Slaughter, 72 None President and Chief Executive Officer, National Action Council for
1997 Minorities in Engineering, Inc. (a non-profit corporation). Mr.
Slaughter previously served as the Irving R. Melbo professor of
leadership in education at the University of Southern California and
President Emeritus of Occidental College from 1999 through 2000.
- ----------------------------------------------------------------------------------------------------------------------------------
110
Philip R. Lochner resigned from our board of directors effective
January 31, 2007 and as a result, his information is not included above. His
resignation was not due to any disagreement with Solutia with respect to its
operations, policies or practices. All the directors were elected prior to
Solutia's Chapter 11 filing. Solutia has not held an annual shareholders'
meeting during its Chapter 11 case.
OFFICERS
The following table shows information about Solutia's executive
officers on March 1, 2007:
- ----------------------------------------------------------------------------------------------------------------------------------
Name, Age and Position with Year First Became an Other Business Experience Since At Least January 1, 2002
Solutia Executive Officer of Solutia
- ----------------------------------------------------------------------------------------------------------------------------------
Jeffry N. Quinn, 48 2003 President, Chief Executive Officer and Director since May
President, Chief Executive 2004. Named Chairman of the Board on February 22, 2006. Mr.
Officer and Chairman of the Quinn previously served as Solutia's Senior Vice President,
Board General Counsel and Chief Restructuring Officer from 2003 to
2004. Prior to joining Solutia, Mr. Quinn served from 2000 to
2002 as Executive Vice President, Chief Administrative Officer
and General Counsel of Premcor Inc., one of the largest
independent petroleum refiners and suppliers of unbranded
transportation fuels, heating oil, petrochemical feedstocks,
petroleum coke and other petroleum products in the United
States. Premcor Inc. is now owned by Valero Energy Corp.
- ----------------------------------------------------------------------------------------------------------------------------------
Kent J. Davies, 43 2006 Senior Vice President and President, CPFilms since January
Senior Vice President and 2006. Mr. Davies previously served as Senior Vice President,
President, CPFilms Marketing, R&D and Regulatory, for United Industries Corp., a
global consumer products company, from 2002 through 2005 and
Senior Vice President, Marketing of United Industries Corp.,
from 2001 through 2002.
- ----------------------------------------------------------------------------------------------------------------------------------
Luc De Temmerman, 52 2003 Senior Vice President and President, Performance Products since
Senior Vice President and 2005. Mr. De Temmerman is a long-time Solutia employee who has
President, Performance Products previously served as Senior Vice President and Chief Operating
Officer from 2004 through 2005; Vice President and General
Manager, Performance Products, from 2003 through 2004;
Worldwide Commercial Director for Laminated Glazing Products
and Services, from 2001 through 2002.
- ----------------------------------------------------------------------------------------------------------------------------------
Rosemary L. Klein, 39 2004 Senior Vice President, General Counsel and Secretary since
Senior Vice President, General 2004. Ms. Klein served as Solutia's Vice President, Secretary
Counsel and Secretary and General Counsel, Corporate and External Affairs in 2004 and
Assistant General Counsel in 2003. Ms. Klein served as
Assistant General Counsel and Secretary of Premcor Inc., one of
the largest independent petroleum refiners and suppliers of
unbranded transportation fuels, heating oil, petrochemical
feedstocks, petroleum coke and other petroleum products in the
United States, from 2000 through 2003. Premcor Inc. is now
owned by Valero Energy Corp.
- ----------------------------------------------------------------------------------------------------------------------------------
James M. Sullivan, 46 2004 Senior Vice President, Chief Financial Officer and Treasurer
Senior Vice President, Chief since 2004. Mr. Sullivan served as Solutia's Vice President
Financial Officer and Treasurer and Controller from 1999 through 2004.
- ----------------------------------------------------------------------------------------------------------------------------------
James R. Voss, 40 2005 Senior Vice President, Business Operations since 2005. Mr.
Senior Vice President, Busines Voss served as Senior Vice President and Chief Administrative
Operations Officer of Premcor Inc., one of the largest independent
petroleum refiners and suppliers of unbranded transportation
fuels, heating oil, petrochemical feedstocks, petroleum coke
and other petroleum products in the United States, from 2000
through 2005. Premcor Inc. is now owned by Valero Energy Corp.
- ----------------------------------------------------------------------------------------------------------------------------------
Jonathon P. Wright, 47 2005 Senior Vice President and President, Integrated Nylon since
Senior Vice President and 2005. Mr. Wright served as a Vice President for Charles River
President, Integrated Nylon Associates, an international economic and business consulting
firm, from 2002 through 2005 where he worked extensively in the
petrochemical, specialty chemical and related process
industries. Mr. Wright was a Managing Director of Arthur D.
Little's North American Strategy and Organizational Consulting
business from 1997 through 2002.
- ----------------------------------------------------------------------------------------------------------------------------------
The above listed individuals are elected to the offices set opposite
their names to hold office until their successors are duly elected and have
qualified, or until their earlier death, resignation or removal.
AUDIT AND FINANCE COMMITTEE; AUDIT COMMITTEE FINANCIAL EXPERT
The members of Solutia's Audit and Finance Committee, which met nine
times in 2006, are Mr. Metz, chairman; Mr. Mulcahy, Mrs. Narodick and Dr.
Slaughter. Solutia's board of directors has concluded that each member of the
committee is independent within the meaning of Rule 10A-3 of the Exchange Act
of 1934 and the New York Stock Exchange's listing standards. The board has
also concluded that Mr. Metz is an audit committee financial expert, as that
term is defined in the rules issued under the Sarbanes-Oxley Act of 2002.
111
The purpose of the committee is to assist the board in overseeing the
integrity of Solutia's financial statements, Solutia's compliance with legal
and regulatory requirements, the qualifications and independence of the
independent auditor, the performance of the independent auditor and Solutia's
internal audit function, and Solutia's systems of disclosure controls and
internal controls over financial reporting, and to prepare the report required
by the rules of the U.S. Securities and Exchange Commission.
Among the committee's responsibilities is the selection of Solutia's
independent auditor.
The committee's written charter sets out the functions the committee
is to perform, in light of the Sarbanes-Oxley Act of 2002 and the rules of the
New York Stock Exchange.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires
Solutia's directors and executive officers to file reports of holdings and
transactions in Solutia's common stock with the Securities and Exchange
Commission. During 2006, all reports required by Solutia's directors and
executive officers under Section 16(a) of the Securities Exchange Act of 1934
were made in a timely manner.
CODE OF ETHICS
Solutia's board of directors has adopted a Code of Ethics for Senior
Financial Officers. This code applies to Solutia's chief executive officer and
the other senior officers who have financial responsibilities, including
Solutia's chief financial officer, treasurer, controller and general counsel.
This code is filed as an exhibit to this Annual Report on Form 10-K. Any
person who wishes to obtain a copy of our Code of Ethics may do so by writing
to Investor Relations, Solutia Inc., 575 Maryville Centre Drive, St. Louis,
Missouri 63141.
LEGAL PROCEEDINGS
For a description of litigation pending against certain former
officers of Solutia see the first paragraph under "Other Legal Proceedings" on
page 21 above.
112
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Executive Compensation and Development Committee of our Board of
Directors (the "ECDC") establishes our compensation philosophy and enacts and
administers programs consistent with that philosophy. The ECDC does this in
consultation with our Chief Executive Officer and our senior-level human
resources personnel. The ECDC functions pursuant to a designation of authority
from the full Board of Directors and in accordance with a written charter
which was approved by the ECDC and the full Board of Directors.
The ECDC has endorsed a pay-for-performance philosophy for our
executives, including our Chief Executive Officer, designed to support our
efforts to create a high performance culture within the Company. The key
objectives of this philosophy are to:
o Attract, retain and motivate executive officers by
maintaining programs which offer competitive total
compensation opportunities ( as compared to similarly
situated companies) but which provide the potential for
recognition of outstanding performance and penalties for
performance that is not competitive;
o Promote and incent the achievement of short-term and
long-term operating and financial objectives that will
maximize the value of Solutia's bankruptcy estate for our
constituents; and
o Avoid creation of an entitlement mentality by sufficiently
differentiating between high-performers who drive the
Company's performance and those who do not.
The ECDC believes that the programs in place are well-designed to
achieve the above stated compensation philosophy; however, certain of its
decisions with respect to executive compensation matters are subject to
Bankruptcy Court approval. As part of the court approval process, these ECDC
determinations are subject to objections by constituents in our Chapter 11
case. In the opinion of the ECDC often the perspectives of these various
constituents may be motivated by their own pecuniary interest, which in some
cases, may not be consistent with the Board's obligations to maximize the
value of our estate for the benefit of all constituents.
In addition, as a result of being in Chapter 11, the Company has been
unable to offer effective broad-based long-term compensation programs. The
absence of the ability to offer any equity-based long term compensation has
been especially troubling in effecting the above stated compensation
philosophy.
Due to these dynamics, during our bankruptcy case, the ECDC has not
been able to, and in the future, may not be able to, fully implement executive
compensation changes to meet the objectives stated above. The ECDC believes
that the current aggregate compensation opportunities for many of the
Company's executives, including its senior executives, may fall short of the
objectives stated above. As a result, the Company may experience difficulty
attracting or retaining executive officers, which could have the effect of
delaying or preventing our emergence from Chapter 11 or our failure to achieve
operating and financial objectives.
To mitigate this issue, to the extent possible, the Company has
requested bankruptcy court approval to make certain changes in its
compensation programs with respect to the terms and conditions of employment
for its senior executives. Specifically the company has requested approval of
changes to the employment contracts of the CEO and certain other senior
executives, a change in the base compensation of the CEO, and the approval of
the 2007 annual incentive plan. These matters are scheduled for hearing before
the Bankruptcy Court on March 12, 2007.
ESTABLISHING COMPENSATION PROGRAMS AND COMPENSATION LEVELS
Our Chief Executive Officer, Jeffry N. Quinn (the "CEO"), plays a
significant role in the compensation process, other than with respect to his
own compensation. Our CEO participates in ECDC meetings at the ECDC's request
to provide:
o Background information regarding our operating and financial
objectives;
o His evaluation of the performance of the senior executive
officers; and
o Compensation and professional development recommendations as
to senior executive officers (other than himself).
The ECDC evaluates the performance of the CEO and, subject to
Bankruptcy Court approval, makes all compensation decisions related to the CEO
and other members of the executive leadership team.
113
To assist the ECDC in making decisions regarding compensation program
design and appropriate compensation levels, the ECDC employs Mercer HR
Consulting, an internationally recognized compensation consulting firm. Mercer
provides the ECDC with company specific compensation market data from their
review of the public filings of certain peer companies. They advise the ECDC
on program design and competitive compensation levels. The ECDC established
two peer groups to be used in evaluating the overall competitiveness of our
compensation program (the "Peer Groups"). The Peer Groups were chosen based on
a number of factors, including similar lines of business and the overall size
and value of the peer companies. One of the Peer Groups consists of chemical
companies while the second peer group includes similarly situated companies
currently in Chapter 11. The Peer Groups are evaluated and updated at least
once a year and more often if necessary.
The ECDC annually compares the compensation program for our
executive officers, including our CEO, Chief Financial Officer ("CFO"), and
our three other most highly paid executive officers named in the Summary
Compensation Table (collectively, the "Named Executive Officers"), to programs
of companies in the Peer Groups.
COMPONENTS OF EXECUTIVE COMPENSATION
The principal components of our current executive compensation
program, including our Named Executive Officers, are:
o Base salary;
o Annual bonus; and
o For certain of our senior executives, including our Named
Executive Officers, a bonus related to emergence from
Chapter 11.
Each of these elements is discussed more fully below.
Currently our executive compensation program does not include any
long-term compensation. Our equity based incentive plan was suspended upon our
Chapter 11 filing. Without such a plan, our executives do not have the
opportunity to be rewarded for the achievement of long term performance goals.
Consequently, the total compensation our executives can earn is significantly
impaired as compared to executives at companies within Solutia's Peer Groups,
that have long term incentive plans. Long term incentive compensation,
particularly in the form of equity based compensation creates an ownership
mentality, encourages retention and helps balance longer term strategic goals
with shorter-term operating and financial goals. The absence of such
incentives is a significant shortcoming in our current programs, especially
with respect to our senior executives for whom, under competitive market
practices, long term compensation would normally constitute a significant part
of total compensation.
ANNUAL COMPENSATION
Mix of Compensation Components
Annual cash compensation for our employees and executives, including
our Named Executive Officers, is comprised of a mixture of base salary and an
annual performance-based bonus. The exact mix between fixed compensation (base
pay) and variable compensation (annual bonuses) varies based upon an
employee's role in the organization. In allocating annual compensation
opportunity between base salary and annual bonus, our ECDC believes that the
compensation of our most senior management personnel - those levels of
management having the greatest ability to influence our performance - should
be weighted more heavily to variable compensation tied to the Company's
performance. As position and responsibility increase, the ECDC believes that
an increasing portion of an employee's total compensation should be
performance based, and contingent upon the achievement of the company's
financial and operating objectives.
As a result, while almost all of our employees have an annual bonus
opportunity, those at senior management levels receive a greater percentage of
their annual cash compensation opportunity in the form of a bonus and
therefore a greater amount of their total annual compensation is at risk. The
ECDC believes that such structure creates a strong incentive for our senior
executives to drive high levels of performance.
Base Salary
Base salary is a critical element of executive compensation as it is
the only element of compensation that provides our executives with an assured
annual cash compensation amount. We generally attempt to maintain base
salaries for senior executives at approximately the 50th percentile of
companies in our Peer Groups. In determining the appropriate base salary
level, the ECDC considers a number of factors including:
114
o the executive's qualifications, past performance and
experience;
o the scope of the executive's responsibilities;
o salary practices at other companies within our Peer Group
for similar positions;
o our internal equity considerations; and
o our overall performance.
Base salaries are reviewed on an annual basis, and may be adjusted
from time to time based on the above criteria. See the Summary Compensation
Table on page 119 for more information about the 2006 base salaries of our
Named Executive Officers.
Annual Bonus
Our annual bonus plan, which was approved for 2006 by the Bankruptcy
Court on September 25, 2006, is the Solutia Annual Incentive Program (the
"AIP"). The AIP is a broad-based plan that applies to almost all of our
employees. The AIP serves as an integral component of annual compensation for
employees and fosters our pay-for-performance philosophy. The AIP is designed
to deliver a significant portion of the executive's annual overall
compensation opportunity in the form of a cash bonus based on achievement of
key financial and operating objectives. The ECDC administers the AIP. The
following is a discussion of the principal concepts embedded in the AIP.
TARGET BONUSES
Each participant in the AIP has a set target bonus. Target bonuses
are based upon both external and internal considerations. The ECDC's
philosophy is that from an external perspective, target bonuses are set such
that median performance will result in median annual compensation and that
performance above or below median levels will result in compensation above or
below median levels. From an internal perspective, target bonuses are
determined primarily by salary grade level within the organization. Salary
grade levels are reflective of an individual's job and level of responsibility.
In general, those with direct profit-and-loss responsibility have a higher
target bonus opportunity than another participant at the same salary grade
level that does not have direct profit-and-loss responsibility.
BONUS POOLS
The AIP is based upon a bonus pool concept. There are separate bonus
pools determined for enterprise-level participants and the participants in
each business unit in the following manner. Each year the ECDC establishes
financial and operating performance metrics for the enterprise and for each
business unit and a weighting for each metric. These determinations are based
on the advice and recommendation of management. For each metric, a threshold
(0.50x), target (1.0x), and maximum (3.0x) funding level is determined by the
ECDC. Under the AIP these funding levels are referred to as funding factors.
If the threshold performance level is not met with respect to any particular
performance metric there is no funding of the bonus pool with respect to that
metric. The target level funding or a 1.0x funding factor is the aggregate of
all target bonuses for participants in the AIP.
These determinations by the ECDC in effect establish a correlation
between performance and funding for bonuses. For example, if only threshold
level performance was achieved for all metrics, the funding factor would be
0.50x and total bonus pool would be only 50% of the sum of all participants'
target bonuses. Conversely, if maximum performance levels were achieved for
all metrics the funding factor would be 3.0x and the total bonus pool would be
300% of the sum of all participants' target bonuses. At the end of the year,
the performance of the Company and its business units against the
pre-established metrics is measured and the ECDC determines the funding factor
for each bonus pool.
FUNDING HISTORY OF BONUS POOLS
The enterprise and each business unit achieved at least the threshold
level of performance during the previous three years and during that period,
the average overall annual funding of the bonus pools has been 42.6% of the
maximum. Overall funding of the AIP for 2006 was approved by the ECDC at 47.3%
of maximum.
115
2006 PERFORMANCE METRICS
The performance metrics for 2006 for each incentive pool are as set
forth in the following chart:
- --------------------------------------------------------------------------------------------------------------------------
BONUS POOL MEASURE WEIGHT MEASURE WEIGHT MEASURE WEIGHT
- --------------------------------------------------------------------------------------------------------------------------
Enterprise
Enterprise Pool EBITDAR(1) 45% Free Cash Flow 55% N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Integrated Nylon Pool EBITDA(2) 50% Free Cash Flow 50% N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Saflex Pool EBITDA 33-1/3% Free Cash Flow 33-1/3% Gross Margin % 33-1/3%
- --------------------------------------------------------------------------------------------------------------------------
CPFilms Pool EBITDA 50% Free Cash Flow 50% N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Chemicals Pool Free Cash Flow 100% N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Plastic Products Pool Free Cash Flow 100% N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(1) In general, "EBITDAR" means EBITDA plus, in accordance with United States
generally accepted accounting principles ("GAAP") and subject to historical
internal reporting standards, reorganization items.
(2) In general, "EBITDA" means consolidated net income (loss) determined on a
consolidated basis in accordance with GAAP and subject to historical internal
reporting standards, excluding certain items specified in the 2006 AIP.
BONUS DETERMINATIONS
Once the bonus pools are established, individual bonuses are
determined as part of our performance management process. Individual bonuses
are comprised of an objective portion and a subjective portion.
Forty-five percent (45%) of each bonus pool is paid out on a straight
objective basis to participants in that pool. This is the objective portion of
a participant's bonus. Forty-five percent (45%) of each bonus pool is
allocated to individual participants within the pool based upon on individual
performance versus set goals and individual performance versus peer
performance. The remaining ten percent (10%) of each bonus pool are aggregated
to constitute an enterprise discretionary pool which can be allocated to any
participant in the AIP. Allocations from these discretionary funds constitute
the discretionary portion of a participant's bonus.
Each participant's target bonus is multiplied by the relevant funding
factor (the same funding factor that was used to determine the size of the
bonus pool from which the participant's bonus is paid). By definition, the sum
of all performance adjusted target bonuses for all participants in one of the
bonus pools equals the total bonus pool. As a result, an individual is in
effect guaranteed 45% of their target adjusted performance bonus except in
cases of extreme individual performance issues. The discretionary portion of
an individual's bonus can range from zero upward, which is limited only by the
total funding of the relevant bonus pool. However, the ECDC has determined, as
an administrative policy matter, that except in extreme cases, the maximum
bonus an individual can receive under the AIP is 200% of their performance
adjusted target bonus.
The aggregate of all bonuses paid from each of the bonus pools can
not exceed the amount of the pool except, any discretionary bonus paid to the
CEO in excess of 50% of his performance adjusted target bonus, does not, at
the discretion of the ECDC, diminish the pool available for bonus to other
participants.
BONUS RANGES
The concepts described above in effect determine the range of
potential bonus for a participant in any given year. If threshold performance
levels are not met, there would be no bonus pool, and there would be no
bonuses. If a bonus pool is funded, except in extreme performance situations,
a participant would be eligible to receive a minimum bonus of 45% of their
performance adjusted target bonus to a maximum bonus of two times their
performance adjusted target bonus. Since the maximum funding factor that can
be achieved is 3.0x (if the maximum performance is achieved) a participant's
maximum performance adjusted bonus would be three times their target bonus and
the maximum bonus they could receive is two times this amount or six times
their target bonus.
116
BONUSES OF NAMED EXECUTIVE OFFICERS
The bonuses of our CEO and other Named Executive Officers are
determined in accordance with the above plan concepts. The ECDC determines the
bonus for our CEO. The ECDC also reviews and approves our CEO's
recommendations for bonus awards to our executive leadership team including
the other Named Executive Officers.
For 2006 Our Named Executive Officers were eligible to receive awards
from the following incentive pools, in addition to the enterprise
discretionary bonus pool:
-------------------------------------------------------------------------------------------------------
Named Executive Officer Bonus Pools
-------------------------------------------------------------------------------------------------------
J. N. QUINN ENTERPRISE POOL
-------------------------------------------------------------------------------------------------------
J. M. SULLIVAN ENTERPRISE POOL
-------------------------------------------------------------------------------------------------------
L. DE TEMMERMAN CHEMICALS POOL; PLASTIC PRODUCTS POOL; AND SAFLEX POOL
-------------------------------------------------------------------------------------------------------
J.R. VOSS ENTERPRISE POOL
-------------------------------------------------------------------------------------------------------
J.P. WRIGHT INTEGRATED NYLON POOL
-------------------------------------------------------------------------------------------------------
The target annual bonus for the Named Executive Officer is in
accordance with the Named Executive Officer's employment agreement with the
Company as described in "Employment Agreements with Named Executive Officers"
on page 122.
Based upon the performance achieved by the Company in 2006 and the
funding of the incentive pools, among other factors, the following items were
considered by the ECDC in determining the amount of the discretionary bonus
for our CEO and in approving the recommendations made by the CEO regarding
senior executives.
o The significant improvement in the Company's financial
performance despite such challenges as continuously
escalating raw material costs, unplanned downtime at our
Alvin, Texas plant and managing the competing demands of the
Chapter 11 process.
o The improved safety performance of the Company;
o The continued growth in our Saflex business and completion
of, or progress towards, such strategic initiatives in
Saflex as the acquisition of our joint venture partner's
51% stake in Quimica resulting in our sole ownership of
Quimica's plant located in Puebla, Mexico, the construction
of our PVB plant in China and a third extrusion line at our
Ghent plant;
o The continued transformation of our Nylon business as
evidenced by the conversion of carpet fiber lines at the
Company's Pensacola facility to produce nylon plastics;
o The development and implementation of a new business model
in our CP Films business;
o The successful launch of an operations excellence initiative;
o The significant progress in our Chapter 11 case including
the filing of a plan of reorganization in February 2006 and
completing a trial on the JPMorgan litigation matter;
o The exploration of all possible avenues to reach a
confirmable plan of reorganization, including the
possibility of selling the equity of the reorganized company
or certain of the Company's businesses or assets;
o The successful amendment and upsizing of our
debtor-in-possession financing;
o The continued upgrading of the Company portfolio as evidenced
by the disposition of the Company's pharmaceutical services
business at an attractive valuation, and the agreement to
acquire the remainder of the Flexsys joint venture; and
o The strong leadership of the executive team that has been
successful in retaining management talent for the Company,
kept morale high and the organization focused
notwithstanding the challenges of the Chapter 11 proceeding.
Please see the "Grants of Plan Based Awards Table" on page 120 for
estimated payouts under the AIP at threshold, target and maximum payout levels
for each Named Executive Officer for the fiscal year ended December 31, 2006.
The actual bonus amount paid under the AIP to each Named Executive Officer can
be found in the Summary Compensation Table on page 119.
117
Long Term Incentives and Emergence Bonus
EQUITY BASED INCENTIVES
Use of our long-term equity based incentive plan was suspended upon
our Chapter 11 filing and no awards have been made under it since that time.
Although suspended, our long-term incentive plan previously included a stock
incentive plan under which stock options, restricted stock or other awards of
stock-based compensation could be granted. Certain of our Named Executive
Officers hold fully-vested stock options that were granted prior to the
suspension of our long-term incentive plan. Solutia's existing shares of
common stock, as well as options and warrants to purchase common stock, will
be cancelled upon our emergence from Chapter 11. It is highly unlikely that
holders of options, including the Named Executive Officers, will receive any
consideration in our Chapter 11 case for their equity based compensation.
See the "Outstanding Equity Awards at Fiscal Year-End Table" on page 120 for
more information regarding the stock options owned by our Named Executive
Officers.
EMERGENCE BONUS
Pursuant to their employment agreements and under certain
circumstances, each of our Named Executive Officers is entitled to receive an
emergence bonus when we emerge from Chapter 11. When we entered into these
employment agreements in 2004 and 2005, the ECDC believed that the inclusion
of an emergence bonus would provide a strong incentive for our Named Executive
Officers to achieve our emergence from Chapter 11 as soon as reasonably
practicable and provide long-term compensation that would serve as a
reasonable substitute for the lack of any other long-term compensation
program. However, the delay in our emergence from Chapter 11, which has been
caused by factors outside the control of senior management, and other program
design issues, have diminished the annualized value of potential awards under
this plan. See "Employment Agreements with Named Executive Officers" on page
122 for a description of the emergence bonuses that each Named Executive
Officer may be entitled to receive.
TERMINATION/SEVERANCE AGREEMENTS
All executives, including our Named Executive Officers, are parties
to employment agreements with us which specify payments upon termination for
various causes. In the event of a "not for cause" termination (as defined in
the respective employment agreements), our Named Executive Officers are
entitled to receive various amounts based on multiples of their base salaries.
Executives are also entitled to four months continuation of health insurance
at active employee contribution rates and executive outplacement services. No
specific "change in control" provisions or tax gross-up provisions are
provided in the agreements. See "Employment Agreements with Named Executive
Officers" on page 122 and the "Potential Payments Under Employment Agreements"
on page 124 for a description of the terms of the employment agreements and an
estimate of the benefits that our Named Executive Officers would be entitled
to receive pursuant to their respective employment agreements under various
employment termination scenarios.
BENEFITS AND OTHER PERQUISITES
Executives participate in the same benefit programs provided for
other Solutia employees. There are no supplemental retirement programs. The
only additional perquisite the executives are provided is company paid
financial and tax preparation services not to exceed $7,000.00 per year. This
benefit is provided for the executive given our belief that good financial
planning and tax preparation by a professional reduces the time and attention
the executive would otherwise spend on their personal financial affairs and
affords them more time to focus on their executive responsibilities with
Solutia.
RETIREMENT PLANS
We froze our pension plan as of June 30, 2004 in connection with our
Chapter 11 reorganization and, as a result, only interest credits are being
applied to the accounts. See "Pension Plans" on page 121 for more information
about our retirement plan and the benefits that our Named Executive Officers
would be entitled to receive thereunder.
COMPENSATION COMMITTEE REPORT
The Executive Compensation and Development Committee has reviewed and
discussed the Compensation Discussion and Analysis with management and based
on the review and discussions, the ECDC recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in Solutia's annual
report on Form 10-K for 2006.
J. PATRICK MULCAHY (CHAIR)
ROBERT H. JENKINS
FRANK A. METZ, JR.
118
SUMMARY COMPENSATION TABLE
The following table shows information about the compensation of
Solutia's chief executive officer, chief financial officer and the three most
highly compensated executive officers other than the chief executive officer
and chief financial officer who were serving as executive officers at December
31, 2006. Certain columns have been omitted where inapplicable.
- ------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Changes in
Pension
Value and
Non-Equity Nonqualified
Incentive Deferred
Name and Stock Option Plan Compensation All Other
Principal Salary Awards Awards Compensation Earnings Compensation
Position Year ($) ($) ($) ($)(1) ($)(2) ($)(3) Total
- ------------------------------------------------------------------------------------------------------------------------
J. N. Quinn 2006 $500,000 -0- -0- $2,700,000 $317 $16,780 $3,217,000
President, Chief
Executive Officer and
Chairman of the Board
- ------------------------------------------------------------------------------------------------------------------------
J. M. Sullivan 2006 360,000 -0- -0- 700,000 2,486 16,297 1,078,783
Senior Vice President,
Chief Financial Officer
and Treasurer
- ------------------------------------------------------------------------------------------------------------------------
L. De Temmerman 2006 377,000 -0- -0- 845,000(4) 201,548 112,045(5) 1,535,593
Senior Vice President
and President,
Performance Products
- ------------------------------------------------------------------------------------------------------------------------
J. R. Voss 2006 320,000 -0- -0- 580,000 -0- 31,003(6) 931,003
Senior Vice President,
Business Operations
- ------------------------------------------------------------------------------------------------------------------------
J. P. Wright 2006 375,000 -0- -0- 412,500 -0- 16,366 803,866
Senior Vice President
and President,
Integrated Nylon
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Included in this column as 2006 Non-Equity Incentive Plan Compensation
are awards under the 2006 Solutia Annual Incentive Program as described
under "Annual Bonus" in the Compensation Discussion and Analysis above.
(2) Amounts represent the actuarial increase in the present value of the
Named Executive Officer's benefits under Solutia's defined benefit plan.
(3) Includes Solutia contributions to thrift/savings plans, as follows: Mr.
Quinn, $15,400; Mr. Sullivan, $15,400; Mr. Voss, $14,467 and Mr. Wright,
$15,400. Mr. De Temmerman does not participate in the Company's
thrift/savings plan.
Also includes the dollar value of insurance premiums paid by Solutia with
respect to life insurance as follows: Mr. Quinn - $1,380; Mr. Sullivan -
$897; Mr. De Temmerman - $1,549; Mr. Voss - $468; and Mr. Wright - $966.
(4) Mr. De Temmerman is a Belgian employee under assignment to the United
States pursuant to the letter agreement identified in the Exhibit Index
to this Annual Report on Form 10-K. Mr. De Temmerman's bonus for 2006 was
paid in Euros. His bonus has been converted into U.S. dollars at the
December 31, 2006 exchange rate of 1.3147 U.S. dollars to 1 Euro.
(5) Includes $50,850 for a housing allowance; $24,254 for a home leave
allowance; $14,951 for tax equalization payments, net of taxes, pursuant
to the letter agreement; $10,381 for a children's allowance provided
under Belgian law; and $10,606 for a customary Belgian representation
allowance.
(6) Includes relocation related tax gross-ups of $16,068.
119
GRANTS OF PLAN-BASED AWARDS TABLE
The amounts indicated below are non-equity incentive payouts under
Solutia's 2006 Annual Incentive Plan. For a complete discussion of the 2006
AIP, please see "Annual Bonus" in the Compensation Discussion and Analysis
above.
--------------------------------------------------------------------------------
ESTIMATED POSSIBLE PAYOUTS UNDER NON-EQUITY
INCENTIVE PLAN AWARDS
--------------------------------------------------------------------------------
Grant date Threshold Target Maximum
Name ($)(1) ($)(2) ($)(3)
--------------------------------------------------------------------------------
J. N. Quinn N/A $375,000 750,000 4,500,000
--------------------------------------------------------------------------------
J. M. Sullivan N/A 135,000 270,000 1,620,000
--------------------------------------------------------------------------------
L. De Temmerman N/A 188,500 377,000 2,262,000
--------------------------------------------------------------------------------
J.R. Voss N/A 120,000 240,000 1,440,000
--------------------------------------------------------------------------------
J. P. Wright N/A 187,500 375,000 2,250,000
--------------------------------------------------------------------------------
<FN>
(1) Represents amounts awarded if the performance adjusted target bonus of 0.50x funding level is achieved.
(2) Represents amounts awarded if the performance adjusted target bonus of 1.0x funding level is achieved.
(3) Represents amounts awarded if the performance adjusted target bonus of 3.0x funding level is achieved.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
The following table sets forth information for each of the Named
Executive Officers regarding the number of shares subject to both exercisable
and unexercisable stock options as of December 31, 2006.
- --------------------------------------------------------------------------------------------------------
OPTION AWARDS
- --------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
Equity
Incentive
Plan Awards:
Number of
Number of Number of Securities
Securities Securities Underlying
Underlying Underlying Unexercised
Unexercised Unexercised Unearned Option
Options (#) Options (#) Options Exercise Price Option
Name Exercisable Unexercisable (#) ($)(1) Expiration Date
- --------------------------------------------------------------------------------------------------------
J. N. Quinn 25,000 - -0- $1.22 7/24/2013
- --------------------------------------------------------------------------------------------------------
- 40,000 (1) $3.90 1/28/2013
- --------------------------------------------------------------------------------------------------------
J. M. Sullivan 25,000 - $19.25 9/15/2007
- --------------------------------------------------------------------------------------------------------
10,000 - $20.594 8/31/2009
- --------------------------------------------------------------------------------------------------------
- 12,000 (2) $14.032 7/5/2010
- --------------------------------------------------------------------------------------------------------
- 12,000 (3) $13.85 9/3/2011
- --------------------------------------------------------------------------------------------------------
- 12,000 (4) $10.35 1/7/2012
- --------------------------------------------------------------------------------------------------------
6,000 - $8.63 5/21/2012
- --------------------------------------------------------------------------------------------------------
25,000 - $1.48 4/21/2013
- --------------------------------------------------------------------------------------------------------
10,000 - $1.22 7/24/2013
- --------------------------------------------------------------------------------------------------------
L. De Temmerman 25,000 - $19.25 9/15/2007
- --------------------------------------------------------------------------------------------------------
10,000 - $20.594 8/31/2009
- --------------------------------------------------------------------------------------------------------
10,000 - $14.032 7/5/2010
- --------------------------------------------------------------------------------------------------------
10,000 - $13.85 9/3/2011
- --------------------------------------------------------------------------------------------------------
10,000 - $10.35 1/7/2012
- --------------------------------------------------------------------------------------------------------
- 50,000 (5) $1.22 7/24/2013
- --------------------------------------------------------------------------------------------------------
J.R. Voss - - -0- N/A
- --------------------------------------------------------------------------------------------------------
J. P. Wright - - -0- N/A
- --------------------------------------------------------------------------------------------------------
120
<FN>
1. Performance options vest upon the earlier of (i) the achievement of
certain percentage increases in the Fair Market Value (as defined
below) of Solutia common stock over the Fair Market Value on the date
of grant, or (ii) 1/29/2012.
2. Performance options vest upon the earlier of (i) the achievement of
certain percentage increases in the Fair Market Value (as defined below)
of Solutia common stock over the Fair Market Value on the date of grant,
or (ii) 7/6/2009.
3. Performance options vest upon the earlier of (i) the achievement of
certain percentage increases in the Fair Market Value (as defined below)
of Solutia common stock over the Fair Market Value on the date of grant,
or (ii) or 9/4/2010.
4. Performance options vest upon the earlier of (i) the achievement of
certain percentage increases in the Fair Market Value (as defined below)
of Solutia common stock over the Fair Market Value on the date of grant,
or (ii) 1/8/2011.
5. Performance options vest upon the earlier of (i) the achievement of
certain percentage increases in the Fair Market Value (as defined below)
of Solutia common stock over the Fair Market Value on the date of grant,
or (ii) 1/1/2007.
% Increase in Fair Market % of Option
Value from Option Grant Date Exercisable
---------------------------- -----------
20% 25%
30 50
50 75
75 100
For purposes of the vesting of performance options, "Fair Market
Value" means, as of any given date, the average of the highest and lowest
sales prices of Solutia common stock reported as the New York Stock
Exchange-Composite Transactions for such day, or if the Common Stock was not
traded on the New York Stock Exchange on such day, then on the next preceding
day on which the Common Stock was traded, all as reported by The Wall Street
Journal under the heading New York Stock Exchange-Composite Transactions or by
such other source as the Executive Compensation and Development Committee may
select. For each stock option reported above, the "Fair Market Value" at the
date of grant is equal to the exercise price.
AGGREGATED OPTION EXERCISES IN 2006 AND STOCK VESTED
There were no options exercised by the Named Executive Officers
during 2006, and none of the options held by them at the end of 2006 were "in
the money." Solutia's existing shares of common stock, as well as options and
warrants to purchase its common stock, will be cancelled upon our emergence
from Chapter 11. It is highly unlikely that holders of options to purchase
Solutia's common stock, including the Named Executive Officers, will receive
any consideration in our Chapter 11 case for their equity based compensation.
PENSION PLANS
SOLUTIA PENSION BENEFITS
- ----------------------------------------------------------------------------------------------------------
Number of Years Present Value of
of Credited Accumulated Payments During
Service Benefit Last Fiscal Year
Name Plan Name ($) ($) ($)
- ----------------------------------------------------------------------------------------------------------
J. N. Quinn Solutia Inc. Employees' 1.46 24,357 -0-
Pension Plan (U.S.)
- ----------------------------------------------------------------------------------------------------------
J. M. Sullivan Solutia Inc. Employees'
Pension Plan (U.S.) 20.93 256,110 -0-
- ----------------------------------------------------------------------------------------------------------
L. De Temmerman Solutia Retirement Plan
(Belgium) 22.33 1,011,589 -0-
- ----------------------------------------------------------------------------------------------------------
J.R. Voss N/A - Not eligible for
any pension plan - - -0-
- ----------------------------------------------------------------------------------------------------------
J. P. Wright N/A - Not eligible for - - -0-
any pension plan
- ----------------------------------------------------------------------------------------------------------
We froze our pension plan as of June 30, 2004 in connection with our
Chapter 11 reorganization and as a result, only interest credits are being
applied to accounts. To the extent Named Executive Officers participated in
the pension plan prior to the freezing of the plan, they are eligible for
benefits payable under the defined benefit pension plans applicable to
Solutia's regular full-time employees. An executive's benefits are based on
his service, if any, with Pharmacia prior to the spinoff of Solutia and
service with Solutia since the spinoff. Solutia's defined benefit pension
plans for its U.S. employees consist of two accounts: a "Prior Plan Account"
(for those employees who earned benefits under Pharmacia's pension plan before
the spinoff) and a "Cash Balance Account." The opening balance of the Prior
Plan Account was the December 31, 1996 present value of the executive's lump
sum retirement benefit earned prior to January 1, 1997, under Pharmacia's
defined benefit pension plans, calculated using the assumption that the
monthly benefit would be
121
payable at age 55 with no reduction for early payment. The formula used to
calculate the opening balance was based on average final compensation (as
defined in the pension plan) multiplied by years of service (as defined in the
pension plan). Until June 30, 2004, for each year of the executive's continued
employment with Solutia (including all of 1997), the executive's Prior Plan
Account increased by 4% to recognize that prior plan benefits would have grown
as a result of pay increases. As a result of the plan freeze, the 4% annual
increases to the Prior Plan Account were eliminated for service after June 30,
2004. The Prior Plan Account is credited with 8.5% interest each year until
the executive reaches age 55.
Until June 30, 2004, for each year during which the executive was
employed by Solutia, 3% of annual compensation (salary and annual bonus) in
excess of the Social Security wage base and a percentage, ranging from 3% to
7% based on age, of annual compensation were credited to the Cash Balance
Account. In addition, the Cash Balance Account of executives who earned
benefits under Pharmacia's defined benefit pension plans before 1997 was
credited each year (for up to ten years based on prior years of service with
Pharmacia before 1997) during which the executive was employed by Solutia
(including all of 1997) with an amount equal to a percentage, ranging from 2%
to 6% based on age, of annual compensation. As a result of the plan freeze,
all credits to the Cash Balance Account that are based on annual compensation
were eliminated for compensation earned after June 30, 2004. The Cash Balance
Account was credited with interest each year based on the 30-year treasury
rate. In light of the discontinuance of the 30-year treasury rate, the Cash
Balance Account is currently credited with an interest rate determined and
published by the Internal Revenue Service to serve as a proxy for the 30-year
treasury rate.
U.S. Pension
The December 31, 2006 account balances were projected to age 65. The
Prior Plan account was projected at 8.5% interest to age 55, and 0% from age
55 to age 65, according to the plan rules. The Cash Balance Account was
projected to age 65 using the current interest crediting rate in effect for
2006 and 2007, which is 5%. The balances were then discounted back from age 65
to December 31, 2006 using the discount rate of 5.75% to determine the present
value.
Because the U.S. Pension Plan is frozen as of June 30, 2004,
compensation earned by the Named Executive Officers after this date is not
considered in the calculation of pension benefits. Prior to June 30, 2004, the
pensionable pay included base pay and annual incentive bonus payments. The
account balances in the U.S. Pension Plan are payable upon termination of
employment, or the executive can choose to defer the receipt of benefits to a
later date and earn interest on the Cash Balance Account and Prior Plan
Account as described above.
Belgian Retirement Plan
Mr. De Temmerman is a Belgian employee and as such, participates in
Solutia's Belgian Retirement Plan. His accrued benefit was calculated as of
December 31, 2006 based on the final average earnings, the credited service,
and the average social security ceiling as of December 31, 2006. The accrued
benefit is equal to a lump sum payable at age 60 based on final average
earnings (as defined in the plan) and credited service (as defined in the
plan). The present value of the accrued benefit as of December 31, 2006 was
determined by discounting the accrued benefit from age 60 to December 31, 2006
using a discount rate of 4.50%. This amount was converted to U.S. dollars
using a conversion rate of $1.31470 per Euro as of December 31, 2006.
Only base salary is used in calculating earnings under the Belgian
Retirement Plan. The Belgian Pension benefit is payable at age 60 with an
actuarial reduction applied to the benefit for earlier retirement or
termination. The Chapter 11 filing does not impact the operation of the
Belgian Retirement Plan in any respect.
NONQUALIFIED DEFERRED COMPENSATION
Solutia does not offer nonqualified deferred compensation to any
employees at this time.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
The descriptions below are only summaries of the agreements that
Solutia has with its Named Executive Officers and are qualified in their
entirety by the actual agreements, copies of which have been filed with the
Securities and Exchange Commission and are identified in the Exhibit Index to
this Annual Report on Form 10-K.
Effective July 19, 2004, Solutia entered into Senior Executive
Agreements with Mr. Quinn, Mr. De Temmerman and Mr. Sullivan which were
approved by our Board and the Bankruptcy Court. On April 21, 2005, upon
Bankruptcy Court approval, we entered into amended and restated employment
agreements with Mr. Quinn and Mr. Sullivan, each dated July 19, 2004.
Subsequently the Company entered similar agreements with Mr. Voss and Mr.
Wright which were approved by the Bankruptcy Court on August 1, 2005. Each of
these agreements has a term beginning on the date such agreement was effective
and expiring on the date which is six-months from the date on which Solutia
emerges from bankruptcy. These agreement as amended and restated are
collectively referred to as the "Senior Executive Agreements".
122
BASE SALARY
The Senior Executive Agreements provide for a minimum annual base salary for
each of the executives until the six month anniversary of the Emergence Date
(as described below) as follows:
Mr. Quinn $500,000
Mr. De Temmerman $350,000
Mr. Sullivan $325,000
Mr. Voss $300,000
Mr. Wright $350,000
Mr. De Temmerman's minimum salary is actually expressed as 289,519
Euros. The above dollar figure represents the U.S. Dollar equivalent at an
exchange rate of 1.2089.
TARGET BONUS OPPORTUNITY AND OTHER BENEFITS
Each of these executives is entitled to participate in Solutia's
annual incentive program with each having a target annual bonus opportunity of
a percentage of his annual base salary as follows:
Mr. Quinn 150%
Mr. De Temmerman 100%
Mr. Wright 100%
Mr. Sullivan 75%
Mr. Voss 75%
Each of the executives is also entitled to participate in all
long-term and other incentive plans or programs applicable to senior executive
officers of Solutia and its subsidiaries and in the applicable savings,
retirement, welfare benefit and vacation plans.
EMERGENCE INCENTIVE PROGRAM
Pursuant to the Senior Executive Agreements each of the Named
Executive Officers participates in the Solutia Inc. Emergence Incentive Bonus
Program ("Emergence Incentive Bonus Program") under which the executives would
be entitled to a bonus on such date that the Bankruptcy Court shall have
confirmed a plan of reorganization of Solutia Inc. under Chapter 11 of the
U.S. Bankruptcy Code and such plan shall have become effective (the "Emergence
Date"). Eligibility for such bonus is dependent upon the Named Executives
being employed by Solutia (or any of our subsidiaries) on the Emergence Date.
If the executives are employed on the six-month anniversary of the
Emergence Date, or shall have been terminated without Cause (as defined in the
Senior Executive Agreements), or shall have resigned for Good Reason (as
defined in the Senior Executive Agreements), or shall have died or been
terminated for Disability (as defined in the Senior Executive Agreements),
they shall be entitled to receive a special emergence bonus to be paid from a
pool. If the executive voluntarily terminates his employment other than for
Good Reason or is terminated for Cause between the Emergence Date and the
six-month anniversary thereof, then he shall forfeit his right to receive the
special emergence bonus.
Funding of the bonus pool will depend upon the achievement of three
performance measures: EBITDA, Enterprise Value and Unsecured Creditor
Recoveries (all as defined and described in the Emergence Incentive Bonus
Program). Our Board, in its discretion, may elect to pay the bonuses in shares
of Reorganized Solutia common stock in lieu of cash. The maximum pool that can
be achieved under the Emergence Incentive Bonus Program is $10,000,000 with
the Named Executive Officers being entitled to receive a fixed percentage of
such pool as follows:
Mr. Quinn 37.5%
Mr. Sullivan 15.0%
Mr. De Temmerman 22.5%
Mr. Wright 15.0%
Mr Voss 10.0%
SEVERANCE AND NON-COMPETE PROVISIONS
If, during the Employment Period, any of the Named Executives is
terminated other than for Cause, or any of these executives terminates his
employment for Good Reason, we will pay such executive: (a) any unpaid but
accrued base salary through the Date of Termination (as defined in the Senior
Executive Agreements), (b) any unpaid annual bonus earned with respect to the
previous year, and
123
(c) any unpaid accrued vacation pay (collectively, "Accrued Obligations"). In
addition, if the Date of Termination occurs before the Emergence Date, Mr. De
Temmerman, would receive an amount equal to 125% of his annual base salary
immediately prior to his Date of Termination, and Mr. Quinn, Mr. Sullivan, Mr.
Wright or Mr. Voss would receive an amount equal to 200% of his respective
annual base salary immediately prior to his respective Date of Termination,
provided that they waive any and all claims against Solutia and its
subsidiaries. The executives will also be entitled to any other benefits or
amounts, excluding severance or separation pay or benefits, for which they are
eligible under any plan, program, or policy of Solutia and its subsidiaries,
such as any vested benefit under any qualified defined benefit or defined
contribution retirement plan in which they participate (collectively, "Other
Benefits"). If employment terminates because of death or Disability, the
executive or his estate, as applicable, will receive Accrued Obligations and
Other Benefits.
The Senior Executive Agreements also contain provisions relating to
non-competition, protection of Solutia's confidential information and
non-solicitation of Solutia employees.
POTENTIAL PAYMENTS UPON TERMINATION
The table below sets forth estimates of the amounts to which each
Named Executive Officer would be entitled, other than accrued but unpaid base
salary and benefits payable under broad-based employee benefit plans and
programs, in the event of a termination of the officer's employment other than
for Cause, or by the executive for Good Reason, on December 31, 2006. The
amounts would be payable under the Senior Executive Agreements are as follows:
-------------------------------------------------------------------------------------------------------
Name Severance Payment (1) Benefits (2) Outplacement Services (3)
-------------------------------------------------------------------------------------------------------
J.N. Quinn $1,000,000 $1005 $25,000
-------------------------------------------------------------------------------------------------------
J. M. Sullivan 720,000 2955 25,000
-------------------------------------------------------------------------------------------------------
L. De Temmerman 471,250 2611 25,000
-------------------------------------------------------------------------------------------------------
J.R. Voss 640,000 No Coverage 25,000
-------------------------------------------------------------------------------------------------------
J. P. Wright 750,000 3116 25,000
-------------------------------------------------------------------------------------------------------
<FN>
(1) Severance Payment based on fiscal 2006 salary.
(2) Consists of health, dental and vision insurance coverage. The value is
based upon the type of insurance coverage we carried for each executive
officer as of January 1, 2007 and is valued at the premiums in effect on
January 1, 2007.
(3) At the request of the Named Executive Officer, we will provide
outplacement services for up to twelve months post termination in an
amount not to exceed $25,000 per Named Executive Officer.
COMPENSATION OF DIRECTORS
The following table describes the compensation arrangements with our
non-employee directors for the 2006 fiscal year.
------------------------------------------------------------------------------------------------------
Name Fees Stock Option Changes in All Other Total
Earned or Awards Awards Pension Value Compensation ($)
Paid in ($)(2) ($)(2) and
Cash Nonqualified
($)(1) Deferred
Compensation
Earnings
------------------------------------------------------------------------------------------------------
Paul H. Hatfield $200,250 -0- -0- -0- -0- $200,250
------------------------------------------------------------------------------------------------------
Robert H. Jenkins 124,376 -0- -0- -0- -0- 124,376
------------------------------------------------------------------------------------------------------
Philip R. Lochner (3) 119,334 -0- -0- -0- -0- 119,334
------------------------------------------------------------------------------------------------------
Frank A. Metz, Jr. 143,793 -0- -0- -0- -0- 143,793
------------------------------------------------------------------------------------------------------
J. Patrick Mulcahy 140,751 -0- -0- -0- -0- 140,751
------------------------------------------------------------------------------------------------------
Sally G. Narodick 127,334 -0- -0- -0- -0- 127,334
------------------------------------------------------------------------------------------------------
John B. Slaughter 136,793 -0- -0- -0- -0- 136,793
------------------------------------------------------------------------------------------------------
<FN>
(1) The fees earned include attendance fees for Board and Committee
meetings. During 2006, the Board met 15 times, the Audit and Finance
Committee, the ECDC and the Governance Committee met 9, 5 and 5
times, respectively.
124
(2) Solutia did not grant any stock or option awards to directors or
employees in 2006. Solutia previously granted deferred stock units to
non-employee directors prior to filing for reorganization under
Chapter 11. The number of deferred stock units credited to each
non-employee director and options outstanding as of December 31, 2006
are as follows:
----------------------------------------------------------------------------------
Name options outstanding deferred stock units
----------------------------------------------------------------------------------
Paul H. Hatfield 21,334 24,202
----------------------------------------------------------------------------------
Robert H. Jenkins 21,334 24,202
----------------------------------------------------------------------------------
Philip R. Lochner 10,833 2,859
----------------------------------------------------------------------------------
Frank A. Metz, Jr. 21,334 12,103
----------------------------------------------------------------------------------
J. Patrick Mulcahy 17,500 20,348
----------------------------------------------------------------------------------
Sally G. Narodick 15,167 16,426
----------------------------------------------------------------------------------
John B. Slaughter 21,334 12,103
----------------------------------------------------------------------------------
Solutia's existing shares of common stock, as well as options and
warrants to purchase its common stock, together with deferred stock
units, will be canceled upon our emergence from Chapter 11. It is
highly unlikely that its directors and executive officers will
receive any consideration in our Chapter 11 case for their equity
based compensation.
(3) Philip R. Lochner resigned from our Board of Directors effective
January 31, 2007. His resignation was not due to any disagreement
with Solutia with respect to its operations, policies or practices.
The following table displays all components of compensation for
non-employee directors in fiscal year 2006. In June 2006, the board of
directors approved an increase in compensation based on the recommendation of
the Governance Committee.
-------------------------------------------------------------------------------
FORM OF COMPENSATION AMOUNT OF COMPENSATION
------------------------------------
Jan-May 2006 June-Dec 2006
$ $
-------------------------------------------------------------------------------
Annual Board Retainer 60,000 70,000
-------------------------------------------------------------------------------
Chairman of the Board Retainer 75,000 -
-------------------------------------------------------------------------------
Lead Director Retainer - 50,000
-------------------------------------------------------------------------------
Annual Retainer for Committee Chairman 5,000 7,500
-------------------------------------------------------------------------------
Board Attendance Fee (each meeting) 2,000 2,500
-------------------------------------------------------------------------------
Committee Attendance Fee (each meeting) 2,000 2,500
-------------------------------------------------------------------------------
Directors who are Solutia employees do not receive payment for their
services as directors. Jeffry N. Quinn, the current Chairman of the Board is
also our President and Chief Executive Officer. The Lead Director retainer is
paid to the lead non-employee director if the Chairman of the Board is an
employee of Solutia. The current Lead Director is Paul Hatfield and he
receives the Lead Director retainer.
Non-employee directors do not have a retirement plan, nor do they
participate in Solutia's benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation and Development Committee is comprised of
three directors: Mr. Mulcahy, Chair, and Messrs. Metz and Jenkins. None of
these individuals is a current or former officer or employee of Solutia or any
of its subsidiaries, nor did any of these individuals have any reportable
transactions with Solutia or any of its subsidiaries during 2006. During 2006,
none of Solutia's executive officers served as a director or member of the
compensation committee (or equivalent thereof) of another entity, any of whose
executive officers served as a director of Solutia.
125
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
OWNERSHIP BY DIRECTORS AND NAMED EXECUTIVE OFFICERS
The following table shows Solutia common stock owned beneficially by
Solutia's directors and executive officers as of December 31, 2006, including
those deferred stock units credited to the account of each non-employee
director that are payable in stock. Solutia's existing shares of common stock
as well as options and warrants to purchase its common stock as well as
deferred stock units will be cancelled upon our emergence from Chapter 11. It
is highly unlikely that our directors and executive officers will receive any
consideration in our Chapter 11 case for their equity based compensation. In
general, "beneficial ownership" includes those shares a person has the power
to vote, or the power to transfer, and stock options that are exercisable
currently or become exercisable within 60 days. Except as otherwise noted,
each person has sole voting and investment power over his or her shares.
- ------------------------------------------------------------------------------------------------------
Shares of Common Stock Shares Underlying
Beneficially Owned Options Exercisable
Name (a) Within 60 Days (b) Total
- ------------------------------------------------------------------------------------------------------
Luc De Temmerman 50(c) 81,999 82,049
- ------------------------------------------------------------------------------------------------------
Paul H. Hatfield 31,602 21,334 52,936
- ------------------------------------------------------------------------------------------------------
Robert H. Jenkins 24,372 (d) 21,334 45,706
- ------------------------------------------------------------------------------------------------------
Philip R. Lochner, Jr. 2,859 10,833 13,692
- ------------------------------------------------------------------------------------------------------
Frank A. Metz, Jr. 13,912 21,334 35,246
- ------------------------------------------------------------------------------------------------------
J. Patrick Mulcahy 31,348 17,500 48,848
- ------------------------------------------------------------------------------------------------------
Sally G. Narodick 16,426 15,167 31,593
- ------------------------------------------------------------------------------------------------------
Jeffry N. Quinn 40,000(e) 25,000 65,000
- ------------------------------------------------------------------------------------------------------
John B. Slaughter 13,903(f) 21,334 35,237
- ------------------------------------------------------------------------------------------------------
James M. Sullivan 2,050(g) 108,938 110,988
- ------------------------------------------------------------------------------------------------------
James R. Voss 0 0 0
- ------------------------------------------------------------------------------------------------------
Jonathon P. Wright 0 0 0
- ------------------------------------------------------------------------------------------------------
All directors and executive officers 176,522 536,773 713,295
(16 persons)
- ------------------------------------------------------------------------------------------------------
<FN>
(a) The number of shares shown includes those deferred stock units credited
to the account of each non-employee director that are scheduled to be
paid out in the form of stock, as follows:
-------------------------------------------------------------------
Mr. Hatfield 24,202
-------------------------------------------------------------------
Mr. Jenkins 24,202
-------------------------------------------------------------------
Mr. Lochner 2,859
-------------------------------------------------------------------
Mr. Metz 12,103
-------------------------------------------------------------------
Mr. Mulcahy 20,348
-------------------------------------------------------------------
Mrs. Narodick 16,426
-------------------------------------------------------------------
Dr. Slaughter 12,103
-------------------------------------------------------------------
The non-employee directors have no current voting or investment power
over these deferred shares.
(b) The shares shown represent stock options granted under Solutia's
incentive plans, including stock options resulting from the conversion of
Pharmacia stock options at the time of the spinoff of Solutia by
Pharmacia in 1997.
(c) Mr. De Temmerman and his wife own these shares jointly.
(d) The number of shares shown for Mr. Jenkins includes 170 shares owned
jointly by Mr. Jenkins and his wife.
(e) The number of shares shown for Mr. Quinn includes 20,000 shares owned in
trust by Mr. Quinn's wife. Mr. Quinn expressly disclaims beneficial
ownership of these shares.
(f) The number of shares shown for Dr. Slaughter includes 137 shares owned by
Dr. Slaughter's wife. Dr. Slaughter expressly disclaims beneficial
ownership of these shares.
(g) The number of shares shown for Mr. Sullivan includes 2,050 shares owned
jointly by Mr. Sullivan and his wife.
The total share holdings reported above for all directors and
executive officers as a group equal less than 1% of the number of shares of
Solutia common stock outstanding on December 31, 2006. No director or
executive officer holds more than 1% of these shares.
126
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
The following table shows all persons or entities that Solutia knows
were "beneficial owners" of more than five percent of Solutia common stock on
February 23, 2007.
- -----------------------------------------------------------------------------------------------------------
Amount and Nature of Beneficial
Name and Address of Beneficial Owner Ownership of Solutia Common Stock Percent of Class
- -----------------------------------------------------------------------------------------------------------
Ardsley Advisory Partners (1) 7,303,500 6.99%
262 Harbor Drive
Stamford, Connecticut 06902
- -----------------------------------------------------------------------------------------------------------
<FN>
(1) This information is based on a Schedule 13G that Ardsley Advisory
Partners filed with the SEC on February 14, 2007 on behalf of itself and
its affiliates Ardsley Partners I, Philip J. Hempelman, Ardsley Offshore
Fund Ltd., Ardsley Partners Fund II, L.P. and Ardsley Partners
Institutional Fund, L.P. Includes 7,303,500 shares (6.99% of Solutia's
common stock) beneficially owned by Ardsley Advisory Partners, 4,776,300
shares (4.57% of Solutia's common stock) beneficially owned by Ardsley
Partners I, 7,303,500 shares (6.99% of Solutia's common stock)
beneficially owned by Philip J. Hempelman, 2,436,200 shares (2.33% of
Solutia's common stock) beneficially owned by Ardsley Offshore Fund Ltd.,
3,194,300 shares (3.06% of Solutia's common stock) beneficially owned by
Ardsley Partners Fund II, L.P., and 1,582,000 shares (1.51% of Solutia's
common stock) beneficially owned by Ardsley Partners Institutional Fund,
L.P. Ardsley Partners I serves as the general partner of Ardsley Partners
I, Ardsley Partners II, L.P. and Ardsley Partners Institutional Fund,
L.P. Ardsley Advisory Partners serves as investment manager of Ardsley
Offshore Fund Ltd. and as investment advisor of Ardsley Partners II, L.P.
and Ardsley Institutional Fund, L.P. and certain managed accounts with
respect to the Solutia common stock directly owned by Ardsley Offshore
Fund Ltd., Ardsley Partners II, L.P., Ardsley Institutional Fund, L.P.
and the managed accounts. Philip J. Hempelman is the managing partner of
Ardsley Advisory Partners and Ardsley Partners I. Mr. Hempelman disclaims
beneficial ownership of all shares of Solutia common stock held or
controlled by Ardsley Partners I, Ardsley Offshore Fund Ltd., Ardsley
Partners Fund II, L.P. and Ardsley Partners Institutional Fund, L.P.
except to the extent of the 612,000 of such shares which relate to his
individual economic interest in Ardsley Partners II, L.P.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about Solutia's equity
compensation plans as of December 31, 2006. Solutia's existing shares of
common stock as well as options and warrants to purchase its common stock will
be cancelled upon our emergence from Chapter 11. It is highly unlikely that
its directors or executive officers will receive any consideration in our
chapter 11 case for their equity based compensation.
- ------------------------------------------------------------------------------------------------------------------
Number of Securities Remaining
Number of Securities to Weighted-Average Available for Future Issuance
be Issued upon Exercise Exercise Price of under Equity Compensation Plans
of Outstanding Options, Outstanding Options, (Excluding Securities Reflected
Warrants, and Rights Warrants, and Rights in Column (a))
Plan Category (a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 12,270,394 15.50 4,654,657(1)
- ------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders (2) 247,320(3) 14.59(4) 25,174
- ------------------------------------------------------------------------------------------------------------------
Total 12,517,714 15.49 4,679,831
- ------------------------------------------------------------------------------------------------------------------
<FN>
(1) There have been no grants of options or appreciation rights nor awards of
restricted or unrestricted stock since the filing of the Chapter 11 case
nor is it anticipated that any grants or awards will be made prior to
emergence from Chapter 11 under either the Solutia Inc. 2000 Stock Based
Incentive Plan or the Solutia Inc. 1997 Stock Based Incentive Plan.
(2) In 2003, the Board of Directors adopted the 2003 Non Employee Director
Compensation Plan which provided that all compensation paid to
non-employee directors be in the form of cash. Prior to the adoption of
this Plan, Solutia had in place a non-employee director compensation plan
which provided for an initial grant of stock options upon election to the
Board and annual stock option grants thereafter on the date of the
Company's annual meeting of shareholders. In addition, this plan provided
that 50 percent of a non-employee director's annual retainer be paid in
the form of deferred stock units. Each director could elect to receive
127
the other half of the annual retainer in cash or defer all or a part into
deferred stock units. This plan was not approved by Solutia stockholders.
It authorized the use of up to 400,000 treasury shares to be used for
option grants and deferred stock units under the plan. The stock options
and deferred stock units granted under the plan will be canceled upon
our emergence from Chapter 11. It is highly unlikely that Solutia's
directors will receive any consideration in the Chapter 11 case for their
equity based compensation.
(3) This number includes options to purchase 128,836 shares of Solutia common
stock and 118,484 deferred stock units to be paid out in shares of
Solutia common stock, however, these options and deferred stock units
will be cancelled upon our emergence from Chapter 11. It is highly
unlikely that Solutia's directors will receive any consideration in the
Chapter 11 case for their equity based compensation.
(4) This weighted average exercise price of outstanding options excludes
deferred stock units, which do not have an exercise price.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
RELATED PARTY TRANSACTION POLICY AND PROCEDURES
Solutia has a written related party transaction policy and
procedures. The Audit and Finance Committee of the Board of Directors is
responsible for approving and ratifying related party transactions under the
Company's policy and procedures. The Audit and Finance Committee reviews the
material facts of all Interested Transactions (as defined in the Policy) that
require the Audit and Finance Committee's approval and either approves or
disapproves of the entry into the Interested Transaction. If advance
pre-approval of an Interested Transaction is not feasible, the Audit and
Finance Committee considers the Interested Transaction at its next regularly
scheduled meeting and if appropriate, the Interested Transaction is ratified.
Under the policy, certain Interested Transactions have standing
pre-approval including (i) employment of executive officers, (ii) director
compensation, (iii) transactions where all shareholders receive proportional
benefits, (iv) transactions involving competitive bids, (v) certain
transactions with other companies where the related party's only relationship
is as an employee (other than an executive officer), director, or beneficial
owner of less than 10% of that company's shares, if the aggregate amount
involved does not exceed $1,000,000 or 2% of that company's total annual
revenues, (vi) regulated transactions and (vii) certain banking related
services.
The Chair of the Audit and Finance Committee also has authority to
pre-approve or ratify any Interested Transaction with a related party in which
the aggregate amount involved is expected to be less than $250,000. No
director may participate in the approval of an Interested Transaction for
which he or she is a related party. If an Interested Transaction will be
ongoing, the Audit and Finance Committee may establish guidelines for Solutia
to follow in its ongoing dealings with the related party. Thereafter, the
Audit and Finance Committee, on a regular basis, will review and assess
ongoing relationships with the related party to assess whether they are in
compliance with the Committee's guidelines, if any, and that the Interested
Transaction remains appropriate.
Mr. Sullivan and one other executive officer, who is not a "named
executive officer" for reporting purposes, have unsecured claims as creditors
in Solutia's Chapter 11 case by virtue of their participation in Solutia's
401(k) excess benefit plan and/or non-qualified defined benefit pension plan.
Vested amounts owed to them under these plans at the time that Solutia filed
for Chapter 11 are as follows:
- ------------------------------------- ----------------------------------- -----------------------------------
Executive Officer 401(k) Excess Benefit Plan Non-Qualified Pension Plan
- ------------------------------------- ----------------------------------- -----------------------------------
J. M. Sullivan $ 33,164 $ 6,384
- ------------------------------------- ----------------------------------- -----------------------------------
Other Executive Officer 4,126 -------
- ------------------------------------- ----------------------------------- -----------------------------------
In addition, each non-employee director is an unsecured creditor of
Solutia with respect to deferred compensation that was payable in cash in the
following amounts: Mr. Hatfield, $37,500; each other current director,
$18,750.
Each director and executive officer has also filed a proof of claim
for benefits under Solutia's director and officer and fidelity insurance and
for any right he or she may have to corporate indemnification. Each director
and executive officer also has, by virtue of Solutia's Chapter 11 filing, a
claim for shares of Solutia common stock held by the director and for the
value of deferred stock units that were payable in shares of Solutia's common
stock.
128
DIRECTOR INDEPENDENCE
Solutia's board of directors has determined that all its non-employee
directors as of December 31, 2006 - Messrs. Hatfield, Jenkins, Metz, Mulcahy,
Mrs. Narodick and Dr. Slaughter - are independent under the board's
categorical independence standards. Mr. Phillip R. Lochner, who resigned from
the board on January 31, 2007, was also determined by the board to be
independent. A copy of these standards is attached to this report as Exhibit
99.1.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
FEES PAID TO INDEPENDENT AUDITOR
The Audit and Finance Committee of Solutia's board of directors
appointed Deloitte & Touche LLP as principal independent auditors to examine
the consolidated financial statements of Solutia and its subsidiaries for 2006
and 2005. The following table displays the aggregate fees billed to Solutia
for the fiscal years ended December 31, 2006 and 2005, by Deloitte & Touche
LLP, the member firms of Deloitte Touche Tohmatsu, and their respective
affiliates.
- ------------------------------------------------------------------------------
TYPE OF FEE 2006 2005
- ------------------------------------------------------------------------------
Audit Fees $2,294,000 $2,266,000
- ------------------------------------------------------------------------------
Audit-Related Fees (1) 62,000 77,000
- ------------------------------------------------------------------------------
Tax Fees (2) 398,000 606,000
- ------------------------------------------------------------------------------
All Other Fees (3) 188,000 203,000
- ------------------------------------------------------------------------------
<FN>
(1) Audit-Related Fees include fees for audits of employee benefit plans;
agreed-upon or expanded audit procedures related to accounting records
required to respond to or comply with financial, accounting or regulatory
reporting matters; consultations on the accounting or disclosure
treatment of transactions or events and/or the actual or potential impact
of final or proposed rules, standards or interpretations by the
Securities and Exchange Commission, FASB or other regulatory or
standard-setting bodies; and attest services not required by statute or
regulation.
(2) Tax Fees include fees for domestic tax planning and advice; domestic tax
compliance; international tax planning and advice; international tax
compliance; and review of federal, state, local and international income,
franchise and other tax returns.
(3) All Other Fees include fees for expatriate tax return preparation,
international assignment services and various other permitted services.
PRE-APPROVAL POLICIES AND PROCEDURES
Consistent with the Sarbanes-Oxley Act of 2002 and the SEC's rules
relating to auditor independence, the Audit and Finance Committee has adopted
a policy to pre-approve all audit and permissible non-audit services provided
by Solutia's independent auditor, Deloitte & Touche LLP. Under this policy,
the committee or its designated member must pre-approve services before a
specified service is begun. Each approval includes a specified range of fees
for the approved service. If approval is by the designated member, the
decision is reported to the committee at its next meeting. Requests for
pre-approval are submitted to the committee or its designated member by both
the independent auditor and either the chief financial officer, treasurer or
controller, with a joint statement as to whether, in their view, the request
is consistent with the Securities and Exchange Commission's rules on auditor
independence.
The Audit and Finance Committee pre-approved all services for which
the fees shown above were paid.
129
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Documents filed as part of this Form 10-K:
1. Financial Statements--See the Index to Consolidated
Financial Statements and Financial Statement Schedule at
page 49 of this report.
2. The following supplemental schedule for the years ended
December 31, 2006, 2005 and 2004
II--Valuation and Qualifying Accounts
3. Exhibits--See the Exhibit Index beginning at page 133 of
this report. For a listing of all management contracts and
compensatory plans or arrangements required to be filed as
exhibits to this report, see the exhibits listed under
Exhibit Nos. 10(a) and 10(d) through 10 (v) on page 133 and
134 of the Exhibit Index. The following exhibits listed in
the Exhibit Index are filed with this Form 10-K:
10(rr) Transaction agreement by and among Akzo Nobel
Chemicals International B.V., Akzo Nobel Chemicals
Inc., Akzo Nobel N.V., Flexsys Holding B.V., Flexsys
America LP, Flexsys Rubber Chemicals Ltd. and
Solutia Inc.
10(ss) Works council side letter by and among Akzo Nobel
N.V., Akzo Nobel Chemicals International B.V.,
Flexsys America LP, Flexsys Rubber Chemicals Ltd.
and Solutia Inc., dated as of February 27, 2007.
12 Computation of the Ratio of Earnings to Fixed Charges
14 Solutia Inc. Code of Ethics for Senior Financial
Officers
21 Subsidiaries of the Registrant
23 Consent of Independent Registered Public Accounting
Firm
24(a) Powers of Attorney
24(b) Certified copy of board resolution authorizing Form
10-K filing using powers of attorney
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
99.1 Solutia's Categorical Independence Standards for
Non-Employee Directors
130
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Timothy J. Spihlman
------------------------------
Timothy J. Spihlman
Vice President and Controller
(Principal Accounting Officer)
Dated: March 6, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
- ---------------------------------------------------------------------------------------------------------------
Signature Title Date
--------- ----- ----
- ---------------------------------------------------------------------------------------------------------------
/s/ Jeffrey N. Quinn President, Chief Executive Officer and March 6, 2007
-------------------- Chairman of the Board
Jeffry N. Quinn
- ---------------------------------------------------------------------------------------------------------------
/s/ James M. Sullivan Senior Vice President and Chief Financial March 6, 2007
--------------------- Officer
James M. Sullivan
- ---------------------------------------------------------------------------------------------------------------
/s/ Timothy J. Spihlman Vice President and Controller (Principal March 6, 2007
----------------------- Accounting Officer)
Timothy J. Spihlman
- ---------------------------------------------------------------------------------------------------------------
*Paul H. Hatfield Director March 6, 2007
- --------------------------------------------------------------------------------------------------------------
*Robert H. Jenkins Director March 6, 2007
- --------------------------------------------------------------------------------------------------------------
*Frank A. Metz, Jr. Director March 6, 2007
- --------------------------------------------------------------------------------------------------------------
*J. Patrick Mulcahy Director March 6, 2007
- --------------------------------------------------------------------------------------------------------------
*Sally G. Narodick Director March 6, 2007
- --------------------------------------------------------------------------------------------------------------
*John B. Slaughter Director March 6, 2007
- ---------------------------------------------------------------------------------------------------------------
<FN>
* Rosemary L. Klein, by signing her name hereto, does sign this document on
behalf of the above noted individuals, pursuant to powers of attorney duly
executed by such individuals which have been filed as an Exhibit to this Form
10-K.
/s/ Rosemary L. Klein
----------------------
Rosemary L. Klein, Attorney-in-Fact
131
EXHIBIT INDEX
These exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
Exhibit No. Description
- ----------- -----------
2(a) Distribution Agreement (incorporated by reference to Exhibit 2 of
Solutia's Registration Statement on Form S-1 (333-36355) filed
September 25, 1997)
2(b) Amendment to Distribution Agreement, dated as of July 1, 2002, by and
among Pharmacia Corporation, Solutia Inc., and Monsanto Company
(incorporated by reference to Exhibit 2 of Solutia's Form 10-Q for
the quarter ended June 30, 2002)
2(c) Joint Venture Agreement between Solutia Inc. and FMC Corporation(1)
(incorporated by reference to Exhibit 2(i) of Solutia's Form 8-K
filed on April 27, 2000)
2(d) First Amendment to Joint Venture Agreement between Solutia Inc. and
FMC Corporation (incorporated by reference to Exhibit 2(ii) of
Solutia's Form 8-K filed on April 27, 2000)
2(e) Second Amendment to Joint Venture Agreement between Solutia Inc. and
FMC Corporation (incorporated by reference to Exhibit 2(iii) of
Solutia's Form 8-K filed on April 27, 2000)
2(f) Third Amendment to Joint Venture Agreement between Solutia Inc. and
FMC Corporation (incorporated by reference to Exhibit 2(iv) of
Solutia's Form 8-K filed on April 27, 2000)
3(a) Restated Certificate of Incorporation of Solutia (incorporated by
reference to Exhibit 3(a) of Solutia's Registration Statement on Form
S-1 (333-36355) filed September 25, 1997)
3(b) By-Laws of Solutia Inc., as amended February 26, 2003 (incorporated
by reference to Exhibit 3(b) of Solutia's Form 10-K for the year
ended December 31, 2003)
4(a) Rights Agreement (incorporated by reference to Exhibit 4 of Solutia's
Registration Statement on Form 10 filed on August 7, 1997)
4(b) Amendment to the Rights Agreement (incorporated by reference to
Exhibit 4.4, of Solutia's Registration Statement on Form S-3
(333-75812) filed December 21, 2001)
4(c) Indenture dated as of October 1, 1997, between Solutia Inc. and The
Chase Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 4.1 of Solutia's Form 10-Q for the quarter ended September
30, 1997)
4(d) 7.375% Debentures due 2027 in the principal amount of $200,000,000
(incorporated by reference to Exhibit 4.3 of Solutia's Form 10-Q for
the quarter ended September 30, 1997)
4(e) 7.375% Debentures due 2027 in the principal amount of $100,000,000
(incorporated by reference to Exhibit 4.4 of Solutia's Form 10-Q for
the quarter ended September 30, 1997)
4(f) 6.72% Debentures due 2037 in the principal amount of $150,000,000
(incorporated by reference to Exhibit 4.5 of Solutia's Form 10-Q for
the quarter ended September 30, 1997)
4(g) Indenture dated as of July 9, 2002, between SOI Funding Corp. and
HSBC Bank USA, as Trustee (incorporated by reference to Exhibit 4.2
of Solutia's Form S-4 (333-99699) filed September 17, 2002)
4(h) First Supplemental Indenture, dated as of July 25, 2002, among
Solutia Inc., SOI Funding Corp., the Subsidiary Guarantors and HSBC
Bank USA, as Trustee (incorporated by reference to Exhibit 4.3 of
Solutia's Form S-4 (333-99699) filed September 17, 2002)
4(i) Second Supplemental Indenture, dated as of October 24, 2002, among
Solutia Inc., the subsidiary guarantors named therein and HSBC Bank
USA (incorporated by reference to Exhibit 4 of Solutia's Form 10-Q
for the quarter ended September 30, 2002)
4(j) Third Supplemental Indenture, dated as of October 8, 2003, among
Solutia Inc., the subsidiary guarantors named therein and HSBC Bank
USA (incorporated by reference to Exhibit 4(c) of Solutia's Form 10-Q
for the quarter ended September 30, 2003)
4(k) Amended, Restated and Novated Junior Intercreditor Agreement, dated
as of October 8, 2003, among Solutia Inc., Solutia Business
Enterprises, Inc., each of the subsidiary guarantors named therein,
Ableco Finance LLC and HSBC Bank USA (incorporated by reference to
Exhibit 4(a) of Solutia's Form 10-Q for the quarter ended September
30, 2003)
4(l) Amended, Restated and Novated Junior Security Agreement, dated as of
October 8, 2003, among Solutia Inc., Solutia Business Enterprises,
Inc., each of the subsidiary guarantors named therein, Ableco Finance
LLC and HSBC Bank USA (incorporated by reference to Exhibit 4(b) of
Solutia's Form 10-Q for the quarter ended September 30, 2003)
9 Omitted--Inapplicable
10(a) Financial Planning and Tax Preparation Services Program for the
Executive Leadership Team (incorporated by reference to Exhibit 10(a)
of Solutia's Form 10-K for the year ended December 31, 1997)
132
10(b) Employee Benefits Allocation Agreement (incorporated by reference to
Exhibit 10(a) of Solutia's Registration Statement on Form S-1
(333-36355) filed September 25, 1997)
10(c) Tax Sharing and Indemnification Agreement (incorporated by reference
to Exhibit 10(b) of Solutia's Registration Statement on Form S-1
(333-36355) filed September 25, 1997)
10(d) Solutia Inc. Management Incentive Replacement Plan as amended in 1999
(incorporated by reference to Exhibit 10(2) of Solutia's Form 10-Q
for the quarter ended June 30, 1999)
10(e) Solutia Inc. 1997 Stock-Based Incentive Plan as amended in 1999 and
2000 (incorporated by reference to Exhibit 10(1) of Solutia's Form
10-Q for the quarter ended June 30, 2000)
10(f) Solutia Inc. 2000 Stock-Based Incentive Plan (incorporated by
reference to Appendix A of the Solutia Inc. Notice of Annual Meeting
and Proxy Statement dated March 9, 2000)
10(g) Solutia Inc. Non-Employee Director Compensation Plan, as amended in
1999, 2000, and 2001 (incorporated by reference to Exhibit 10 of
Solutia's Form 10-Q for the quarter ended June 30, 2001)
10(h) Solutia Inc. 2003 Non-Employee Director Compensation Plan
(incorporated by reference to Exhibit 10(a) of Solutia's Form 10-Q
for the quarter ended June 30, 2003)
10(i) 2006 Solutia Annual Incentive Plan (incorporated by reference to
Exhibit 10.1 of Solutia's Form 8-K, filed September 28, 2006)
10(j) Solutia Inc. Deferred Compensation Plan, as amended in 2002
(incorporated by reference to Exhibit 10(l) of Solutia's Form 10-K
for the year ended December 31, 2002)
10(k) Solutia Inc. 2002-2006 Long-Term Incentive Plan (incorporated by
reference to Appendix A of the Solutia Inc. Notice of Annual Meeting
and Proxy Statement dated March 14, 2002)
10(l) Form of Retention Agreement between Solutia Inc. and other named
Executive Officers (incorporated by reference to Exhibit 10(q) of
Solutia's Form 10-K for the year ended December 31, 2003, filed March
15, 2004)
10(m) Agreement by and between Solutia Inc. and Rosemary L. Klein
(incorporated by reference to Exhibit 99.2 of Solutia's Form 8-K
filed April 27, 2005)
10(n) Amended and Restated Agreement by and between Solutia Inc. and Jeffry
N. Quinn (incorporated by reference to Exhibit 99.3 of Solutia's Form
8-K filed April 27, 2005)
10(o) Amended and Restated Agreement by and between Solutia Inc. and James
M. Sullivan (incorporated by reference to Exhibit 99.4 of Solutia's
Form 8-K filed April 27, 2005)
10(p) Agreement by and between Solutia Inc. and Luc De Temmerman dated as
of July 19, 2004 (incorporated by reference to Exhibit 99.2 of
Solutia's Form 8-K filed January 18, 2005)
10(q) Letter Agreement between Solutia Inc. and Luc De Temmerman effective
as of July 19, 2004 (incorporated by reference to Exhibit 99.3 of
Solutia's Form 8-K filed January 18, 2005)
10(r) Retention Agreement, dated as of June 17, 2004, by and between
Solutia Inc. and Rosemary L. Klein (incorporated by reference to
Exhibit 10(aa) of Solutia's Form 10-K for the year ended December 31,
2004)
10(s) Agreement by and between Solutia Inc. and James R. Voss, dated as of
August 1, 2005 (incorporated by reference to Exhibit 10.1 of
Solutia's Form 10-Q for the quarter ended June 30, 2005)
10(t) Agreement by and between Solutia Inc. and Jonathon P. Wright, dated
as of August 1, 2005 (incorporated by reference to Exhibit 10.2 of
Solutia's Form 10-Q for the quarter ended June 30, 2005)
10(u) Form of Retention Agreement between Solutia Inc. and Key Employees
(incorporated by reference to Exhibit 10(bb) of Solutia's Form 10-K
for the year ended December 31, 2004)
10(v) 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 for the year ended December 31, 2005)
10(w) Protocol Agreement, dated as of July 1, 2002, by and among Pharmacia
Corporation, Solutia Inc., and Monsanto Company (incorporated by
reference to Exhibit 10(b) of Solutia's Form 10-Q for the quarter
ended June 30, 2002)
10(x) Protocol Agreement, dated as of November 15, 2002, by and among
Pharmacia Corporation, Solutia Inc. and Monsanto Company
(incorporated by reference to Exhibit 10.1 of Solutia's Form 8-K
filed November 18, 2002)
10(y) Amendment to Protocol Agreement, dated as of March 3, 2003, by and
among Pharmacia Corporation, Solutia Inc. and Monsanto Company
(incorporated by reference to Exhibit 10(t) of Solutia's Form10-K for
the year ended December 31, 2003)
10(z) Amendment to Protocol Agreement, dated August 4, 2003, by and among
Pharmacia Corporation, Monsanto Company and Solutia Inc.
(incorporated by reference to Exhibit 10(e) of Solutia's Form 10-Q
for the quarter ended June 30, 2003)
133
10(aa) Financing Agreement, dated as of January 16, 2004, by and among
Solutia Inc. and Solutia Business Enterprises, Inc., as debtors and
debtors-in-possession, as Borrowers, certain subsidiaries of Solutia
Inc. listed as a Guarantor, as debtors and debtors-in-possession, as
Guarantors, the lenders from time to time party thereto, as Lenders,
Citicorp USA, Inc., as Collateral Agent, Administrative Agent and
Documentation Agent (incorporated by reference to Exhibit 99.2 of
Solutia's Form 8-K filed January, 23, 2004)
10(bb) Amendment No. 1 to Financing Agreement and Waiver, dated as of March
1, 2004, by and among Solutia Inc. and Solutia Business Enterprises,
Inc., as debtors, debtors-in-possession and as Borrowers; certain
subsidiaries of Solutia Inc., as debtors, debtors-in-possession and
as Guarantors; the lenders from time to time party thereto, as
Lenders; Citicorp USA, Inc., as Collateral Agent, Administrative
Agent and Co-Documentation Agent and Wells Fargo Foothill, LLC, as
Co-Documentation Agent (incorporated by reference to Exhibit 10(y)
of Solutia's Form 10-K for the year ended December 31, 2004)
10(cc) Amendment No. 2 to Financing Agreement and Waiver dated as of July
20, 2004 by and among Solutia Inc. and Solutia Business Enterprises,
Inc., as debtors, debtors-in-possession and as Borrowers; certain
subsidiaries of Solutia Inc. as debtors, debtors-in-possession and as
Guarantors; the lenders from time to time party thereto, as Lenders;
Citicorp USA, Inc., as Collateral Agent, Administrative agent and
Co-Documentation Agent and Wells Fargo Foothill, LLC, as
Co-Documentation Agent (incorporated by reference to Exhibit 10(f) of
Solutia's Form 10-Q for the quarter ended June 30, 2004)
10(dd) Amendment No. 3 to the $525,000,000 Debtor-in-Possession Financing
Agreement dated January 16, 2004 (as amended) between Solutia Inc.,
Solutia Business Enterprises, Inc. and the other parties thereto
(incorporated by reference to Exhibit 10.1 of Solutia's Form 8-K
filed July 27, 2005)
10(ee) Amendment No. 4 to Financing Agreement and Waiver dated as of March
17, 2006 amending the Debtor-in-Possession Financing Agreement dated
January 16, 2005 (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 March 17, 2006)
10(ff) Waiver and Consent dated as of October 31, 2005 by and among Solutia,
Solutia Business Enterprises, Inc., each subsidiary of Solutia listed
on the signature pages thereto, the lenders party thereto, Citicorp
USA, Inc. and Wells Fargo Foothill, LLC (incorporated by reference to
Exhibit 10.1 of Solutia's Form 8-K filed December 5, 2005)
10(gg) Asset Purchase Agreement by and among FMC Corporation, Solutia Inc.,
Astaris LLC, Israel Chemicals Limited and ICL Performance Products
Holding Inc. dated as of September 1, 2005 (incorporated by reference
to Exhibit 10.1 of Solutia's Form 10-Q for the quarter ended
September 30, 2005)
10(hh) Toll Manufacturing Agreement by and between Solutia Inc. and
Phosphorus Derivatives Inc. dated November 4, 2005 (incorporated by
reference to Exhibit 10.2 of Solutia's Form 10-Q for the quarter
ended September 30, 2005)
10(ii) Owners Agreement by and between Solutia Inc. and FMC Corporation
dated as of September 1, 2005 (incorporated by reference to Exhibit
10.3 of Solutia's Form 10-Q for the quarter ended September 30, 2005)
10(jj) Stock Purchase Agreement, dated as November 23, 2005 by and between
Solutia Inc., Vitro S.A. de C.V., and Vitro Plan S.A. de C.V.
(incorporated by reference to Exhibit 10.1 of Solutia's Form 8-K
filed on December 21, 2005)
10(kk) 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(ll) 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(mm) 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(nn) Share and Asset Purchase Agreement entered into on May 23, 2006
between Solutia Europe S.A./N.V. and Dishman Pharmaceuticals &
Chemicals Ltd. (incorporated by reference to Exhibit 10.2 of
Solutia's Form 10-Q for the quarter ended June 30, 2006)
10(oo) Amendment to Share and Asset Purchase Agreement entered into on
August 22, 2006 between Solutia Europe S.A./N.V. and Dishman
Pharmaceuticals & Chemicals Ltd.(1) (incorporated by reference to
Exhibit 10.1 of Solutia's Form 10-Q for the quarter ended September
30, 2006)
10(pp) (euro)200,000,000 Facility Agreement dated July 26, 2006 between
Solutia Europe S.A./N.V., Solutia Services International S.C.A./Comm.
V.A., the guarantors listed therein, Citigroup Global Markets
Limited, as mandated lead arranger, the financial institutions listed
therein, as the original lenders, Citibank International plc as agent
for the finance parties and Citibank N.A. as security agent for the
secured parties (incorporated by reference to Exhibit 10.1 of
Solutia's Form 10-Q for the quarter ended June 30, 2006)
10(qq) (euro)200,000,000 Facility Agreement dated July 26, 2006 between
Solutia Europe S.A./N.V., Solutia Services International S.C.A./Comm.
V.A., the guarantors listed therein, Citigroup Global Markets
Limited, as mandated lead arranger, the financial institutions listed
therein, as the original lenders, Citibank International plc as agent
for the finance parties and Citibank N.A. as security agent for the
secured parties (incorporated by reference to Exhibit 10.1 of
Solutia's Form 10-Q for the quarter ended June 30, 2006) and
amendment and restatement thereof dated September 15, 2006 filed
herewith (incorporated by reference to Exhibit 10.1 of Solutia's Form
10-Q for the quarter ended September 30, 2006)
10(rr) Transaction agreement by and among Akzo Nobel Chemicals International
B.V., Akzo Nobel Chemicals Inc., Akzo Nobel N.V., Flexsys Holding
B.V., Flexsys America LP, Flexsys Rubber Chemicals Ltd. and Solutia
Inc.
10(ss) Works council side letter by and among Akzo Nobel N.V., Akzo Nobel
Chemicals International B.V., Flexsys America LP, Flexsys Rubber
Chemicals Ltd. and Solutia Inc., dated as of February 27, 2007.
11 Omitted--Inapplicable; see "Consolidated Statement of Operations" on
page 51.
134
12 Computation of the Ratio of Earnings to Fixed Charges (see page 137)
14 Solutia Inc. Code of Ethics for Senior Financial Officers
16 Omitted--Inapplicable
18 Omitted--Inapplicable
21 Subsidiaries of the Registrant
22 Omitted--Inapplicable
23 Consent of Independent Registered Public Accounting Firm
24(a) Powers of Attorney
24(b) Certified copy of board resolution authorizing Form 10-K filing
utilizing powers of attorney
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
99.1 Solutia's Categorical Independence Standards for Non-Employee
Directors
<FN>
(1) Confidential treatment has been granted for a portion of this exhibit.
135
SCHEDULE II
SOLUTIA INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Dollars in Millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------------------- -------------- --------------------------- ----------- --------------
Additions
---------------------------
(1)
Balance at Charged to (2)
beginning of costs and Charged to Balance at end
Description year expenses other accounts Deductions of period
---------------------------------- -------------- ----------- -------------- ----------- --------------
YEAR ENDED DECEMBER 31, 2006
Valuation accounts for doubtful
receivables $ 7 $ 1 $ (1) $ - $ 7
Restructuring reserves 4 17 - 16 5
YEAR ENDED DECEMBER 31, 2005
Valuation accounts for doubtful
receivables $ 11 $ 5 $ (9) $ - $ 7
Restructuring reserves 17 27 - 40 4
YEAR ENDED DECEMBER 31, 2004
Valuation accounts for doubtful
receivables $ 14 $ 2 $ (5) $ - $ 11
Restructuring reserves 18 22 - 23 17
136