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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
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SOLUTIA INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
- --------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED
FILER, AN ACCELERATED FILER OR A NON-ACCELERATED FILER. SEE DEFINITION OF
"ACCELERATED FILER" AND "LARGE ACCELERATED FILER" IN RULE 12b-2 OF THE
EXCHANGE ACT (CHECK ONE):
LARGE ACCELERATED FILER ACCELERATED FILER X NON-ACCELERATED FILER .
--- --- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES NO X
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT
CLASS MARCH 31, 2007
----- --------------
COMMON STOCK, $0.01 PAR VALUE 104,459,578 SHARES
----------------------------- ------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2007 2006
---- ----
NET SALES...................................................... $ 727 $ 678
Cost of goods sold............................................. 621 598
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GROSS PROFIT................................................... 106 80
Marketing expenses............................................. 32 33
Administrative expenses........................................ 24 21
Technological expenses......................................... 11 12
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OPERATING INCOME .............................................. 39 14
Equity earnings from affiliates................................ 9 10
Interest expense (a)........................................... (29) (23)
Other income, net ............................................. 3 3
Loss on debt modification ..................................... (7) (8)
Reorganization items, net ..................................... (16) (14)
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LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAX EXPENSE................................................... (1) (18)
Income tax expense............................................. 7 2
------ ------
LOSS FROM CONTINUING OPERATIONS................................ (8) (20)
Income from Discontinued Operations, net of tax................ -- 4
------ ------
NET LOSS ...................................................... $ (8) $ (16)
====== ======
BASIC AND DILUTED LOSS PER SHARE:
Loss from Continuing Operations................................ $(0.08) $(0.19)
Net Loss ...................................................... $(0.08) $(0.15)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING.......... 104.5 104.5
===== =====
<FN>
(a) Excludes unrecorded contractual interest expense of $8 in 2007 and 2006.
See accompanying Notes to Condensed Consolidated Financial Statements.
1
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2007 2006
---- ----
NET LOSS............................................................. $ (8) $ (16)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments..................................... 2 2
Net unrealized loss on derivative instruments........................ -- (1)
Amortization of prior service gain................................... (4) --
Amortization of actuarial loss....................................... 4 --
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COMPREHENSIVE LOSS................................................... $ (6) $ (15)
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
2
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2007 2006
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 168 $ 150
Trade receivables, net of allowances of $7 in 2007 and 2006............... 337 288
Miscellaneous receivables ................................................ 100 105
Inventories............................................................... 314 274
Restricted cash for acquisition........................................... 150 --
Prepaid expenses and other assets......................................... 42 34
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TOTAL CURRENT ASSETS...................................................... 1,111 851
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$2,485 in 2007 and $2,518 in 2006....................................... 801 795
INVESTMENTS IN AFFILIATES................................................. 198 193
GOODWILL.................................................................. 89 89
IDENTIFIED INTANGIBLE ASSETS, net ........................................ 31 31
OTHER ASSETS.............................................................. 100 100
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TOTAL ASSETS.............................................................. $ 2,330 $ 2,059
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 243 $ 228
Accrued liabilities ...................................................... 216 237
Short-term debt .......................................................... 975 650
Liabilities of discontinued operations.................................... -- 1
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TOTAL CURRENT LIABILITIES ................................................ 1,434 1,116
LONG-TERM DEBT ........................................................... 213 210
OTHER LIABILITIES ........................................................ 289 289
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TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,936 1,615
LIABILITIES SUBJECT TO COMPROMISE ........................................ 1,807 1,849
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
Issued: 118,400,635 shares in 2007 and 2006........................... 1 1
Additional contributed capital........................................ 56 56
Treasury stock, at cost (13,941,057 shares in 2007 and 2006).......... (251) (251)
Net deficiency of assets at spin-off...................................... (113) (113)
Accumulated other comprehensive loss...................................... (65) (67)
Accumulated deficit....................................................... (1,041) (1,031)
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TOTAL SHAREHOLDERS' DEFICIT............................................... (1,413) (1,405)
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $ 2,330 $ 2,059
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
3
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2007 2006
---- ----
INCREASE IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss..................................................................... $ (8) $ (16)
Adjustments to reconcile to Cash From Operations:
Income from discontinued operations, net of tax....................... -- (4)
Depreciation and amortization......................................... 25 28
Amortization of deferred credits...................................... (2) (2)
Deferred income taxes................................................. 3 (1)
Equity earnings from affiliates, net.................................. (9) (10)
Restructuring expenses and other charges.............................. 7 18
Changes in assets and liabilities:
Income taxes payable............................................. -- 3
Trade receivables................................................ (49) (34)
Inventories...................................................... (40) (27)
Accounts payable................................................. 22 1
Other assets and liabilities..................................... (26) 3
Liabilities subject to compromise:
Pension plan liabilities.................................... (29) (7)
Other postretirement benefits liabilities................... (12) (13)
Other liabilities subject to compromise..................... (1) (3)
----- -----
CASH USED IN OPERATIONS-CONTINUING OPERATIONS.................................. (119) (64)
CASH USED IN OPERATIONS-DISCONTINUED OPERATIONS................................ -- (1)
----- -----
CASH USED IN OPERATIONS........................................................ (119) (65)
----- -----
INVESTING ACTIVITIES:
Restricted cash for acquisition................................................ (150) --
Property, plant and equipment purchases........................................ (36) (24)
Acquisition and investment payments, net of cash acquired...................... -- (16)
Investment proceeds and property disposals, net................................ 4 --
----- -----
CASH USED IN INVESTING ACTIVITIES-CONTINUING OPERATIONS........................ (182) (40)
CASH USED IN INVESTING ACTIVITIES-DISCONTINUED OPERATIONS...................... (1) (1)
----- -----
CASH USED IN INVESTING ACTIVITIES.............................................. (183) (41)
----- -----
FINANCING ACTIVITIES:
Net change in short-term debt obligations...................................... 325 350
Debt issuance costs............................................................ (5) (9)
----- -----
CASH PROVIDED BY FINANCING ACTIVITIES.......................................... 320 341
----- -----
INCREASE IN CASH AND CASH EQUIVALENTS.......................................... 18 235
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.............................................................. 150 107
----- -----
END OF PERIOD.................................................................. $ 168 $ 342
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for reorganization items......................................... $ (19) $ (14)
===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
4
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS
Nature of Operations
Solutia Inc., together with its subsidiaries (referred to herein as
"Solutia" or the "Company"), is a global manufacturer and marketer of a
variety of high-performance chemical-based materials. Solutia is a world
leader in performance films for laminated safety glass and after-market
applications; specialties such as water treatment chemicals, heat transfer
fluids and aviation hydraulic fluids; and an integrated family of nylon
products including high-performance polymers and fibers.
Prior to September 1, 1997, Solutia was a wholly-owned subsidiary of
the former Monsanto Company (now known as Pharmacia Corporation, a
wholly-owned subsidiary of Pfizer, Inc. ("Pharmacia")). On September 1, 1997,
Pharmacia distributed all of the outstanding shares of common stock of Solutia
as a dividend to Pharmacia stockholders (the "Solutia Spinoff"). As a result
of the Solutia Spinoff, on September 1, 1997, Solutia became an independent
publicly held company and its operations ceased to be owned by Pharmacia. A
net deficiency of assets of $113 resulted from the Solutia Spinoff.
Bankruptcy Proceedings
Overview
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On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries (the
"Debtors") filed voluntary petitions for reorganization under Chapter 11 of
the U.S. Bankruptcy Code (the "Chapter 11 Cases") in the U.S. Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court"). The cases were
consolidated for the purpose of joint administration and were assigned case
number 03-17949 (PCB). Solutia's subsidiaries outside the United States were
not included in the Chapter 11 filing.
The filing was made to restructure Solutia's balance sheet, to
streamline operations and to reduce costs, in order to allow Solutia to emerge
from Chapter 11 as a viable going concern. The filing also was 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.
On January 16, 2004, pursuant to authorization from the Bankruptcy
Court, Solutia entered into a DIP credit facility. This 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 fully-drawn term loan; and (b) a $250 borrowing-based revolving credit
facility, which includes a $150 letter of credit subfacility.
5
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 fully completed its analysis of all the proofs of claim.
Since the settlement terms of allowed claims are subject to a confirmed plan
of reorganization, the ultimate distribution with respect to allowed claims is
not presently ascertainable.
On February 14, 2006, the Debtors filed with the Bankruptcy Court 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 Creditors' 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.
The Bankruptcy Court did not move forward with the process to approve
the Disclosure Statement and confirm the Plan. Rather, the Court's focus
turned to two adversary proceedings filed in the Chapter 11 case. JPMorgan
Chase National Bank N.A. ("JPMorgan"), as indenture trustee of Solutia's
debentures due 2027 and 2037, filed an adversary proceeding against Solutia
alleging that the debentures are entitled to secured status as opposed to
general unsecured status as set forth in the Plan. Trial of this matter
commenced on May 23, 2006 and concluded on July 10, 2006. On May 1, 2007, the
Bankruptcy Court ruled in favor of Solutia, holding that the 2027 and 2037
Debentures were properly de-securitized under the express terms of the
prepetition indenture and its related agreements, that the holders of the 2027
and 2037 Debentures do not have, and are not entitled to, any security
interests or liens on any of Solutia's assets and that the holders are not
entitled to any equitable relief.
The Bankruptcy Court also focused on the adversary proceeding brought
by the Official Committee of Equity Security Holders ("Equity Committee")
against Pharmacia and Monsanto in the Chapter 11 case. The Equity Committee
seeks to avoid certain Legacy Liabilities assumed by Solutia at the time of
its spinoff from Pharmacia. A pivotal issue is whether the Equity Committee
can pursue this matter as part of the Plan confirmation process. A hearing is
scheduled for May 18, 2007, at which the Bankruptcy Court will consider this
issue.
Basis of Presentation
- ---------------------
These financial statements should be read in conjunction with the
audited consolidated financial statements and notes to consolidated financial
statements included in Solutia's 2006 Annual Report on Form 10-K ("2006 Form
10-K"), filed with the Securities and Exchange Commission ("SEC") on March 6,
2007.
The condensed consolidated financial statements have been prepared in
accordance with Statement of Position 90-7 ("SOP 90-7"), Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code, and on a going
concern basis, which assumes the continuity of operations and reflects the
realization of assets and satisfaction of liabilities in the ordinary course
6
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
of business. 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 condensed
consolidated financial statements do not reflect any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might result from the outcome of these
uncertainties. Additionally, a confirmed plan of reorganization could
materially change amounts reported in the condensed consolidated financial
statements, which do not give effect to all adjustments of the carrying value
of assets and liabilities that are necessary as a consequence of
reorganization under Chapter 11.
The accompanying unaudited condensed consolidated financial
statements reflect all adjustments that, in the opinion of management, are
necessary to present fairly the financial position, results of operations,
comprehensive income (loss), and cash flows for the interim periods reported.
Such adjustments are of a normal, recurring nature. In addition, footnote
disclosures which would substantially duplicate the disclosures in the audited
consolidated financial statements have been omitted in the accompanying
unaudited condensed consolidated financial statements. The results of
operations for the three month period ended March 31, 2007 are not necessarily
indicative of the results to be expected for the full year.
Condensed Consolidating Financial Statements
- --------------------------------------------
Condensed consolidating financial statements for Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as of
March 31, 2007 and December 31, 2006, and for the three months ended March 31,
2007 and March 31, 2006 are presented below. These condensed consolidating
financial statements include investments in subsidiaries carried under the
equity method.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
NET SALES................................. $ 603 $ 259 $(135) $ 727
Cost of goods sold........................ 537 225 (141) 621
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GROSS PROFIT.............................. 66 34 6 106
Marketing, administrative and
technological expenses................... 51 16 -- 67
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OPERATING INCOME.......................... 15 18 6 39
Equity earnings from affiliates........... 17 -- (8) 9
Interest expense.......................... (26) (3) -- (29)
Other income (loss), net.................. 10 (1) (6) 3
Loss on debt modification................. (7) -- -- (7)
Reorganization items, net................. (16) -- -- (16)
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INCOME (LOSS) BEFORE INCOME TAX EXPENSE.. (7) 14 (8) (1)
Income tax expense ....................... 1 5 1 7
-----------------------------------------------------------
NET INCOME (LOSS) ....................... $ (8) $ 9 $ (9) $ (8)
===========================================================
7
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
NET SALES................................. $ 557 $ 227 $(106) $ 678
Cost of goods sold........................ 511 199 (112) 598
-----------------------------------------------------------
GROSS PROFIT.............................. 46 28 6 80
Marketing, administrative and
technological expenses................... 52 14 -- 66
-----------------------------------------------------------
OPERATING INCOME (LOSS)................... (6) 14 6 14
Equity earnings (loss) from affiliates.... 25 (1) (14) 10
Interest expense.......................... (18) (5) -- (23)
Other income, net......................... 8 1 (6) 3
Loss on debt modification................. (8) -- -- (8)
Reorganization items, net................. (14) -- -- (14)
-----------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE ............... (13) 9 (14) (18)
Income tax expense ....................... 3 -- (1) 2
-----------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS.. (16) 9 (13) (20)
Income from discontinued operations,
net of tax............................... -- 4 -- 4
-----------------------------------------------------------
NET INCOME (LOSS)......................... $ (16) $ 13 $ (13) $ (16)
===========================================================
8
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2007
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
ASSETS
Current assets............................ $ 744 $ 476 $ (109) $ 1,111
Property, plant and equipment, net........ 661 140 -- 801
Investment in subsidiaries and affiliates. 465 217 (484) 198
Goodwill and identified intangible assets,
net...................................... 100 20 -- 120
Other assets.............................. 59 41 -- 100
-----------------------------------------------------------
TOTAL ASSETS........................... $ 2,029 $ 894 $ (593) $ 2,330
===========================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities....................... $ 1,325 $ 195 $ (86) $ 1,434
Long-term debt............................ -- 213 -- 213
Other liabilities......................... 195 94 -- 289
-----------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 1,520 502 (86) 1,936
LIABILITIES SUBJECT TO COMPROMISE......... 1,922 -- (115) 1,807
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,413) 392 (392) (1,413)
-----------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) .............................. $ 2,029 $ 894 $ (593) $ 2,330
===========================================================
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............................ $ 500 $ 436 $ (85) $ 851
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.............................. 59 42 (1) 100
-----------------------------------------------------------
TOTAL ASSETS........................... $ 1,767 $ 849 $ (557) $ 2,059
===========================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities....................... $ 1,011 $ 169 $ (64) $ 1,116
Long-term debt............................ -- 210 -- 210
Other liabilities......................... 198 91 -- 289
-----------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 1,209 470 (64) 1,615
LIABILITIES SUBJECT TO COMPROMISE......... 1,963 -- (114) 1,849
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,405) 379 (379) (1,405)
-----------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) .............................. $ 1,767 $ 849 $ (557) $ 2,059
===========================================================
9
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2007
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities................................. $ (126) $ 7 $ -- $ (119)
Net Cash Used in Investing Activities....... (171) (12) -- (183)
Net Cash Provided by Financing Activities... 285 35 -- 320
-----------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents................................ (12) 30 -- 18
Cash and Cash Equivalents:
Beginning of year......................... 38 112 -- 150
-----------------------------------------------------------
End of period............................. $ 26 $ 142 $ -- $ 168
===========================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2006
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities................................. $ (84) $ 19 $ -- $ (65)
Net Cash Used in Investing Activities....... (39) (2) -- (41)
Net Cash Provided by Financing Activities... 338 3 -- 341
-----------------------------------------------------------
Net Increase in Cash and Cash Equivalents... 215 20 -- 235
Cash and Cash Equivalents:
Beginning of year......................... 18 89 -- 107
-----------------------------------------------------------
End of period............................. $ 233 $ 109 $ -- $ 342
===========================================================
Recently Issued Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities including an
Amendment of FASB Statement No. 115 ("SFAS No. 159"). SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other
items at fair value. The provisions of SFAS No. 159 are effective for fiscal
years beginning after November 15, 2007. Solutia is currently evaluating the
impact of SFAS No. 159 on the condensed consolidated financial statements.
2. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET
Liabilities Subject to Compromise
Under Chapter 11 of the U.S. Bankruptcy Code, certain claims against
Solutia in existence prior to the filing of the petitions for relief under the
federal bankruptcy laws are stayed while Solutia continues business operations
as debtor-in-possession. These estimated claims are reflected in the Condensed
Consolidated Statement of Financial Position as Liabilities Subject to
Compromise as of March 31, 2007 and December 31, 2006 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.
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
10
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
programs; and (x) pre-petition claims of critical vendors in the ordinary
course of business. Accordingly, these pre-petition items have been excluded
from Liabilities Subject to Compromise as of March 31, 2007 and December 31,
2006, as applicable. The amounts subject to compromise consisted of the
following items:
MARCH 31, DECEMBER 31,
2007 2006
---- ----
Postretirement benefits (a)............................... $ 759 $ 800
Litigation reserves (b)................................... 111 111
Accounts payable (c)...................................... 116 116
Environmental reserves (d)................................ 81 81
Other miscellaneous liabilities........................... 72 73
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................... $1,807 $1,849
====== ======
<FN>
(a) Postretirement benefits include Solutia's domestic (i) qualified pension
plan liabilities of $276 and $305 as of March 31, 2007 and December 31,
2006, respectively; (ii) non-qualified pension plan liabilities of $19
as of both March 31, 2007 and December 31, 2006; and (iii) other
postretirement benefits liabilities of $464 and $476 as of March 31,
2007 and December 31, 2006, respectively. Pursuant to a Bankruptcy Court
order, Solutia made payments with respect to other postretirement
obligations of approximately $20 in the three months ended March 31,
2007. Solutia also made a $29 contribution to its pension plan pursuant
to IRS funding requirements in the three months ended March 31, 2007.
(b) An automatic stay has been imposed against the commencement or
continuation of legal proceedings against Solutia outside of the
bankruptcy court process. Consequently, Solutia's accrued liability with
respect to pre-petition legal proceedings has been classified as subject
to compromise as of March 31, 2007 and December 31, 2006.
(c) Pursuant to Bankruptcy Court orders, Solutia is allowed to settle
certain accounts payable liabilities subject to compromise, however, no
settlements occurred in the first quarter 2007.
(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 12 for further disclosure with respect to ongoing legal
proceedings concerning environmental liabilities subject to compromise.
(e) While operating during the Chapter 11 bankruptcy proceedings, Solutia
has ceased recording interest on its 6.72% debentures due 2037 and its
7.375% debentures due 2027. The amount of contractual interest expense
not recorded in the three months ended March 31, 2007 was approximately $8.
(f) Pursuant to a Bankruptcy Court order, Solutia is required to continue
payments of the contractual interest on its 11.25% notes due 2009 as a
form of adequate protection under the U.S. Bankruptcy Code; provided,
however, that Solutia's Unsecured Creditors' Committee has the right at
any time, and Solutia has the right at any time after the payment of the
contractual interest due in July 2005, to seek to terminate Solutia's
obligation to continue making the interest payments. Solutia or the
Unsecured Creditors' Committee could successfully terminate all or part
of Solutia's interest payment obligations only after a showing that the
noteholders are not entitled to adequate protection, which would depend,
among other things, on the value of the collateral securing the notes as
of December 17, 2003, and whether that value is decreasing during the
course of Solutia's bankruptcy case. The amount of contractual interest
paid with respect to these notes was approximately $13 in the three
months ended March 31, 2007, and the accrued interest related to these
notes was included in Accrued Liabilities classified as not subject to
compromise as of March 31, 2007 and December 31, 2006.
(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.
11
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Reorganization Items, net
Reorganization items, net are presented separately in the Condensed
Consolidated Statement of Operations and represent items of income, expense,
gain or loss that are realized or incurred by Solutia because it is in
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Reorganization items, net consisted of the following items:
THREE MONTHS ENDED
MARCH 31,
---------
2007 2006
---- ----
Professional fees (a)..................................... $ (15) $ (12)
Severance and employee retention costs (b)................ (1) (2)
Adjustments to allowed claim amounts (c).................. -- 2
Other .................................................... -- (2)
------ ------
TOTAL REORGANIZATION ITEMS, NET........................... $ (16) $ (14)
====== ======
<FN>
(a) Professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization
proceedings.
(b) Expense provisions related to (i) employee severance costs incurred
directly as part of the Chapter 11 reorganization process and (ii) a
retention plan for certain Solutia employees approved by the
Bankruptcy Court.
(c) Adjustments to record certain pre-petition claims at estimated
amounts of the allowed claims.
3. RETROSPECTIVE APPLICATION OF NEW ACCOUNTING GUIDANCE
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 was effective for
fiscal years beginning after December 15, 2006 and requires retrospective
application to all prior period results presented. Historically, the Company
has accrued for certain major maintenance activities associated with periodic
major overhauls and maintenance of equipment under the accrue-in-advance
method.
Periodically, Solutia conducts a complete shutdown of certain
manufacturing units ("turnaround") to perform necessary inspection, repairs,
and maintenance. These planned turnarounds generally occur every 2 to 3 years.
With the adoption of FSP AUG AIR-1 on January 1, 2007, Solutia implemented the
deferral method for costs associated with significant turnarounds, which
include estimated costs for material, labor, supplies and contractor
assistance.
Solutia retrospectively applied the change from the accrue-in-advance
method to the deferral method. The following balances in the Condensed
Consolidated Statement of Financial Position as of December 31, 2006 and the
Condensed Consolidated Statement of Operations for the quarter ended March 31,
2006 have been restated from amounts previously reported as follows:
12
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
AS PREVIOUSLY
REPORTED AS ADJUSTED
-------- -----------
AT DECEMBER 31, 2006:
Prepaid expenses and other assets............................. $ 31 $ 34
Other assets.................................................. 99 100
Accrued liabilities........................................... 245 237
Accumulated deficit........................................... (1,043) (1,031)
FOR THE QUARTER ENDED MARCH 31, 2006:
Cost of goods sold............................................ $ 604 $ 598
Loss from continuing operations............................... (26) (20)
Net Loss...................................................... (22) (16)
Loss from continuing operations per basic and diluted share... $ (0.25) $ (0.19)
Net loss per basic and diluted share.......................... $ (0.21) $ (0.15)
4. STOCK OPTION PLANS
Solutia has two stock-based incentive plans under which awards are
available for grants to officers and employees; the Solutia Inc. 2000
Stock-Based Incentive Plan ("2000 Plan") and the Solutia Inc. 1997 Stock-Based
Incentive Plan ("1997 Plan"). The 2000 Plan authorizes up to 5,400,000 shares
and the 1997 Plan up to 7,800,000 shares of Solutia common stock for grants of
non-qualified and incentive stock options, stock appreciation rights,
restricted stock awards and bonus stock awards. The shares used may be newly
issued shares, treasury shares or a combination. Under both plans, the
exercise price of a stock option must be no less than the fair market value of
Solutia's common stock on the option grant date. Additionally, the plans
provide that the term of any stock option granted may not exceed 10 years. At
March 31, 2007, approximately 2,285,293 shares from the 2000 Plan and
2,984,756 shares from the 1997 Plan remained available for grants.
During the first quarter of 2007, no options were granted to current
executive officers and other senior executives as a group, or to other
employees. Total shares covered by options granted under the plans to current
executive officers and other senior executives as a group totaled 3,011,000,
and those to other employees totaled 10,016,592, through March 31, 2007. 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 March 31,
2007, 25,174 shares of Solutia's common stock remained available for grants
under the plan. There were no options or deferred shares granted in the first
quarter of 2007 as all non-employee director compensation is now paid in cash.
There were no options granted or exercised during the three months
ended March 31, 2007. Accordingly, no compensation cost with respect to such
activities was recognized in the Condensed Consolidated Statement of
Operations in the three months ended March 31, 2007. The fair value related to
options granted prior to January 1, 2006 was fully amortized as of June 30,
2006 in accordance with SFAS No. 123 (revised 2004), Share-Based Payment,
therefore, the Condensed Consolidated Statement of Operations and Condensed
Consolidated Statement of
13
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Cash Flows did not include any compensation costs or any related effects
associated with these options for the three months ended March 31, 2007.
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.
A summary of Solutia's stock option plans for the three months ended
March 31, 2007 is as follows:
WEIGHTED-AVERAGE AGGREGATE
WEIGHTED-AVERAGE REMAINING INTRINSIC
OPTIONS EXERCISE PRICE CONTRACTUAL LIFE VALUE (a)
---------------------------------------------------------------------
Outstanding at January 1, 2007....... 12,399,230 $15.49 -- --
Granted........................... -- 0.00 -- --
Exercised......................... -- 0.00 -- --
Expired........................... (5,126,171) 16.58 -- --
---------------------------------------------------------------------
Outstanding at March 31, 2007........ 7,273,059 $14.72 2.1 $(107)
=====================================================================
Exercisable at March 31, 2007........ 7,197,059 $14.79 2.0 $(106)
<FN>
(a) Intrinsic value for stock options is calculated based on the
difference between the exercise price of the underlying awards and
the quoted market price of Solutia's common stock as of the
reporting date.
5. DIVESTITURES
Discontinued Operations - Pharmaceutical Services Business
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 in 2006. Further, Solutia used $51 of the proceeds from the
sale to pay down SESA's (euro)200 million facility agreement.
The carrying amounts of assets and liabilities from discontinued
operations have been classified as current in the Condensed Consolidated
Statement of Financial Position at December 31, 2006 and consisted of the
following:
14
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31,
2006
----
ASSETS:
Assets of discontinued operations........ $ --
====
LIABILITIES:
Accrued liabilities............................... 1
----
Liabilities of discontinued operations... $ 1
====
The operating results of the pharmaceutical services business have
been reported separately as discontinued operations, net of tax, in the
Condensed Consolidated Statement of Operations for the three months ended
March 31, 2006. Net sales and income from discontinued operations for the
three months ended March 31, 2006 are as follows:
Net sales ........................................ $ 22
Income before income taxes........................ 4
Income tax expense ............................... --
----
INCOME FROM DISCONTINUED OPERATIONS .............. $ 4
====
DEQUEST(R) Business
On March 11, 2007, Solutia reached a definitive agreement to sell
DEQUEST(R), its water treatment phosphonates business ("Dequest") to Thermphos
Trading GmbH ("Thermphos"). Under the terms of the agreement, Thermphos will
purchase the assets and assume certain of the liabilities of Dequest for $67,
subject to a working capital adjustment. The proposed transaction is subject
to certain governmental and regulatory approvals and other customary closing
conditions. In addition, the sale is subject to approval by the Bankruptcy
Court, following completion of a Bankruptcy Court supervised auction process.
The Bankruptcy Court has scheduled a hearing to approve the sale on May 18,
2007. Dequest has not been classified as discontinued operations within the
condensed consolidated financial statements as it has not met the held for
sale criteria defined in SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets as of March 31, 2007.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill of $89 at both March 31, 2007 and December 31, 2006 was
allocated to the Performance Products segment. There were no changes to the
net carrying amount of goodwill during the three months ended March 31, 2007.
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:
15
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, 2007 DECEMBER 31, 2006
------------------------------------ ------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
------------------------------------ ------------------------------------
Amortizable intangible assets............. $ 12 $ (7) $ 5 $ 12 $ (7) $ 5
Trademarks................................ 26 -- 26 26 -- 26
------------------------------------ ------------------------------------
TOTAL IDENTIFIED INTANGIBLE ASSETS........ $ 38 $ (7) $ 31 $ 38 $ (7) $ 31
==================================== ====================================
There have been no changes to amortizable lives or methods during the
three months ended March 31, 2007. Further, there were no write downs or
disposals of Amortizable Assets in 2007. 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.
7. RESTRICTED CASH FOR ACQUISITION
Restricted cash for acquisition included in the Condensed Consolidated
Statement of Financial Position relates to the portion of the DIP credit
facility that has been restricted for a special purpose by the January 2007
amendment (as more fully described in Note 14). Of the $1,225 DIP credit
facility, $150 was utilized to partially finance the acquisition of Akzo
Nobel's interest in the 50/50 Flexsys joint venture between Solutia and Akzo
Nobel. The $150 was invested in cash and cash equivalents prior to the
acquisition.
8. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
INVENTORIES MARCH 31, DECEMBER 31,
2007 2006
---- ----
Finished goods................................................ $ 245 $ 226
Goods in process.............................................. 175 165
Raw materials and supplies.................................... 107 92
------- -------
Inventories, at FIFO cost..................................... 527 483
Excess of FIFO over LIFO cost................................. (213) (209)
------- -------
TOTAL INVENTORIES............................................. $ 314 $ 274
======= =======
Inventories at FIFO approximate current cost.
PROPERTY, PLANT AND EQUIPMENT MARCH 31, DECEMBER 31,
2007 2006
---- ----
Land.......................................................... $ 18 $ 18
Leasehold improvements........................................ 37 37
Buildings..................................................... 428 435
Machinery and equipment....................................... 2,732 2,757
Construction in progress...................................... 71 66
------- -------
Total property, plant and equipment........................... 3,286 3,313
Less accumulated depreciation................................. (2,485) (2,518)
------- -------
TOTAL......................................................... $ 801 $ 795
======= =======
16
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ACCRUED LIABILITIES MARCH 31, DECEMBER 31,
2007 2006
---- ----
Wages and benefits............................................ $ 45 $ 61
Accrued selling expenses...................................... 31 32
Accrued interest.............................................. 13 20
Other......................................................... 127 124
------- -------
TOTAL ACCRUED LIABILITIES..................................... $ 216 $ 237
======= =======
9. INCOME TAXES
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 Condensed Consolidated
Statements of Financial Position prior to the adoption of FIN 48 and the
amounts reported after adoption are accounted for as a cumulative effect
adjustment recorded to the beginning balance of retained earnings or other
appropriate components of equity or net assets in the Condensed Consolidated
Statements of Financial Position. The cumulative effect adjustment does 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 adopted the provisions of FIN 48 on January 1, 2007. As a
result of the implementation of FIN 48, Solutia increased its January 1, 2007
accumulated deficit by $3 as a cumulative effect adjustment in the Condensed
Consolidated Statements of Financial Position.
The total amount of unrecognized tax benefits at January 1, 2007 was
$109. Included in the balance at January 1, 2007 were $35 of unrecognized tax
benefits that, if recognized, would affect the effective tax rate and $74
million of unrecognized tax benefits that, if recognized, would result in
adjustments to other tax accounts.
Solutia recognizes accrued interest and penalties related to
unrecognized tax benefits in income tax expense. As of January 1, 2007,
Solutia accrued $8 for interest and penalties. No significant interest and
penalties were recognized in the Condensed Consolidated Statement of
Operations as of March 31, 2007.
Solutia files income tax returns in the United States and various
states and foreign jurisdictions. With few exceptions, Solutia is no longer
subject to U.S. federal, state and local, or non-U.S. income tax examinations
by tax authorities for years before 2002. It is not anticipated that any
significant changes in the total amounts of unrecognized tax benefits for
positions will occur within 12 months of the date of adoption.
10. INVESTMENT IN AFFILIATE
At March 31, 2007, Solutia participated in one principal joint
venture, Flexsys Group, comprised of interests in Flexsys Holding B.V.,
Flexsys America L.P. and Flexsys Rubber Chemicals Ltd. (collectively
"Flexsys"), for which Solutia applies the equity method of accounting.
On May 1, 2007, Solutia acquired Akzo Nobel's stake in Flexsys as
further described in Note 16.
17
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Summarized financial information for 100 percent of the Flexsys joint
venture is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
---- ----
Net sales...................................................... $ 158 $ 155
Gross profit .................................................. 38 46
Operating income .............................................. 25 28
Net income .................................................... 19 19
11. RESTRUCTURING RESERVES
Solutia recorded $1 of severance and retraining costs during the
first quarter 2007 in Costs of Goods Sold involving headcount reductions
within the Performance Products segment.
A summary of restructuring activity during the three months ended
March 31, 2007 is as follows:
FUTURE
DECOMMISSIONING/ CONTRACTUAL EMPLOYMENT
DISMANTLING PAYMENTS REDUCTIONS TOTAL
---------------------------------------------------------------
Balance at December 31, 2006............ $ 1 $ 2 $ 2 $ 5
Charges taken......................... -- -- 1 1
Amounts utilized...................... -- -- (1) (1)
---------------------------------------------------------------
BALANCE AT MARCH 31, 2007............... $ 1 $ 2 $ 2 $ 5
===============================================================
Solutia cannot forecast the level of future restructuring charges due
to the inherent uncertainty involved in operating as a debtor-in-possession
under Chapter 11 bankruptcy protection.
12. COMMITMENTS AND 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 both March 31, 2007 and
December 31, 2006 in the amount of $111.
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 in this category relate to property damage, personal injury,
products liability, premises liability or other damages relating to
18
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
exposure to PCB, asbestos and other chemicals manufactured before the Solutia
Spinoff. Defense and settlement costs as well as judgments, if any, 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 ability to confirm a plan of
reorganization or on its 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 related 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 alleged that the October 8, 2003 refinancing had no effect on the
security interests and liens that were created in 2002, and argued 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 intervened in the proceeding in support of Solutia and the Ad Hoc
Committee of Solutia Noteholders intervened in the proceeding in support of
JPMorgan. The trial commenced on May 23, 2006 and concluded on July 10, 2006.
Thereafter, Wilmington Trust Company, which succeeded JPMorgan as Prepetition
Trustee, replaced JPMorgan as plaintiff in the proceeding.
On May 1, 2007, the Bankruptcy Court ruled in favor of Solutia,
holding that the 2027 and 2037 Debentures were properly de-securitized under
the express terms of the Prepetition Indenture and its related agreements,
that the holders of the 2027 and 2037 Debentures do not have, and are not
entitled to any security interests or liens of any of Solutia's assets and
that the noteholders are not entitled to any equitable relief.
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 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
19
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
resolution. The adversary proceeding had been stayed indefinitely by the
parties pursuant to a standstill agreement which was subject to certain
rights of the parties to recommence such proceeding. On April 6, 2007, the
Equity Committee provided written notice to Monsanto and Pharmacia terminating
the standstill agreement. In addition, the Equity Committee has requested that
the Bankruptcy Court schedule the adversary proceeding for trial. A hearing is
scheduled for May 18, 2007, at which the Bankruptcy Court will consider the
Equity Committee's request.
LEGAL PROCEEDINGS OUTSIDE SOLUTIA'S BANKRUPTCY CASE
- ---------------------------------------------------
GE RELATED LITIGATION
On March 13, 2007, a purported class action lawsuit, captioned
Corlew, et al., v. General Electric Company, Monsanto Company, Pharmacia
Corporation, and Solutia Inc., was filed in the Superior Court of New York
County, New York ("the GE Litigation"). The plaintiffs are current residents
of Schenectady, New York, who seek to represent a class of all individuals who
owned and/or occupied property within a five-mile radius of General Electric's
Main Plant in Schenectady. The plaintiffs allege that their properties were
contaminated by the release of PCBs manufactured by Monsanto, Pharmacia,
and/or Solutia (collectively referred to in the Complaint as "Monsanto") that
were used in the manufacture of a variety of products at General Electric's
Schenectady plant. Plaintiffs allege a series of twenty-five claims including
thirteen claims specifically against Monsanto, Pharmacia, and Solutia
collectively including negligence, breach of warranty, strict liability,
fraudulent concealment, negligent and intentional infliction of emotional
distress, nuisance, trespass, unjust enrichment, and willful and wanton
misconduct, with each claim seeking between $12,000 and $20,000 in
compensatory damages, and an equivalent amount in punitive damages. Solutia
believes the GE Litigation is automatically stayed as to Solutia pursuant to
Section 362 of the U.S. Bankruptcy Code. Accordingly, Solutia has filed its
suggestion of bankruptcy with the trial court.
As described in the introduction to this litigation section, at the
time of the Solutia Spinoff from Pharmacia, Solutia agreed to defend Pharmacia
against, and indemnify Pharmacia for, litigation liabilities related to
chemical products formerly manufactured, released or used by Pharmacia prior
to the Solutia Spinoff. After filing for Chapter 11 protection, Solutia ceased
performance of its defense and indemnification obligations with respect to
these litigation liabilities as they are deemed pre-petition obligations under
the U.S. Bankruptcy Code. Monsanto is currently managing and funding such
litigation liabilities pursuant to its indemnification obligations to
Pharmacia. Because Solutia is not managing such litigation, it has ceased
updating on the status of those legal proceedings. The GE Litigation falls
within the scope of litigation liabilities described above. Monsanto's funding
of the GE Litigation may give rise to a claim against Solutia which Monsanto
may assert in Solutia's bankruptcy case.
FLEXSYS RELATED LITIGATION
Since 2002, antitrust authorities in the United States, Europe and
Canada have been investigating past commercial practices in the rubber
chemicals industry including the practices of Flexsys. The practices being
investigated occurred during the period that Flexsys was a 50/50 joint venture
between Solutia and Akzo Nobel. The European Commission issued its findings
from its investigation in 2005, in which the Commission granted Flexsys full
immunity from any potential fines. 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 such purported class actions that have been filed against Flexsys in
various state courts in the United States and in four courts in Canada. Except
for two cases pending in the United States, all of the cases have been
dismissed, or are currently subject to tentative settlements.
OTHER LEGAL PROCEEDINGS
-----------------------
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")
20
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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. Solutia has not 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 against the Solutia Pension Plan and were consolidated in
September 2006 with similar cash balance pension plan cases 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 seek 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
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
cases, plaintiffs moved to certify a class only with respect to the claim that
termination of interest credits violates ERISA. Briefing on the class
certification motions was completed in January, and the court scheduled
the motions for a hearing on July 12, 2007. However, on May 3, 2007 the judge
presiding over the case recused himself from the proceeding and a new judge
was appointed, therefore, it is unclear if the hearing will proceed as
scheduled.
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.
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
scheduled for May 22, 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 was removed to
the U.S. District Court for the Southern District of New York.
21
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In March 2005, the District Court dismissed with prejudice three of
Solutia's causes of action for breach of contract, but denied FMC's motion to
dismiss with respect to Solutia's causes of action for breach of warranty,
breach of fiduciary duty, negligent misrepresentation, fraud, and fraud in the
inducement. The parties completed their fact discovery on the remaining
claims, and submitted cross motions for summary judgment. On July 31, 2006,
the Court granted portions of FMC's Motion for Summary Judgment but denied
others. Subsequently, the Court scheduled a bench trial of the case which was
to begin on April 2, 2007. Prior to the start of trial, Solutia and FMC
reached a settlement pursuant to which FMC agreed to pay Solutia $23 in cash,
subject to Bankruptcy Court approval. The settlement was approved by the
Bankruptcy Court on May 1, 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 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
22
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 effective 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).
INEOS disputes the overall amount of Solutia Canada's termination costs.
Solutia filed this litigation against INEOS for breach of the LTA
with respect to such termination costs. On March 26, 2007, INEOS filed a
cross-demand against Solutia Canada for $1 (CAD), alleging that Solutia Canada
improperly charged INEOS on its October and November 2006 invoices for items
which INEOS claims are not actual direct or indirect costs under the LTA.
INEOS reserved the right to amend its demand for additional alleged
overpayments on any future invoices through the remaining term of the LTA.
Solutia Canada denies INEOS' allegation.
Texas Commission on Environmental Quality Administrative Enforcement
--------------------------------------------------------------------
Proceeding. On August 11, 2006, the Executive Director of the Texas Commission
- ----------
on Environmental Quality (the "Commission") commenced an administrative
enforcement proceeding against Solutia by filing a petition with the Texas
Commission on Environmental Quality. The petition alleged certain violations
of the State of Texas air quality program. The Executive Director requested
that an administrative penalty, the amount of which was de minimis, 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 reached a settlement in principle
that includes payment of a de minimis penalty and contribution to an
environmentally beneficial project in exchange for mitigation of a portion of
the penalty. All required corrective action has been completed. The final
settlement orders are subject to approval by the Commission.
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 $77 and $78 as of March 31, 2007 and December 31, 2006,
respectively, for solid and hazardous waste remediation, which represents
Solutia's best estimate of the underlying obligation. In addition, this
balance also includes post-closure costs at certain of Solutia's operating
locations. This liability is not classified as subject to compromise in the
Condensed Consolidated Statement of Financial Position because, irrespective
of the bankruptcy proceedings, Solutia will be required to comply with
environmental requirements in the conduct of its business, regardless of when
the underlying environmental contamination occurred. However, Solutia
ultimately intends to seek recovery against other potentially responsible
parties at certain of these locations.
Solutia had an accrued liability of $81 as of both March 31, 2007 and
December 31, 2006 for properties not owned or operated by Solutia which was
classified as subject to compromise in the Condensed Consolidated Statement of
Financial Position. Under the Plan and the Relationship Agreement, as between
Monsanto and Solutia,
23
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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
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.
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 condensed 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 condensed consolidated financial statements. Generally, claims against
Debtors arising from actions or omissions prior to their filing date may be
subject to compromise in connection with the plan of reorganization. The
ultimate resolution of all of these claims may be settled through negotiation
as compared to court proceedings, with the result being that Solutia may
retain certain obligations currently classified as subject to compromise in
the Condensed Consolidated Statement of Financial Position.
13. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
For the three months ended March 31, 2007 and 2006, Solutia's pension
and healthcare and other benefit costs were as follows:
24
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2007 2006 2007 2006
---- ---- ---- ----
Service costs for benefits earned.............. $ 1 $ 1 $ 1 $ 1
Interest costs on benefit obligation........... 16 16 6 8
Assumed return on plan assets.................. (17) (15) -- --
Prior service (gains)/costs ................... -- -- (4) (3)
Actuarial net loss............................. 2 2 2 1
----- ----- ----- -----
TOTAL.......................................... $ 2 $ 4 $ 5 $ 7
===== ===== ===== =====
Employer Contributions
According to IRS funding rules, Solutia will be required to make
approximately $100 in pension contributions to its U.S. qualified pension plan
in 2007. Approximately $29 of these required 2007 contributions were made in
the first quarter 2007. Solutia also expects to be required to fund
approximately $6 in pension contributions for its foreign pension plans in
2007.
14. DEBT OBLIGATIONS
Solutia amended its DIP financing facility on January 25, 2007 with
Bankruptcy Court approval. This amendment, among other things, (i) increased
the DIP facility from $825 to $1,225; (ii) extended the term of the DIP
facility from March 31, 2007 to March 31, 2008; (iii) decreased the interest
rate on the term loan component of the DIP facility from LIBOR plus 350 basis
points to LIBOR plus 300 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; and (vi) amended certain financial and other covenants.
Of the $1,225 facility, $150 was utilized to partially finance Solutia's
acquisition of Akzo Nobel's interest in the 50/50 Flexsys joint venture
between Solutia and Akzo Nobel. The remaining increased availability under the
DIP credit facility provides Solutia with additional liquidity for operations
and the ability to fund mandatory pension payments due in 2007. The DIP credit
facility can be repaid by Solutia at any time without prepayment penalties.
Solutia analyzed the modifications of the DIP facility in January
2007 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 $7 to record the write-off of debt issuance
costs and to record the DIP facility as modified at its fair value.
15. SEGMENT DATA
Solutia, together with its subsidiaries, is a global manufacturer and
marketer of a variety of high-performance chemical-based materials, which are
used in a broad range of consumer and industrial applications. Solutia manages
its business in 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.
25
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
Segment data for the three months ended March 31, 2007 and 2006 are
as follows:
2007 2006
---------------------- -----------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products................ $301 $ 46 $286 $ 42
Integrated Nylon.................... 426 6 392 (8)
---- ---- ---- ----
SEGMENT TOTALS...................... 727 52 678 34
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses.............. (13) (20)
Equity earnings from affiliates. 9 9
Interest expense................ (29) (23)
Other income, net............... 3 --
Loss on debt modification....... (7) (8)
Reorganization items, net....... (16) (10)
CONSOLIDATED TOTALS:
---- ----
NET SALES........................ $727 $678
==== ---- ==== ----
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES $ (1) $(18)
==== ====
16. SUBSEQUENT EVENTS
On February 27, 2007, Solutia reached a definitive agreement to
purchase Akzo Nobel's stake in Flexsys. Closing of the sale occurred on May 1,
2007 simultaneous with Flexsys' purchase of Akzo Nobel's Crystex manufacturing
operations in Japan for $25. Under the terms of the agreement, Solutia
purchased Akzo Nobel's 50% interest in the Flexsys joint venture for $213,
subject to debt assumption and certain purchase price adjustments. In
conjunction with the acquisition, Flexsys executed a $200, five year debt
facility agreement.
As is more fully described in Note 12 under the caption Solutia v.
FMC Corporation, Solutia and FMC reached a settlement on April 2, 2007
pursuant to which FMC agreed to pay Solutia $23 in cash, subject to Bankruptcy
Court approval. The settlement was approved by the Bankruptcy Court on May 1,
2007 with Solutia expecting to receive the proceeds in the second quarter
2007.
26
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
17. 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 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 facility (as well as a smaller,
interim DIP facility put in place as of December 19, 2003), but the DIP
Guarantors were not required by the cross-guarantor provisions to guarantee
the Notes.
The Guarantors fully and unconditionally guarantee the Notes on a
joint and several basis. The following condensed consolidating financial
statements present, in separate columns, financial information for: Solutia
Inc. on a parent only basis carrying its investment in subsidiaries under the
equity method; Guarantors on a combined, or where appropriate, consolidated
basis, carrying investments in subsidiaries which do not guarantee the debt
(the "Non-Guarantors") under the equity method; Non-Guarantors on a combined,
or where appropriate, consolidated basis; eliminating adjustments; and
consolidated totals as of March 31, 2007 and December 31, 2006, and for the
three months ended March 31, 2007 and 2006. 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.
27
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES................................ $ 548 $ 54 $ 260 $(135) $ 727
Cost of goods sold....................... 510 25 226 (140) 621
------------------------------------------------------------------------
GROSS PROFIT............................. 38 29 34 5 106
Marketing expenses....................... 18 6 8 -- 32
Administrative expenses.................. 16 2 6 -- 24
Technological expenses................... 8 1 2 -- 11
------------------------------------------------------------------------
OPERATING INCOME (LOSS).................. (4) 20 18 5 39
Equity earnings from affiliates.......... 41 7 -- (39) 9
Interest expense......................... (26) -- (15) 12 (29)
Other income, net........................ 4 5 11 (17) 3
Loss on debt modification................ (7) -- -- -- (7)
Reorganization items, net................ (15) (1) -- -- (16)
------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ....... (7) 31 14 (39) (1)
Income tax expense ..................... 1 -- 5 1 7
------------------------------------------------------------------------
NET INCOME (LOSS)........................ $ (8) $ 31 $ 9 $ (40) $ (8)
========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2007
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS)........................ $ (8) $ 31 $ 9 $ (40) $ (8)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments......... 2 2 4 (6) 2
Amortization of prior service gain....... (4) -- -- -- (4)
Amortization of actuarial loss........... 4 -- -- -- 4
------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS).............. $ (6) $ 33 $ 13 $ (46) $ (6)
========================================================================
28
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES................................ $ 507 $ 49 $ 229 $(107) $ 678
Cost of goods sold....................... 487 24 200 (113) 598
------------------------------------------------------------------------
GROSS PROFIT............................. 20 25 29 6 80
Marketing expenses....................... 19 6 8 -- 33
Administrative expenses.................. 13 2 6 -- 21
Technological expenses................... 11 1 -- -- 12
------------------------------------------------------------------------
OPERATING INCOME (LOSS).................. (23) 16 15 6 14
Equity earnings (loss) from affiliates... 45 13 (1) (47) 10
Interest expense......................... (18) -- (11) 6 (23)
Other income, net........................ 4 4 8 (13) 3
Loss on debt modification................ (8) -- -- -- (8)
Reorganization items, net................ (14) -- -- -- (14)
------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ..... (14) 33 11 (48) (18)
Income tax expense ..................... 2 -- 1 (1) 2
------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS.......................... (16) 33 10 (47) (20)
Income from discontinued
operations, net of tax.............. -- -- 4 -- 4
------------------------------------------------------------------------
NET INCOME (LOSS)........................ $ (16) $ 33 $ 14 $ (47) $ (16)
========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2006
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS)........................ $ (16) $ 33 $ 14 $ (47) $ (16)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments......... 2 2 2 (4) 2
Net unrealized loss on derivative
instruments......................... (1) -- -- -- (1)
------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS).............. $ (15) $ 35 $ 16 $ (51) $ (15)
========================================================================
29
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION
MARCH 31, 2007
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 22 $ 4 $ 142 $ -- $ 168
Trade receivables, net.......................... 3 191 143 -- 337
Intercompany receivables........................ 148 759 127 (1,034) --
Miscellaneous receivables....................... 63 1 36 -- 100
Inventories..................................... 171 29 130 (16) 314
Restricted cash for acquisition................. 150 -- -- -- 150
Prepaid expenses and other current assets....... 30 2 8 2 42
-----------------------------------------------------------------------
TOTAL CURRENT ASSETS............................ 587 986 586 (1,048) 1,111
PROPERTY, PLANT AND EQUIPMENT, NET.............. 580 82 139 -- 801
INVESTMENTS IN AFFILIATES....................... 2,434 276 7 (2,519) 198
GOODWILL........................................ -- 72 17 -- 89
IDENTIFIED INTANGIBLE ASSETS, NET............... 2 26 3 -- 31
INTERCOMPANY ADVANCES........................... 128 1,238 1,020 (2,386) --
OTHER ASSETS.................................... 59 -- 41 -- 100
-----------------------------------------------------------------------
TOTAL ASSETS.................................... $ 3,790 $ 2,680 $ 1,813 $(5,953) $ 2,330
=======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................ $ 187 $ 9 $ 49 $ (2) $ 243
Intercompany payables........................... 117 3 187 (307) --
Accrued liabilities............................. 132 14 70 -- 216
Short-term debt................................. 975 -- -- -- 975
Intercompany short-term debt.................... 1 -- 211 (212) --
-----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES....................... 1,412 26 517 (521) 1,434
LONG-TERM DEBT.................................. -- -- 213 -- 213
INTERCOMPANY LONG-TERM DEBT..................... -- -- 676 (676) --
OTHER LIABILITIES............................... 193 1 95 -- 289
-----------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE..... 1,605 27 1,501 (1,197) 1,936
LIABILITIES SUBJECT TO COMPROMISE............... 3,598 413 20 (2,224) 1,807
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) 2,240 292 (2,532) (113)
Accumulated other comprehensive loss............ (65) -- -- -- (65)
Accumulated deficit............................. (1,041) -- -- -- (1,041)
-----------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)............ (1,413) 2,240 292 (2,532) (1,413)
-----------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)...................................... $ 3,790 $ 2,680 $ 1,813 $(5,953) $ 2,330
=======================================================================
30
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2006
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
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 current assets....... 23 1 7 3 34
-----------------------------------------------------------------------
TOTAL CURRENT ASSETS............................ 422 970 545 (1,086) 851
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.................................... 58 -- 42 -- 100
-----------------------------------------------------------------------
TOTAL ASSETS.................................... $ 3,582 $ 2,654 $ 1,743 $(5,920) $ 2,059
=======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................ $ 177 $ 8 $ 45 $ (2) $ 228
Intercompany payables........................... 177 13 156 (346) --
Accrued liabilities............................. 146 14 77 -- 237
Short-term debt................................. 650 -- -- -- 650
Intercompany short-term debt.................... 1 -- 195 (196) --
Liabilities of discontinued operations.......... 1 -- -- -- 1
-----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES....................... 1,152 35 473 (544) 1,116
LONG-TERM DEBT.................................. -- -- 210 -- 210
INTERCOMPANY LONG-TERM DEBT..................... -- -- 669 (669) --
OTHER LIABILITIES............................... 196 1 92 -- 289
-----------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE..... 1,348 36 1,444 (1,213) 1,615
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............................. (1,031) -- -- -- (1,031)
-----------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)............ (1,405) 2,205 279 (2,484) (1,405)
-----------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)..................................... $ 3,582 $ 2,654 $ 1,743 $(5,920) $ 2,059
=======================================================================
31
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS........... $ (104) $ (21) $ 6 $ -- $ (119)
-----------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases......... (23) (1) (12) -- (36)
Restricted cash for acquisition................. (150) -- -- -- (150)
Investment proceeds and property
disposals, net................................. 3 -- -- -- 3
-----------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES............... (170) (1) (12) -- (183)
-----------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations....... 325 -- -- -- 325
Debt issuance costs............................. (5) -- -- -- (5)
Changes in investments and advances from
(to) affiliates................................ (47) 12 35 -- --
-----------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES........... 273 12 35 -- 320
-----------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (1) (10) 29 -- 18
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR............................... 23 14 113 -- 150
-----------------------------------------------------------------------
END OF PERIOD.................................. $ 22 $ 4 $ 142 $ -- $ 168
=======================================================================
32
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS........... $ (79) $ (6) $ 20 $ -- $ (65)
-----------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases......... (13) (2) (10) -- (25)
Acquisition and investment payments, net of
cash acquired.................................. (23) -- 7 -- (16)
-----------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES............... (36) (2) (3) -- (41)
-----------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations....... 350 -- -- -- 350
Debt issuance costs............................. (9) -- -- -- (9)
Changes in investments and advances from
(to) affiliates................................ (5) 3 2 -- --
-----------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES........... 336 3 2 -- 341
-----------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 221 (5) 19 -- 235
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR............................... 1 15 91 -- 107
-----------------------------------------------------------------------
END OF PERIOD................................... $ 222 $ 10 $ 110 $ -- $ 342
=======================================================================
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements include all statements
regarding expected future financial position, results of operations,
profitability, cash flows and liquidity. Important factors that could cause
actual results to differ materially from the expectations reflected in the
forward-looking statements herein include, among others, Solutia's ability to
develop, confirm and consummate a Chapter 11 plan of reorganization; Solutia's
ability to reduce its overall leveraged position; the potential adverse impact
of Solutia's Chapter 11 filing on its operations, management and employees,
and the risks associated with operating businesses under Chapter 11
protection; Solutia's ability to comply with the terms of its
debtor-in-possession ("DIP") financing facility; customer response to
Solutia's Chapter 11 filing; general economic, business and market conditions;
customer acceptance of new products; raw material and energy costs or
shortages; limited access to capital resources; currency and interest rate
fluctuations; increased competitive and/or customer pressure; gain or loss of
significant customers; compression of credit terms with suppliers; exposure to
product liability and other litigation; changes in cost of environmental
remediation obligations and other environmental liabilities; changes in
accounting principles generally accepted in the U.S.; ability to implement
cost reduction initiatives in a timely manner; geopolitical instability; and
changes in pension and other postretirement assumptions.
OVERVIEW
Summary of Significant First Quarter 2007 Events
Bankruptcy Proceedings
- ----------------------
On May 1, 2007, in the JPMorgan adversary proceeding (as fully
described in Note 1 to the accompanying condensed consolidated financial
statements) the Bankruptcy Court ruled in favor of Solutia, holding that the
2027 and 2037 Debentures were properly de-securitized under the express terms
of the prepetition indenture and its related agreements, that the holders of
the 2027 and 2037 Debentures do not have, and are not entitled to, any
security interests or liens on any of Solutia's assets and that the holders
are not entitled to any equitable relief.
The other significant litigation matter within the bankruptcy
proceedings is the adversary proceeding brought by the Official Committee of
Equity Security Holders ("Equity Committee") against Pharmacia and Monsanto in
the Chapter 11 case. The Equity Committee seeks to avoid certain Legacy
Liabilities assumed by Solutia at the time of its spinoff from Pharmacia. A
pivotal issue is whether the Equity Committee can pursue this matter as part
of the Plan confirmation process. A hearing is scheduled for May 18, 2007, at
which the Bankruptcy Court will consider this issue.
Solutia anticipates filing an amended Plan and Disclosure Statement
during the second quarter and believes that the Bankruptcy Court will
thereafter move forward with the Plan confirmation process. Solutia will
continue its effort to gain consensus among the major stakeholders in the
Chapter 11 case on the terms of the Amended Plan.
Reorganization Strategy
- -----------------------
In the first quarter 2007, 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 2007 to enhance its
financial performance including using the tools of bankruptcy and making
changes to its asset portfolio, as explained below. Solutia also continues to
pursue a reallocation of legacy liabilities in the bankruptcy proceeding
through negotiations with the other constituents in the bankruptcy case.
Solutia will also be working in 2007 to establish a proper capital structure
upon emergence from bankruptcy. However, as a result of the numerous
uncertainties and complexities inherent in Solutia's bankruptcy proceedings,
its ability and timing of emergence from bankruptcy are subject to significant
uncertainty.
PERFORMANCE ENHANCEMENT
Solutia benefited in the first quarter of 2007 from actions
implemented earlier in the Chapter 11 reorganization process designed to
enhance its performance as described in previous filings. In the first quarter
of 2007, the Company continued to execute a cost reduction program at
Solutia's operating sites focused on actions such as lean manufacturing
techniques, yield improvement, maintenance savings and utilities optimization;
and implementing an enterprise-wide procurement effort.
Solutia amended its DIP financing facility on January 25, 2007 with
Bankruptcy Court approval. This amendment, among other things, (i) increased
the DIP facility from $825 million to $1,225 million; (ii) extended the term
of the DIP facility from March 31, 2007 to March 31, 2008; (iii) decreased the
interest rate on the term loan component of the DIP facility from LIBOR plus
350 basis points to LIBOR plus 300 basis points. Of the $1,225 million
facility, $150 million was utilized to partially finance the acquisition of
Akzo Nobel's interest in the 50/50 Flexsys joint venture between Solutia and
Akzo Nobel. The remaining increased availability under the DIP credit facility
provides Solutia with additional liquidity for operations and the ability to
fund mandatory pension payments due in 2007. Solutia expects the refinancing
will provide greater flexibility in executing Solutia's reorganization
strategy along with significant interest savings.
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 the first quarter of 2007. On February 27, 2007,
Solutia entered into a definitive agreement to
34
purchase Akzo Nobel's stake in the Flexsys joint venture. The transaction
closed on May 1, 2007 as described in Note 16 to the accompanying condensed
consolidated financial statements.
On March 11, 2007, Solutia reached a definitive agreement to sell
DEQUEST(R), its water treatment phosphonates business ("Dequest") to Thermphos
Trading GmbH ("Thermphos"). Under the terms of the agreement, Thermphos will
purchase the assets and assume certain of the liabilities of Dequest for $67
million, subject to a working capital adjustment.
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 distribution, if any, that various constituencies
in the Chapter 11 Cases would receive under the Plan. See Note 1 to the
accompanying condensed 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 condensed 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.
- -----------------------------------------------------------------------------------------------------
(dollars in millions) 2007 2006
---- ----
Net Sales.................................................................... $ 727 $ 678
====== ======
Operating Income:
Performance Products Segment Profit...................................... $ 46 $ 42
Integrated Nylon Segment Profit (Loss)................................... 6 (8)
Less: Corporate Expenses............................................ (13) (20)
Less: Equity Earnings from Affiliates, Other Income and
Reorganization Items included in Segment Profit (Loss)............. -- --
------ ------
Operating Income ............................................................ $ 39 $ 14
====== ======
Charges included in Operating Income ........................................ $ -- $ (9)
====== ======
- -----------------------------------------------------------------------------------------------------
The $49 million, or 7 percent, increase in net sales as compared to
the first quarter 2006 was primarily a result of higher average selling prices
of 3 percent, higher sales volumes of 3 percent, and favorable currency
exchange rate fluctuations of 1 percent. The $25 million increase in operating
income as compared to the first quarter 2006 resulted from higher net sales
and lower charges, which are described in greater detail in the Results of
Operations section below, partially offset by higher raw material and energy
costs.
35
Financial Information
- ---------------------
Summarized financial information concerning Solutia and subsidiaries
in reorganization and subsidiaries not in reorganization as of and for the
three months ended March 31, 2007 is presented as follows:
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
Net sales................................. $ 603 $ 259 $ (135) $ 727
Operating income.......................... 15 18 6 39
Net income (loss)......................... (8) 9 (9) (8)
Total assets.............................. 2,029 894 (593) 2,330
Liabilities not subject to compromise..... 1,520 502 (86) 1,936
Liabilities subject to compromise......... 1,922 -- (115) 1,807
Total shareholders' equity (deficit)...... (1,413) 392 (392) (1,413)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the first quarter 2007 with respect to
Solutia's critical accounting policies, as presented on pages 29 through 32 of
Solutia's 2006 Form 10-K.
RESULTS OF OPERATIONS--FIRST QUARTER 2007 COMPARED WITH FIRST QUARTER 2006
Performance Products
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2007 2006
---- ----
Net Sales.............................................................. $ 301 $ 286
===== =====
Segment Profit ........................................................ $ 46 $ 42
===== =====
Charges and Reorganization Items included in Segment Profit........ $ -- $ (1)
===== =====
- -----------------------------------------------------------------------------------------------
The $15 million, or 5 percent, increase in net sales as compared to
the first quarter 2006 resulted primarily from favorable currency exchange
rate fluctuations of 3 percent, higher sales volumes of 1 percent and higher
average selling prices of 1 percent. The favorable exchange rate fluctuations
occurred primarily as a result of the weakening U.S. dollar in relation to the
Euro in comparison to the first quarter 2006. Higher sales volumes were
experienced in LLUMAR(R) and VISTA(R) professional film products and SAFLEX(R)
plastic interlayer products, partially offset by lower volumes in DEQUEST(R)
water treatment chemicals. Higher average selling prices were experienced in
LLUMAR(R) and VISTA(R) professional film products and in THERMINOL(R) heat
transfer fluids.
The $4 million, or 10 percent, increase in segment profit in
comparison to the first quarter 2006 resulted primarily from higher net sales,
partially offset by higher raw material costs. The $1 million of
reorganization items in the first quarter 2006 consisted primarily of employee
severance and retraining costs.
36
Integrated Nylon
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2007 2006
---- ----
Net Sales.............................................................. $ 426 $ 392
===== =====
Segment Profit (Loss).................................................. $ 6 $ (8)
===== =====
Charges and Reorganization Items included in Segment Profit
(Loss)........................................................ $ -- $ (3)
===== =====
- -------------------------------------------------------------------------------------------------
The $34 million, or 9 percent, increase in net sales as compared to
the first quarter 2006 resulted primarily from higher average selling prices
of 5 percent and higher sales volumes of 4 percent. Average selling prices
increased in the intermediate chemicals business as a result of favorable
market conditions and in response to the escalating cost of raw materials.
Sales volumes increased in intermediate chemicals and nylon plastics and
polymers, partially offset by a decrease in carpet fibers. The nylon plastics
and polymers volumes increased due to a third quarter 2006 capacity increase
as a result of reconfiguration of idle assets.
The $14 million increase in segment profit in comparison to the first
quarter 2006 resulted primarily from higher sales and higher asset
utilization, partially offset by higher raw material and energy costs. The
segment incurred higher raw material and energy costs of approximately $7
million during the quarter, which was more than offset by the aforementioned
selling price increases. Higher asset utilization was experienced in
intermediate chemicals due in part to the manufacturing interruption incurred
at the Alvin, Texas plant in the first quarter 2006 and in nylon plastics and
polymers due to the aforementioned capacity increase. Solutia recorded
approximately $2 million of decommissioning and dismantling costs in the first
quarter 2006 as a result of the shut-down of its acrylic fibers business in
2005 and $1 million of asset write-downs.
Corporate Expenses
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2007 2006
---- ----
Corporate Expenses..................................................... $ 13 $ 20
===== =====
Charges included in Corporate Expenses............................. $ -- $ (9)
===== =====
- -------------------------------------------------------------------------------------------------
Corporate expenses decreased by $7 million, or 35 percent, in the
first quarter 2007 compared to the first quarter 2006 principally due to lower
charges. After consideration of the charges recorded in the first quarter
2006, the change in corporate expenses was also impacted by increased legal
and professional development costs. Included in the charges for the first
quarter 2006 is an environmental charge precipitated by the notification by a
third-party of its intent to terminate a tolling agreement at one of Solutia's
facilities outside the U.S. that will likely result in the cessation of
operations at that site.
Equity Earnings from Affiliates
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2007 2006
---- ----
Equity Earnings from Affiliates not included in Reportable Segment
Profit (Loss)......................................................... $ 9 $ 9
Equity Earnings from Affiliates included in Reportable Segment
Profit (Loss)......................................................... -- 1
----- -----
Equity Earnings from Affiliates........................................ $ 9 $ 10
===== =====
Charges included in Equity Earnings from Affiliates............... $ -- $ --
===== =====
- -------------------------------------------------------------------------------------------------
37
Equity earnings from affiliates decreased by $1 million in the first
quarter 2007 as compared to the first quarter 2006. This decline was primarily
a result of the inclusion of results of operations from the Puebla, Mexico
plant in the condensed consolidated financial statements for the entire first
quarter 2007. The Puebla plant was formerly the primary asset within the
Quimica joint venture which was accounted for using the equity method. Solutia
purchased the remaining interest in Quimica on March 1, 2006.
Interest Expense
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2007 2006
---- ----
Interest Expense....................................................... $ 29 $ 23
===== =====
Charges included in Interest Expense.............................. $ -- $ (1)
===== =====
- -------------------------------------------------------------------------------------------------
The $6 million, or 26 percent, increase in interest expense in the
first quarter 2007 in comparison to the first quarter 2006 resulted
principally from higher debt outstanding in the first quarter 2007 than in
2006, partially offset by lower interest rates due to the March 2006 and
January 2007 amendments to the DIP credit facility and the July 2006
refinancing of the Euronotes and subsequent partial pay down. In addition,
results in the first quarter 2006 included a $1 million charge related to the
March 2006 amendment of the DIP credit facility. The amount of contractual
interest not recorded was $8 million in both the first quarter 2007 and 2006.
Reorganization Items, net
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2007 2006
---- ----
Reorganization Items, net.............................................. $ 16 $ 14
===== =====
Reorganization Items, net included in Reportable Segment
Profit (Loss).................................................... $ -- $ 4
===== =====
- -------------------------------------------------------------------------------------------------
Reorganization items, net are presented separately in the Condensed
Consolidated Statement of Operations and represent items of income, expense,
gain, or loss that are realized or incurred by Solutia because it is in
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization
items incurred in the first quarter 2007 included $15 million of professional
fees for services provided by debtor and creditor professionals directly
related to Solutia's reorganization proceedings and $1 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.
Reorganization items incurred in the first quarter 2006 included $12
million of professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization proceedings; $2
million of net gain for adjustments to record certain pre-petition claims at
estimated amounts of the allowed claims; $2 million of expense provisions
related to (i) employee severance costs incurred directly as part of the
Chapter 11 reorganization process and (ii) a retention plan for certain
Solutia employees approved by the Bankruptcy Court; and $2 million of other
reorganization charges primarily involving costs incurred with the shut-down
of Solutia's acrylic fibers business.
Income Tax Expense
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2007 2006
---- ----
Income Tax Expense ................................................... $ 7 $ 2
===== =====
- -------------------------------------------------------------------------------------------------
Solutia's income tax expense in the first quarter 2007 and 2006 was
primarily a result of foreign income taxes. As a result of Solutia's Chapter
11 filing, Solutia did not record any U.S. income tax expense or benefit for
domestic operations (including temporary differences) during the three months
ended March 31, 2007 and 2006.
38
Consequently, the changes in federal and state deferred tax assets were offset
by corresponding changes in valuation allowances. The $5 million increase in
income tax expense in the first quarter 2007 as compared to the first quarter
2006 was the result of higher foreign income and a non-consolidated equity
affiliate surrendering a prior year loss in the first quarter 2006 that was
used to offset a foreign subsidiary's taxable income in the United Kingdom.
Discontinued Operations
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2007 2006
---- ----
Income from Discontinued Operations, net of tax........................ $ -- $ 4
===== =====
- -------------------------------------------------------------------------------------------------
Income from discontinued operations consists of the results of
Solutia's pharmaceutical services business. As described in Note 5 to the
accompanying condensed consolidated financial statements, on August 22, 2006,
SESA sold its pharmaceutical services business to Dishman.
Summary of Events Affecting Comparability
Charges and gains recorded in the first quarter of 2007 and 2006 and
other events affecting comparability have been summarized and described in the
table and accompanying footnotes below (dollars in millions):
2007
------------------------------------------------------------------
INCREASE/(DECREASE) PERFORMANCE INTEGRATED CORPORATE/
PRODUCTS NYLON OTHER CONSOLIDATED
-------- ----- ----- ------------
IMPACT ON:
Cost of goods sold.......................... $ -- $ -- $ -- $ --
------------------------------------------------------------------
OPERATING INCOME IMPACT..................... -- -- -- --
Loss on debt modification................... -- -- (7) (7) (a)
Reorganization Items, net................... -- -- (16) (16) (b)
------------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT............. $ -- $ -- $ (23) (23)
====================================================
Income tax impact........................... -- (c)
--------------
AFTER-TAX INCOME STATEMENT IMPACT........... $(23)
======
<FN>
2007 EVENTS
-----------
a) Solutia recorded a charge of approximately $7 million (pre-tax and
after-tax - see note (c) below) to record the write-off of debt
issuance costs and to record the DIP facility as modified at its
fair value as of the amendment date.
b) Reorganization items, net consist of the following: $15 million of
professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization
proceedings and $1 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. ($16 million pre-tax and
after-tax - see note (c) below)
c) 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
2006
------------------------------------------------------------------
INCREASE/(DECREASE) PERFORMANCE INTEGRATED CORPORATE/
PRODUCTS NYLON OTHER CONSOLIDATED
-------- ----- ----- ------------
IMPACT ON:
Cost of goods sold.......................... $ -- $ -- $ 9 $ 9 (a)
------------------------------------------------------------------
OPERATING INCOME IMPACT..................... -- -- (9) (9)
Interest expense ........................... -- -- (1) (1) (b)
Loss on debt modification................... -- -- (8) (8) (b)
Reorganization Items, net................... (1) (3) (10) (14) (c)
------------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT............. $ (1) $ (3) $(28) (32)
====================================================
Income tax impact........................... 2 (d)
--------------
AFTER-TAX INCOME STATEMENT IMPACT........... $(30)
======
<FN>
2006 EVENTS
-----------
a) Environmental charge precipitated by the notification by a
third-party of its intent to terminate a tolling agreement at one of
Solutia's facilities outside the U.S. that will likely result in the
cessation of operations at that site ($9 million pre-tax and $7
million after-tax - see note (d) below).
b) Solutia recorded a charge of approximately $8 million (pre-tax and
after-tax - see note (d) below) to record the write-off of debt
issuance costs and to record the DIP facility as modified at its
fair value. In addition, $1 million (pre-tax and after-tax - see
note (d) below) of unamortized debt issuance costs associated with
the DIP facility were written off at the time of modification in
March 2006.
c) Reorganization items, net consist of the following: $12 million of
professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization
proceedings; $2 million of net gains for adjustments to record
certain pre-petition claims at estimated amounts of the allowed
claims; $2 million of expense provisions related to (i) employee
severance costs incurred directly as part of the Chapter 11
reorganization process and (ii) a retention plan for certain Solutia
employees approved by the Bankruptcy Court; and $2 million of other
reorganization charges primarily involving costs incurred with the
shut-down of Solutia's acrylic fibers business. ($14 million pre-tax
and after-tax - see note (d) below)
d) With the exception of item (a) above, which primarily relates to
ex-U.S. operations, the above items are considered to have like
pre-tax and after-tax impact as the tax benefit or expense realized
from these events is offset by the change in valuation allowance for
U.S. deferred tax assets resulting from uncertainty as to their
recovery due to Solutia's Chapter 11 bankruptcy filing.
FINANCIAL CONDITION AND LIQUIDITY
As discussed in Note 1 to the accompanying condensed consolidated
financial statements, Solutia is operating as a debtor-in-possession under
Chapter 11 of the U.S. Bankruptcy Code. As a result of the uncertainty
surrounding Solutia's current circumstances, it is difficult to predict
Solutia's actual liquidity needs and sources at this time. However, based upon
current and anticipated levels of operations during the continuation of the
bankruptcy proceedings, Solutia believes that its liquidity and capital
resources will be sufficient to maintain its normal operations at current
levels. Solutia's access to additional financing while in the Chapter 11
bankruptcy process may be limited.
Financial Analysis
Solutia used its existing cash on-hand to finance operating needs and
capital expenditures during the first quarter 2007. Cash used in continuing
operations was $119 million in the first quarter 2007, a change of $55 million
from $64 million used in continuing operations for the comparable period of
2006. This change in cash used in
40
operations was primarily attributable to higher pension contributions and
increases in working capital items in comparing the first quarter 2007 and
2006.
Capital spending increased $12 million to $36 million in the first
quarter 2007, compared to $24 million in the first quarter 2006. The
expenditures in the first quarter 2007 were primarily to fund certain growth
initiatives in the Performance Products and Integrated Nylon segments, as well
as various capital improvements and certain cost reduction projects.
Solutia's working capital decreased by $58 million to ($323) million
at March 31, 2007, compared to ($265) million at December 31, 2006. The change
was primarily a result of higher short-term debt, partially offset by the $150
million restricted cash for acquisition and the seasonal increase in working
capital as of March 31, 2007.
Total debt of $1,856 million as of March 31, 2007, including $668
million subject to compromise and $1,188 million not subject to compromise,
increased by $328 million as compared to $1,528 million at December 31, 2006,
including $668 million subject to compromise and $860 million not subject to
compromise. This increase in total debt resulted primarily from $325 million
of additional borrowings from Solutia's DIP credit facility in the first
quarter 2007 related to the January 2007 amendment (as described below).
The weighted average interest rate on Solutia's total debt
outstanding was approximately 8.2 percent and 8.4 percent at March 31, 2007
and December 31, 2006, respectively. Excluding debt subject to compromise,
with the exception of the 11.25 percent notes due 2009 on which the Bankruptcy
Court has permitted continued payments of the contractual interest, the
weighted average interest rate on total debt was 8.5 percent at March 31, 2007
compared to 8.9 percent at December 31, 2006. While operating as a
debtor-in-possession during the Chapter 11 proceedings, Solutia has ceased
paying interest on its 6.72% debentures due 2037 and its 7.375% debentures due
2027. The amount of contractual interest expense not recorded in each of the
first quarter 2007 and 2006 was approximately $8 million.
Solutia had a shareholders' deficit of $1,413 million at March 31,
2007 compared to $1,405 million at December 31, 2006. The $8 million increase
in shareholders' deficit resulted from the $8 million first quarter 2007 net
loss and the $3 million cumulative adjustment related to the adoption of FIN
48; partially offset by the $2 million decrease in accumulated other
comprehensive loss.
As a result of the Chapter 11 bankruptcy filing, Solutia was in
default on all its debt agreements as of March 31, 2007, with the exception of
its DIP credit facility and SESA's (euro)200 million 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.
At March 31, 2007, Solutia's total liquidity was $347 million in the
form of $179 million of availability under the DIP credit facility and
approximately $168 million of cash on-hand, of which $142 million was cash of
Solutia's subsidiaries that are not parties to the Chapter 11 proceedings. In
comparison, Solutia's total liquidity at December 31, 2006 was $245 million in
the form of $95 million of availability under the 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. The increase in cash on-hand was primarily a result of the DIP
amendment in January 2007 as described below.
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. Approximately $29 million of these required 2007
contributions were made in the first quarter 2007. Solutia also expects to be
required to fund approximately $6 million in pension contributions for its
foreign pension plans in 2007.
DIP Amendment
Solutia amended its DIP financing facility on January 25, 2007 with
Bankruptcy Court approval. This amendment, among other things, (i) increased
the DIP facility from $825 million to $1,225 million; (ii) extended the term
of the DIP facility from March 31, 2007 to March 31, 2008; (iii) decreased the
interest rate on the term loan component of the DIP facility from LIBOR plus
350 basis points to LIBOR plus 300 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; and (vi) amended certain financial and other
covenants. Of the $1,225 million facility, $150 million was utilized to
partially finance the acquisition of Akzo Nobel's interest in the
41
50/50 Flexsys joint venture between Solutia and Akzo Nobel. The remaining
increased availability under the DIP credit facility provides Solutia with
additional liquidity for operations and the ability to fund upcoming mandatory
pension payments. The DIP credit facility can be repaid by Solutia at any time
without prepayment penalties.
Acquisition
On May 1, 2007, Solutia acquired Akzo Nobel's interest in the 50/50
Flexsys joint venture between Solutia and Akzo Nobel as described in Note 16
to the accompanying condensed consolidated financial statements.
Pending Transactions
Solutia continued to divest certain non-strategic businesses in order
to focus resources on core businesses. On March 11, 2007, Solutia entered into
a definitive agreement to sell DEQUEST(R), its water treatment phosphonates
business ("Dequest") to Thermphos Trading GmbH ("Thermphos"). Under the terms
of the agreement, Thermphos will purchase the assets and assume certain of the
liabilities of Dequest for $67 million in cash, subject to a working capital
adjustment. The sale is subject to Bankruptcy Court approval following the
completion of a Bankruptcy Court-supervised auction process. The Bankruptcy
Court has scheduled a hearing to approve the sale on May 18, 2007. The closing
of the sale is also subject to certain governmental and regulatory approvals,
and other customary closing conditions. The proposed transaction is expected
to close in the second quarter 2007 with Solutia receiving estimated net
proceeds of $60 million.
As is more fully described in Note 12 to the accompanying condensed
consolidated financial statements under the caption Solutia v. FMC
Corporation, Solutia and FMC reached a settlement on April 2, 2007 pursuant to
which FMC agreed to pay Solutia $23 million in cash, subject to Bankruptcy
Court approval. The settlement was approved by the Bankruptcy Court on May 1,
2007 with Solutia expecting to receive the proceeds in the second quarter
2007.
CONTINGENCIES
See Note 12 to the accompanying condensed consolidated financial
statements for a summary of Solutia's contingencies as of March 31, 2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
There have been no material changes in market risk exposures during
the first quarter 2007 that affect the disclosures presented in the
information appearing under "Derivative Financial Instruments" on pages 43-44
of Solutia's Form 10-K for the year-ended December 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
During the period covered by this Form 10-Q, Solutia carried out an
evaluation, under the supervision and with the participation of Solutia's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of Solutia's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 ("Exchange Act")). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, as of
the end of the period covered by this Form 10-Q, Solutia's disclosure controls
and procedures are effective in timely alerting them to material information
relating to Solutia and its consolidated subsidiaries that is required to be
included in Solutia's periodic SEC filings. The Chief Executive Officer and
Chief Financial Officer also concluded that, as of the end of the period
covered by this Form 10-Q, 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 quarterly period ended March
31, 2007 that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting.
42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS IN SOLUTIA'S BANKRUPTCY CASE
- ----------------------------------------------
JP MORGAN ADVERSARY PROCEEDING
Solutia's 2006 Form 10-K describes an adversary proceeding filed by
JPMorgan, as indenture trustee for Solutia's debentures due 2027 and 2037 (the
"Prepetition Indenture"), against Solutia in Solutia's bankruptcy case. In
this proceeding, JPMorgan alleged that the Debentures are entitled to secured
status as opposed to general unsecured status as set forth in the Plan.
On May 1, 2007, the Bankruptcy Court ruled in favor of Solutia,
holding that the 2027 and 2037 Debentures were properly de-securitized under
the express terms of the Prepetition Indenture and its related agreements,
that the noteholders of the 2027 and 2037 Debentures do not have, and are not
entitled to any security interests or liens on any of Solutia's assets and
that the noteholders are not entitled to any equitable relief.
EQUITY COMMITTEE ADVERSARY PROCEEDING AGAINST MONSANTO AND PHARMACIA
Solutia's 2006 Form 10-K described the Equity Committee Adversary
Proceeding pending in Solutia's bankruptcy case. This Adversary Proceeding had
been stayed indefinitely by the parties pursuant to a standstill agreement
which was subject to certain rights of the parties to recommence such
proceeding. On April 6, 2007, the Equity Committee provided written notice to
Monsanto and Pharmacia terminating the standstill agreement. In addition, the
Equity Committee requested that the Bankruptcy Court schedule the Adversary
Proceeding for trial. A hearing is scheduled for May 18, 2007, at which the
Bankruptcy Court will consider the Equity Committee's request.
LEGAL PROCEEDINGS OUTSIDE SOLUTIA'S BANKRUPTCY CASE
- ---------------------------------------------------
GE RELATED LITIGATION
On March 13, 2007, a purported class action lawsuit, captioned
Corlew, et al., v. General Electric Company, Monsanto Company, Pharmacia
Corporation, and Solutia Inc., was filed in the Superior Court of New York
County, New York ("the GE Litigation"). The plaintiffs are current residents
of Schenectady, New York, who seek to represent a class of all individuals who
owned and/or occupied property within a five-mile radius of General Electric's
Main Plant in Schenectady. The plaintiffs allege that their properties were
contaminated by the release of PCBs manufactured by Monsanto, Pharmacia,
and/or Solutia (collectively referred to in the Complaint as "Monsanto") that
were used in the manufacture of a variety of products at General Electric's
Schenectady plant. Plaintiffs allege a series of twenty-five claims including
thirteen claims specifically against Monsanto, Pharmacia, and Solutia
collectively including negligence, breach of warranty, strict liability,
fraudulent concealment, negligent and intentional infliction of emotional
distress, nuisance, trespass, unjust enrichment, and willful and wanton
misconduct, with each claim seeking between $12 billion and $20 billion in
compensatory damages, and an equivalent amount in punitive damages. Solutia
believes the GE Litigation is automatically stayed as to Solutia pursuant to
Section 362 of the U.S. Bankruptcy Code. Accordingly, Solutia has filed its
suggestion of bankruptcy with the trial court.
At the time of the Solutia Spinoff from Pharmacia, Solutia agreed to
defend Pharmacia against, and indemnify Pharmacia for, litigation liabilities
related to chemical products formerly manufactured, released or used by
Pharmacia prior to the Solutia Spinoff. After filing for Chapter 11
protection, Solutia ceased performance of its defense and indemnification
obligations with respect to these litigation liabilities as they are deemed
pre-petition obligations under the U.S. Bankruptcy Code. Monsanto is
currently managing and funding such litigation liabilities pursuant to its
indemnification obligations to Pharmacia. Because Solutia is not managing such
litigation, it has ceased updating on the status of those legal proceedings.
The GE Litigation falls within the scope of litigation liabilities described
above. Monsanto's funding of the GE Litigation may give rise to a claim
against Solutia which Monsanto may assert in Solutia's bankruptcy case.
OTHER LEGAL PROCEEDINGS
-----------------------
Davis v. Solutia Inc. Employees' Pension Plan; Hammond, et al. v.
-----------------------------------------------------------------
Solutia Inc. Employees' Pension Plan. Solutia's 2006 Form 10-K described
- ------------------------------------
consolidated class action cases filed in the Southern District of Illinois
captioned Davis, et al. v. Solutia Inc Employees' Pension Plan and Hammond, et
al. v. Solutia Inc. Employees' Pension Plan. The class certification motions
filed in late 2006 have been scheduled for hearing on July 12, 2007. However,
on May 3, 2007, the judge presiding over the case recused himself from the
proceeding and a new judge was appointed, therefore, it is unclear if the
hearing will proceed as scheduled.
Dickerson v. Feldman. Solutia's 2006 Form 10-K described a purported
--------------------
class action captioned Dickerson v. Feldman, et al. 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.
Oral arguments on the appeal of the District Court's dismissal of the action
based upon lack of standing and failure to state a claim on which relief could
be granted have been scheduled for May 22, 2007.
43
Solutia Inc. v. FMC Corporation. Solutia's 2006 Form 10-K described
-------------------------------
an action filed by Solutia captioned Solutia Inc. v. FMC Corporation relating
to the failure of purified phosphoric acid technology contributed by FMC to
Astaris, the former 50/50 joint venture between Solutia and FMC. On April 2,
2007, Solutia and FMC reached a settlement in this litigation pursuant to
which FMC agreed to pay Solutia $23 million in cash, subject to Bankruptcy
Court approval. Solutia's motion for approval of the settlement was approved
by the Bankruptcy Court on May 1, 2007.
Solutia Canada Inc. v. INEOS Americas LLC. Solutia's 2006 Form 10-K
-----------------------------------------
described an action filed by Solutia Canada captioned Solutia Canada Inc. v.
INEOS Americas LLC in Quebec Court for breach of contract by INEOS Americas
LLC ("INEOS") of the LaSalle Toll Agreement ("LTA"). On March 26, 2007, INEOS
filed a cross-demand against Solutia Canada for $1 million (CAD), alleging
that Solutia Canada improperly charged INEOS on its October and November 2006
invoices for items which INEOS claims are not actual direct or indirect costs
under the LTA. INEOS reserved the right to amend its demand for additional
alleged overpayments on any future invoices through the remaining term of the
LTA. Solutia Canada denies INEOS' allegation.
Texas Commission on Environmental Quality Administrative Enforcement
--------------------------------------------------------------------
Proceeding. Solutia's 2006 Form 10-K described an administrative enforcement
- ----------
proceeding against Solutia filed by the Texas Commission on Environmental
Quality (the "Commission) alleging certain violations of the State of Texas air
quality program and seeking assessment of an administrative penalty and the
undertaking of corrective actions by Solutia. Solutia and the Commission have
reached a settlement in principle that includes payment of a de minimis
penalty and a contribution to an environmentally beneficial project in
exchange for mitigation of a portion of the penalty. All required corrective
action has been completed. The final settlement orders are subject to approval
by the Commission.
ITEM 5. OTHER INFORMATION
On April 11, 2007, the Bankruptcy Court approved Solutia's entry into
the Transaction Agreement previously disclosed in Solutia's 2006 Annual Report
on Form 10-K, pursuant to which Solutia agreed to purchase, on the terms and
subject to the conditions set forth in the agreement, Akzo Nobel's stake in
Flexsys, a 50/50 rubber chemicals joint venture between Akzo Nobel and Solutia
(the "Flexsys Acquisition") for $213 million, subject to various adjustments.
The Flexsys Acquisition was financed by $150 million of funding under the
amended DIP credit facility and additional funding through Flexsys. The
Flexsys Acquisition closed on May 1, 2007, upon which Solutia became the sole
owner of Flexsys. Contemporaneous with the closing of Flexsys Acquisition,
Solutia purchased Akzo Nobel's Crystex manufacturing operations in Japan.
After the closing, Akzo Nobel and certain of its affiliates will continue
providing services to Flexsys at certain sites shared by Flexsys and Akzo
Nobel pursuant to services agreements entered into in connection with the
Flexsys Acquisition.
Combined Financial Statements of Flexsys Group required pursuant to
Item 2.01 of the Form 8-K rules are incorporated by reference to Exhibit 99.2
of Solutia's Form 10-K/A filed on March 28, 2007.
Pro forma financial information required pursuant to Item 2.01 of the
Form 8-K rules will be provided on Form 8-K on or before July 13, 2007.
ITEM 6. EXHIBITS
See the Exhibit Index at page 46 of this report.
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOLUTIA INC.
--------------------------
(Registrant)
/s/ TIMOTHY J. SPIHLMAN
--------------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Dated: May 7, 2007
45
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Amendment No. 5 to Financing Agreement and Waiver dated as of January
25, 2007 amending the Debtor-in-Possession Financing Agreement dated
January 16, 2004 (as amended) between Solutia Inc., Solutia Business
Enterprises, Inc. and the other parties thereto (incorporated by
reference to Exhibit 10.1 of Solutia's Form 8-K filed on January 25,
2007)
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 Combined Financial Statements of Flexsys Group (incorporated by
reference to Exhibit 99.2 of Solutia's Form 10-K/A filed on March 28,
2007)
46