Exhibit 99.2
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THIS DISCLOSURE STATEMENT IS BEING SUBMITTED FOR APPROVAL BUT HAS NOT BEEN
APPROVED BY THE BANKRUPTCY COURT. THIS IS NOT A SOLICITATION OF ACCEPTANCE OR
REJECTION OF THE DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION (THE
"AMENDED PLAN") ANNEXED HERETO. ACCEPTANCES OR REJECTIONS OF THE AMENDED PLAN
MAY NOT BE SOLICITED UNTIL A DISCLOSURE STATEMENT HAS BEEN APPROVED BY THE
BANKRUPTCY COURT.
==============================================================================
THE UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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:
IN RE : Chapter 11
:
SOLUTIA INC., ET AL., : Case No. 03-17949 (PCB)
:
Debtors. : (Jointly Administered)
:
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THIS DISCLOSURE STATEMENT APPLIES TO:
X All Debtors Axio Research Corporation
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Solutia Inc. Solutia Investments, LLC
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Solutia Business Enterprises Inc. Beamer Road Management Company
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Solutia Systems, Inc. Monchem, Inc.
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Solutia Overseas, Inc. Solutia Inter-America, Inc.
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CPFilms Inc. Solutia International Holding, LLC
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Solutia Management Company, Inc. Solutia Taiwan, Inc.
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Monchem International, Inc. Solutia Greater China, Inc.
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DEBTORS' FIRST AMENDED DISCLOSURE STATEMENT PURSUANT
TO SECTION 1125 OF THE BANKRUPTCY CODE
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KIRKLAND & ELLIS LLP
Citigroup Center
153 East 53rd Street
New York, New York 10022-4611
(212) 446-4800
Attorneys for Debtors and Debtors in Possession
Dated: May 16, 2007
TABLE OF CONTENTS
PAGE
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I. INTRODUCTION...................................................................................................1
II. EXECUTIVE SUMMARY.............................................................................................2
A. CORPORATE HISTORY AND EVENTS LEADING TO THE FILING OF THE CHAPTER 11 CASES......................2
B. EVENTS DURING THE CHAPTER 11 CASES..............................................................3
C. REORGANIZED SOLUTIA.............................................................................5
D. KEY ELEMENTS OF THE AMENDED PLAN................................................................5
1. Reallocation of the Legacy Liabilities.................................................6
2. Resolution of Outstanding Adversary Litigations and Claims.............................7
3. Chapter 11 Claims......................................................................8
(a) Asserted and Scheduled Claims.................................................8
(b) Estimates of Certain Classes of Claims........................................9
(c) Implied Equity Value Available For Distribution..............................10
(d) Distributions to Creditors Under the Amended Plan............................10
(i) Certain Creditors Will Be Paid In Full...............................10
(ii) Certain Creditors and Equity Interest Holders Will Receive
Shares of New Common Stock...........................................10
4. Releases..............................................................................11
5. The Exit Financing Facility...........................................................12
E. SUMMARY OF CLASSIFICATION AND TREATMENT OF ALLOWED CLAIMS AND EQUITY INTERESTS UNDER
THE AMENDED PLAN...............................................................................12
F. PARTIES ENTITLED TO VOTE ON THE AMENDED PLAN...................................................16
G. SOLICITATION PACKAGE...........................................................................16
H. VOTING INSTRUCTIONS............................................................................17
I. THE CONFIRMATION HEARING.......................................................................20
J. CONFIRMATION OF THE PLAN IS THE CULMINATION OF THE CHAPTER 11 CASES............................21
K. EFFECT OF THE AMENDED PLAN ON SOLUTIA'S ONGOING BUSINESS.......................................21
III. IMPORTANT INFORMATION.......................................................................................22
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IV. EVENTS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11 CASES...................................................25
A. OVERVIEW OF SOLUTIA'S BUSINESS.................................................................25
B. SOLUTIA'S CORPORATE HISTORY....................................................................26
1. The Creation of Solutia...............................................................26
2. The Spinoff...........................................................................26
3. The Monsanto Spinoff - Old Monsanto Becomes Pharmacia.................................27
4. Pfizer's Acquisition of Pharmacia.....................................................28
C. THE ASSUMPTION OF LEGACY LIABILITIES...........................................................28
1. Legacy OPEB Liabilities...............................................................29
2. Legacy Environmental Liabilities......................................................30
3. Legacy Tort Liabilities...............................................................30
4. Legacy Pension Liabilities............................................................30
5. Legacy Liability Allocation...........................................................31
D. EVENTS LEADING UP TO BANKRUPTCY................................................................31
1. The Initial Period Following the Spinoff..............................................31
2. Beginning of the Economic Downturn....................................................32
3. Continued Decline in Results, Burden of the Legacy Liabilities and
Difficulties Obtaining Favorable Financing............................................33
4. The Period Prior to Filing Bankruptcy.................................................34
5. Prepetition Attempts to Restructure the Business......................................36
(a) Anniston PCB Cases Settlement................................................36
(b) Anniston Partial Consent Decree..............................................37
(c) The Bank Credit Agreement....................................................37
(d) Negotiations with Monsanto, Pharmacia and Noteholders........................38
(e) Restructuring of the Euro Notes..............................................38
E. THE COMMENCEMENT OF THE CHAPTER 11 CASES.......................................................38
V. EVENTS DURING THE CHAPTER 11 CASES............................................................................39
A. STABILIZATION OF BUSINESS OPERATIONS...........................................................39
1. First Day Relief......................................................................39
2. DIP Financing.........................................................................40
3. Employee Retention....................................................................40
4. Retention of Restructuring and Other Professionals....................................41
B. NEW SENIOR MANAGEMENT TEAM.....................................................................42
C. REORGANIZATION STRATEGY........................................................................44
1. Enhancing the Performance of Solutia's Businesses.....................................44
(a) New Corporate Culture........................................................44
(b) Strategic Review of Solutia's Material Businesses............................45
(c) Proactive Commercial Perspective.............................................45
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(d) Cost Reduction and Efficiency Initiatives....................................45
(e) Operational Excellence Initiative............................................46
(f) Headcount Reductions.........................................................46
(g) Changes to Employee and Retiree Benefit Programs.............................46
(i) Changes in Active Employee Welfare Benefits..........................46
(ii) Actions Regarding the Forsberg Settlement............................46
(iii) Changes in Qualified U.S. Pension Plan Benefits......................47
(iv) Termination of Non-Qualified Pension Benefits........................48
(v) Changes in Other Post-Employment Benefits for Active
Employees............................................................48
(vi) Collective Bargaining Agreements with U.S. Union-Represented
Employees............................................................48
(h) Changes in Compensation Philosophy and Annual Incentive Programs.............49
(i) Remediation Management of Legacy Environmental Liabilities...................49
(j) Executory Contracts and Unexpired Leases.....................................50
2. Changes to the Asset Portfolio........................................................52
(a) Acquisition of Akzo Nobel's Interest in the Flexsys joint venture............52
(b) Changes in the Nylon Business................................................52
(i) Closure of the Acrylic Fibers Business...............................52
(ii) Closure of the Pensacola Industrial Fiber Business...................53
(iii) Conversion of the Pensacola Industrial Fiber Assets..................53
(iv) Improved Nylon Operational Reliability...............................53
(c) Changes in the Saflex Business...............................................54
(i) Acquisition of Vitro's interest in the Quimica Joint Venture.........54
(ii) Construction of Saflex(R) Interlayer Plant in China..................54
(iii) Construction of Third Extrusion Line at Ghent........................54
(d) Changes in the CPFilms Business..............................................55
(i) Installation of New CPFilms Metallizing Production Line..............55
(ii) Installation of New CPFilms Dye Line.................................55
(e) Changes in the Specialty Products Business...................................55
(i) Expansion of Therminol(R) Production in China........................55
(ii) Divestiture of the Dequest(R) Business...............................55
(iii) Closure of the Queeny Plant..........................................56
(iv) Closure of the Chlorobenzene Business................................56
(v) Closure of Other Operations..........................................56
(f) Strategic Actions Regarding Non-Core Assets..................................56
(i) Divestiture of the Pharmaceutical Services Business..................56
(ii) Divestiture of the Astaris Joint Venture.............................56
(iii) Divestiture of Axio Research Corporation.............................57
3. Reallocation of the Legacy Liabilities................................................57
(a) Legacy OPEB Liabilities......................................................57
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(i) The Retiree Trust....................................................57
(ii) Modification of Benefits Provided to Existing Retirees...............57
(b) Legacy Environmental Liabilities.............................................58
(c) Legacy Tort Liabilities......................................................58
(d) Legacy Pension Liabilities...................................................59
4. Appropriate Capital Structure and Conversion of Debt..................................59
(a) Capital Structure as of Petition Date........................................59
(b) Capital Structure upon Emergence; Exit Financing Facility....................60
D. FINANCIAL PERFORMANCE DURING BANKRUPTCY........................................................60
VI. SUMMARY OF LEGAL PROCEEDINGS.................................................................................60
A. LEGAL PROCEEDINGS IN THE BANKRUPTCY COURT......................................................61
1. The JPM Adversary Proceeding..........................................................61
2. Equity Committee Adversary Proceeding Against Monsanto and Pharmacia..................62
3. Litigation Among Pharmacia, Monsanto and Solutia......................................63
(a) Distribution Agreement Rejection.............................................63
(b) The Adversary Proceedings....................................................64
(c) The Standstill Agreement and Treatment in the Amended Plan...................64
(d) Monsanto's Proof of Claim....................................................64
(e) Pharmacia's Proof of Claim...................................................65
4. The EPA Adversary Proceeding..........................................................65
5. The Retirees Adversary Proceeding.....................................................66
6. Calpine Arbitration...................................................................66
7. Avoidance Actions.....................................................................66
(a) Preference Actions...........................................................67
(b) Fraudulent Transfer and Conveyance Actions...................................67
(i) Section 548 of the Bankruptcy Code...................................67
(ii) Section 544 of the Bankruptcy Code...................................68
B. PENDING LEGAL PROCEEDINGS OUTSIDE THE BANKRUPTCY COURT.........................................68
1. Cash Balance Plan Litigation..........................................................68
2. SIP Plan Litigation...................................................................69
3. Significant Legal Proceedings Involving Non-Debtor Affiliates of Solutia..............70
(a) Ferro Antitrust Investigation................................................70
(b) Flexsys Related Litigation...................................................70
4. Commercial Litigation.................................................................71
(a) Litigation against INEOS Americas LLC........................................71
5. Other Matters.........................................................................72
(a) Probst v. Monsanto and Solutia...............................................72
(b) Department of Labor Investigation............................................72
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VII. REORGANIZED SOLUTIA.........................................................................................73
A. BUSINESS OVERVIEW..............................................................................73
B. THE NYLON BUSINESS.............................................................................74
C. THE SAFLEX BUSINESS............................................................................75
D. THE FLEXSYS BUSINESS...........................................................................77
E. THE CPFILMS BUSINESS...........................................................................77
F. THE SPECIALTY PRODUCTS BUSINESS................................................................78
G. CAPITAL OBLIGATIONS TO BE SATISFIED OR COMPROMISED UPON EMERGENCE..............................80
1. DIP Credit Facility & Prepetition Secured Bank Debt...................................82
2. Senior Secured Notes..................................................................82
3. Retiree Trust.........................................................................83
4. Funding Co............................................................................83
5. Headquarters Financing................................................................83
6. Euro Notes............................................................................84
7. Flexsys Financing.....................................................................84
8. 2027/2037 Notes.......................................................................84
9. Trade Claims and Other Unsecured Obligations..........................................84
10. Equity................................................................................85
H. REORGANIZED SOLUTIA'S STRUCTURE................................................................86
1. New Common Stock......................................................................86
2. Exit Financing Facility...............................................................86
VIII. RESOLUTION OF THE LEGACY LIABILITIES.......................................................................86
A. EVENTS LEADING TO THE CURRENT RESOLUTION OF THE LEGACY LIABILITIES.............................86
1. The Agreement in Principle............................................................86
2. The Original Plan.....................................................................87
3. The Global Settlement.................................................................87
(a) Material terms of the Global Settlement remain unchanged by the terms
of the Amended Plan..........................................................87
(b) Changes to the Global Settlement since February 2006.........................88
B. DETAILED DISCUSSION OF TERMS OF THE REALLOCATION OF THE LEGACY LIABILITIES.....................89
1. Settlement Overview...................................................................89
(a) The Monsanto Claim...........................................................89
(b) Monsanto's Contributions to Solutia's Reorganization.........................90
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(i) As Between Itself and Solutia, Monsanto Is Taking Financial
Responsibility for All Tort Claims...................................90
(ii) Monsanto Is Taking Financial Responsibility, As Between
Itself and Solutia Only, for Certain Environmental
Remediation and Clean-Up Obligations.................................91
(a) Monsanto Is Taking Responsibility, As Between
Itself and Solutia Only, for All Environmental
Liabilities at the Legacy Sites.............................91
(b) Monsanto Is Sharing Financial Responsibility with
Solutia for Obligations at Shared Sites.....................91
(iii) Settlement of Litigation Among Pharmacia, Monsanto and
Solutia..............................................................92
(iv) Monsanto Will Continue To Operate Under the Commercial and
Operating Agreements, and Will Extend the Terms of the
Master Operating Agreement...........................................92
(c) The Retiree Settlement.......................................................93
(d) Settlement With Pharmacia....................................................93
2. Settlement of Tort Claims.............................................................94
3. Overview of Tort Claims For Which Monsanto Has Agreed to Take
Financial Responsibility..............................................................95
(a) Premises-Based Asbestos Claims...............................................95
(b) Dioxin Claims................................................................95
(c) PCB Claims...................................................................96
(d) Silica.......................................................................97
(e) Other Claims/Unspecified Claims..............................................97
4. Settlement of Legacy Environmental Liabilities........................................97
(a) Retained Sites (Solutia-Owned or Operated Sites).............................98
(b) Legacy Sites (Never Owned or Operated by Solutia)............................99
(c) Shared Site Areas (Anniston and Sauget).....................................100
(d) Certain Waste Sites.........................................................100
(e) Natural Resource Damages at Anniston and Sauget.............................101
(f) Miscellaneous Prepetition Environmental Claims..............................101
(g) The Terms of the Relationship Agreement.....................................101
5. Monsanto's Settlement of Adversary Proceedings, Contested Matters, Disputes
and the Monsanto Proof of Claim......................................................102
6. Monsanto's Agreement to Waive Claims for Indemnity and Contribution Against
Solutia..............................................................................102
7. Monsanto's Agreement to Enter into the Relationship Agreement and Continue the
Commercial and Operating Agreements..................................................103
(a) Chocolate Bayou Agreements..................................................103
(b) HMD Supply Agreement........................................................104
8. The Retiree Settlement...............................................................104
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9. The Pharmacia Settlement.............................................................105
C. CONSIDERATION RECEIVED UNDER THE AMENDED PLAN.................................................105
1. Monsanto's Consideration.............................................................105
2. Pharmacia's Consideration............................................................106
3. General Unsecured Creditors' Consideration...........................................106
4. New Indemnities......................................................................106
D. THE RELEASES AND THE MONSANTO/PHARMACIA INJUNCTION ARE NECESSARY COMPONENTS OF THE
AMENDED PLAN..................................................................................107
E. THE RELATIONSHIP AGREEMENT IS CRITICAL TO THE AMENDED PLAN....................................109
F. APPROVAL OF THE SETTLEMENT OF THE LITIGATION AMONG MONSANTO, PHARMACIA AND SOLUTIA IS
CLEARLY WARRANTED.............................................................................110
IX. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE AMENDED PLAN...........................................111
A. LIQUIDATION UNDER CHAPTER 7...................................................................111
B. ALTERNATIVE PLAN TO REORGANIZATION OR LIQUIDATION.............................................112
X. PROJECTED FINANCIAL INFORMATION..............................................................................113
XI. RISK FACTORS................................................................................................115
A. CERTAIN BANKRUPTCY CONSIDERATIONS.............................................................115
B. FACTORS AFFECTING THE VALUE OF THE SECURITIES TO BE ISSUED UNDER THE AMENDED PLAN.............118
C. RISKS RELATED TO SOLUTIA'S BUSINESS AND INDUSTRY..............................................123
XII. CONFIRMATION OF THE PLAN...................................................................................130
A. THE CONFIRMATION HEARING......................................................................130
B. DEADLINE TO OBJECT TO CONFIRMATION............................................................130
C. REQUIREMENTS FOR CONFIRMATION OF THE PLAN.....................................................130
1. Requirements of Section 1129(a) of the Bankruptcy Code...............................130
2. Best Interests of Creditors..........................................................132
3. Acceptance...........................................................................134
4. Feasibility..........................................................................134
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5. Requirements of Section 1129(b) of the Bankruptcy Code...............................134
(a) "Fair and Equitable"........................................................135
(b) Secured Creditors...........................................................135
(c) Unsecured Creditors.........................................................135
(d) Holders of Equity Interests.................................................135
(e) "Unfair Discrimination".....................................................136
D. VALUATION OF REORGANIZED SOLUTIA..............................................................136
E. IDENTITY OF INSIDERS..........................................................................136
F. EFFECT OF CONFIRMATION OF THE PLAN............................................................136
1. Term of Bankruptcy Injunction or Stays...............................................136
2. Preservation of Avoidance Actions....................................................137
3. Discharge of Claims and Termination of Equity Interests..............................137
XIII. SECTION 1145 EXEMPTION FOR OFFER AND SALE OF THE NEW COMMON STOCK UNDER THE PLAN..........................138
XIV. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE AMENDED PLAN...........................................141
1. Consequences to Holders of Claims and Equity Interests...............................142
(a) Consequences to Holders of Secured Claims...................................142
(b) Consequences to Holders of Senior Secured Note Claims.......................142
(c) Consequences to Holders of Noteholder Claims and General Unsecured
Claims......................................................................143
(i) Treatment of a Debt Instrument as a "Security"......................143
(ii) The Rights..........................................................144
(iii) Treatment of a Holder of an Allowed Noteholder Claim or a
General Unsecured Claim if the Exchange of Its Claim Is
Treated as a Reorganization.........................................144
(iv) Treatment of a Holder of an Allowed Noteholder Claim or an
Allowed General Unsecured Claim if the Exchange of its Claim
Is Not Treated as a Reorganization..................................145
(v) Accrued Interest....................................................145
(vi) Market Discount.....................................................146
(d) Consequences to Holders of CPFilms Claims...................................146
(e) Consequences to Holders of Tort Claims......................................146
(f) Consequences to Holders of Security Claims..................................147
(g) Consequences to Holders of Equity Interests.................................147
(h) Consequences to Holders of Retiree Claims...................................147
B. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO THE DEBTORS.......................147
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1. Certain U.S. Federal Income Tax Consequences of the Amended Plan to Solutia..........147
(a) Cancellation of Indebtedness and Reduction of Tax Attributes................147
(b) Limitation of Net Operating Loss Carryovers and Other Tax Attributes........148
(c) Alternative Minimum Tax.....................................................150
(d) Funding Co..................................................................150
2. Backup Withholding and Reporting.....................................................151
XV. RECOMMENDATION..............................................................................................152
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EXHIBITS
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EXHIBIT A First Amended Plan of Reorganization(1)
EXHIBIT B Disclosure Statement Order
EXHIBIT C Solutia Inc. Annual Report, as amended, on Form 10-K for the fiscal
year ended December 31, 2006
EXHIBIT D Reorganized Debtors' Projections
EXHIBIT E Reorganized Debtors' Valuation
EXHIBIT F Liquidation Analysis(2)
EXHIBIT G Committees Appointed in the Debtors' Chapter 11 Cases and Their
Professionals
EXHIBIT H Schedule of Avoidance Actions
EXHIBIT I Certain Litigation Involving Monsanto and/or Pharmacia
EXHIBIT J Reconciliation of EBITDAR to GAAP Net Income
<FN>
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(1) The Exhibits to the proposed Debtors' First Amended Disclosure Statement
Pursuant to Section 1125 of the Bankruptcy Code (the "Disclosure
Statement") are voluminous. Accordingly, those Exhibits will be filed
with the Bankruptcy Court but will not be annexed to the Disclosure
Statement for purposes of service. Parties can obtain copies of the
Exhibits to the proposed Disclosure Statement from the website of the
Debtors' notice and claims agent, The Trumbull Group, at
http://www.trumbullgroup.com.
(2) A liquidation analysis was included as an exhibit to the original
Disclosure Statement filed on February 14, 2006. A revised exhibit,
updated to reflect changes to the liquidation analysis since February 14,
2006, will be filed with the Bankruptcy Court and provided to parties in
interest prior to the Disclosure Statement Hearing.
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I.
INTRODUCTION
------------
Solutia Inc. ("Solutia"), a Delaware corporation with its primary
headquarters in St. Louis, Missouri, and certain of Solutia's direct and
indirect subsidiaries identified on the title page above (collectively,
"Solutia," the "Debtors" or the "Company"), as debtors and debtors in
possession, submit this Disclosure Statement,(3) pursuant to section 1125 of
title 11 of the United States Code (the "Bankruptcy Code"), to Holders of
Claims and Equity Interests(4) in connection with (A) the solicitation of
acceptances of the Debtors' First Amended Joint Plan of Reorganization, dated
[_________] [__], 2007, as the same may be amended from time to time (the
"Amended Plan"), which was filed by Solutia with the United States Bankruptcy
Court for the Southern District of New York (the "Bankruptcy Court") on May
16, 2007, and (B) the Confirmation Hearing, which is scheduled for [DATE,
MONTH], 2007, commencing at [TIME _.M.], (prevailing Eastern Time). A copy of
the Amended Plan is annexed to this Disclosure Statement as Exhibit A.
This Disclosure Statement includes information about Solutia's
prepetition operating and financial history, the events leading up to the
commencement of the Chapter 11 Cases, significant events that occurred during
the Chapter 11 Cases, and the proposed organization, operations and financing
of Reorganized Solutia if the Amended Plan is confirmed and becomes effective.
This Disclosure Statement also summarizes terms and provisions of the Amended
Plan, including certain effects of confirmation of the Amended Plan, certain
risk factors relating to Solutia or Reorganized Solutia, the Amended Plan and
the securities to be issued under the Amended Plan and the manner in which
Distributions will be made under the Amended Plan. In addition, this
Disclosure Statement discusses the confirmation process and the voting
procedures that Holders of Claims entitled to vote on the Amended Plan must
follow for their votes to be counted. Unless otherwise noted in this
Disclosure Statement, all dollar amounts provided in this Disclosure Statement
and in the Amended Plan are given in United States dollars.
On [______], 2007, the Bankruptcy Court entered an order, annexed
hereto as Exhibit B (the "Disclosure Statement Order"), approving this
Disclosure Statement as containing "adequate information," i.e., information
of a kind and in sufficient detail to enable a hypothetical reasonable
investor typical of the Holders of Claims to make an informed judgment whether
to accept the Amended Plan.
<FN>
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(3) All capitalized terms used but not otherwise defined in this Disclosure
Statement shall have the meanings ascribed to them in the Amended Plan
and the exhibits thereto, including the Retiree Settlement Agreement.
(4) As set forth in this Disclosure Statement, and pursuant to the Disclosure
Statement Order (as hereinafter defined), only those Holders of Claims in
Classes 11, 12, 13, 14 and 15 who are entitled to vote on the Amended
Plan will receive this Disclosure Statement. All other Holders of Claims
and Equity Interests will receive a notice of the Disclosure Statement,
which will provide details on how to procure copies of this Disclosure
Statement.
1
II.
EXECUTIVE SUMMARY
-----------------
Prior to soliciting acceptances of a proposed plan of reorganization,
section 1125 of the Bankruptcy Code requires a debtor to prepare a disclosure
statement containing information of a kind, and in sufficient detail, to
enable a hypothetical reasonable investor to make an informed judgment
regarding acceptance of the plan of reorganization. This Disclosure Statement
is being submitted in accordance with the requirements of section 1125 of the
Bankruptcy Code. The following is a summary of the material items addressed in
the Disclosure Statement and of the Amended Plan, which is qualified by
reference to the entire Disclosure Statement and by the actual terms of the
Amended Plan, and the exhibits attached hereto and to the Amended Plan. This
Executive Summary is being provided as an overview and should not be relied
upon for a comprehensive discussion of the Disclosure Statement and/or the
Amended Plan.
A. CORPORATE HISTORY AND EVENTS LEADING TO THE FILING OF THE CHAPTER
-----------------------------------------------------------------
11 CASES
--------
In 1997 Old Monsanto (as defined below and also referred to herein as
Pharmacia) formed Solutia to hold and operate substantially all of the assets
and liabilities of Old Monsanto's historical chemicals business, including the
Legacy Liabilities (as defined below) related to contingent tort liabilities,
environmental remediation, pension obligations and certain retiree medical and
other benefits. Solutia was spun off to Old Monsanto's shareholders pursuant
to the terms of a Distribution Agreement, dated September 1, 1997, between
Solutia and Old Monsanto (the "Spinoff").
From the Spinoff until 1999, Solutia was a profitable business.
However, beginning in late 1999 and continuing through 2003, a general
downturn in the economy, increasing raw material prices and excess capacity in
the chemicals markets began to negatively impact Solutia's financial results.
Despite cost cutting efforts, this negative trend continued. During this
timeframe, the more than $100 million per year that Solutia was spending on
account of the Legacy Liabilities transferred to it at the time of the Spinoff
began to impose significant financial burdens on the Company. Moreover, as a
result of negative publicity surrounding PCB-related litigation filed against
Solutia and Monsanto in Anniston, Alabama, Solutia was unable to refinance its
senior debt facility on favorable terms. Faced with the challenges presented
by the Legacy Liabilities, the continuing economic downturn, high raw
materials costs and unfavorable debt terms, Solutia took several actions in an
attempt to improve its financial condition and mitigate the burdens imposed by
the Legacy Liabilities, including reducing costs and headcount, seeking a
reallocation of the Legacy Liabilities among Solutia, Pharmacia and Monsanto,
settling the Anniston PCB cases and refinancing its Bank Credit Agreement.
Despite these efforts to restructure its liabilities out of court, Solutia
continued to face deteriorating liquidity and a substantial Legacy Liability
burden. Accordingly, on December 17, 2003, Solutia commenced the Chapter 11
Cases.
2
B. EVENTS DURING THE CHAPTER 11 CASES
----------------------------------
During the Chapter 11 Cases, Solutia has greatly improved its
business operations and financial results. Under the leadership of a new
senior management team, Solutia developed and has been implementing a
four-prong reorganization strategy designed to address the factors that led to
its chapter 11 filing and to enable Solutia to thrive after emergence from
chapter 11. This four-prong strategy focuses on:
o managing Solutia's businesses to enhance financial and
operating performance including the utilization of the
unique powers of a chapter 11 debtor-in-possession;
o making changes to Solutia's asset portfolio so that it
consists of high-potential businesses that can consistently
deliver returns in excess of their cost of capital;
o achieving a reallocation of the Legacy Liabilities; and
o establishing an appropriate capital structure.
Solutia has implemented numerous initiatives since the Petition Date
to enhance its operational and financial performance in furtherance of the
first element of its reorganization strategy. Solutia's immediate emphasis
after filing the Chapter 11 Cases was on revitalizing the culture within
Solutia and on implementing cost cutting measures. Solutia promptly made
management changes throughout the Company, rolled out extensive cost reduction
initiatives and redesigned its compensation systems to be more
performance-driven. To further improve its cost competitiveness, Solutia made
changes to its U.S. based welfare benefit programs and froze future benefits
accruals under its qualified U.S. Pension Plan. During the Chapter 11 Cases,
Solutia has also utilized the tools of bankruptcy, including the chapter 11
contract rejection and assumption processes, to reject unfavorable contracts
or assume and obtain beneficial amendments to a number of executory contracts.
To better assess the Company's long-term viability, Solutia's
management conducted comprehensive and systematic strategic reviews of the
Company's material businesses and thereafter began executing on those reviews.
Solutia also adopted a more proactive commercial approach in dealing with its
customers. In addition, the Company initiated an operational excellence
program designed to deliver sustainable improvements in its manufacturing and
supply chain operations.
The second element of Solutia's reorganization strategy has been to
make changes to its asset portfolio as a means of enhancing the value of its
estates. This is consistent with Solutia's business strategy to build a
portfolio of high-potential businesses that can consistently deliver returns
in excess of their cost of capital. To implement this strategy, during the
Chapter 11 Cases, Solutia has (a) made strategic investments in its core
businesses; (b) exited certain unprofitable businesses and facilities; and (c)
divested non-core assets.
With respect to strategic investments in high-performing businesses,
Solutia has:
o acquired Flexsys, a global leader in high quality chemicals for
the rubber industry with $600 million in annual revenues. Prior to
such acquisition, Flexsys was a 50/50 joint venture between
Solutia and Akzo Nobel N.V. ("Akzo Nobel");
3
o acquired a polyvinyl butyral ("PVB") interlayer plant, and its
related business operations, located in Puebla, Mexico, which
allows its Saflex laminating glazing interlayers business
("Saflex") to accelerate production of a new, higher margin
acoustic PVB product. Prior to such acquisition, the Puebla
facility and its related operations were part of a joint venture
between Solutia, with a 49% interest, and Vitro S.A., with a 51%
interest;
o initiated construction of a third extrusion line at its facility
in Ghent, Belgium, which allows its Saflex business to better meet
the rapid growth in architectural PVB sheet;
o initiated construction of a new PVB interlayer plant in Suzhou,
China, which provides its Saflex business with improved access to
the growing Asian automotive industry;
o initiated conversion of historic industrial and carpet fiber
assets at its Pensacola, Florida facility into assets that produce
resin and compound, which allows its integrated nylon ("Nylon")
business to participate in the higher value and growing plastics
market for Nylon 6,6;
o invested in improved plant infrastructure and operational
reliability at its Alvin, Texas (Chocolate Bayou) Nylon facility,
which has historically incurred high costs associated with
unplanned downtime and disruptions in raw material deliveries and
product shipments;
o installed a new metallizing production line and a new dye line at
its Martinsville, Virginia facility, which significantly increased
the capacity and versatility of its CPFilms (as defined below)
business in such areas; and
o invested in a new Therminol heat transfer fluid manufacturing
facility in Suzhou, China, which more than doubled the facility's
production capacity.
With respect to exiting non-profitable businesses and facilities and
divesting of non-core assets, Solutia has:
o closed its acrylic fibers business, its chlorobenzene business and
its Pensacola, Florida industrial fiber business;
o relocated its Skydrol and Skykleen production lines from St.
Louis, Missouri to Anniston, Alabama, and thereafter closed its
Queeny (St. Louis, Missouri) plant; and
o divested its pharmaceutical services business and its Astaris
joint venture interest. Solutia has also entered into an agreement
to divest its Dequest(R) phosphonates business.
4
The third element of Solutia's reorganization strategy is to achieve
a reallocation of the significant tort, environmental and retiree Legacy
Liabilities that it assumed as part of the Spinoff. To achieve a reallocation
of these Legacy Liabilities, Solutia entered into arms-length negotiations
with Monsanto, the Creditors' Committee and the Retirees' Committee which
resulted in the reallocation of the Legacy Liabilities described herein.
Solutia believes that the reallocation is necessary for the Company to emerge
as a viable entity. The reallocation of the Legacy Liabilities will be
accomplished pursuant to the Amended Plan, which incorporates the terms of the
Relationship Agreement and the Retiree Settlement.
With respect to the fourth element of its reorganization strategy,
Solutia believes that it is positioned to emerge with an improved capital
structure and an appropriate Exit Financing Facility.
C. REORGANIZED SOLUTIA
-------------------
Solutia, together with its wholly owned debtor subsidiaries and
wholly owned non-debtor foreign subsidiaries, will emerge from these Chapter
11 Cases as a global organization with a strong portfolio of businesses, many
of which have industry-leading positions within their markets. Each of
Reorganized Solutia's major businesses is described below:
o Solutia's Nylon business produces fibers, plastics and
high-performance polymers for a variety of applications from carpet
to automotive parts. Solutia's Nylon business is one of the world's
few fully integrated producers of Nylon 6,6.
o Solutia's Saflex business manufactures PVB, plastic interlayers that
are used in laminated safety glass in automotive and architectural
applications. Solutia is a leader in the laminated glass industry and
is the world's largest manufacturer of PVB.
o Solutia's recently acquired Flexsys business is a leading producer of
chemicals for the rubber industry.
o Solutia's CPFilms ("CPFilms") business is the world leader in
custom-coated window films for aftermarket automotive and
architectural applications, as well as other precision coating
applications.
o Solutia's specialty products ("Specialty Products") business is
comprised of a group of specialty industrial chemical products,
including heat transfer fluids and aviation hydraulic fluids, used in
a variety of industrial applications and a plastic products business
focusing on entrance matting and automotive spray suppression flaps.
Solutia is a world leader in many of the markets for these niche
businesses.
D. KEY ELEMENTS OF THE AMENDED PLAN
--------------------------------
The Amended Plan is the result of protracted arms-length negotiations
among Solutia and its stakeholders. Importantly, the Amended Plan does not
alter the material terms of the reallocation of the Legacy Liabilities set
forth (a) in the plan of reorganization filed on February 14, 2006 (the
"Original Plan"), (b) the Relationship Agreement, or (c) the Retiree
5
Settlement Agreement. However, the terms of the Amended Plan do provide for
material changes to the classification of Solutia's creditors and the
Distributions that will be available to them.
1. REALLOCATION OF THE LEGACY LIABILITIES
--------------------------------------
The Amended Plan, the Relationship Agreement and the Retiree
Settlement Agreement reallocate the Legacy Liabilities as follows:
o Tort Liabilities. Approximately 8,500 Tort Claims were filed in
----------------
the Chapter 11 Cases asserting amounts that total more than $17
billion in the aggregate, plus multiple unliquidated Claims not
specifying a damage amount. Monsanto has agreed to be responsible,
as between itself and Solutia only, for the payment of all past
and future Tort Claims related to products liability, property
damage, personal injury or premises liability or other damages
arising out of or related to the historical chemical business and
liabilities transferred to Solutia at the time of the Spinoff. As
a result, the Tort Claims will be Reinstated under the Amended
Plan and resolved by Monsanto in the ordinary course of business.
o Environmental Liabilities. Environmental Claims in an aggregate
-------------------------
amount of $4 billion have been asserted against Solutia in the
Chapter 11 Cases. Pursuant to the terms of the Relationship
Agreement, Solutia and Monsanto have agreed to allocate the
responsibility for environmental remediation and clean-up
obligations at designated sites as follows: (a) Solutia will
remain responsible for the environmental liabilities at sites that
it presently owns or operates; (b) Monsanto will assume
responsibility for sites that were transferred to Solutia pursuant
to the Spinoff, but with respect to which Solutia was never an
owner/operator; and (c) Solutia and Monsanto will share
responsibility with respect to the Anniston, Alabama and Sauget,
Illinois sites.(5)
o Legacy OPEB Liabilities. Solutia's liabilities with respect to
-----------------------
providing its Retirees with medical and other post-employment
benefits were modified by the terms of the Retiree Settlement
Agreement. The Retiree Settlement effectuates a comprehensive
settlement between Solutia and the Retirees' Committee regarding
Solutia's OPEB obligations. This settlement (a) provides cost
savings to Solutia by modifying Solutia's obligations to provide
medical and other post employment benefits to its Retirees, (b)
sets up a trust funded with $175 million in cash to be raised in
the Rights Offering, which will satisfy Reorganized Solutia's
continued payment of retiree medical and life insurance benefits,
and (c) grants the Retirees a $35 million Retiree Claim, the
Distribution on account of which will be contributed to the
Retiree Trust.
<FN>
- -------------------------
(5) The description of sites in this paragraph and the Disclosure Statement
generally is qualified by reference to the Relationship Agreement.
6
o Legacy Pension Liabilities. During the Chapter 11 Cases, Solutia
--------------------------
ceased future benefit accruals under its qualified U.S. Pension
Plan in order to reduce required funding obligations to a
manageable level. While in chapter 11, Solutia has funded over
$235 million to the Pension Plan with approximately $100 million
in additional contributions to be made later this year. Solutia
has satisfied all minimum funding requirements under ERISA and
expects the Plan to be over 80% funded by the end of 2007. Solutia
will retain its Pension Plan after emergence and is confident that
it can satisfy future mandatory funding obligations now that
benefit accruals have ceased. Total required contributions for
2008 through 2011 are expected to be approximately $90 million.
The preservation of Solutia's Pension Plan through Solutia's
reorganization will benefit over 19,000 participants in the
Pension Plan.
2. RESOLUTION OF OUTSTANDING ADVERSARY LITIGATIONS AND CLAIMS
----------------------------------------------------------
The Amended Plan incorporates the resolution or settlement of the
various adversary proceedings filed by and against Solutia during the Chapter
11 Cases:
o The JPM Adversary Proceeding. As described in Section VI.A.1
----------------------------
hereof, on May 27, 2005, JPMorgan Chase National Bank N.A.
("JPMorgan"),(6) as the Prepetition Indenture Trustee under the
Prepetition Indenture, filed an adversary proceeding against
Solutia in the Chapter 11 Cases (the "JPM Adversary Proceeding").
In this adversary proceeding, the Prepetition Indenture Trustee
asserted five causes of action seeking declaratory judgments that
the holders of the 2027/2037 Notes (the "Noteholders") were
entitled to security interests in certain of Solutia's assets, and
one cause of action seeking adequate protection under section 363
of the Bankruptcy Code. After significant discovery and pre-trial
briefing, a trial in this adversary proceeding took place from
late May through early July 2006. On May 1, 2007, the Bankruptcy
Court ruled that the Noteholders do not have, and are not entitled
to, a lien on any of the Debtors' assets. As a result of the
Bankruptcy Court's ruling, the Amended Plan provides that the
Noteholders will receive, on account of their individual Claims,
the same percentage recovery provided to Holders of General
Unsecured Claims.
o The Equity Committee Adversary Proceeding. As described in Section
-----------------------------------------
VI.A.2 hereof, on March 7, 2005, the Equity Committee commenced an
adversary proceeding against Monsanto and Pharmacia in the Chapter
11 Cases (the "Equity Committee Adversary Proceeding"). By its
adversary proceeding, the Equity Committee seeks to disallow
Monsanto and Pharmacia's Claims against Solutia based on alleged
wrongful and inequitable conduct by Monsanto and Pharmacia
relating to the Spinoff. On September 14, 2006, the Bankruptcy
Court ruled that the Equity Committee only had standing to pursue
claim objections against Monsanto and
<FN>
- -------------------------
(6) Wilmington Trust Company ("Wilmington") has replaced JPMorgan as the
Prepetition Indenture Trustee. On March 12, 2007, the Bankruptcy Court
entered a Stipulation and Order substituting Wilmington as plaintiff in
the JPM Adversary Proceeding.
7
Pharmacia. The Bankruptcy Court has indicated that it will
consider at its hearing on May 18, 2007, the Equity Committee's
request to schedule the Equity Committee Adversary Proceeding for
trial. Solutia believes that it has already settled the objections
to Monsanto and Pharmacia's claims and that the Equity Committee
only has the ability to challenge the reasonableness of this
settlement. If the Bankruptcy Court approves the terms of
Solutia's settlement with Pharmacia and Monsanto at the
Confirmation Hearing, pursuant to the standards governing the
approval of settlements under Bankruptcy Rule 9019, then the
Equity Committee Adversary Proceeding will necessarily be
dismissed with prejudice.
o Litigation Among Pharmacia, Monsanto and Solutia. Since the
------------------------------------------------
Petition Date, Solutia, Pharmacia and Monsanto have engaged in
certain litigations regarding their respective rights and
obligations under the Distribution Agreement. In exchange for,
among other things, Monsanto's agreement to take financial
responsibility for the Legacy Liabilities as described herein, the
distribution of New Common Stock provided to Monsanto pursuant to
the terms of the Amended Plan, Pharmacia's agreement to waive its
claims against the Estates and the releases provided to Monsanto
and Pharmacia pursuant to the terms of the Amended Plan, Solutia,
Monsanto and Pharmacia have each agreed to settle these adversary
proceedings.
o The Retirees' Adversary Proceeding. On May 7, 2004, the Retirees'
----------------------------------
Committee commenced an adversary proceeding seeking a declaratory
judgment (a) that Pharmacia and Monsanto are liable for the
Retirees' benefit claims in the event Solutia obtains relief
pursuant to Bankruptcy Code section 1114 and (b) that Pharmacia
and Monsanto's claims for indemnity related to Retiree Claims
should be equitably subordinated (the "Retirees' Adversary
Proceeding"). Pursuant to the terms of the Amended Plan and the
Retiree Settlement Agreement, the Retirees' Adversary Proceeding
will be withdrawn with prejudice.
3. CHAPTER 11 CLAIMS
-----------------
(a) Asserted and Scheduled Claims
Over 14,800 proofs of claim were filed against the Debtors in the
Chapter 11 Cases. In addition, the Debtors listed approximately 2,500 Claims
in their Schedules. These Claims asserted amounts of over $28 billion in the
aggregate. The Claims are categorized into classes based upon the similarity
or dissimilarity of Claims (with similarly situated Claims in the same class)
as prescribed by the Bankruptcy Code. A chart setting forth the Classes of
Claims against and Interests in Solutia, and the treatment of such Claims and
Interests as provided for in the Amended Plan, follows.
Pursuant to the terms of the Amended Plan, except for Claims that are
(a) expressly exempted from the discharge provisions of the Bankruptcy Code,
or (b) specifically identified as being Reinstated, all Claims that arose
prior to the confirmation of the Amended Plan will be discharged.
8
(b) Estimates of Certain Classes of Claims
Claims in Classes 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 will be paid in
Cash in full on the Effective Date, will be Reinstated or will otherwise not
be impaired by the terms of the Amended Plan. Claims and Equity Interests in
Classes 18, 19 and 20 will not receive any Distribution under the Amended
Plan. Claims in Class 16 will receive a Distribution under the Amended Plan
and the holders of such claims are deemed to accept the Amended Plan. Claims
in Class 17 will not receive a Distribution and are deemed to accept the
Amended Plan. Claims in Classes 11, 12, 13, 14 and 15 will receive
Distributions of shares of New Common Stock under the terms of the Amended
Plan or other Distributions. The estimated aggregate amount of Claims in each
of Classes 11, 12, 13, 14 and 15 is set forth below:
o Monsanto Claim. Monsanto has agreed, as part of the Monsanto
--------------
Settlement only, to accept an Allowed Unsecured Claim equal to the
value of (a) amounts related to the management and settlement of
Legacy Claims and other expenses on the Debtors' behalf that (i)
Monsanto has spent from the Petition Date through March 31, 2007,
which Solutia believes to be $180.9 million, and (ii) Monsanto
likely will spend, pursuant to the Monsanto Settlement, following
such date (discounted to present value), which amount Solutia
believes to be $143.6 million, (b) the extension of the term of
the Master Operating Agreement, (c) the replacement of the
Distribution Agreement with the Relationship Agreement, (d) the
settlement of litigation related to Solutia's Anniston, Alabama
plant, (e) the elimination of all Tort Claims from Solutia's
General Unsecured Claims pool, (f) the waiver of the right to file
surrogate claims on behalf of legacy claimants, (g) the waiver of
various indemnity claims related to legacy liabilities for which
Monsanto has agreed to assume responsibility, (h) the Chocolate
Bayou Settlement and continuation of the Commercial and Operating
Agreements subject to the terms thereof, and (i) the resolution of
all litigation and potential litigation related to the
Distribution Agreement, the classification of Monsanto's Claim and
other matters, between Solutia and Monsanto.(7)
o 2027/2037 Notes. The face amount of the 2027/2037 Notes plus
---------------
accrued but unpaid interest as of the Petition Date is $455.4
million.
o General Unsecured Claims. The Debtors estimate that the total
------------------------
amount of Allowed General Unsecured Claims will range between
$327 million and $377 million.
o Retiree Claim. Pursuant to the terms of the Retiree Settlement
-------------
Agreement, the Retiree Claim has been fixed at $35 million.
o Pharmacia. Holders of Pharmacia Claims will receive
---------
Distributions in the form of a limited indemnity and release.
<FN>
- -------------------------
(7) Monsanto believes that the amounts in clause (a) of this paragraph exceed
the Debtors' estimates.
9
(c) Implied Equity Value Available For Distribution
As more fully described in the valuation attached as Exhibit E hereto
prepared by Rothschild, the Debtors' financial advisor and investment banker,
the estimated midpoint enterprise value for Reorganized Solutia is
approximately $2.85 billion, assuming pro forma net debt of approximately $1.7
billion.(8) Accordingly, Reorganized Solutia's implied midpoint equity value
available for distribution to creditors is approximately $1.2 billion.
(d) Distributions to Creditors Under the Amended Plan
(i) Certain Creditors Will Be Paid In Full
Distributions under the Amended Plan will be made only to Holders of
Allowed Claims. As more fully described in Article VII of the Amended Plan,
Holders of Disputed Claims must wait until their Claims become Allowed to
receive their respective distributions. In addition, Allowed Administrative
Expense Claims, Allowed Priority Non-Tax Claims, Allowed CPFilms Claims and
Secured Claims will be paid in full.
(ii) Certain Creditors and Equity Interest Holders Will Receive
Shares of New Common Stock
Pursuant to the Amended Plan, the following Creditors and Equity
Interest Holders will receive the following distributions, as summarized below
(the recovery calculations set forth herein are based on the following
assumptions: (a) a General Unsecured Claims pool of $352 million -- the
midpoint of the estimated range for the ultimate aggregate amount of Allowed
General Unsecured Claims; (b) an exercise price in the Rights Offering at a
discount of 25% to Solutia's implied midpoint equity valuation; (c) full
subscription to the Rights Offering by participating parties; and (d) that all
recoveries are calculated net of the cost to acquire Rights):(9)
o Holders of Allowed Noteholder Claims in Class 12 will receive their
Pro Rata share, inclusive of Allowed General Unsecured Claims, of the
Stock Pool consisting of 50.4% of the New Common Stock. In addition,
each Holder of an Allowed Noteholder Claim that is an Eligible Holder
will be entitled to participate in the Rights Offering. Holders of
Allowed Noteholder Claims in Class 12 will receive a recovery of
approximately 84.9 cents on the dollar.
o Monsanto will receive 20% of the New Common Stock.(10) This recovery
will not be subject to dilution on account of the Rights Offering. In
addition, Monsanto will have an
<FN>
- -------------------------
(8) Pro forma debt of $1.7 billion less pro forma cash of $30 million.
(9) The discount applied to the Rights may change as a result of negotiations
among Solutia and its stakeholders; provided that the Rights Offering
--------
generates $250 million in Cash proceeds and that Monsanto receives 20% of
the New Common Stock after taking into account any dilution as a result
of the Rights Offering.
(10) Pursuant to the Monsanto Settlement, Monsanto's recovery on account of
this Claim is materially less than if the Monsanto Claim were allowed in
its full asserted amount.
10
Allowed Administrative Claim for all documented out of pocket
Environmental Liabilities spent by Monsanto related to the Retained
Sites, and to the Shared Sites in excess of $50 million during the
Chapter 11 Cases.
o Holders of Allowed General Unsecured Claims in Class 13 will receive
their Pro Rata share, inclusive of Allowed Noteholder Claims, of the
Stock Pool consisting of 50.4% of the New Common Stock. In addition,
each Holder of an Allowed General Unsecured Claim that is an Eligible
Holder will be entitled to participate in the Rights Offering.
Holders of Allowed General Unsecured Claims in Class 13 will receive
a recovery of approximately 84.9 cents on the dollar.
o In accordance with the terms of the Retiree Settlement Agreement, the
Retirees as a class will receive 1.7% of the New Common Stock,
resulting in a recovery of 59.5 cents on the dollar.
4. RELEASES
--------
The Amended Plan provides for the following releases:(11)
o Release By the Debtors. As of the Effective Date, the Debtors,
----------------------
Reorganized Solutia and their respective Estates will forever
release all claims arising on or prior to the Effective Date
against (a) the Debtors' current or former directors, officers and
employees, (b) the current and former members of the Creditors'
Committee, except for the Prepetition Indenture Trustee and their
advisors, (c) Monsanto, (d) Pharmacia, (e) Monsanto and
Pharmacia's employee benefit plans, (f) the Ad Hoc Trade Committee
and (g) the respective Affiliates and current or former
representatives, agents and advisors of the foregoing.
o Release By Holders of Claims and Equity Interests. As of the
-------------------------------------------------
Effective Date, each Holder of a Claim or Equity Interest will
forever release all claims, other than claims for Environmental
Liabilities related to the Retained Sites or the Shared Sites,
arising on or prior to the Effective Date against (a) the Debtors'
current or former directors, officers and employees, (b) the
current and former members of the Creditors' Committee, except for
the Prepetition Indenture Trustee and their respective advisors,
(c) Monsanto, (d) Pharmacia, (e) the Ad Hoc Trade Committee and
(f) the respective Affiliates and current or former
representatives, agents and advisors of the foregoing.
o Retiree Release. Pursuant to the terms of the Retiree Settlement
---------------
Agreement, the Retirees' Committee and the Retirees have agreed to
release and discharge claims for retiree benefits against (a) the
Debtors, (b) Monsanto, (c) Pharmacia, (d) Monsanto and Pharmacia's
employee benefit plans and (e) the respective directors, officers,
<FN>
- -------------------------
(11) This summary of the releases set forth in Article X of the Amended Plan
is provided solely for the convenience of the Bankruptcy Court and
parties in interest, and is qualified in its entirety by reference to the
terms of the Amended Plan. In the event of any inconsistency between the
terms of the Amended Plan and the terms of this summary, the terms of the
Amended Plan shall govern.
11
employees, affiliates, agents, advisors and professionals of each
of the foregoing. This release will not release and discharge
Reorganized Solutia or Monsanto from the performance of their
obligations under the terms of the Retiree Settlement Agreement.
Importantly, Monsanto and Pharmacia are not receiving a release from
the Debtors, Reorganized Solutia or Holders of Claims and Equity Interest for
those Claims for which Monsanto has agreed to assume financial responsibility
under the terms of the Amended Plan and the Relationship Agreement. These
Claims include Tort Claims, certain NRD Claims, Legacy Site Claims, and Claims
for Environmental Liabilities or Costs at sites other than the Retained Sites.
5. THE EXIT FINANCING FACILITY
---------------------------
As more fully described in Section VII.H.2. herein, Solutia will seek
to obtain an exit facility (the "Exit Financing Facility") of up to $2.0
billion (including undrawn availability on the revolving loan) to replace all
of its existing secured debt obligations, satisfy various bankruptcy related
costs, and provide adequate liquidity for on-going operations. The Exit
Financing Facility is expected to include some combination of institutional
term loans, a revolving loan, a letter of credit facility, high yield bonds or
second lien loans, depending on many factors, including the strength of the
capital markets.
E. SUMMARY OF CLASSIFICATION AND TREATMENT OF ALLOWED CLAIMS AND EQUITY
--------------------------------------------------------------------
INTERESTS UNDER THE AMENDED PLAN
--------------------------------
The following table(12) provides a summary of the distributions to
Holders of Allowed Claims and Equity Interests under the Amended Plan. The
recoveries set forth below are projected recoveries and may change based upon
changes in Allowed Claims and available proceeds.
<FN>
- -------------------------
(12) This table is only a summary of the classification and treatment of
Allowed Claims and Equity Interests under the Amended Plan. Reference
should be made to the entire Disclosure Statement and the Amended Plan
for a complete description of the classification and treatment of Allowed
Claims and Equity Interests.
12
- --------------------------------------------------------------------------------------------------------------------------------
ESTIMATED PERCENTAGE
TREATMENT OF ESTIMATED AGGREGATED AMOUNT OF RECOVERY OF ALLOWED
CLAIM/EQUITY ALLOWED CLAIMS OR EQUITY CLAIMS OR EQUITY
CLASS CLAIM/EQUITY INTEREST INTEREST INTERESTS INTERESTS
- --------------------------------------------------------------------------------------------------------------------------------
Class 1 Priority Non-Tax Claims Unimpaired $2.2 million 100%
- --------------------------------------------------------------------------------------------------------------------------------
Class 2 Secured Claims(13) Unimpaired $40-$50 million 100%
- --------------------------------------------------------------------------------------------------------------------------------
$205.9 million to
Class 3 Senior Secured Note Claims Unimpaired $223 million(14) 100%
- --------------------------------------------------------------------------------------------------------------------------------
Class 4 Convenience Claims Unimpaired $1 to $2.5 million 100%(15)
- --------------------------------------------------------------------------------------------------------------------------------
Class 5 CPFilms Claims Unimpaired $8.4 million(16) 100%
- --------------------------------------------------------------------------------------------------------------------------------
Class 6 NRD Claims Unimpaired Not applicable. NRD Claims See Exhibit A.
are being Reinstated and will
be paid in accordance with the
terms of the Amended Plan and
the Relationship Agreement.
- --------------------------------------------------------------------------------------------------------------------------------
Class 7 Insured Claims Unimpaired Not applicable. Holders of See Exhibit A.
Insured Claims can recover
against the applicable
insurance policies.
- --------------------------------------------------------------------------------------------------------------------------------
Class 8 Tort Claims Unimpaired Not applicable. Monsanto is See Exhibit A.
taking financial
responsibility for Tort Claims.
- --------------------------------------------------------------------------------------------------------------------------------
Class 9 Legacy Site Claims Unimpaired Not applicable. Monsanto is See Exhibit A.
taking financial
responsibility for Legacy
Site Claims.
- --------------------------------------------------------------------------------------------------------------------------------
Class 10 Equity Interests in all Unimpaired Not applicable. Not applicable.
Debtors other than Solutia
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
- -------------------------
(13) Secured Claims include Claims premised upon mechanics' liens and
materialmen's liens.
(14) The Allowed Amount of the Senior Secured Note Claims is subject to a
determination of the Senior Secured Noteholders' rights under applicable
law. Solutia believes that the Allowed amount of the Senior Secured
Notes Claim will not exceed $223 milion, however, the Senior Secured
Notes Trustee has asserted that its claims on behalf of the Senior
Secured Noteholders could exceed this amount. The $205.9 million is
determined using the effective interest method as of June 30, 2007.
(15) See Exhibit A.
(16) Holders of Allowed CPFilms Claims are entitled to receive interest on
such Claims at a rate to be negotiated among Solutia, the Creditors'
Committee, and the Ad Hoc Trade Committee. This interest rate shall be
disclosed prior to the Disclosure Statement Hearing.
13
- --------------------------------------------------------------------------------------------------------------------------------
ESTIMATED PERCENTAGE
TREATMENT OF ESTIMATED AGGREGATED AMOUNT OF RECOVERY OF ALLOWED
CLAIM/EQUITY ALLOWED CLAIMS OR EQUITY CLAIMS OR EQUITY
CLASS CLAIM/EQUITY INTEREST INTEREST INTERESTS INTERESTS
- --------------------------------------------------------------------------------------------------------------------------------
Class 11 Monsanto Claim Impaired See Note 17.(17) See Note 17.
- --------------------------------------------------------------------------------------------------------------------------------
Class 12 Noteholder Claims Impaired $455.4 million(18) 84.9%(19)
- --------------------------------------------------------------------------------------------------------------------------------
Class 13 General Unsecured Claims Impaired $327 million to $377 million 84.9%(20) (21)
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
- -------------------------
(17) Monsanto has agreed, as part of the Monsanto Settlement only, to accept
an Allowed Unsecured Claim equal to the value of (a) amounts related to
the management and settlement of Legacy Claims and other expenses on the
Debtors' behalf that (i) Monsanto has spent from the Petition Date
through March 31, 2007, which Solutia believes to be $180.9 million, and
(ii) Monsanto likely will spend, pursuant to the Monsanto Settlement,
following such date (discounted to present value), which amount Solutia
believes to be $143.6 million, (b) the extension of the term of the
Master Operating Agreement, (c) the replacement of the Distribution
Agreement with the Relationship Agreement, (d) the settlement of
litigation related to Solutia's Anniston, Alabama plant, (e) the
elimination of all Tort Claims from Solutia's General Unsecured Claims
pool, (f) the waiver of the right to file surrogate claims on behalf of
legacy claimants, (g) the waiver of various indemnity claims related to
legacy liabilities for which Monsanto has agreed to assume
responsibility, (h) the Chocolate Bayou Settlement and continuation of
the Commercial and Operating Agreements subject to the terms thereof,
and (i) the resolution of all litigation and potential litigation
related to the Distribution Agreement, the classification of Monsanto's
Claim and other matters, between Solutia and Monsanto. Monsanto will
also receive an Administrative Expense Claim for any amounts it pays (a)
for Retained Sites and (b) in excess of $50 million with respect to
documented out of pocket Environmental Liabilities at the Shared Sites
during the Chapter 11 Cases.
(18) Based on principal amount of $450 million plus accrued and unpaid
interest of $5.4 million as of the Petition Date.
(19) The recovery calculation is based on the following assumptions: (a) a
General Unsecured Claims pool of $352 million -- the midpoint of the
estimated range for the ultimate aggregate amount of Allowed General
Unsecured Claims; (b) an exercise price in the Rights Offering at a
discount of 25% to Solutia's implied midpoint equity valuation; (c) full
subscription to the Rights Offering by participating parties; and (d)
that all recoveries are calculated net of the cost to acquire Rights.
The discount applied to the Rights may change as a result of
negotiations among Solutia and its stakeholders; provided that the
--------
Rights Offering generates $250 million in Cash proceeds and that
Monsanto receives 20% of the New Common Stock after taking into account
any dilution as a result of the Rights Offering.
(20) The recovery calculation is based on the following assumptions: (a) a
General Unsecured Claims pool of $352 million -- the midpoint of the
estimated range for the ultimate aggregate amount of Allowed General
Unsecured Claims; (b) a Rights Offering discount of 25% to Solutia's
implied midpoint equity valuation; (c) full subscription to the Rights
Offering by participating parties; and (d) that all recoveries are
calculated net of the cost to acquire Rights. The discount applied to
the Rights may change as a result of negotiations among Solutia and its
stakeholders; provided that the Rights Offering generates $250 million
--------
in Cash proceeds and that Monsanto receives 20% of the New Common Stock
after taking into account any dilution as a result of the Rights
Offering.
(21) The ultimate percentage recovery received by Holders of Allowed General
Unsecured Claims will depend on the final aggregate amount of Allowed
General Unsecured Claims. For a discussion of Solutia's estimate of the
(Continued)
14
- --------------------------------------------------------------------------------------------------------------------------------
ESTIMATED PERCENTAGE
TREATMENT OF ESTIMATED AGGREGATED AMOUNT OF RECOVERY OF ALLOWED
CLAIM/EQUITY ALLOWED CLAIMS OR EQUITY CLAIMS OR EQUITY
CLASS CLAIM/EQUITY INTEREST INTEREST INTERESTS INTERESTS
- --------------------------------------------------------------------------------------------------------------------------------
Class 14 Retiree Claim Impaired $35 million 59.5%(22)
- --------------------------------------------------------------------------------------------------------------------------------
Class 15 Pharmacia Claims Impaired Not applicable. Pursuant to 0%
the terms of the Plan and the
Relationship Agreement,
Pharmacia will receive a
limited indemnity from
Reorganized Solutia and a
limited release from certain
claims.
- --------------------------------------------------------------------------------------------------------------------------------
Class 16 Non-Debtor
Intercompany Claims Impaired $108 million 40%(23)
- --------------------------------------------------------------------------------------------------------------------------------
Class 17 Debtor Intercompany Claims Impaired $2.44 billion 0%
- --------------------------------------------------------------------------------------------------------------------------------
Class 18 Axio Claims Impaired Not applicable. Holders of 0%
Claims in Class 18 will
receive no distribution under
the Amended Plan.
- --------------------------------------------------------------------------------------------------------------------------------
Class 19 Security Claims Impaired Not applicable. Holders of 0%
Claims in Class 19 will
receive no distribution under
the Amended Plan.
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
- -------------------------
aggregate amount of Allowed General Unsecured Claims, please see Exhibit
A to this Disclosure Statement. Notably, Solutia is in the process of
reconciling the General Unsecured Claims asserted in the Chapter 11
Cases and, as a result, certain General Unsecured Claims will be
resolved, through liquidation or disallowance, between now and the date
the Disclosure Statement is approved, and thereafter. Consequently, the
actual aggregate amount of Allowed General Unsecured Claims set forth in
this Disclosure Statement may be higher or lower than what is currently
estimated and the actual aggregate amount of Allowed General Unsecured
Claims ultimately could be outside the range that is currently
estimated.
(22) The recovery calculation is based on the following assumptions: (a) a
General Unsecured Claims pool of $352 million -- the midpoint of the
estimated range for the ultimate aggregate amount of Allowed General
Unsecured Claims; (b) an exercise price in the Rights Offering at a
discount of 25% to Solutia's implied midpoint equity valuation; (c) full
subscription to the Rights Offering by participating parties; and (d)
that all recoveries are calculated net of the cost to acquire Rights.
The discount applied to the Rights may change as a result of
negotiations among Solutia and its stakeholders; provided that the
--------
Rights Offering generates $250 million in Cash proceeds and that
Monsanto receives 20% of the New Common Stock after taking into account
any dilution as a result of the Rights Offering.
(23) On the Effective Date, each Non-Debtor Intercompany Claim will be
reduced by 60% and the remainder thereof shall be Reinstated by virtue
of book entries without a Distribution of Cash or other consideration
being made on account of such Claim.
15
- --------------------------------------------------------------------------------------------------------------------------------
ESTIMATED PERCENTAGE
TREATMENT OF ESTIMATED AGGREGATED AMOUNT OF RECOVERY OF ALLOWED
CLAIM/EQUITY ALLOWED CLAIMS OR EQUITY CLAIMS OR EQUITY
CLASS CLAIM/EQUITY INTEREST INTEREST INTERESTS INTERESTS
- --------------------------------------------------------------------------------------------------------------------------------
Class 20 Equity Interests in Impaired Not applicable. Holders of 0%
Solutia Claims in Class 20 will
receive no distribution under
the Amended Plan.
- --------------------------------------------------------------------------------------------------------------------------------
F. PARTIES ENTITLED TO VOTE ON THE AMENDED PLAN
--------------------------------------------
Under the provisions of the Bankruptcy Code, not all parties in
interest are entitled to vote on a Chapter 11 plan. The following sets forth
the Classes that are entitled to vote on the Amended Plan and the Classes that
are not entitled to vote on the Amended Plan:
o Solutia is NOT soliciting votes from the Holders of Claims in
Classes 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10, because such Classes,
and each Holder of a Claim in such Classes, are not Impaired under
the Amended Plan. Pursuant to section 1126(f) of the Bankruptcy
Code, such Classes are conclusively presumed to have accepted the
Amended Plan.
o Solutia is NOT soliciting votes from Holders of Claims in Classes
16 and 17, such Classes are deemed to have accepted the Amended
Plan.
o Solutia is NOT soliciting votes from the Holders of Claims in
Classes 18, 19 and 20 because such Classes are Impaired under the
Amended Plan, and such Holders will not receive any Distributions
under the Amended Plan. Pursuant to section 1126(g) of the
Bankruptcy Code, such Classes are deemed to have rejected the
Amended Plan.
o Solutia IS soliciting votes to accept or reject the Amended Plan
from those Holders of Claims as of [_____], 2007, which is the
record date for voting on the Amended Plan (also defined in the
Amended Plan as the "Voting Record Date"), in Classes 11, 12, 13,
14, and 15 because Claims in those Classes are Impaired under the
Amended Plan and the Holders of those Claims will receive
Distributions under the Amended Plan. As such, the Holders of such
Claims have the right to vote to accept or reject the Amended
Plan.
For a detailed description of the Classes of Claims and the Class of
Equity Interests, as well as their respective treatment under the Amended
Plan, see Exhibit A to this Disclosure Statement.
G. SOLICITATION PACKAGE
--------------------
Accompanying this Disclosure Statement are copies of:
o the Amended Plan;
16
o the Disclosure Statement Order, which, among other things, (a)
approves this Disclosure Statement as containing "adequate
information" in accordance with section 1125 of the Bankruptcy
Code, (b) establishes the procedures for voting on the Amended
Plan, (c) schedules a hearing to consider confirmation of the
Amended Plan (the "Confirmation Hearing"), (d) sets the deadline
for voting on and for objecting to confirmation of the Amended
Plan and (e) approves the Rights Offering Procedures;
o the Rights Offering Procedures, which accompany the Amended Plan
as Exhibit H;
o Rights Subscription Exercise Forms, which are provided only to the
Holders of Claims in Classes 12 and 13;
o notice of the Confirmation Hearing ("Confirmation Hearing
Notice"); and
o one or more Ballots and a return envelope, which are provided only
to the Holders of Claims in Classes 11, 12, 13, 14, and 15.
H. VOTING INSTRUCTIONS
-------------------
This Disclosure Statement, accompanied by a Ballot or Ballots to be
used for voting on the Amended Plan, is being distributed to the Holders of
Claims in Classes 11, 12, 13, 14, and 15. Only the Holders of Claims in these
Classes are entitled to vote to accept or reject the Amended Plan and may do
so by completing the Ballot and returning it in the envelope provided.
Solutia, with the approval of the Bankruptcy Court, has engaged
Financial Balloting Group LLC, 757 Third Avenue, New York, New York 10017,
www.fbgllc.com, as the claims and balloting agent (the "Voting Agent") to
assist in the voting process. The Voting Agent will answer questions, provide
additional copies of all materials, and oversee the voting process. The Voting
Agent will also process and tabulate Ballots for each Class entitled to vote
to accept or reject the Amended Plan.
The deadline to vote on the Amended Plan is 5:00 p.m. (prevailing
Eastern Time) [______], 2007 (the "Voting Deadline").
17
-----------------------------------------------------------
BALLOTS
-----------------------------------------------------------
Ballots and Master Ballots must be actually received by
the Voting Agent by the Voting Deadline at the following
address:
Solutia Balloting
c/o Financial Balloting Group LLC
757 Third Avenue, 3rd Floor
New York, New York 10017
If you received an envelope addressed to your Nominee,
please allow enough time when you return your ballot for
your Nominee to cast your vote on a Master Ballot before
the Voting Deadline.
If you have any questions on the procedure for voting on
the Amended Plan, please call the Voting Agent at the
following telephone number:
(646) 282-1800
-----------------------------------------------------------
MORE DETAILED INSTRUCTIONS REGARDING HOW TO VOTE ON THE AMENDED PLAN
ARE CONTAINED ON THE BALLOTS DISTRIBUTED TO CREDITORS THAT ARE ENTITLED TO
VOTE ON THE AMENDED PLAN. FOR YOUR VOTE TO BE COUNTED, YOUR BALLOT MUST BE
COMPLETED, SIGNED AND RECEIVED BY ___ P.M., (PREVAILING EASTERN TIME), ON
[____________], 2007.
ANY BALLOT THAT IS PROPERLY EXECUTED BY THE HOLDER OF A CLAIM, BUT
WHICH DOES NOT CLEARLY INDICATE AN ACCEPTANCE OR REJECTION OF THE AMENDED PLAN
OR WHICH INDICATES BOTH AN ACCEPTANCE AND A REJECTION OF THE AMENDED PLAN,
SHALL NOT BE COUNTED.
EACH HOLDER OF A CLAIM MAY CAST ONLY ONE BALLOT PER EACH SUCH CLAIM
HELD. BY SIGNING AND RETURNING A BALLOT, EACH HOLDER OF A CLAIM IN CLASSES 11,
12, 13, 14, AND 15 WILL CERTIFY TO THE BANKRUPTCY COURT AND SOLUTIA THAT NO
OTHER BALLOTS WITH RESPECT TO SUCH CLAIM HAVE BEEN CAST OR, IF ANY OTHER
BALLOTS HAVE BEEN CAST WITH RESPECT TO SUCH CLASS OF CLAIMS, SUCH EARLIER
BALLOTS ARE THEREBY SUPERSEDED AND REVOKED.
ALL BALLOTS ARE ACCOMPANIED BY RETURN ENVELOPES. IT IS IMPORTANT TO
FOLLOW THE SPECIFIC INSTRUCTIONS PROVIDED ON EACH BALLOT.
18
FOR NOMINEES:
------------
With respect to Noteholder Claims, Solutia will deliver Ballots to
Nominees.
The Nominees should deliver the Ballot and other documents relating
to the Amended Plan, including this Disclosure Statement, to each Beneficial
Owner (as defined in the Disclosure Statement Order) for which they serve as
Nominee.
A Nominee has two options with respect to voting. Under the first
option, the Nominee will forward the Solicitation Package to each Beneficial
Owner for voting and include a return envelope provided by and addressed to
the Nominee so that the Beneficial Owner may return the completed Beneficial
Owner Ballot to the Nominee. Upon receipt of the Ballots, the Nominee will
summarize the individual votes of its respective Beneficial Owners on the
appropriate Master Ballot and then return the Master Ballot to the Voting
Agent before the Voting Deadline.
Under the second option, if the Nominee elects to "prevalidate"
Ballots:
o The Nominee shall forward the Solicitation Package or copies
thereof (including (a) the Disclosure Statement (together with the
Amended Plan annexed thereto as Exhibit A, and all other
exhibits), (b) an individual Ballot that has been prevalidated, as
indicated in paragraph (b) below, and (c) a return envelope
provided by and addressed to the Voting Agent) to the Beneficial
Owner within three (3) business days of the receipt by such
Nominee of the Solicitation Package;
o To "prevalidate" a ballot, the Nominee shall complete and execute
the Ballot and indicate on the Ballot the name of the registered
holder, the amount of securities held by the Nominee for the
Beneficial Owner and the account number(s) for the account(s) in
which such securities are held by the Nominee; and
o The Beneficial Owner shall return the prevalidated Ballot to the
Voting Agent by the Voting Deadline.
If a Master Ballot is received after the Voting Deadline, the votes
and elections on such Master Ballot will not be counted. The method of
delivery of a Master Ballot to be sent to the Voting Agent is at the election
and risk of each Nominee. Except as otherwise provided in this Disclosure
Statement, such delivery will be deemed made only when the executed Master
Ballot is actually received by the Voting Agent. Instead of effecting delivery
by mail, it is recommended, though not required, that such entities use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Ballot should be sent to Solutia, or
Solutia's financial or legal advisors, but only to the Voting Agent as set
forth above.
Nominees must provide appropriate information for each of the items
on the Master Ballot, including, without limitation, identifying the votes to
accept or reject the Amended Plan.
By returning a Master Ballot, each Nominee will be certifying to
Solutia and the Bankruptcy Court, among other things, that:
19
o it has received a copy of the Disclosure Statement and other
solicitation materials annexed to the Disclosure Statement, and it
has delivered the same to the Beneficial Owners such Nominee
represents;
o it has received a completed and signed Ballot from each Beneficial
Owner whose vote is reflected on such Master Ballot;
o it is a bank, broker or other nominee (or agent thereof) that
holds the securities being voted on behalf of the Beneficial
Owners identified on such Master Ballot;
o it has properly disclosed (a) the number of such Beneficial
Owners, (b) the amount of the 2027/2037 Notes owned by each such
Beneficial Owner, (c) each Beneficial Owner's respective vote, if
any, concerning the Amended Plan and (d) the customer account,
serial number and/or other identification number for each such
Beneficial Owner;
o each such Beneficial Owner has certified to the Nominee that such
Beneficial Owner has not submitted any other Ballots for such
Class 12 Claims held in other accounts or other names, or, if it
has submitted another Ballot held in other accounts or names, that
the Beneficial Owner has certified to the Nominee that such
Beneficial Owner has cast the same vote for such Class 12 Claims,
and the undersigned has identified such other accounts or Owner
and such other Ballots;
o it has been authorized by each such Beneficial Owner to vote on
the Amended Plan; and
o it will maintain the original Beneficial Owner Ballot returned by
each Beneficial Owner (whether properly completed or defective)
for one year after the Voting Deadline (or such other date as is
set by subsequent Bankruptcy Court order) for disclosure to the
Bankruptcy Court or the Debtor, if so ordered.
Each Master Ballot must be returned in sufficient time to allow it to
be RECEIVED by the Voting Agent by no later than 5:00 p.m. (prevailing Eastern
Time) on the date of the Voting Deadline.
I. THE CONFIRMATION HEARING
------------------------
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court,
after notice, to hold a hearing on confirmation of the Amended Plan. Section
1128(b) of the Bankruptcy Code provides that any party in interest may object
to confirmation of the Amended Plan.
The Bankruptcy Court has scheduled the Confirmation Hearing for
[______], 2007 to take place at [______] (prevailing Eastern Time) (the
"Confirmation Hearing Date") before the Honorable Prudence Carter Beatty,
United States Bankruptcy Judge, in the United States Bankruptcy Court for the
Southern District of New York, located at Alexander Hamilton Custom House, One
Bowling Green, New York, New York 10004. The Confirmation Hearing may be
20
adjourned from time to time without further notice except for an announcement
of the adjourned date made at the Confirmation Hearing or any adjournment
thereof.
Objections to confirmation of the Amended Plan must be filed and
served on Solutia, and certain other parties, by no later than [______], 2007
at 4:00 p.m. (prevailing Eastern Time) (the "Plan Objection Deadline") in
accordance with the Confirmation Hearing Notice that accompanies this
Disclosure Statement. UNLESS OBJECTIONS TO CONFIRMATION OF THE AMENDED PLAN
ARE TIMELY SERVED AND FILED IN COMPLIANCE WITH THE DISCLOSURE STATEMENT ORDER,
THEY MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
Solutia will publish the Confirmation Hearing Notice, which will
contain the Plan Objection Deadline and Confirmation Hearing Date, in the
national edition of The Wall Street Journal, The Financial Times (U.S.
edition), St. Louis Post-Dispatch, and USA Today, to provide notification to
those persons who may not receive notice by mail.
J. CONFIRMATION OF THE PLAN IS THE CULMINATION OF THE CHAPTER 11 CASES
-------------------------------------------------------------------
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code enabling debtors to reorganize their businesses for the
benefit of creditors and shareholders. In addition to permitting the
rehabilitation of a debtor, chapter 11 promotes equality of treatment for
similarly situated creditors and similarly situated equity interest holders,
subject to the priority of distributions prescribed by the Bankruptcy Code.
The commencement of a chapter 11 case creates an estate that is
comprised of all of the legal and equitable interests of the debtor as of the
bankruptcy commencement date. The Bankruptcy Code provides that the debtor may
continue to operate its business and remain in possession of its property as a
"debtor in possession."
The consummation of a plan of reorganization is the principal
objective of a chapter 11 reorganization case. The confirmation of a plan of
reorganization by the bankruptcy court binds the debtor, any issuer of
securities under the plan of reorganization, any person acquiring property
under the plan of reorganization, any creditor or equity interest holder of a
debtor and any other person or entity as may be ordered by the bankruptcy
court in accordance with the applicable provisions of the Bankruptcy Code.
Subject to certain limited exceptions, the order issued by the bankruptcy
court confirming a plan of reorganization discharges a debtor from any debt
that arose prior to the confirmation of the plan of reorganization and
provides for the treatment of such debt in accordance with the terms of the
confirmed plan of reorganization.
K. EFFECT OF THE AMENDED PLAN ON SOLUTIA'S ONGOING BUSINESS
--------------------------------------------------------
Solutia is reorganizing pursuant to chapter 11 of the Bankruptcy
Code. As a result, the confirmation of the Amended Plan does not mean that
Solutia will be liquidated or forced to go out of business. Reorganized
Solutia will continue to operate Solutia's businesses going forward. More
information about the operation of Reorganized Solutia's business can be found
in Section VII of this Disclosure Statement.
21
III.
IMPORTANT INFORMATION
---------------------
THE DEBTORS, THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS, AND THE
AD HOC TRADE COMMITTEE APPOINTED IN THE CHAPTER 11 CASES, BELIEVE THAT THE
PLAN IS IN THE BEST INTERESTS OF ALL CREDITORS. ALL CREDITORS ENTITLED TO VOTE
ON THE PLAN ARE URGED TO VOTE IN FAVOR OF THE PLAN AND ALL RETIREES ARE URGED
TO SUPPORT THE RETIREE SETTLEMENT AGREEMENT (AS DEFINED BELOW). THE CREDITORS'
COMMITTEE SUPPORTS THE PLAN AND URGES ALL HOLDERS OF GENERAL UNSECURED CLAIMS
TO VOTE IN FAVOR OF THE PLAN. THE RETIREES' COMMITTEE SUPPORTS THE RETIREE
SETTLEMENT AGREEMENT AND THE PLAN PROCESS AND URGES ALL RETIREES TO SUPPORT
THE RETIREE SETTLEMENT AGREEMENT AND THE PLAN PROCESS. THE AD HOC TRADE
COMMITTEE SUPPORTS THE PLAN AND URGES ALL HOLDERS OF TRADE CLAIMS TO VOTE IN
FAVOR OF THE PLAN.
SOLUTIA BELIEVES THAT THE AMENDED PLAN IS IN THE BEST INTERESTS OF
ALL CREDITORS AND RETIREES. ALL CREDITORS ENTITLED TO VOTE ON THE AMENDED PLAN
ARE URGED TO VOTE IN FAVOR OF THE AMENDED PLAN AND ALL RETIREES ARE URGED TO
SUPPORT THE RETIREE SETTLEMENT AGREEMENT (AS DEFINED BELOW).
THE CONFIRMATION AND EFFECTIVENESS OF THE AMENDED PLAN ARE SUBJECT TO
MATERIAL CONDITIONS PRECEDENT, AS STATED IN ARTICLE VIII OF THIS DISCLOSURE
STATEMENT. THERE IS NO ASSURANCE THAT THESE CONDITIONS WILL BE SATISFIED OR
WAIVED.
CREDITORS ARE ENCOURAGED TO READ AND CAREFULLY CONSIDER THIS ENTIRE
DISCLOSURE STATEMENT, INCLUDING, WITHOUT LIMITATION, THE AMENDED PLAN, WHICH
IS ANNEXED HERETO AS EXHIBIT A, AND THE MATTERS DESCRIBED IN ARTICLE XI OF
THIS DISCLOSURE STATEMENT, ENTITLED "RISK FACTORS," PRIOR TO SUBMITTING
BALLOTS TO VOTE ON THE AMENDED PLAN.
THE BANKRUPTCY COURT'S APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT
CONSTITUTE A GUARANTEE OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION
CONTAINED HEREIN OR AN ENDORSEMENT OF THE MERITS OF THE AMENDED PLAN BY THE
BANKRUPTCY COURT.
SUMMARIES OF THE AMENDED PLAN AND STATEMENTS MADE IN THIS DISCLOSURE
STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE AMENDED PLAN AND
THE EXHIBITS AND SCHEDULES ATTACHED TO THE AMENDED PLAN AND THIS DISCLOSURE
STATEMENT. THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE
22
ONLY AS OF THE DATE OF THIS DISCLOSURE STATEMENT, AND THERE CAN BE NO
ASSURANCE THAT THE STATEMENTS CONTAINED HEREIN WILL BE CORRECT AT ANY TIME
AFTER SUCH DATE. EXCEPT AS OTHERWISE PROVIDED IN THE AMENDED PLAN OR IN
ACCORDANCE WITH APPLICABLE LAW, SOLUTIA IS UNDER NO DUTY TO UPDATE OR
SUPPLEMENT THIS DISCLOSURE STATEMENT.
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS INCLUDED
FOR PURPOSES OF SOLICITING ACCEPTANCES TO, AND CONFIRMATION OF, THE AMENDED
PLAN AND MAY NOT BE RELIED ON FOR ANY OTHER PURPOSE. SOLUTIA BELIEVES THAT A
SUMMARY OF CERTAIN PROVISIONS OF THE AMENDED PLAN AND CERTAIN OTHER DOCUMENTS
AND FINANCIAL INFORMATION CONTAINED OR REFERENCED IN THIS DISCLOSURE STATEMENT
ARE FAIR AND ACCURATE. THE SUMMARIES OF THE FINANCIAL INFORMATION AND THE
DOCUMENTS ANNEXED TO THIS DISCLOSURE STATEMENT, INCLUDING, BUT NOT LIMITED TO,
THE AMENDED PLAN, THE AMENDED PLAN DOCUMENTS AND THE RELATIONSHIP AGREEMENT,
OR INCORPORATED HEREIN BY REFERENCE, ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO THOSE DOCUMENTS. IN THE EVENT OF ANY INCONSISTENCY BETWEEN THE
DISCLOSURE STATEMENT AND THE AMENDED PLAN, THE RELEVANT PROVISION OF THE
AMENDED PLAN, AS IT RELATES TO SUCH INCONSISTENCY, SHALL GOVERN.
NO REPRESENTATIONS CONCERNING SOLUTIA OR THE VALUE OF SOLUTIA'S
PROPERTY HAVE BEEN AUTHORIZED BY SOLUTIA OTHER THAN AS SET FORTH IN THIS
DISCLOSURE STATEMENT. ANY INFORMATION, REPRESENTATIONS OR INDUCEMENTS MADE TO
OBTAIN ACCEPTANCE OF THE AMENDED PLAN, WHICH ARE OTHER THAN OR INCONSISTENT
WITH THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT AND IN THE AMENDED
PLAN, SHOULD NOT BE RELIED ON BY ANY CREDITOR ENTITLED TO VOTE ON THE AMENDED
PLAN.
THE NEW COMMON STOCK AND THE RIGHTS DESCRIBED IN THIS DISCLOSURE
STATEMENT WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY SIMILAR FEDERAL, STATE, LOCAL
OR FOREIGN LAW, IN RELIANCE ON THE EXEMPTION SET FORTH IN SECTION 1145 OF THE
BANKRUPTCY CODE OR OTHER APPLICABLE EXEMPTIONS UNDER THE FEDERAL SECURITIES
LAWS, TO THE EXTENT SUCH EXEMPTION MAY APPLY, AND MAY NOT BE OFFERED OR SOLD
EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION ("SEC") OR ANY SIMILAR
FEDERAL, STATE, LOCAL OR FOREIGN REGULATORY AGENCY, NOR HAS THE SEC OR ANY
OTHER SUCH AGENCY
23
PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED IN THIS
DISCLOSURE STATEMENT.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER PENDING,
THREATENED OR POTENTIAL LITIGATION OR ACTIONS, THIS DISCLOSURE STATEMENT DOES
NOT CONSTITUTE AND MAY NOT BE CONSTRUED AS AN ADMISSION OF FACT, LIABILITY,
STIPULATION OR WAIVER, BUT, RATHER, AS A STATEMENT MADE IN SETTLEMENT
NEGOTIATIONS.
SOLUTIA HAS SOUGHT TO ENSURE THE ACCURACY OF THE FINANCIAL
INFORMATION PROVIDED IN THIS DISCLOSURE STATEMENT, BUT THE FINANCIAL
INFORMATION CONTAINED IN, OR INCORPORATED BY REFERENCE INTO, THIS DISCLOSURE
STATEMENT HAS NOT BEEN AND WILL NOT BE AUDITED OR REVIEWED BY SOLUTIA'S
INDEPENDENT AUDITORS UNLESS EXPLICITLY PROVIDED OTHERWISE.
SOLUTIA MAKES STATEMENTS IN THIS DISCLOSURE STATEMENT THAT ARE
CONSIDERED FORWARD-LOOKING STATEMENTS UNDER THE FEDERAL SECURITIES LAWS.
SOLUTIA CONSIDERS ALL STATEMENTS REGARDING ANTICIPATED OR FUTURE MATTERS,
INCLUDING THE FOLLOWING, TO BE FORWARD-LOOKING STATEMENTS:
o any future effects as a result of the pendency o results of litigation;
ofthe Chapter 11 Cases;
o plans and objectives of management for future
o Solutia's expected future financial position, operations;
liquidity, results of operations, profitability
and cash flows; o contractual obligations;
o dividends; o off-balance sheet arrangements;
o financing plans; o growth opportunities for existing products and
services;
o competitive position;
o price increases;
o business strategy;
o general market conditions;
o budgets;
o benefits from new technology; and
o projected cost reductions;
o effect of changes in accounting due to
o projected and estimated liability costs, recently issued accounting standards.
including pension, retiree, tort and environmental
costs and costs of environmental remediation;
THESE STATEMENTS ARE NOT GUARANTEES OF SOLUTIA'S FUTURE PERFORMANCE.
THESE STATEMENTS REPRESENT SOLUTIA'S ESTIMATES AND ASSUMPTIONS ONLY AS OF THE
DATE SUCH STATEMENTS WERE MADE.
24
THERE ARE RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS THAT COULD CAUSE
THE DEBTORS' ACTUAL PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT
FROM THOSE THEY MAY PROJECT AND SOLUTIA UNDERTAKES NO OBLIGATION TO UPDATE ANY
SUCH STATEMENT. THESE RISKS, UNCERTAINTIES AND FACTORS INCLUDE:
o Solutia's ability to develop, confirm and o exposure to product liability and other
consummate the Amended Plan; litigation, environmental remediation obligations
and other environmental liabilities;
o Solutia's ability to reduce its overall financial
leverage; o lower prices for Solutia's products or a
decline in Solutia's market share due to
o the potential adverse impact of the Chapter competition or price pressure by customers;
11 Cases on Solutia's operations, management
and employees, and the risks associated with o ability to implement cost reduction initiatives
operating businesses in the Chapter 11 Cases; in a timely manner;
o the applicable Debtors' ability to comply with o ability to divest existing businesses;
the terms of the DIP Credit Facility;
o efficacy of new technology and facilities;
o customer response to the Chapter 11 Cases;
o limited access to capital resources;
o general economic, business and market conditions;
o changes in domestic and foreign laws and
o currency fluctuations; regulations;
o interest rate fluctuations; o general market conditions;
o price increases or shortages of raw materials and o geopolitical instability;
energy;
o changes in pension and other post-retirement
o disruption of operations; benefit plan assumptions; and
o the enactment of legislation increasing
funding obligations to the Solutia Pension Plan.
IV.
EVENTS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11 CASES
----------------------------------------------------------
A. OVERVIEW OF SOLUTIA'S BUSINESS
------------------------------
Solutia, together with its wholly owned debtor subsidiaries and
wholly owned non-debtor foreign subsidiaries, is a global organization that
manufactures and sells chemical-based materials for industrial and consumer
use. Solutia is a world leader in a number of markets. Solutia is currently
organized in five business units:
25
o Solutia's integrated Nylon business produces fibers, plastics and
high-performance polymers for a variety of applications from carpet
to automotive parts. Solutia's Nylon business is one of the world's
few fully integrated producers of nylon 6,6.
o Solutia's Saflex business manufactures PVB, plastic interlayers that
are used in laminated safety glass in automotive and architectural
applications. Solutia is a leader in the laminated glass industry and
is the world's largest manufacturer of PVB.
o Solutia's recently acquired Flexsys business is a leading producer of
chemicals for the rubber industry.
o Solutia's CPFilms business is the world leader in custom-coated window
films for aftermarket automotive and architectural applications, as
well as other precision coating applications.
o Solutia's Specialty Products business is comprised of a group of
specialty industrial chemical products, including heat transfer
fluids and aviation hydraulic fluids, used in a variety of industrial
applications and a plastic products business focusing on entrance
matting and automotive spray suppression flaps. (24) Solutia is a
world leader in many of the markets for these niche businesses.
B. SOLUTIA'S CORPORATE HISTORY
---------------------------
1. THE CREATION OF SOLUTIA
-----------------------
Solutia was created by Pharmacia Corporation ("Pharmacia"), which was
then known as the Monsanto Company ("Old Monsanto"). Old Monsanto was
originally founded in 1901 as a chemicals company. Over the course of the
twentieth century, Old Monsanto grew into a highly successful global
enterprise that manufactured not only chemicals but also agricultural
products, pharmaceuticals, and food ingredients. By 1996, Old Monsanto's net
annual sales had grown to approximately $9.6 billion, with chemicals
representing less than one-third of its revenues.
2. THE SPINOFF
-----------
The core businesses of what are now Solutia and the new Monsanto
Company were, prior to 1997, all owned and operated by Old Monsanto. In 1997,
Old Monsanto made the strategic decision to exit the chemicals business upon
which it had been founded and focus on building a life sciences-based business
around its agricultural, pharmaceutical and food ingredient products. In April
1997, Old Monsanto formed Solutia as a wholly owned subsidiary to hold and
operate substantially all assets, and assume substantially all of the
liabilities, of Old Monsanto's historical chemicals business, including, among
others, certain retiree benefits, environmental
<FN>
- -------------------------
(24) Solutia has entered into a definitive agreement, subject to Bankruptcy
Court approval, to sell Dequest(R), its water treatment phosphonates
business, to Thermphos Trading GmbH. See Section V.C.2.(e)(ii) of this
Disclosure Statement for more information on the Dequest(R) Sale.
26
remediation and pension obligations, as well as contingent tort liability,
related to its historical chemicals business.
The transfer of the chemicals business assets and liabilities from
Old Monsanto to Solutia was accomplished pursuant to a Distribution Agreement,
dated September 1, 1997, between Solutia and Old Monsanto (as amended on July
1, 2002, the "Distribution Agreement").(25) Pursuant to the Distribution
Agreement, Solutia was contractually required to assume and indemnify Old
Monsanto from and against a wide variety of liabilities. In accordance with
the Distribution Agreement, Old Monsanto, through a spinoff transaction,
distributed its shares of common stock in Solutia to its shareholders and
Solutia became a publicly held company with operations independent of Old
Monsanto.
Pursuant to the Distribution Agreement, Solutia and Old Monsanto
entered into a series of contracts to effectuate the transactions necessary to
implement the Spinoff (collectively, the "Spinoff Agreements"). The majority
of the Spinoff Agreements facilitated Solutia's assumption of liabilities of
the chemicals businesses, caused the assignment and transfer of various assets
and property from Old Monsanto to Solutia to enable Solutia to operate the
chemicals businesses and defined the relationship which was to exist between
Solutia and Old Monsanto going forward. Additional Spinoff Agreements were
entered into to effectuate Solutia's employment of certain of Old Monsanto's
employees and the transfer of their respective benefit plans and related
liabilities to Solutia, as well as to allocate tax liability associated with
the transferred chemical assets. There were also a number of Spinoff
Agreements entered into to govern the leasing of, and guest/operator
relationship at, certain facilities as well as the supply of services and
arrangements for the provision of utilities at such facilities.
3. THE MONSANTO SPINOFF - OLD MONSANTO BECOMES PHARMACIA
-----------------------------------------------------
On December 19, 1999, Old Monsanto was acquired by Pharmacia &
Upjohn, Inc. The acquisition was effected by a merger of Old Monsanto with
Pharmacia & Upjohn, Inc. whereby (a) Pharmacia & Upjohn, Inc. became a wholly
owned subsidiary of Old Monsanto, (b) on February 9, 2000, Old Monsanto formed
a new subsidiary, Monsanto Ag Company and (c) on March 31, 2000, Old Monsanto
changed its name to "Pharmacia Corporation," and Monsanto Ag Company changed
its name to "Monsanto Company." The latter corporation is the entity known
today as Monsanto Company and sometimes referred to herein as "Monsanto" or
"New Monsanto."
On September 1, 2000, Pharmacia and the newly formed Monsanto Company
entered into a separation agreement (as amended, the "Separation Agreement")
whereby Pharmacia's agricultural business, including its agricultural
chemicals manufacturing business, was transferred to Monsanto. Pursuant to the
Separation Agreement, Monsanto agreed to assume and indemnify Pharmacia not
only for any liabilities related to Pharmacia's agricultural business, but
also for the liabilities assumed by Solutia in the Spinoff pursuant to the
Distribution Agreement,
<FN>
- -------------------------
(25) Article VI of the Disclosure Statement contains a more detailed
discussion of the terms of the Distribution Agreement and its impact on
the relationship among Pharmacia, Monsanto and Solutia.
27
if and to the extent that Solutia failed to pay, perform or discharge them.
Certain of the Spinoff Agreements, including the Commercial and Operating
Agreements, were assigned by Pharmacia to Monsanto in connection with the
Separation Agreement.
In October 2000, Monsanto made an initial public offering of its
common stock in which it sold approximately 15% of its common stock to the
public. On August 13, 2002, Pharmacia spun off to its shareholders its
remaining interest in Monsanto such that Monsanto became an independent,
publicly held company.
On or about July 1, 2002, prior to the completion of the separation
of Monsanto and Pharmacia, Monsanto, Pharmacia and Solutia entered into an
amendment to the Distribution Agreement (the "Amendment"). The Amendment was
entered into to effectuate the transfer of certain assets and liabilities from
Pharmacia to Monsanto pursuant to the Separation Agreement and to preserve the
relationship among Solutia, Monsanto and Pharmacia as nearly as possible in
accordance with the original intent of the Distribution Agreement. In
addition, in exchange for certain undertakings by Monsanto and Pharmacia,
including the agreement by Pharmacia to post an appeal bond, if necessary, in
connection with certain PCB litigation relating to Solutia's Anniston, Alabama
plant, Solutia agreed to indemnify Monsanto for the liabilities assumed by
Solutia in the Spinoff, to the extent Monsanto was required to satisfy them.
The contractual relationship among Solutia, Pharmacia and Monsanto
with respect to the liabilities arising out of the historical chemicals
business of Old Monsanto pursuant to the Distribution Agreement and Separation
Agreement resulted in a "triangle" of indemnities which is described in
greater detail in Section IV.C of this Disclosure Statement.
4. PFIZER'S ACQUISITION OF PHARMACIA
----------------------------------
In April 2003, Pharmacia was acquired by Pfizer Inc. ("Pfizer"). The
acquisition was effectuated by a merger of Pharmacia and a wholly owned
subsidiary of Pfizer, which resulted in Pharmacia becoming a wholly owned
subsidiary of Pfizer.
C. THE ASSUMPTION OF LEGACY LIABILITIES
------------------------------------
Pursuant to the Distribution Agreement, Solutia agreed to indemnify
Old Monsanto from and against liabilities associated with the future ownership
and operation of the businesses that Old Monsanto spun-off as Solutia. Solutia
was also required to indemnify Old Monsanto for a wide variety of liabilities
related to the ownership and operation of the historical chemicals business
prior to the Spinoff (the "Legacy Liabilities"). The most significant of the
Legacy Liabilities relate to: (a) healthcare, life and disability insurance
costs for certain of Old Monsanto's employees who had previously retired from
Old Monsanto ("Other Post Employment Benefit Liabilities" or "Legacy OPEB
Liabilities"); (b) environmental remediation, compliance and litigation
liabilities related to sites owned or operated by Old Monsanto prior to the
Spinoff (the "Legacy Environmental Liabilities"); (c) litigation liabilities
related to chemical products formerly manufactured, released or used by Old
Monsanto in its operations and claims related to asbestos, general liability
and other disputes (the "Legacy Tort Liabilities"); and (d) liability for
pension benefits for certain of Old Monsanto's employees who retired from Old
28
Monsanto prior to the Spinoff (the "Legacy Pension Liabilities"). These Legacy
Liabilities are more fully described below.
1. LEGACY OPEB LIABILITIES
-----------------------
The Legacy OPEB Liabilities include medical and life insurance
benefits for employees who retired from Old Monsanto prior to the Spinoff and
disability benefits for individuals who became disabled while working for Old
Monsanto prior to the Spinoff. As of the Petition Date, Solutia was providing
such benefits to approximately 20,000 pre-Spinoff retirees, disabled
individuals and their dependent and surviving spouses at an annual cost of
approximately $55 million to $60 million per year.
In June 1998, Solutia attempted to modify and clarify the benefit
payment obligations assigned to it by Old Monsanto for subscribing individuals
receiving retiree medical benefits from Solutia. Solutia filed a declaratory
judgment action in the United States District Court for the Northern District
of Florida, Pensacola Division. In this action, styled Solutia Inc. v. George
Forsberg et al. (the "Forsberg Litigation"), Solutia asserted that these
medical benefits were not "vested" under ERISA. In addition, certain Old
Monsanto retirees filed three lawsuits against Pharmacia in the United States
District Court for the Eastern District of Missouri, Eastern Division. Those
lawsuits, styled Larry Baird v. Monsanto Company (the "Baird Litigation"),
were consolidated for all purposes with the Forsberg Litigation. In addition
to Solutia and the retirees, Monsanto and Pharmacia were added as parties to
the Forsberg Litigation.
On November 1, 2001, a settlement of the Forsberg Litigation was
approved by the United States District Court for the Northern District of
Florida (the "Forsberg Settlement"). The Forsberg Settlement divided union and
non-union retirees into eight groups, each entitled to specific benefits under
the Solutia Inc. Medical Benefits Plan for Retirees (2002) (the "Forsberg
Plan"). In addition to their agreement to participate in the Forsberg Plan,
the Forsberg Settlement released all claims by the named plaintiffs, and the
classes of retirees that they represented, against Solutia, Pharmacia and
Monsanto, and any and all claims for post employment benefits that could have
been asserted in the Forsberg Litigation. The retirees' release of Pharmacia
and Monsanto provided that the retirees could refile and pursue their claims
for retiree medical benefits asserted in the Forsberg Litigation against
Pharmacia and Monsanto if Solutia failed to perform its obligations under the
Forsberg Plan and was declared to be insolvent. The Forsberg Settlement
provides, however, that if the retirees were successful in any such refiled
litigation, the measure of damages awarded to such prevailing retiree
plaintiffs may not exceed an amount equal to the level and duration of
benefits to which such retirees would have been entitled to receive from
Solutia under the Forsberg Plan.
See Section V.C.1.(g)(ii) of this Disclosure Statement which outlines
the actions taken by Solutia during the Chapter 11 Cases regarding the
Forsberg Settlement and Section VIII.B of this Disclosure Statement for a
discussion of the treatment of Legacy OPEB Liabilities under the Retiree
Settlement and the Amended Plan.
29
2. LEGACY ENVIRONMENTAL LIABILITIES
--------------------------------
The Legacy Environmental Liabilities for which Solutia was
responsible under the Distribution Agreement include the costs of
environmental remediation, compliance and litigation obligations arising from
activities conducted by Old Monsanto's chemicals business both at sites owned
by Solutia as of the Petition Date and others not owned by Solutia as of the
Petition Date, including clean-up obligations for off-site migration of
contaminants. Prior to the Petition Date, Solutia had spent between $20
million and $40 million annually with respect to the Legacy Environmental
Liabilities. As of the Petition Date, Solutia projected that costs related to
the Legacy Environmental Liabilities would increase to between $35 million and
$45 million annually for 2004 through 2006.
See Section V.C.1.(i) of this Disclosure Statement which describes
the actions taken by Solutia regarding the management of Legacy Environmental
Liabilities during the Chapter 11 Cases and Section VIII.B of this Disclosure
Statement for a discussion of the treatment of Legacy Environmental
Liabilities under the Relationship Agreement and the Amended Plan.
3. LEGACY TORT LIABILITIES
-----------------------
The Legacy Tort Liabilities include the costs of toxic tort lawsuits
relating to chemical exposure resulting from the conduct of Old Monsanto's
chemicals business, including expenses, settlements and judgments arising from
the litigation. The Legacy Tort Liabilities included liabilities related to
PCBs, most significantly the Tort Claims arising out of the manufacture of
PCBs in Anniston, Alabama prior to the Spinoff. Although the Tort Claims
related to PCBs at Anniston were settled prior to the Petition Date, as of
such date, Solutia estimated that costs related to the Legacy Tort Liabilities
would be approximately $20 million per year for the foreseeable future. See
Section VIII.B.2 and 3 of this Disclosure Statement regarding the treatment of
Legacy Tort Liabilities under the Relationship Agreement and the Amended Plan.
4. LEGACY PENSION LIABILITIES
--------------------------
Solutia's qualified U.S. pension plan includes pension benefits for
employees of Old Monsanto who retired from Old Monsanto prior to the Spinoff.
While the valuation of the pension plan assets contributed to Solutia by Old
Monsanto at the time of the Spinoff was equal to the projected pension
liabilities assumed by Solutia, the actual returns on such pension assets fell
short of the projected returns, in part due to the generally poor performance
of the stock market in the early 2000s. This shortfall, coupled with a sharp
drop in the interest rate required to be used in calculating the pension
plan's liabilities, resulted in Solutia's qualified pension plan becoming
underfunded. As a result, as of the Petition Date, Solutia estimated that it
would need to make quarterly contributions to the qualified pension plan in
2005 totaling approximately $150 million in the aggregate and significant
contributions thereafter. See Section V.C.1.(g) of this Disclosure Statement
which outlines the actions taken by Solutia during the Chapter 11 Cases
regarding the Legacy Pension Liabilities.
30
5. LEGACY LIABILITY ALLOCATION
---------------------------
Through the execution of the Distribution Agreement and the
Separation Agreement and the consummation of the Spinoff and the spinoff of
Monsanto, Pharmacia effectuated an allocation of its historic liabilities
among itself, Solutia and Monsanto, with the ultimate contractual
responsibility for the Legacy Liabilities allocated to Solutia. This
contractual allocation, as it existed immediately prior to the commencement of
the Chapter 11 Cases, can be summarized as follows:
o Pharmacia: Pharmacia, as the original corporate entity that
---------
conducted the operations giving rise to the Legacy Liabilities,
remains responsible for the Legacy Liabilities by operation of
law. Pharmacia is contractually indemnified for these liabilities
by both Solutia and, to the extent that Solutia fails to pay,
perform or discharge such liabilities, Monsanto.
o Solutia: Solutia is contractually responsible for the Legacy
-------
Liabilities and must indemnify (a) Pharmacia under the
Distribution Agreement and (b) Monsanto under the 2002 amendment
to the Distribution Agreement, with respect to losses incurred by
such parties in connection with the Legacy Liabilities.
o Monsanto: Monsanto is contractually obligated to indemnify
--------
Pharmacia under the Separation Agreement for the Legacy
Liabilities to the extent that Solutia fails to pay, perform or
discharge such liabilities.
D. EVENTS LEADING UP TO BANKRUPTCY
-------------------------------
1. THE INITIAL PERIOD FOLLOWING THE SPINOFF
----------------------------------------
For the first few years after the Spinoff, from 1997 through 1999,
Solutia was a profitable business. In 1997, its initial year of existence,
Solutia had net income of $192 million on net sales of $3.0 billion. Net
income was $249 million and $206 million, respectively, in 1998 and 1999 on
net sales of approximately $2.8 billion in each year. As a result of these
strong earnings, Solutia began an expansion and acquisition program to grow
and expand its businesses. Capital expenditures increased from $165 million
and $158 million in 1997 and 1998, respectively, to $257 million in 1999.
Pursuant to this growth strategy, during 1997, Solutia opened a new
industrial nylon fiber production facility at its plant in Greenwood, South
Carolina at a cost of approximately $55 million. At this time, Solutia also
finalized plans for the "AN7 Project" which was designed to double the
production capacity at its Chocolate Bayou plant for acrylonitrile and
hydrogen cyanide, two major feedstocks used to make nylon and acrylic fiber,
as well as Roundup(TM) and Alimet(TM), which was completed in 2000 at a cost
of approximately $320 million.
In 1998, Solutia announced plans to build a new phenol to ketone
production facility which was completed in 2001 at a cost of approximately $35
million. During 1999, Solutia began repositioning its portfolio of businesses
with the goal of achieving $5 billion in net sales within three to four years.
This growth program included internal initiatives such as (a) the full
31
global commercialization of Saflex IIIG(TM), Solutia's third-generation
polyvinyl butyral product, (b) the continued commercialization of KeepSafe(R),
Saflex Inside(TM) and KeepSafe Maximum(TM) for residential security and
hurricane protection windows, (c) the launch of a Saflex(R) product for
Enhanced Protective Glass in side and rear automotive windows and (d) the
introduction of Ascend(TM) nylon plastics and polymers, among other programs.
As part of Solutia's external growth programs, Solutia acquired CPFilms, a
leading manufacturer and marketer of window films and other high-technology
films products for automotive, architectural and other applications, in May
1999 for approximately $200 million. In December 1999, Solutia purchased
Vianova Resins, a leading European producer of resins and additives for
coatings and technical applications, for approximately $640 million. This
acquisition became the foundation for Solutia's resins, additives and
adhesives business (the "Resins & Additives Business").
In addition, starting in 1997, Solutia authorized a number of share
repurchase programs. At the time the programs were initiated, Solutia had
surplus cash available and management believed that Solutia stock was a good
investment. Solutia believed that share repurchases were a more tax-efficient
method than dividends for returning value to shareholders and also
demonstrated confidence in Solutia's prospects and its pragmatic approach to
delivering earnings-per-share growth. Between 1997 and 2000, Solutia
repurchased approximately 17.7 million shares of its common stock at a cost of
approximately $345 million pursuant to these repurchase programs.
2. BEGINNING OF THE ECONOMIC DOWNTURN
----------------------------------
Beginning in late 1999 and into 2000, a general downturn in the
economy and increasing raw materials and energy prices began to negatively
impact Solutia's financial results. Raw material and energy costs,
particularly petroleum products and natural gas, increased, with oil prices
increasing to over $30 a barrel in 2000 from lows of approximately $10 a
barrel in 1998 and early 1999. This resulted in Solutia's raw materials and
energy costs increasing from $994 million and $984 million in 1998 and 1999,
respectively, to $1.3 billion in 2000. At the time of these raw materials cost
increases, it became apparent that Solutia's strategies for addressing the
risk of fluctuating raw material prices were not adequate for the existing raw
materials market.
In addition, investment in capacity by Solutia and other
manufacturers in the late 1990s resulted in excess manufacturing capacity and
low utilization in a number of the markets in which Solutia participated. This
excess capacity made it difficult for Solutia to raise prices sufficiently to
offset increased raw materials costs. Nylon carpet selling prices were
adversely impacted in 1999 by continuing consolidation in the carpet mill
industry and the resulting increase in the carpet mills' buying leverage. In
1999, acrylic fiber demand decreased as a result of weak economic conditions
in Asia and a strengthening dollar, resulting in lower sales volumes and, just
as this demand began to improve in late 2000, Solutia began experiencing
decreased sales volumes in carpet fiber, which adversely impacted the Nylon
business's sales. As a result of these factors, Solutia's net income decreased
from $206 million in 1999 to $49 million in 2000, even though net sales
increased from $2.8 billion in 1999 to $3.2 billion in 2000.
To partially alleviate the impact of this economic downturn on
Solutia, in December 2000, Solutia's management initiated a number of cost
reduction initiatives that were expected
32
to achieve $100 million in annual savings for 2001 and 2002. These initiatives
included a reduction in force, streamlining operations primarily within the
Nylon business and implementing enterprise-wide systems as a means of
improving work design processes and gaining efficiencies. Along with these
cost reduction efforts, in August 2000, Solutia completed the sale of its
polymer modifiers business and related manufacturing facilities to Ferro
Corporation for approximately $130 million in order to raise cash and allow
Solutia to focus on its core businesses.
During the time that Solutia implemented its cost reduction strategy
as a means of alleviating the impact of the economic downturn on the Company,
it continued making capital expenditures and pursuing external growth through
acquisitions in line with the growth plan initiated in 1999. In early 2000,
Solutia purchased CarboGen Holdings AG, a leading process research and
development firm, and AMCIS AG, which developed production processes and
manufactured active ingredients for clinical trials and small-volume
commercial drugs for the global pharmaceutical industry, which together would
become Solutia's pharmaceutical services business. In addition, in 2000
Solutia entered into the Astaris joint venture with FMC Corporation (described
in further detail in Section V.C.2(f)(ii) of this Disclosure Statement) to
manufacture and market phosphorus chemicals. Finally, in early 2000, Solutia
Europe S.A./N.V. ("SESA") issued the Euro Notes (as defined herein) in part to
refinance commercial paper used to finance the pharmaceutical services and
Resins & Additives Business acquisitions.
3. CONTINUED DECLINE IN RESULTS, BURDEN OF THE LEGACY LIABILITIES AND
------------------------------------------------------------------
DIFFICULTIES OBTAINING FAVORABLE FINANCING
------------------------------------------
Despite its efforts to cut costs, in 2001, Solutia's results
continued to be significantly impacted by high, and increasingly more
volatile, raw materials and energy costs. Overall, raw materials and energy
costs in 2001 remained at the high levels experienced in 2000. Solutia began
to experience decreased demand for a number of its products, along with lower
selling prices, which resulted in a decrease in net sales from $3.2 billion in
2000 to $2.8 billion in 2001. For the first time since its inception in 1997,
Solutia reported a net loss of $59 million in 2001.
At this time Solutia began to feel more acutely the burden of the
Legacy Liabilities on its ability to operate its businesses. The Legacy
Liabilities imposed substantial continuing financial burdens on Solutia that
made the first cyclical downturn since the Spinoff more difficult to manage.
In addition, the generally weak performance of the stock market in the early
2000s caused returns on the assets contributed to Solutia's qualified pension
plan by Pharmacia to fall short of projections. As a result of this shortfall,
combined with a sharp drop in the interest rate required to be used in
calculating the pension plan's liabilities, Solutia determined that the
pension plan was underfunded and that Solutia would be required to make
significant contributions to fund the plan going forward.
Between the Spinoff and the Petition Date, the Legacy Liabilities
required average payments by Solutia in excess of $100 million per year.
During the early years after the Spinoff, Solutia's positive cash-generating
capability allowed it to satisfy the Legacy Liabilities and its continuing
operations without the need for additional financing. However, with the
ongoing
33
economic downturn, it became more difficult for Solutia to bear the burden of
the Legacy Liabilities from its operating cash flow.
In 2001, Solutia's Astaris joint venture placed an additional drain
on Solutia's operating cash flow. Astaris' business suffered at this time as a
result of the failure of certain technology contributed to Astaris by FMC
Corporation, Solutia's joint venture partner in Astaris, as well as higher raw
material costs and lower sales volumes resulting from the economic downturn
and a weaker euro. Due to Astaris' deteriorating results, beginning in 2001,
Solutia was contractually required to make additional contributions to the
Astaris joint venture. These additional contributions totaled $31 million in
2001 and $160 million in the aggregate through the end of 2005.
In the face of declining results and the burdens of the Legacy
Liabilities, in early 2001 Solutia began having difficulty meeting the
financial covenants included in its $800 million revolving credit facility due
August 2002 (the "$800 million facility") and under its $250 million
multi-currency revolving credit facility (the "$250 million facility"). As a
result, during 2001, Solutia terminated the $250 million facility which it had
not drawn on, and obtained a number of waivers and amendments to the $800
million facility that modified the financial covenants contained therein and
collateralized the borrowings thereunder.
Solutia planned to issue debt equity convertible bonds (the "DECS
Offering") during the third quarter of 2001 and use the proceeds therefrom to
repay the $800 million facility and $150 million of its 6.5% notes due October
2002 (the "2002 Notes"). Solutia decided to postpone the offering, however,
due to a downgrade of Solutia's commercial paper and unsecured debt ratings
and the impact of the terrorist attacks of September 11, 2001 on the financial
markets and the economy as a whole. These ratings downgrades also resulted in
Solutia being unable to issue commercial paper, thereby forcing Solutia to
refinance outstanding commercial paper under the $800 million facility at
relatively higher rates.
4. THE PERIOD PRIOR TO FILING BANKRUPTCY
-------------------------------------
During 2002, Solutia continued to face a deteriorating economy,
overcapacity in the industry and the ongoing financial burden of the Legacy
Liabilities. In early 2002, Solutia began to be significantly impacted by
toxic tort litigation relating to the discharge of polychlorinated biphenyls
("PCBs") from the Anniston, Alabama plant site during Pharmacia's historical
operation of that site. Responsibility for such litigation was one of the
Legacy Tort Liabilities that was assumed by Solutia in the Spinoff.
On January 1, 2002, simultaneous articles were published in The
Washington Post, The St. Louis Post-Dispatch and The Birmingham, Alabama Daily
News regarding Solutia's potential liability for the damage caused by the
alleged discharge of PCBs from Solutia's Anniston, Alabama plant site. Solutia
believes the stories were strategically placed by, and based on information
provided by, an environmental group with ties to various plaintiffs' attorney
groups, immediately prior to the trial of Abernathy v. Monsanto ("Abernathy")
case in state court and the commencement of new actions in federal court
regarding the Anniston PCBs. At the time of the articles, several consolidated
litigation proceedings (the "Anniston PCB Cases") were in progress against
Pharmacia, Monsanto and/or Solutia seeking damages and injunctive relief
relating to
34
alleged PCB contamination at the Anniston plant. These cases (including
Tolbert v. Monsanto ("Tolbert") case in federal court and the Abernathy case
in state court) are described in further detail in Exhibit I to this
Disclosure Statement. Historically, Old Monsanto had been successful in
managing liability related to PCB litigation based on personal injury from
exposure to products containing PCBs. However, the Anniston PCB Cases were
based on injuries resulting from discharges of PCBs from the Anniston plant.
The Anniston PCB Cases, and the attention brought to the cases by the
various news articles, raised concerns in the financial markets regarding
Solutia's continued ability to satisfy potential judgments in the litigation
and resulted in a further downgrade of Solutia's debt ratings, for the first
time dropping the ratings below investment grade. Furthermore, the publicity
resulted in a rapid decline in Solutia's stock price from $14.02 per share on
December 31, 2001, to $9 per share on January 3, 2002. By mid-February 2002,
Solutia's stock price was fluctuating between $8 and $9 per share. The
concerns raised in the various media reports regarding Anniston were realized
when, in February of 2002, a verdict was rendered on the question of liability
against Solutia in favor of the Abernathy plaintiffs. After the Abernathy
judgment, Solutia's stock price dropped below $6 per share. This rapid decline
in Solutia's stock price, coupled with the loss of Solutia's investment grade
rating, resulted in Solutia abandoning its plan to pursue the DECS Offering.
By the end of 2002, Solutia's stock price had declined even further and closed
on December 31, 2002 at $3.63 per share.
With the DECS Offering no longer a possible financing alternative,
obtaining new financing to fund its operations and to refinance the $800
million facility and the 2002 Notes, which were scheduled to mature in August
and October of 2002, respectively, became more difficult. With declining
results, a slow economy and a lowered credit rating, along with the
uncertainty relating to the Legacy Liabilities and the Anniston PCB Cases, the
terms of the debt Solutia was able to obtain to replace the $800 million
facility and the 2002 Notes were much less favorable than the terms of prior
financings.
In July 2002, the $800 million facility was amended to reduce the
facility to $600 million (hereinafter, the "$600 million facility"), comprised
of a $300 million term loan and a $300 million revolving credit facility. The
$600 million facility was secured by certain assets of Solutia. Solutia's
grant of a security interest in certain assets to the lenders under the $600
million credit facility, as well as the grant of a security interest to the
lenders under Astaris' credit facility, resulted in other outstanding
indebtedness of Solutia becoming secured pursuant to "equal and ratable"
provisions in the instruments governing that indebtedness, which provided that
it be secured on an equal and ratable basis with Solutia's other secured
indebtedness. This indebtedness included Solutia's $150 million 6.72%
unsecured debentures due October 15, 2037 (the "2037 Notes") and $300 million
7.375% unsecured debentures due October 15, 2027 (the "2027 Notes"), all
issued under the Prepetition Indenture, and the 6.25% Notes due February 14,
2005 ((euro)200 million) issued by nondebtor Solutia Europe S.A/N.V. under a
Fiscal Agency Agreement dated February 11, 2000 (as amended, the "Euro
Notes").
Also in July 2002, Solutia completed a private placement of $223
million (issued with an original issue discount) of 11.25% senior secured
7-year notes (the "Senior Secured Notes"). Part of the proceeds from the
Senior Secured Notes was used to repay the outstanding principal
35
and interest under the 2002 Notes. Solutia obtained a number of additional
amendments to the $600 million facility in 2002 to modify certain financial
covenants and allow the sale of the Resins & Additives Business.
In December 2002, Solutia entered into an agreement to sell its
Resins & Additives Business to UCB S.A. ("UCB") and the sale was completed on
January 31, 2003. Net proceeds to Solutia of approximately $474 million from
the sale of the Resins & Additives Business were used to partially pay down
indebtedness under the $600 million facility.
Solutia's inability to access the financial markets on favorable
terms continued throughout 2002 and into 2003. Efforts to raise additional
financing were further impacted by a "60 Minutes" segment in late 2002
highlighting environmental remediation concerns at the Anniston plant and the
adverse impact such remediation cost could have on Solutia.
5. PREPETITION ATTEMPTS TO RESTRUCTURE THE BUSINESS
------------------------------------------------
Faced with the challenges presented by the Legacy Liabilities, the
continuing economic downturn, high raw materials and energy costs and
unfavorable debt terms, Solutia took several actions in an attempt to improve
its financial condition and mitigate the financial burden imposed by the
Legacy Liabilities. In addition to continuing to proactively reduce costs and
headcount, manage discretionary spending, pass along cost increases when
possible, and implement operational efficiencies, Solutia also sought a
reallocation of the Legacy Liabilities among Solutia, Pharmacia and Monsanto,
refinanced debt through the Bank Credit Agreement (as hereinafter defined),
settled (with the assistance of Monsanto and Pharmacia) the Anniston PCB Cases
and restructured the Euro Notes. Each of these actions is discussed in more
detail below.
(a) Anniston PCB Cases Settlement
During 2003, Solutia continued to defend the Anniston PCB Cases as it
was contractually required to do under the Distribution Agreement. Verdicts
with respect to damages in a number of the Anniston PCB Cases, which involved
over 20,000 plaintiffs, began issuing in March, 2003. The verdicts reflected
that the jury in the Anniston PCB Cases was using a formula in determining the
amounts of damages which was based on various factors relating to the
individual plaintiffs. If the verdicts continued to follow this formula,
Solutia estimated that its total liability with respect to the Anniston PCB
Cases could reach in excess of $3 billion.
Based on the expected amount of liability with respect to the
Anniston PCB Cases, in May 2003 the federal judge overseeing the Tolbert case
facilitated mediation among the plaintiffs in all of the Anniston PCB Cases
and Solutia. At the same time, Solutia began negotiating with Pharmacia and
Monsanto on a reallocation of the liability relating to the Anniston PCB
Cases, focusing on the contributions Solutia would require from Pharmacia
and/or Monsanto in order to avoid bankruptcy. Initially, the Tolbert mediation
was unsuccessful and, with a trial date in the Tolbert case approaching,
Solutia's preparation for a potential Chapter 11 filing intensified.
In August 2003, Solutia and the plaintiffs in the Anniston PCB Cases
entered into a settlement agreement (the "Anniston Global Settlement
Agreement") that provided for cash
36
payments by the defendants of $600 million, as well as certain community
health initiatives for low income residents in the areas affected by the
alleged PCB contamination. Solutia entered into a separate agreement with
Pharmacia and Monsanto pursuant to which Solutia agreed, among other things,
to pay $50 million of the $600 million cash settlement, payable in ten equal
annual installments, without interest, beginning in August 2004. Pursuant to
its indemnification obligations to Pharmacia under the Separation Agreement,
Monsanto made $550 million in cash payments under the Anniston Global
Settlement Agreement, a portion of which was funded through insurance, in
exchange for Solutia's commitment to deliver to Monsanto a specified amount of
warrants to purchase shares of Solutia's common stock. As its contribution to
the Anniston Global Settlement Agreement, Pharmacia released Solutia and its
affiliates from certain indemnification obligations, agreed to make certain
benefits available to the plaintiffs in the Anniston PCB Cases and agreed to
provide the community health initiatives described above. As a result of the
entry into the Anniston Global Settlement Agreement, Solutia believed the
possibility for an out-of-court restructuring increased and focused its
energies on negotiations with Pharmacia and Monsanto for a reallocation of the
Legacy Liabilities and on refinancing its debt, as described below.
(b) Anniston Partial Consent Decree
Related to the Anniston PCB Cases, on August 4, 2003, the District
Court for the Northern District of Alabama entered a Partial Consent Decree
(the "Anniston Consent Decree"), among the United States, Pharmacia and
Solutia, with respect to the Anniston PCB Superfund Site in Anniston, Alabama.
The Anniston Consent Decree requires Pharmacia and Solutia to finance and
perform a remedial investigation and feasibility study ("RI/FS"), a non-time
critical removal action on residential properties with PCB levels between 1
part per million ("PPM") and 10 ppm, and the continuation of the time critical
removal action on residential properties with PCB levels in excess of 10 ppm.
It also requires Pharmacia and Solutia to reimburse the United States for
future response costs for the RI/FS and non-time critical removal work, as
well as for oversight costs for the time critical removal work. Finally, it
requires Pharmacia and Solutia to provide approximately $3 million in funding
for an education trust to benefit the citizens of West Anniston, and to
provide funds for a technical assistance plan and a community advisory group.
(c) The Bank Credit Agreement
On October 8, 2003, Solutia and its Debtor subsidiary Solutia
Business Enterprises Inc. (together, the "Borrowers") entered into a $350
million bank credit facility (the "Bank Credit Agreement") with Ableco Finance
LLC, a unit of Cerberus Capital Management, L.P., and other syndicate lenders,
including Wells Fargo Foothill, Inc. and Congress Financial Corporation. The
Bank Credit Agreement provided for a three-year, $350 million revolving credit
facility guaranteed by CPFilms, Monchem International, Inc., Monchem, Inc.,
Solutia Systems, Inc. and Solutia Investments, LLC (collectively, the
"Guarantors"), and was secured by liens consisting of certain of the
Borrowers' and Guarantors' working capital assets and plant, property and
equipment of the Guarantors, but not all of the assets that secured the prior
bank credit facility. The funds borrowed under the Bank Credit Agreement were
used to refinance and retire Solutia's then-existing bank credit facility, for
general working capital purposes and to pay fees and expenses related to the
Bank Credit Agreement. The release of liens on assets not otherwise
37
pledged as security for the Bank Credit Agreement in connection with the
retirement of the prior bank credit facility, along with the release of assets
securing a credit agreement related to Solutia's Astaris joint venture,
resulted in the 2027/2037 Notes and the Euro Notes, representing collectively
approximately $680 million of debt on Solutia's balance sheet, reverting from
secured to unsecured status. As discussed below, at the time of the
refinancing, Solutia was still negotiating with Monsanto and Pharmacia on a
reallocation of the Legacy Liabilities to avoid a bankruptcy filing.
(d) Negotiations with Monsanto, Pharmacia and Noteholders
After entering into the settlement with Pharmacia and Monsanto with
respect to reallocation of liability for the Anniston PCB Cases, Solutia
continued discussions with Pharmacia and Monsanto on further reallocations of
the Legacy Liabilities among Solutia, Pharmacia and Monsanto. In addition, on
October 22, 2003, Solutia announced that it had initiated discussions with its
noteholders regarding a restructuring of its debt and that three informal
noteholder committees were formed to represent the holders of the Senior
Secured Notes, the 2027/2037 Notes and the Euro Notes to begin negotiating a
restructuring of Solutia's outstanding debt and other obligations.
Through negotiations with Monsanto, Solutia was able to procure a $25
million advance from Monsanto for purchases under a supply agreement between
Solutia and Monsanto, and Pharmacia agreed to release $40 million of the
security provided by Solutia to secure the appeal bond in the Penndot
litigation, described in Exhibit I to this Disclosure Statement. These actions
incrementally improved Solutia's liquidity position. However, in December
2003, discussions among Solutia, Pharmacia, Monsanto and the bondholders
regarding a possible out-of-court restructuring and reallocation of the Legacy
Liabilities ceased, and Solutia filed for Chapter 11 protection.
(e) Restructuring of the Euro Notes
Prior to the Petition Date, Solutia and SESA negotiated a
comprehensive debt restructuring agreement with the requisite holders of the
Euro Notes. The restructuring of the Euro Notes, among other things, extended
the maturity of the Euro Notes to February 2008, increased the interest rate
to 10% per annum, eliminated cross-default provisions related to Solutia and
removed Solutia as a guarantor of the Euro Notes. On January 30, 2004, SESA
successfully completed the second and final step of the restructuring of the
Euro Notes. The restructuring, and particularly the elimination of Solutia as
a guarantor, allowed SESA to continue normal, uninterrupted operations during
the Chapter 11 Cases. As a result of this restructuring, neither Solutia nor
any of its subsidiaries or affiliates was at any time in default under the
terms of the Euro Notes as a result of Solutia's bankruptcy filing.
E. THE COMMENCEMENT OF THE CHAPTER 11 CASES
----------------------------------------
Despite its efforts to restructure its liabilities out-of-court,
Solutia continued to be faced with a deteriorating liquidity position,
exacerbated by tightening credit terms with key suppliers, and a lack of
viable alternatives that would comprehensively address all of its obligations.
Furthermore, the Legacy Liabilities remained a substantial drain on Solutia's
liquidity, and
38
negotiations with Pharmacia and Monsanto on the reallocation of the Legacy
Liabilities had ceased. Finally, Solutia was facing upcoming maturities and
interest payments on a number of its outstanding debt obligations and upcoming
required contributions to its qualified pension plan. Therefore, Solutia made
the decision to file for Chapter 11 protection. On December 17, 2003, Solutia
received waivers of the cross-default provisions under the Euro Notes which
would allow Solutia to enter bankruptcy without forcing its non-Debtor
subsidiaries into default. With this final step completed, Solutia commenced
the Chapter 11 Cases on December 17, 2003 (the "Petition Date"). No foreign
subsidiaries or affiliates of Solutia are Debtors in the Chapter 11 Cases or
other bankruptcy or insolvency cases. Solutia has continued to operate its
businesses and manage its properties as debtors in possession pursuant to
sections 1107 and 1108 of the Bankruptcy Code during the course of the Chapter
11 Cases.
V.
EVENTS DURING THE CHAPTER 11 CASES
----------------------------------
As set forth in greater detail below, during the Chapter 11 Cases,
Solutia has expended substantial effort to stabilize and improve its
businesses. As part of these efforts, Solutia obtained various critical
first-day orders to allow a smooth transition into bankruptcy, obtained
favorable DIP financing, took actions to retain employees essential to a
successful reorganization process, retained restructuring and other
professionals and made significant management changes. In addition, Solutia
developed and implemented a reorganization strategy to address the factors
that led to its bankruptcy filing and to position Solutia to thrive upon
emergence from bankruptcy.
A. STABILIZATION OF BUSINESS OPERATIONS
------------------------------------
1. FIRST DAY RELIEF
----------------
Through a careful review of their business operations and cash
requirements, Solutia entered bankruptcy with minimal impact on their
day-to-day business operations. Integral to this transition were certain
"first day" orders entered by the Bankruptcy Court that provided, among other
things, flexibility in cash management, the ability to use cash collateral and
the ability to pay certain prepetition vendors. In addition, Solutia engaged
in an extensive communication program with vendors and customers assuring them
that the transition into bankruptcy would be smooth and there would be no
interruption in the purchase or supply of goods by Solutia.
On the Petition Date, Solutia sought and obtained several orders
authorizing Solutia to pay various prepetition Claims. These orders were
designed to ease the strain on Solutia's relationships with employees,
vendors, customers and taxing authorities as a consequence of the commencement
of the Chapter 11 Cases. Among other things, these orders authorized Solutia
to: (a) honor customer prepayments for goods and services; (b) maintain
business support programs; (c) make certain pass-through payments to customers
received on the customers' behalf under certain arrangements; (d) honor
customer and dealer Claims for prepetition refunds, rebates and adjustments,
including adjustments to billing, product returns or exchanges, as well as
promotional discounts and other credits; (e) maintain cash management systems;
(f) use
39
prepetition bank accounts, checks, and other business forms; (g) pay
outstanding prepetition trust fund taxes; and (h) pay certain prepetition
employee wage and benefit claims.
Additionally, Solutia obtained authority to pay the prepetition
Claims of certain vendors and service providers. Solutia's ability to pay the
Claims of these vendors was critical to maintaining ongoing business
operations due to the Solutia's inability to acquire essential replacement
goods and services of the same quality, reliability, cost or availability from
other sources.
Finally, the Bankruptcy Court entered an interim order, which was
made final on January 20, 2004, permitting Solutia to use cash collateral in
accordance with an agreed budget.
2. DIP FINANCING
-------------
A critical goal of Solutia's business stabilization efforts was to
ensure that Solutia maintained sufficient liquidity to operate their
businesses during the Chapter 11 Cases. Solutia addressed their initial
liquidity needs by securing an interim debtor-in-possession financing package.
On December 19, 2003, Solutia, Solutia Business Enterprises Inc. and each of
Solutia's other Debtor subsidiaries entered into a Finance Agreement with
Ableco Finance LLC, Wells Fargo Foothill, Inc., Congress Financial Corporation
and the lenders from time to time party thereto (the "Interim DIP Facility").
The Interim DIP Facility provided up to $500 million in debtor-in-possession
financing, which was secured by substantially all of Solutia's assets and from
which Solutia made an initial borrowing of $75 million.
After an orderly transition into bankruptcy that was facilitated by
the procurement of the Interim DIP Facility and the other stabilization
activities described above, Solutia solicited and received expressions of
interest in providing final debtor-in-possession financing from a number of
financial institutions. Competition among financial institutions allowed
Solutia to obtain a final debtor-in-possession financing package with
substantially better terms than those of the Interim DIP Facility. On January
16, 2004, pursuant to authorization from the Bankruptcy Court, Solutia entered
into a $525 million Financing Agreement among Solutia and Solutia Business
Enterprises Inc., as borrowers, all of the other Debtors, as guarantors,
Citicorp USA, Inc., as administrative, collateral and documentation agent, and
Citibank, N.A., as issuer (the "DIP Credit Facility"). The DIP Credit Facility
was used by Solutia and its Debtor subsidiary Solutia Business Enterprises
Inc. to retire their respective obligations under the Bank Credit Agreement
and the Interim DIP Facility, as described in Section VII.G.1 below.
The DIP Credit Facility, as amended, currently consists of: (a) a
$975 million fully drawn term loan, and (b) a $250 million borrowing-based
revolving credit facility, which includes a $150 million letter of credit
subfacility. The maturity date of the DIP Credit Facility is March 31, 2008.
Upon consummation of the pending Dequest(R) sale, $51 million in proceeds from
the sale will be used to pay down a portion of the $975 million term loan.
3. EMPLOYEE RETENTION
------------------
In connection with the restructuring process leading up to the
Petition Date, Solutia significantly reduced its employee headcount, which
increased job security concerns among
40
remaining employees. The commencement of the Chapter 11 Cases exacerbated
these concerns. As a result, Solutia implemented a number of programs
including a key employee retention bonus plan designed to retain the services
of employees integral to the successful functioning of Solutia's businesses.
These programs were successful in influencing the vast majority of key
employees to remain with Solutia after the Petition Date. The prolonged
pendency of the Chapter 11 Cases has, however, significantly diminished the
on-going effectiveness of the retention bonus plan and other programs.
4. RETENTION OF RESTRUCTURING AND OTHER PROFESSIONALS
--------------------------------------------------
To assist Solutia in carrying out their duties as debtors in
possession and to represent their interests in the Chapter 11 Cases, Solutia
initially retained, as of the Petition Date, with authorization from the
Bankruptcy Court, the law firm of Gibson, Dunn & Crutcher LLP ("Gibson Dunn")
as lead restructuring attorneys for Solutia. On March 11, 2005, as a result of
the death of one of Gibson Dunn's senior restructuring partners overseeing the
Chapter 11 Cases and the departure of another Gibson Dunn senior partner to
Kirkland & Ellis LLP ("K&E"), as well as in view of K&E's extensive bankruptcy
expertise, Solutia obtained approval from the Bankruptcy Court to engage K&E
to replace Gibson Dunn as their lead restructuring attorneys to represent them
in all aspects of the Chapter 11 Cases. The costs associated with the
transition of Solutia's representation from Gibson Dunn to K&E were fully
covered by K&E. Additionally, with the Bankruptcy Court's approval, Solutia
retained Rothschild Inc. ("Rothschild"), as financial advisors and investment
bankers; Kroll Zolfo Cooper, LLC, as restructuring advisors and bankruptcy
consultants; and Charles River Associates Inc., as special business
consultants.
In addition to these key professionals, Solutia has retained various
other professionals to assist it in managing the Chapter 11 Cases, as follows:
special litigation counsel; corporate counsel; conflicts counsel; accountants;
tax service providers; corporate communication consultants; and a claims and
noticing agent. Solutia also employs attorneys and other professionals to
represent or assist it in a variety of situations arising in the ordinary
course of Solutia's business in matters unrelated to the Chapter 11 Cases.
Solutia has also retained, with the approval of the Bankruptcy Court, various
experts to assist it in the estimation of alleged personal injury and property
damage claims, alleged natural resource damages and other matters.
In addition to paying the fees of their own advisors, Solutia is
required to pay fees related to the Chapter 11 Cases incurred by various other
constituencies. On January 6, 2004, the United States Trustee for the Southern
District of New York appointed the Creditors' Committee in the Chapter 11
Cases to represent the interests of all general unsecured creditors of the
Debtors. On February 20, 2004, the Bankruptcy Court authorized the appointment
of the Retirees' Committee in the Chapter 11 Cases, pursuant to section 1114
of the Bankruptcy Code, to represent the interests of those retirees (and
their covered dependents) whose retirement benefits were impacted by the
Chapter 11 Cases. On March 24, 2004, the United States Trustee for the
Southern District of New York appointed the Equity Committee in the Chapter 11
Cases, pursuant to sections 1102(a) and 1102(b) of the Bankruptcy Code, to
represent the interests of all equity holders of Solutia. Each of the
above-referenced committees and their respective professional advisors are
listed on Exhibit G annexed to this Disclosure Statement. The fees and costs
incurred by the Creditors' Committee, the Retirees' Committee and the Equity
Committee
41
and their professional advisors, to the extent approved by the Bankruptcy
Court, are paid by Solutia. As of March 31, 2007, Solutia has paid
approximately $144 million in legal and professional fees in connection with
administering the Chapter 11 Cases. Of this amount, approximately $103 million
was paid to professionals retained by Solutia in connection with the Chapter
11 Cases, and approximately $41 million was paid to the professional advisors
of other constituencies in the Chapter 11 Cases, as approved by the Bankruptcy
Court after proper notice and hearing.
Three ad hoc committees of Creditors have been formed in the Chapter
11 Cases: the Ad Hoc Trade Committee which, according to the First Amended
Verified Statement of Brown Rudnick Berlack Israels LLP pursuant to Fed. R.
Bankr. P. 2019(a), dated July 14, 2006, consists of seven Holders of an
aggregate minimum amount of approximately $52 million in General Unsecured
Claims; the Ad Hoc Notes Committee which, according to the Third Amended
Verified Statement Pursuant to Bankruptcy Rule 2019 of Hennigan, Bennett &
Dorman LLP, dated March 16, 2007, consists of sixteen Holders of an aggregate
amount of approximately $234 million of 2027/2037 Notes; and an ad hoc
committee of holders of the Senior Secured Notes (the "Secured Notes
Committee") which according to the Verified Supplemental Statement of White &
Case LLP Pursuant to Bankruptcy Rule 2019, dated June 16, 2006, consists of
twelve Holders of an aggregate amount of approximately $156 million of Senior
Secured Notes.
Since the formation of the above-referenced committees, Solutia has
kept such committees informed about Solutia's business operations.
Additionally, when it has deemed appropriate, Solutia has sought the
concurrence of the committees, in connection with certain actions and
transactions taken by Solutia outside of the ordinary course of business.
B. NEW SENIOR MANAGEMENT TEAM
--------------------------
Shortly after Solutia filed for chapter 11 protection, Solutia's
Board of Directors elected Mr. Jeffry N. Quinn to serve as the Company's
President and Chief Executive Officer. Thereafter, Mr. Quinn effectuated a
reorganization of Solutia's senior leadership team. Biographical information
for Mr. Quinn and the other members of the senior management team is set forth
below:
JEFFRY N. QUINN is Solutia's President, Chief Executive Officer and
Chairman of the Board. Prior to his election as the Company's
President and CEO, Mr. Quinn had served as Solutia's Senior Vice
President, General Counsel and Chief Restructuring Officer. Prior to
joining Solutia in January 2003, Mr. Quinn spent 14 years in senior
executive positions in the mining and petroleum refining industries,
including service from 2000 through 2002 as Executive Vice President,
Chief Administrative Officer and General Counsel of Premcor Inc., one
of the largest independent petroleum refiners and suppliers of
unbranded transportation fuels, heating oil, petrochemical
feedstocks, petroleum coke and other petroleum products in the United
States.(26) Mr. Quinn also served from 1989 to
<FN>
- -------------------------
(26) Premcor Inc. was acquired by Valero Energy Corporation in 2005.
42
2000 as an executive officer of Arch Coal Inc., one of the largest
coal producers in the United States.
JAMES M. SULLIVAN is Senior Vice President and Chief Financial
Officer of Solutia. He was elected to this position in 2004. Mr.
Sullivan is a long-time Solutia employee who became General Auditor
of Solutia at the time of the Spinoff. He then served as Solutia's
Director of Financial Reporting and Analysis, and from 1999 until
2004 he was Vice President and Controller.
LUC DE TEMMERMAN is Senior Vice President and President, Performance
Products of Solutia. Mr. De Temmerman is a long-time Solutia employee
who had previously served as Vice President and General Manager,
Performance Products from 2003 through 2004, Worldwide Commercial
Director of Laminated Glazing Products and Services from 2001 through
2002, and Business Director, Saflex-Europe/Africa from 2000 through
2001. Mr. De Temmerman joined the Company in 1984 in Louvain La
Neuve, Belgium.
JONATHON P. WRIGHT, joined Solutia in early 2005 as Senior Vice
President and President, Integrated Nylon. Mr. Wright previously
served as a Vice President for Charles River Associates, an
international economic and business consulting firm, from 2002
through 2005 where he worked extensively in the petrochemical,
specialty chemical and related process industries. Prior to that, Mr.
Wright was a Managing Director of Arthur D. Little's North American
Strategy and Organizational Consulting business from 1997 through
2002. Prior to consulting, Mr. Wright was a Senior Manager of British
Gas in various operating, commercial and strategic roles.
KENT J. DAVIES joined Solutia in early 2006 as Senior Vice President
and President, CPFilms. Mr. Davies had previously served as Senior
Vice President, Marketing, R&D and Regulatory, for United Industries
Corp., a global consumer products company, from 2002 through 2005.
Prior to that, Mr. Davies served as General Manager, Global Medical
Non-Wovens Business for Kimberly-Clark Corp.
JAMES R. VOSS is Senior Vice President and President, Flexsys. He
joined Solutia in early 2005 as Senior Vice President, Business
Operations. Prior to joining Solutia, Mr. Voss served as Senior Vice
President and Chief Administrative Officer of Premcor Inc. from 2000
through 2005. Prior to that, Mr. Voss served in various operational
and human resources capacities with United Parcel Services.
ROSEMARY L. KLEIN is Senior Vice President, Secretary & General
Counsel of Solutia. She was elected to this position in 2004. Ms.
Klein previously served as Vice President, Secretary and General
Counsel, Corporate and External Affairs and Assistant General Counsel
of Solutia from 2003 through 2004. Prior to joining Solutia, Ms.
Klein served from 2000 through 2003 as Assistant General Counsel and
Secretary at Premcor Inc. and in 2000 as the Assistant General
Counsel and Secretary of Arch Coal, Inc.
ROBERT T. DEBOLT is Senior Vice President, Business Operations. Mr.
DeBolt is a long-time Solutia employee who previously served as the
Vice President of Strategy from 2005 to 2007 and as the Controller
for the Nylon business from 2003 through 2004 and a
43
Director, Manufacturing Accounting with responsibility over all of
Solutia's manufacturing facilities. Mr. DeBolt joined the Company in
1982.
Certain of these executive officers, including Mr. Quinn, are
eligible to receive special bonuses upon Solutia's emergence from the Chapter
11 Cases. Granting these bonus opportunities was essential to attracting and
retaining the top-quality leadership that has been invaluable in bringing
Solutia through the bankruptcy process and positioning it to thrive upon
emergence. These emergence incentive bonus opportunities were approved by the
Bankruptcy Court.
In conjunction with these changes in senior management, a broader
reorganization of Solutia's worldwide management and organizational structure
was undertaken. This reorganization resulted in changes in management and
other positions within the business segments, as well as general
administrative functions, including elevation of the environmental, safety and
health and strategic planning roles and promoting personnel within the
organization into positions of greater responsibility.
C. REORGANIZATION STRATEGY
-----------------------
The senior leadership team developed and has been executing a
reorganization strategy focused on four principal objectives in order to
maximize the value of Solutia's estates, address the factors that led to the
bankruptcy filing and enable Solutia to thrive after emergence from
bankruptcy. This reorganization strategy focuses on:
o managing Solutia's businesses to enhance financial and operating
performance including the utilization of the unique powers of a
chapter 11 debtor-in-possession;
o making changes to Solutia's asset portfolio so that it consists of
high-potential businesses that can consistently deliver returns in
excess of their cost of capital;
o achieving a reallocation of the Legacy Liabilities; and
o establishing an appropriate capital structure.
1. ENHANCING THE PERFORMANCE OF SOLUTIA'S BUSINESSES
-------------------------------------------------
Solutia has implemented numerous initiatives since the Petition Date
to enhance its operational and financial performance. These actions are more
fully described below.
(a) New Corporate Culture
Solutia has revitalized its internal culture, which has enabled the
organization to confront underlying and recurring issues with decisive actions
to restore profitability. This culture is focused on execution and results,
rather than process. It emphasizes impatience with the status quo, rather than
a fixation with historic practices. It is intended to drive step-change
improvements, rather than evolutionary progress.
44
Solutia has built this revitalized internal culture through numerous
means. Leadership changes among the senior management team and managers
throughout the Company have brought fresh perspectives and a passion for
positive change. Compensation systems have been redesigned to be more
performance-driven, with fewer entitlements and greater differentiation.
Expectations are established through goal alignment throughout the
organization, with greater accountability for delivering on those
expectations. Leadership is engaging in a proactive, ongoing and in-depth
program to ensure strategic plans are not just formulated but fully executed.
In summary, these efforts are building a high-performing culture that is
focused and motivated to achieve exceptional results.
(b) Strategic Review of Solutia's Material Businesses
Solutia's management engaged in comprehensive and systematic
strategic reviews of its material businesses. These strategic reviews focused
Solutia's efforts during the Chapter 11 Cases and provide the basis of
Solutia's strategy going forward. Solutia is implementing these strategies and
the execution of these efforts will form the basis for a successful
reorganized Solutia upon emergence from bankruptcy.
(c) Proactive Commercial Perspective
A key element of Solutia's corporate strategy post-emergence is a
significantly more proactive commercial approach, one that recognizes that the
long-term success of its customers requires a strong and dependable supplier.
This new commercial perspective strives for a true partnership and is not
based on the premise that the suppliers subsidize investments in materials,
technology or people. Solutia's commercial approach is to better manage with
customers the risk of movements in the oil and energy markets, in some cases
via formula pricing, to ensure the value chain remains connected to key raw
material and energy cost inputs. Solutia intends to ensure the long term
success of its customers by pricing its products adequately to fund
customer-driven technology and innovation resulting in a stream of highly
innovative and unique products and services. Finally, Solutia is committed to
retain and attract personnel of the highest quality by achieving a fair share
of the value that is both created and delivered by the people of Solutia. This
perspective and commercial approach was one of the reasons Solutia was able to
generate an expanding gross margin in 2005 in comparison to 2004 and in 2006
in comparison to 2005. From 2004 to 2006, Solutia's raw material and energy
costs increased substantially, by over $300 million. However, Solutia's
disciplined commercial approach has allowed the Company to expand its
operating margin despite the rising raw materials and energy costs. By
comparison, in the two years leading up to the filing date, through 2004,
Solutia was unsuccessful in passing through the raw material and energy costs
increases via pricing actions, which was a key factor in its declining
financial performance.
(d) Cost Reduction and Efficiency Initiatives
In May 2004, Solutia launched a series of cost reduction initiatives
throughout the Company. At the plant level, these programs focused on actions
such as asset management effectiveness to optimize manufacturing operations,
maintenance savings, yield improvement and utilities optimization.
Additionally, actions were taken to better control discretionary spending,
particularly within the core corporate services functions (e.g., information
technology,
45
human resources, finance, legal, etc.). Finally, a focused effort was
undertaken to achieve additional savings in the procurement of goods and
services. These actions have helped to drive revenue growth and expansion of
operating margins, and yielded approximately $65 million in savings in 2004.
Solutia continues to monitor its costs and identify areas to improve the cost
competitiveness of its businesses.
(e) Operational Excellence Initiative
In 2006, Solutia kicked-off an operational excellence initiative,
which is designed to better focus management's efforts to deliver sustainable
improvement in its manufacturing and supply chain operations. The operational
excellence initiative has already generated significant improvements in
productivity, inventory management, cost competitiveness and customer service.
Plant maintenance costs have been reduced by implementing operating systems
better designed to increase maintenance availability and predictability.
Increased overall output has been achieved by utilizing planning tools that
better match output requirements with labor and machine hours expended. The
operational excellence initiative has yielded significant cost savings and
management believes additional benefits will be achieved as this initiative
continues.
(f) Headcount Reductions
As of the Petition Date, Solutia had approximately 6,350 employees
worldwide. Through various initiatives, including downsizing of its corporate
office, shutdown or divestiture of various non-core businesses and involuntary
reductions-in-force, Solutia has reduced its total number of worldwide
employees as of December 31, 2006 to approximately 5,100. These headcount
reductions resulted in significant company-wide cost savings and increased
efficiency.
(g) Changes to Employee and Retiree Benefit Programs
(i) Changes in Active Employee Welfare Benefits
Since the Petition Date, Solutia has improved its cost
competitiveness by making significant changes to the welfare benefit programs
it provides to its active U.S. non-union employees. These changes are similar
to those provided to, and accepted in an amended collective-bargaining
agreement by, Solutia's U.S. union-represented employees as discussed below.
Specifically, Solutia increased the deductibles, co-payments and coinsurance
amounts in its medical and dental programs, as well as increased the employee
share of the cost to participate in these plans. Solutia also reduced the
company-paid income replacement amount in the disability insurance program.
These benefits changes are expected to result in savings of approximately $12
million per year.
(ii) Actions Regarding the Forsberg Settlement
Throughout the Chapter 11 Cases, and in accordance with the terms of
the Retiree 1114 Order (as defined below), Solutia has continued to perform
its financial and other obligations to its retirees under the terms of the
Forsberg Settlement described in Section V.C.1.(g)(ii) of this Disclosure
Statement. As of the Petition Date, Solutia estimated that the cost of
providing benefits to retirees in accordance with the terms of the Forsberg
Settlement would be
46
approximately $90 million per year with projected annual costs for pre-Spinoff
retirees and their dependents and surviving spouses of approximately $55 to
$60 million.
In August 2004, Solutia sent a notice to its current employees
notifying them of changes in Solutia's medical plans for active employees (the
"2005 Active Plan"). In accordance with the terms of the Forsberg Settlement,
the proposed changes to the 2005 Active Plan were to be applied to those
retirees covered by the Forsberg Plan. In response to the notice concerning
the 2005 Active Plan, the Retirees' Committee filed the Official Committee of
Retirees' Motion to Compel Debtors to Comply With 11 U.S.C. Section 1114 (the
"Retirees' 1114 Motion"). The Retirees' 1114 Motion claimed that Solutia's
implementation of the 2005 Active Plan violated section 1114 of the Bankruptcy
Code. Section 1114 of the Bankruptcy Code prohibits a debtor from modifying
retiree benefits (as defined therein) without first obtaining (a) a court
order authorizing the modifications or (b) the consent of the authorized
representative of the recipients of the benefits. Solutia objected to the
Retirees' 1114 Motion on the grounds, among others, that section 1114 approval
was not necessary because the express terms of the post-employment medical and
welfare benefit plans that applied to the retirees and the Forsberg Settlement
permitted those modifications. After a hearing held before the Bankruptcy
Court on September 28, 2004, the Bankruptcy Court entered an Order Compelling
Debtor to Comply With 11 U.S.C. Section 1114 (the "Retiree 1114 Order"), which
ordered that the establishment of the 2005 Active Plan could not in any way
affect the amount of or entitlement to retirement benefits to be paid by
Solutia to or for the Retirees, and further ordered that no retiree benefits,
as they existed on January 1, 2004, could be modified by Solutia pending the
Debtors' compliance with section 1114 of the Bankruptcy Code. Solutia filed a
notice of its appeal of the Retiree 1114 Order, and Solutia's appeal remains
pending before the United States District Court for the Southern District of
New York (the "New York District Court"). This appeal will be stayed, and
ultimately withdrawn, in connection with the Retiree Settlement described
below.
In July 2005, Solutia entered into an agreement with the Retirees'
Committee to (a) resolve the Retirees' claims against Solutia's estates and
(b) provide for modifications to the level of disability and retiree medical
and life insurance benefits (referred to as "OPEB" in Section IV.C.1 of this
Disclosure Statement) paid to Retirees after the Effective Date (the "Retiree
Settlement"). Among other things, the Retirees agreed that the termination and
modification rights granted to Solutia under the Forsberg Settlement would be
implemented. On November 27, 2006, the Bankruptcy Court approved a stipulation
between Solutia and the Retirees' Committee authorizing Solutia to terminate
retiree welfare benefits for certain Medicare eligible participants on January
1, 2007 or such later date as may be applicable under the Forsberg Settlement.
(iii) Changes in Qualified U.S. Pension Plan Benefits
Solutia has made significant changes to its qualified U.S. Pension
Plan to reduce costs and enhance the financial condition of such plan.
Specifically, Solutia amended its U.S. qualified Pension Plan to cease future
benefit accruals, effective July 1, 2004, for non-union participants and
January 1, 2006 for union participants. The cessation of future benefit
accruals saved Solutia approximately $40 million in annual pension expense and
reduced overall pension funding requirements by approximately $110 million.
During the Chapter 11 Cases, Solutia has
47
made over $235 million in plan contributions with approximately $100 million
in additional contributions to be made later this year. Total required
contributions to the Pension Plan for 2008 through 2011 will be approximately
$90 million. Solutia believes that its retention of the pension plan has been,
and will continue to be, an effective tool for helping to retain long-term
employees.
Pursuant to the Amended Plan, the Debtors shall assume and
continue the Pension Plan in accordance with its terms, satisfy the minimum
funding standards pursuant to 26 U.S.C. Section 412 and 29 U.S.C. Section
1082, and administer the Pension Plan in accordance with its terms and the
provisions of ERISA. Furthermore, nothing in the Amended Plan shall be
construed as discharging, releasing or relieving the Debtors or the Debtors'
successors, including the Reorganized Debtors, or any party, in any capacity,
from any liability imposed under any law or regulatory provision with respect
to the Pension Plan or the PBGC. The PBGC and the Pension Plan shall not be
enjoined or precluded from seeking to enforce such liability as a result of
any provision of the Amended Plan or the Confirmation Order. Notwithstanding
any provision of the Amended Plan to the contrary, the Pension Plan shall be
assumed and administered in accordance with ERISA and the Internal Revenue
Code.
(iv) Termination of Non-Qualified Pension Benefits
Prior to the Petition Date, Solutia maintained the Solutia Inc.
ERISA Parity Savings and Investment Plan, the Solutia Inc. ERISA Parity
Pension Plan, the Solutia Inc. Supplemental Retirement Plan and the Solutia
Inc. Deferred Compensation Plan, pursuant to Sections 3(36) and 4(b)(5) of
ERISA (together, the "Nonqualified Plans") for the benefit of a select group
of management employees. Benefits provided under the Nonqualified Plans are
payable from the general assets of Solutia. Effective December 7, 2005,
Solutia terminated the Nonqualified Plans, as permitted by the terms thereof.
(v) Changes in Other Post-Employment Benefits for Active Employees
Solutia also enacted several changes to its other U.S. post
employment benefits ("OPEB") for active employees. These changes, effective
September 1, 2004 for non-union employees and January 1, 2006 for union
employees, included changes to certain eligibility requirements for post
employment medical benefits and the elimination or reduction of retiree life
insurance benefits for future retirees. The changes resulted in an
approximately $40 million reduction in liabilities in 2006. Upon emergence
from Chapter 11, Solutia's OPEB liability will be reduced by approximately an
additional $115 million pursuant to the Retiree Settlement and Amended Plan.
(vi) Collective Bargaining Agreements with U.S. Union-Represented
Employees
On September 1, 2005, Solutia reached new collective bargaining
agreements with its union-represented employees. The new collective bargaining
agreements cover pension and insurance benefits and made employee pension,
health and welfare benefits consistent with those changes that Solutia had
previously implemented for its active U.S. non-union employees. Specifically,
the union employees agreed, effective January 1, 2006, (a) to freeze their
pension
48
plan, (b) to end post employment medical benefits for retirees and spouses on
the earlier of the time such person attains age 65 or October 31, 2016 and (c)
to participate in more cost-effective medical, dental and disability programs.
These new collective bargaining agreements are expected to generate savings of
approximately $8 to $10 million per year.
(h) Changes in Compensation Philosophy and Annual Incentive Programs
To improve performance, Solutia made a number of changes in its
compensation programs in order to more closely tie the compensation of its
executives and other employees to the performance of its businesses. During
the Chapter 11 Cases, Solutia has implemented broad based annual incentive
programs designed to foster its "pay-for-performance" philosophy. The annual
incentive programs implemented post-petition have been structured to deliver a
significant portion of annual overall compensation opportunity for executives
in the form of a cash bonus contingent upon the achievement of key financial
and operating objectives. For other employees, the programs have been
structured such that as position and responsibility within the Company
increases, an increasing portion of an employee's total compensation is tied
to company performance.
(i) Remediation Management of Legacy Environmental Liabilities
As of the Petition Date, Solutia was managing active remediation
projects at approximately 75 sites with an annual budget of approximately $40
million in the aggregate. Since commencing the Chapter 11 Cases, Solutia has
had three goals with respect to the Legacy Environmental Liabilities: (a) to
exercise and comply with its rights and obligations under applicable
bankruptcy and environmental laws; (b) to ensure that key remediation projects
continue to move forward with costs shifted to other parties to the extent
possible; and (c) to achieve a reallocation of the Legacy Environmental
Liabilities that will allow Solutia to emerge from Chapter 11 as a viable
entity. In connection with its commencement of the Chapter 11 Cases, Solutia
initiated contact with the Environmental Protection Agency ("EPA"), Pharmacia,
Monsanto and other interested parties to inform them of Solutia's status and
ensure continuation of critical remediation activity.
As a result of Solutia's discussions with Monsanto, Pharmacia, the
United States Department of Justice (the "DOJ"), other relevant government
agencies, and other stakeholders, an interim arrangement (the "Interim
Protocol") for the continued management of key remediation projects was
reached among Solutia, Pharmacia and Monsanto. The Interim Protocol initially
provided that Monsanto, as Pharmacia's attorney-in-fact, would perform and/or
fund Solutia's remediation obligations arising under outstanding judicial and
administrative orders at the portions of the Shared Sites (described below) of
the Anniston PCB Site and the Sauget Area 1 and Area 2 Sites not owned or
operated by Solutia, and that Solutia would perform and/or fund activities
related to Solutia owned or operated portions of those sites or the related
Anniston and W.G. Krummrich Plant Sites. Under the Interim Protocol, Solutia,
at its cost, would provide its remediation managers to continue to manage the
site, but Monsanto would assume all other costs. The Interim Protocol was
designed to function "indefinitely," subject to Monsanto's right to withdraw
upon 60 days' written notice to Solutia and the DOJ. The Interim Protocol has
been in place and has functioned effectively since March 2004, and its
49
principles have now been followed with respect to the remediation efforts at
15 other sites with Legacy Liabilities never owned or operated by Solutia. As
of the date hereof, Monsanto has not provided Solutia with a notice of
withdrawal. Due to these efforts, all environmental remediation projects being
managed by Solutia prior to the Petition Date continue to move forward
notwithstanding the pendency of the Chapter 11 Cases through management either
by Solutia or Monsanto.
(j) Executory Contracts and Unexpired Leases
Since the Petition Date, Solutia has undertaken an extensive review
of over 13,000 contracts that either Solutia entered into prior to the
Petition Date or that were assigned to Solutia in connection with the Spinoff
and the Distribution Agreement to determine whether there are benefits to
Solutia in assuming or rejecting any Executory Contracts or Unexpired Leases.
Thus far, Solutia has rejected 15 Executory Contracts, which realized over
$179 million of gross savings for Solutia's estates. In addition, as further
discussed below, Solutia has utilized the chapter 11 contract assumption
process to assume and obtain beneficial amendments to a number of its
Executory Contracts and Unexpired Leases. Solutia was able to use this process
to induce contract and lease counterparties to agree to reduce their cure
claims in exchange for an early assumption of such contracts and leases by
Solutia. This course of action resulted in significant savings for Solutia's
estates resulting from the reduced cure costs associated with such assumptions
and, accordingly, a reduction in potential contract and lease rejection Claims
against Solutia. In addition, the amendments to the assumed Executory
Contracts and Unexpired Leases will enable Solutia and Reorganized Solutia to
operate with greater efficiency in the future. The following examples
illustrate the benefits Solutia has obtained through this assumption and
rejection process:
o Assumption of certain contracts with UCB and related entities and
Surface Specialties, Inc. as part of a global settlement. The
settlement improved Solutia's terms under the contracts as well as
resulting in the waiver of over $40 million in Claims against
Solutia's estates.
o Rejection of certain contracts with Calpine-related entities,
effective June 1, 2004. These contracts were rejected in order for
Solutia to avoid purchasing natural-gas generated steam and
electricity from Calpine's Decatur facility, which, due to rising
natural gas prices, had grown prohibitively expensive relative to
Solutia's other steam and electricity alternatives. At the time of
the rejection, Solutia estimated that annual benefits from these
rejections would range from $14 million to $22 million, resulting
in a net present value of $125 million in benefits over the life
of the contracts. This benefit to Solutia has increased since June
2004 as a result of the continued rise in natural gas prices
relative to alternative steam and power generation costs.
o Assumption and amendment of an Information Technology Services
Agreement with Electronic Data Systems Corporation ("EDS"). The
amended agreement allows Solutia to save approximately 14% to 24%
annually, eliminates unnecessary service requirements and provides
Solutia with more flexibility with regard to terminating the
50
agreement. In addition, EDS agreed to a 25% reduction in its cure
Claim and that such Claim would be amortized and paid in 10
monthly installments.
o Assumption and amendment of a nitrogen sales contract with
AirLiquide Large Industries US LP. Assuming and amending this
contract enables Solutia to acquire nitrogen at a reduced price
and eliminates minimum purchasing obligations contained in the
previous contract. The modifications will allow Solutia to save
approximately $800,000 annually.
o Assumption and amendment of a warehouse lease with Ashley
Brownstone South LLC. This resulted in an extension of the term of
the lease and a $540,000 reduction in rent payments due over the
term of the lease.
o Assumption and amendment of a specialty film and commodity film
products supply agreement between CPFilms and Toray Plastics
(America), Inc. ("TPA"). The amended agreement enables CPFilms to
secure an increased supply of film products. In addition, the
amended agreement clearly defines TPA's obligation to provide a
variety of beneficial services to CPFilms not specifically set
forth in the original agreement. TPA agreed to reduce its cure
Claim by 10% and have such Claim paid in six monthly installments.
o Assumption and assignment of a rail car lease with ACF Industries
LLC to Monsanto, saving Solutia $112,500 in lease payments for the
remainder of the lease.
o Assumption and amendment of a service agreement between CPFilms
and Virginia Gas Company, enabling CPFilms to reduce the cure
amount associated with the assumption and improve its credit
terms.
o Assumption of certain software licenses with Microsoft Corporation
enabling Solutia to transfer certain licenses in connection with
the sale of Axio Research Corporation's assets, as described in
Section V.C.2.(f)(iii) of this Disclosure Statement.
o Assumption and amendment of an office lease between Solutia Inc.
and Pharmacia & Upjohn Inc.
o Assumption and amendment of a certain ammonia supply agreement
between Solutia Inc. and El Paso Merchant Energy-Petroleum
Company.
o Assumption and amendment of the hydrogen supply agreement and
assumption of the CO2 agreement between Solutia Inc. and Linde Gas
LLC.
o Assumption and amendment of a certain agreement between Solutia
Inc. and Saint Gobain Glass France SA, enabling Solutia to make a
lump sum royalty payment in exchange for Solutia's perpetual
rights to sell acoustic glazing products.
o Assumption and amendment of certain agreements between Solutia and
Western Nonwovens, Inc.
51
Solutia is continuing to review its Executory Contracts and Unexpired
Leases to determine which, if any, of such contracts and leases should be
assumed or rejected before the Effective Date. Solutia has determined that
they will assume the contracts set forth on Exhibit G annexed to the Amended
Plan. The remainder of the contracts are either no longer executory within the
meaning of section 365 of the Bankruptcy Code or will be rejected by Solutia
pursuant to the Amended Plan.
2. CHANGES TO THE ASSET PORTFOLIO
------------------------------
Another element of Solutia's reorganization strategy has been to make
changes to its asset portfolio while in bankruptcy to enhance the value of the
estate. This is consistent with Solutia's business strategy to build a
portfolio of high-potential businesses that can consistently deliver returns
in excess of their cost of capital. To implement this strategy, during the
Chapter 11 Cases, Solutia has (a) made strategic investments in its core
businesses; (b) exited certain unprofitable businesses and facilities; and (c)
divested non-core assets, as further described below.
(a) Acquisition of Akzo Nobel's Interest in the Flexsys joint venture
Solutia recently acquired Akzo Nobel's interest in the 50/50 Flexsys
joint venture between Solutia and Akzo Nobel for $213 million subject to debt
assumption and certain purchase price adjustments (the "Flexsys Acquisition").
Flexsys, a leading producer of rubber chemicals, was originally formed in 1995
as a 50/50 joint venture between Akzo Nobel and Monsanto, with Monsanto's
interest being transferred to Solutia as part of the Spinoff. The acquisition
of Akzo Nobel's interest in Flexsys allows Solutia to fully integrate Flexsys
into its portfolio of market leading businesses. Flexsys products play an
important role in the manufacture of tires and other rubber products such as
belts, hoses, seals and footware. These chemicals help cure and protect
rubber, impart desirable properties to cured rubber, increase durability and
lengthen product life. The Flexsys business is currently headquartered in
Brussels, Belgium with manufacturing facilities in Europe, North America,
South America and Asia.
See Section VII.D of this Disclosure Statement for more information
regarding the Flexsys business.
(b) Changes in the Nylon Business
(i) Closure of the Acrylic Fibers Business
Solutia exited its acrylic fibers business in the second quarter of
2005. Solutia's decision to exit the acrylic fibers business was based on
increased foreign competition and the resulting significant profitability
decline in the sector. Acrylic fibers produced by Solutia were previously used
in diverse personal products and industrial applications such as apparel,
craft yarns, dental floss and conveyer belts. Historically, the acrylic fibers
business accounted for approximately 6% of Solutia's consolidated revenues. As
a result of this business initiative, Solutia's plant located in Decatur,
Alabama ceased to operate its acrylic fiber line, but continues to produce
chemical intermediaries for use in nylon products.
52
(ii) Closure of the Pensacola Industrial Fiber Business
In June 2005, Solutia closed the nylon industrial fiber business at
its plant in Pensacola, Florida (the "Pensacola Tire Business"). Nylon
industrial fibers manufactured by the Pensacola Tire Business were previously
used in diverse applications such as tire reinforcement, automotive belts and
hoses and other industrial products. As a result of the shutdown of the
Pensacola Tire Business, Solutia announced that it would concentrate its
production of nylon industrial fibers at its Greenwood, South Carolina plant.
The nylon industrial fiber unit at the Greenwood, South Carolina plant
utilizes newer technology than the Pensacola unit, enabling it to achieve
lower costs and higher quality. Historically, the Pensacola Tire Business
accounted for approximately 1% of Solutia's consolidated revenues.
(iii) Conversion of the Pensacola Industrial Fiber Assets
Following the shutdown of the Pensacola Industrial Fiber operations,
Solutia began converting assets used in the Industrial Fiber business into
assets that can be utilized to manufacture nylon resins and compounds. This is
part of Solutia's overall strategy to convert historic industrial and carpet
fiber assets to resin and compound production in order to participate in the
higher value and growing plastics market for Nylon 6,6. The conversion is
being implemented in phases. The first two phases, which entailed
reconfiguring four continuous polymerization production lines to create
products suitable for the plastics market, have been completed. The conversion
of the four production lines increased the capacity of nylon resins and
compounds by approximately 160 million pounds. Solutia intends to convert a
fifth production line by the end of 2007, which will provide approximately 75
million pounds of additional resin capacity. Solutia contemplates continuing
to convert production lines in future years in order to meet the expected
growth for Nylon 6,6 in the automotive and electrical/electronics segments of
the plastics market.
(iv) Improved Nylon Operational Reliability
During the course of the Chapter 11 Cases, Solutia management has
focused its efforts on improving plant infrastructure and operational
reliability within its Nylon business. Solutia's primary focus has been on its
Alvin, Texas (Chocolate Bayou) facility where, in 2000, Solutia had expanded
the facility into the largest single-site acrylonitrile plant in the world.
However, certain infrastructure and related maintenance processes to support
the additional capacity had not been put in place and the plant incurred
historically high costs associated with unplanned and extended downtime and
other disruptions in raw material deliveries and product shipments. In early
2005 Solutia brought in a new site leadership team to analyze the issues
impacting the facility and implement changes to ensure greater operational
reliability. Since that time, processes have been put in place and critical
investments have been completed which have resulted in improved product yields
and the number of unplanned outages has been significantly reduced. Solutia is
also implementing similar reliability measures at its other Nylon
manufacturing facilities.
53
(c) Changes in the Saflex Business
(i) Acquisition of Vitro's interest in the Quimica Joint Venture
On March 1, 2006, pursuant to a stock purchase agreement among
Solutia, Vitro S.A. de C.V. ("Vitro") and Vitro Plan, S.A. de C.V. ("Vitro
Plan"), a 100%-owned subsidiary of Vitro, Solutia acquired Vitro Plan's 51
percent stake in Quimica (originally formed in 1996 as a joint venture between
Vitro, Vitro Plan and Monsanto) for approximately $20 million in cash. As a
result of this acquisition, Solutia is the sole owner of Quimica and its PVB
interlayer plant located in Puebla, Mexico. Solutia believes that the
worldwide market for laminated glass products will grow over the next five
years, creating greater demand for PVB products. The Quimica acquisition
increases Solutia's existing Saflex(R) PVB interlayer manufacturing capacity
and provides new opportunities for low-cost expansions, thereby better
positioning Solutia to capitalize on this growth. It also provides facilities
in which Solutia will accelerate production of a new, higher margin acoustic
PVB product. Since the acquisition Solutia has completed a significant
engineering project at the Puebla site to add this manufacturing capability.
Pursuant to the stock purchase agreement, Solutia and Vitro also entered into
supply agreements under which Solutia will provide Vitro and certain of its
affiliates with 100% of their requirements for most Saflex(R) PVB products for
up to five years.
(ii) Construction of Saflex(R) Interlayer Plant in China
Solutia is constructing a new Saflex(R) PVB interlayer plant in
Suzhou, China. The plant will provide Solutia with improved access to the
growing Chinese automotive industry, allowing reduced supply chain costs and
greatly improved responsiveness in serving this region. The plant will focus
on meeting the rapidly growing demands of the Chinese automotive glass market
by manufacturing PVB interlayers for use in windshields. The plant is also
well located geographically to supply other markets in Asia, improving
Solutia's ability to meet rising customer needs for Solutia's Saflex(R) PVB
interlayers across the broader Asia-Pacific region. Construction of the new
plant began in April 2006. It is expected that the plant will start production
of commercial quality material in August 2007, and that future projects will
add additional capacity at the plant to meet market demands.
(iii) Construction of Third Extrusion Line at Ghent
In March 2007, Solutia began construction of a third extrusion line
at its manufacturing facility in Ghent, Belgium. The new extrusion facility
will be dedicated to the manufacturing of super wide (3.2m) architectural PVB
sheet. The architectural market is in a state of rapid expansion and the
European architectural market alone is expected to grow by 40 million square
meters (Msm) over the next 10 years. The majority of this growth will be in
super-wide product, and the new Ghent line will provide Solutia with the
capability to meet this demand in a highly efficient, dedicated unit. The
Ghent plant is well located geographically to serve the European markets and
integrating this new extrusion line with the existing plant operations offers
advantages in terms of shared infrastructure and fixed costs that will further
improve the competitive position of the Saflex business.
54
(d) Changes in the CPFilms Business
(i) Installation of New CPFilms Metallizing Production Line
In March 2005, Solutia completed the installation and successful
startup of a new metallizing production line at its manufacturing facility in
Martinsville, Virginia. The new metallizer, which joins three other
metallizing lines already in place at the facility, significantly increases
the existing metallizing business' capacity and versatility. In addition to
producing solar control window films for commercial, automotive and consumer
markets, other applications now supported by the new metallizing line include
static-dissipative packaging, graphic arts, automotive badging and specialty
labels.
(ii) Installation of New CPFilms Dye Line
In December 2005, Solutia completed the installation and successful
start up of a new dyed film production line at its manufacturing facility in
Martinsville, Virginia. The new dye line, which adds to the six lines already
in place, significantly increased Solutia's existing dyed film capacity and
versatility. The new dye line primarily focuses on higher speed and precise
color control of films for the window film consumer market. The line was
custom designed and built by Solutia and includes sophisticated control
systems for maximum versatility and precision. Other applications for the line
include graphic arts and theatrical lighting filters for film studio
applications.
(e) Changes in the Specialty Products Business
(i) Expansion of Therminol(R) Production in China
In September 2005, Solutia Therminol Co. Ltd. ("Therminol"), a
non-Debtor joint venture between Solutia and Jiangsu Suhua Group Co., Ltd., in
which Solutia holds a 60% ownership interest, opened a new Therminol(R) heat
transfer fluid manufacturing facility in Suzhou, China. The new facility more
than doubles the production capacity of the original manufacturing plant and
will support China's rapidly growing market for heat transfer fluids. Since
1995, Therminol heat transfer fluids have become the most widely used high
temperature synthetic heat transfer product in China.
(ii) Divestiture of the Dequest(R) Business
On March 12, 2007, Solutia reached a definitive agreement to sell the
Dequest(R) business to Thermphos Trading GmbH, a Swiss corporation
("Thermphos"). The Dequest(R) business is a leader in the production and sale
of phosphonates and phosphonates-based specialty additives that enhance water
quality for industrial and domestic use. Under the terms of the agreement,
Thermphos will purchase the assets and certain of the liabilities of the
Dequest(R) business for $67 million in cash, subject to a working capital
adjustment. The sale is subject to Bankruptcy Court approval and certain
governmental and regulatory approvals, and other customary closing conditions.
55
(iii) Closure of the Queeny Plant
Solutia relocated its Skydrol(R) and Skykleen(R) production lines
from its Queeny plant in St. Louis, Missouri to a new state-of-the-art
facility at its Anniston, Alabama plant. Production at the new plant began in
August 2006. Skydrol(R) and Skykleen(R) products are used in the aviation
industry for such applications as hydraulic fluids for commercial aircraft and
environmentally friendly solvents for aviation maintenance. As a result of
this move, operations at the Queeny plant have ceased and the plant has been
shut down.
(iv) Closure of the Chlorobenzene Business
In mid-2004, Solutia closed its chlorobenzene business due to its
unprofitable financial performance, which resulted principally from increased
foreign competition. Chlorobenzene products manufactured by Solutia were
previously used in diverse applications such as herbicides, rubber
anti-oxidants and other industrial uses. Historically, the chlorobenzene
business accounted for approximately 2% of Solutia's consolidated revenues.
(v) Closure of Other Operations
In addition to the closure of the businesses described above, Solutia
also closed, in late 2003 and early 2004, its feed ingredients business at the
Nitro, West Virginia facility and its L-Aspartic operations at the Queeny
plant in St. Louis, Missouri. The decision to exit these businesses was
precipitated by continued losses and Solutia's continued strategic evaluation
of its businesses focusing on profitable, core businesses. Historically, these
closed businesses together accounted for approximately 1% of Solutia's
consolidated revenues.
(f) Strategic Actions Regarding Non-Core Assets
Since the Petition Date, Solutia has also analyzed its ownership and
operation of certain other non-core assets. Actions taken with respect to
these non-core assets are more fully described below.
(i) Divestiture of the Pharmaceutical Services Business
In August 2006, Solutia's 100% owned subsidiary, Solutia Europe
S.A./N.V. ("SESA"), sold its pharmaceutical services business to Dishman
Pharmaceuticals & Chemicals Ltd. ("Dishman") pursuant to a Stock and Asset
Purchase Agreement under which 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 $74.5 million, 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.
(ii) Divestiture of the Astaris Joint Venture
In November 2005, Solutia and FMC Corporation ("FMC") each a 50%
owner of Astaris LLC ("Astaris") a joint venture sold substantially all of
Astaris' assets to Israel Chemicals
56
Limited ("ICL") for $255 million in cash (subject to certain purchase price
adjustments) and the assumption by ICL of certain related liabilities. In
connection with the transaction, Solutia and FMC agreed to indemnify ICL for
certain pre-closing liabilities relating to Astaris, including certain
pre-closing environmental liabilities. The transaction resulted in gross
proceeds to Solutia of approximately $95 million, of which approximately $13
million remains in escrow to pay off any potential indemnification claims.
Subsequently, ICL provided notice of indemnity claims with regard to the
escrow amount but Solutia disputes such claims.
(iii) Divestiture of Axio Research Corporation
In December 2004, with Bankruptcy Court approval, Solutia sold
substantially all of the assets of Axio Research Corporation ("Axio"), a
Debtor subsidiary of Solutia that provided clinical data services to help make
the drug development process safer and more efficient, to Axio Research
Acquisition Company, LLC, an entity owned by one of the former Axio
shareholders, who sold the business to Solutia in May of 2002, for $200,000
plus additional consideration.
3. REALLOCATION OF THE LEGACY LIABILITIES
--------------------------------------
Another element of Solutia's reorganization strategy was to achieve a
reallocation of the Legacy Liabilities. The reallocation of the Legacy
Liabilities will be accomplished pursuant to the Amended Plan, the
Relationship Agreement and the Retiree Settlement. Confirmation of the Amended
Plan which incorporates the terms of the Relationship Agreement and the
Retiree Settlement will, among its other benefits, significantly reduce
Reorganized Solutia's risk of contingent Legacy Liabilities, considerably
strengthen Reorganized Solutia's balance sheet, and provide Solutia with a
solid foundation to emerge from the Chapter 11 Cases as a viable enterprise.
The reallocation of the Legacy Liabilities provided for by the Amended Plan,
the Relationship Agreement and the Retiree Settlement is as follows:
(a) Legacy OPEB Liabilities
(i) The Retiree Trust
As more fully described in Section VIII.B of this Disclosure
Statement, $175 million of the cash proceeds generated by the Rights Offering
will be deposited into a trust (the "Retiree Trust"), intended to qualify as a
"voluntary employees' beneficiary association" under Section 501(c)(9) of the
IRC. The funds are being deposited into the Retiree Trust to ensure that they
are used to satisfy the Legacy OPEB Liabilities. These funds will be available
solely to reimburse the Legacy OPEB Liabilities incurred by Reorganized
Solutia.
(ii) Modification of Benefits Provided to Existing Retirees
Solutia, along with Monsanto, Pharmacia and the Creditors' Committee,
reached a settlement with the Retirees' Committee, regarding modifications to
the level of disability and retiree medical and life insurance benefits
(referred to as "Legacy OPEB Liabilities" in Section IV.C.1 of this Disclosure
Statement) to be paid to the Retirees after the Effective Date. The Retiree
Settlement is annexed to the Amended Plan as Exhibit B. Key terms of the
Retiree
57
Settlement include the implementation of a defined dollar limit on the amount
Reorganized Solutia will pay annually for retiree medical expenses, changes to
deductibles and co-payments under the medical plan post-Confirmation, and a
cap on the amount of life insurance provided to eligible Retirees. In
addition, Reorganized Solutia will continue to offer prescription drug
benefits to Medicare-eligible Retirees and will retain the government subsidy
provided to employers for their continued participation in such benefits.
Pursuant to the Retiree Settlement, the Retirees agreed that the termination
and modification rights granted to Solutia under the Forsberg Settlement would
be implemented. On November 27, 2006, the Bankruptcy Court approved a
stipulation between Solutia and the Retirees' Committee authorizing Solutia to
terminate retiree welfare benefits for certain Medicare eligible participants
on January 1, 2007 or such later date as may be applicable under the Forsberg
Settlement.
In consideration for Monsanto's contributions to Reorganized Solutia
under the Amended Plan and the Relationship Agreement, the Retirees will
release claims against Monsanto and Pharmacia. In addition, Retiree
representatives will maintain certain monitoring rights with respect to the
Retiree Trust and the 2006 Retiree Welfare Benefit Plan, and the Retirees will
receive an Allowed Retiree Claim of $35 million, the treatment of which is set
forth in the Retiree Settlement Agreement and the Amended Plan, to compensate
the Retirees as a class for the reductions in their OPEB benefits. The
modifications to the Retirees' OPEB benefits will result in a significant
savings to Reorganized Solutia.
(b) Legacy Environmental Liabilities
Under the Relationship Agreement, as more fully described in Section
VIII.B.4. of this Disclosure Statement, Monsanto agreed to take financial
responsibility, as between itself and Reorganized Solutia only, for a
significant portion of the Legacy Environmental Liabilities, including
complete responsibility for future remediation at certain sites never owned or
operated by Solutia, or to which Solutia never sent waste, and share future
remediation responsibility at certain shared sites adjacent or proximate to
Solutia's Anniston and Krummrich plant sites. The first $50 million in
Environmental Liabilities at those shared sites will be funded by proceeds
from the Rights Offering; the next $50 million, less amounts expended by
Monsanto during the pendency of the Chapter 11 Cases for remediation at such
sites, will be paid by Monsanto; the next $325 million will be paid by
Reorganized Solutia. Any additional amounts exceeding the aggregate amounts
described above, would be shared equally by Reorganized Solutia and Monsanto.
In addition, subject to the terms of the Relationship Agreement, Monsanto
agreed to bear, and to allow Reorganized Solutia to defer, up to $25 million
of certain expenses in excess of $30 million annually that are payable by
Reorganized Solutia with respect to such sites, subject to Solutia's agreement
to repay such deferred amounts over two years.
(c) Legacy Tort Liabilities
Under the Relationship Agreement, as more fully described in Section
VIII.B.4 of this Disclosure Statement, Monsanto, between itself and
Reorganized Solutia only, agreed to take financial responsibility for all Tort
Claims. As a result, on the Effective Date, Monsanto would be solely
responsible, as between itself and Reorganized Solutia only, for all costs
related to the defense, mediation, arbitration, judgment and settlement of the
Tort Claims and would indemnify
58
Reorganized Solutia with respect to such Tort Claims. Since the Petition Date,
Monsanto has paid all costs of this nature arising in connection with the Tort
Claims and, pursuant to the Relationship Agreement and the Amended Plan, shall
not be reimbursed for such costs. Under the Amended Plan, as of the Effective
Date, Reorganized Solutia will no longer be responsible for indemnifying
Pharmacia or Monsanto with respect to such Tort Claims.
(d) Legacy Pension Liabilities
Solutia realized cost savings of its pension liabilities by freezing
the pension plan as described in Section V.C.1.(g)(iii) hereof. Solutia plans
to retain responsibility for the Legacy Pension Liabilities after emergence
from the Chapter 11 Cases as it believes the qualified pension plan is an
effective tool for helping to retain long-term employees.
4. APPROPRIATE CAPITAL STRUCTURE AND CONVERSION OF DEBT
----------------------------------------------------
(a) Capital Structure as of Petition Date
As of the Petition Date, Solutia had, on a consolidated basis, over
$1.2 billion in aggregate long-term indebtedness, consisting of secured and
unsecured notes, a bank credit facility and a synthetic lease financing
arrangement. Outside Chapter 11, Solutia's subsidiary SESA had (euro)200
million of 10 percent Senior Secured Notes outstanding (the "Euro Notes").
Upon filing for Chapter 11, Solutia entered into a $525 million DIP
Credit Facility on January 16, 2004 which has since been amended five times
during the Chapter 11 Cases. In general, the amendments modified, among other
things, the mandatory prepayment terms and covenants regarding the disposition
of assets and investments, certain notice provisions and the interest rate.
The DIP Credit Facility currently stands at $1.225 billion and consists of a
$975 million fully drawn term loan and a $250 million borrowing-based
revolving credit facility, which includes a $150 million letter of credit
subfacility. Of the $1.225 billion, $150 million 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. Upon consummation of the pending
Dequest(R) sale, a portion of the net proceeds of the sale will be used to pay
down $51 million of the $975 million term loan. The DIP Credit Facility has a
maturity date of March 31, 2008.
In August 2006, SESA entered into a (euro)200 million Facility
Agreement (the "Euro Facility Agreement") using the proceeds, among other
things, to refinance the outstanding Euro Notes. The Euro Facility Agreement
terminates on July 31, 2011 and is secured by substantially all of the assets
of SESA and its subsidiaries.
In conjunction with the Flexsys Acquisition, Flexsys entered into a
$200 million Secured Facilities Agreement on April 27, 2007. This facility was
used together with the $150 million intercompany loan from Solutia as
described above to retire Flexsys' prior credit facility and complete the
Flexsys acquisition. The facility may be upsized by an additional $25 million.
59
(b) Capital Structure upon Emergence; Exit Financing Facility
Upon emergence from Chapter 11, Reorganized Solutia will have an
improved balance sheet and more appropriate capital structure. Under the
Amended Plan, a significant portion of Solutia's prepetition debt will be
converted to equity. As of the Petition Date, Solutia had outstanding the
following unsecured notes: (a) $300 million under the 2027 Notes and (b) $150
million under the 2037 Notes. The 2027/2037 Notes were both issued pursuant to
the Prepetition Indenture. Pursuant to the Amended Plan, as more fully
described in Exhibit A to this Disclosure Statement, the Holders of the
2027/2037 Notes will be separately classified and will receive equity in
Reorganized Solutia.
D. FINANCIAL PERFORMANCE DURING BANKRUPTCY
---------------------------------------
Solutia, including its non-Debtor subsidiaries, reported, on a
consolidated basis for the fiscal year ended December 31, 2006 and 2005, net
income of approximately $11 million and $8 million, respectively, and a net
loss of approximately $316 million in fiscal 2004. This compares to net losses
in 2003, 2002 and 2001, the three years leading up to Solutia's bankruptcy
filing, of approximately $987 million, $151 million and $59 million,
respectively. Net sales in 2006, 2005 and 2004 were approximately $2.9
billion, $2.8 billion and $2.7 billion, respectively, while net sales in 2003,
2002 and 2001 were approximately $2.4 billion, $2.3 billion and $2.3 billion,
respectively. As of December 31, 2006, Solutia reported, on a consolidated
basis, approximately $2.0 billion in total assets and approximately $3.4
billion in total liabilities, including approximately $1.85 billion of
liabilities subject to compromise.
Certain events preceding the filing date, as well as management's
reorganization strategy and execution against the four principal objectives
outlined in Section V.C. of this Disclosure Statement, have created a
significant number of non-recurring, non-operational accounting events, which
significantly affect comparability of Solutia's financial performance from
2003 through 2006. Excluding these impacts as well as the significant cost of
the reorganization process itself, Solutia would have reported EBITDAR, which
is earnings before interest, taxes, depreciation, amortization and
reorganization items, in 2006, 2005 and 2004 of $262 million, $226 million and
$147 million, respectively. The identification of the items to reconcile these
non-GAAP earnings to GAAP measures is located at Exhibit J to this Disclosure
Statement.
Solutia's Annual Report, as amended, on Form 10-K for the fiscal year
ended December 31, 2006 is annexed to this Disclosure Statement as Exhibit C.
VI.
SUMMARY OF LEGAL PROCEEDINGS
----------------------------
Because of the size and nature of Solutia's businesses, Solutia is
party to numerous legal proceedings. Most of these legal proceedings have
arisen in the ordinary course of Solutia's business and involve claims for
money damages. Whether these claims are or will be liquidated or resolved in
the Bankruptcy Court or in some other jurisdiction depends upon the nature of
the claims and the debt arising therefrom. Generally, if the debt underlying
such claims was incurred by one of the Debtors prior to the Confirmation Date,
such debt, in accordance with
60
section 1141 of the Bankruptcy Code, will be discharged through bankruptcy,
depending upon the nature of the relief sought, regardless of whether the
claim is liquidated and resolved before or after the Effective Date. Claims
arising from conduct occurring after the Effective Date, unless provided for
under the Amended Plan, generally are not dischargeable through bankruptcy,
and will be handled by Reorganized Solutia in the ordinary course of its
business after emergence.
Following is a summary of Solutia's significant legal proceedings:(27)
A. LEGAL PROCEEDINGS IN THE BANKRUPTCY COURT
-----------------------------------------
1. THE JPM ADVERSARY PROCEEDING
----------------------------
On May 27, 2005, JP Morgan as the Prepetition Indenture Trustee under
the Prepetition Indenture, filed the JPM Adversary Proceeding, seeking
declaratory judgment that the 2027/2037 Notes were entitled to security
interests in certain of Solutia's assets and seeking adequate protection under
section 363 of the Bankruptcy Code. (28)
The JPM Adversary Proceeding related to Solutia's refinancing of its
credit facilities in 2002 and 2003. When Solutia refinanced its credit
facilities on July 25, 2002, the Noteholders obtained a pro rata security
interest in certain of Solutia's assets under the "equal and ratable"
provision of the Prepetition Indenture. On October 8, 2003, Solutia refinanced
its credit facilities, as described in Section IV.D.5(c) of this Disclosure
Statement, thereby reducing its outstanding debt secured by certain assets
below the threshold level that triggered the "equal and ratable" provision of
the Prepetition Indenture. As a result, the 2027/2037 Notes returned to their
original unsecured status.
The Prepetition Indenture Trustee alleged that the October 8, 2003
refinancing had no effect on the security interests and liens that were
created in July 2002. Alternatively, the Prepetition Indenture Trustee argued
that the liens should be reinstated as a matter of equity. Solutia contended
that the Prepetition Indenture only requires Solutia to provide security
interests to the Noteholders when debt secured by certain collateral exceeds
15 percent of Solutia's Consolidated Net Tangible Assets (as defined in the
Prepetition Indenture). Because debt secured by the restricted collateral did
not exceed this threshold following the October 8, 2003 refinancing, the
Noteholders were not entitled to security interests in certain collateral, and
therefore Solutia could not have breached the Prepetition Indenture by failing
to provide them.
Trial of the JPM Adversary Proceeding 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
<FN>
- -------------------------
(27) This summary is not intended as an exhaustive description of all pending
legal matters or proceedings in which Solutia or its Debtor and
non-Debtor affiliates are involved. Certain legal proceedings may be
subject to appeal in or outside the Bankruptcy Court. Nothing in this
discussion is deemed to be an admission by Solutia or any of their
Debtor or non-Debtor affiliates of any liability or wrongdoing.
(28) On March 12, 2007, the Court entered a Stipulation and Order
substituting Wilmington, which replaced JPMorgan as the Prepetition
Indenture Trustee, as plaintiff in the JPM Adversary Proceeding.
61
Noteholders do not have, and are not entitled to, a lien on any of the
Debtors' assets. The Bankruptcy Court also found that the 2027/2037 Notes were
properly de-securitized under the express terms of the Prepetition Indenture.
2. EQUITY COMMITTEE ADVERSARY PROCEEDING AGAINST MONSANTO AND
----------------------------------------------------------
PHARMACIA
---------
On March 7, 2005, the Equity Committee commenced the Equity Committee
Adversary Proceeding by filing a complaint against Monsanto and Pharmacia (the
"Equity Committee Complaint"). The Equity Committee Complaint seeks the
disallowance of the claims filed by Monsanto and Pharmacia against Solutia's
bankruptcy estates and a reallocation of substantial amounts of the Legacy
Liabilities from Solutia's balance sheet to that of Monsanto and Pharmacia,
based on alleged wrongful and inequitable conduct by Monsanto and Pharmacia.
In particular, the Equity Committee Complaint alleges that as part of the
Spinoff, Pharmacia forced Solutia to assume excessive liabilities and
insufficient assets such that Solutia was destined to fail from its inception.
The Noteholders' Committee and the Trade Committee have intervened in
the Equity Committee Adversary Proceeding. Solutia and the Creditors'
Committee have intervened in the Equity Committee Adversary Proceeding as
neutral parties due to the importance of the proceeding with respect to
Solutia's bankruptcy case.
In May 2005, Monsanto and Pharmacia filed a motion to dismiss the
Equity Committee Complaint or, in the alternative, to stay the adversary
proceeding, which was later denied by the Bankruptcy Court. In August 2005,
Solutia filed with the Bankruptcy Court a Statement and Reservation of Rights
in Response to Equity Committee's Complaint and Objection to Claims, in which
Solutia expressed its view that the issues and disputes raised in the Equity
Committee Complaint would be resolved through the Amended Plan confirmation
process.
In August 2006, Solutia filed a motion to stay the Equity Committee
Adversary Proceeding, alleging that the Equity Committee lacked proper
standing to pursue the claims in the Equity Committee Adversary Proceeding on
behalf of Solutia. In September 2006, the Bankruptcy Court ruled that the
Equity Committee did not have standing to pursue claims on behalf of Solutia
because Solutia had already pursued claims against Monsanto and Pharmacia and
entered into a settlement agreement with respect to those claims. However, the
Bankruptcy Court also ruled that the Equity Committee did have standing under
section 502 of the Bankruptcy Code to pursue its own objections to the claims
of Monsanto and Pharmacia.
In November 2006, the parties to the Equity Committee Adversary
Proceeding submitted their outstanding disputes to mediation. Ultimately, the
parties were unable to reach a settlement, but the parties did, however, agree
to an evergreen standstill of the 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 Equity Committee Adversary Proceeding for trial.
On April 16, 2007, Solutia filed a motion requesting that the
Bankruptcy Court reconsider its September 2006 ruling that the Equity
Committee could pursue claims objections against Monsanto and Pharmacia on the
grounds that Solutia has already resolved these Claims.
62
Solutia has settled the objections to Monsanto's and Pharmacia's claims. If
the Bankruptcy Court approves the terms of Solutia's settlement with Pharmacia
and Monsanto at the Confirmation Hearing, pursuant to the standards governing
the approval of settlements under Bankruptcy Rule 9019, then the Equity
Committee Adversary Proceeding will necessarily be dismissed with prejudice.
Solutia's motion is scheduled to be heard by the Bankruptcy Court on May 18,
2007. Pursuant to the terms of the Amended Plan, the Equity Committee
Adversary Proceeding will be dismissed with prejudice on the Effective Date.
3. LITIGATION AMONG PHARMACIA, MONSANTO AND SOLUTIA
------------------------------------------------
Since the Petition Date, Solutia, Pharmacia and Monsanto have engaged
in a variety of proceedings regarding their respective rights and obligations
under the Distribution Agreement, and with respect to the Legacy Liabilities.
(a) Distribution Agreement Rejection
On the Petition Date, Solutia filed a motion for an order approving
rejection of the Distribution Agreement (the "Rejection Motion"). The
Rejection Motion sought Bankruptcy Court authority to reject the Distribution
Agreement and its attendant indemnity obligations flowing from Solutia to
Pharmacia and Monsanto.
In January 2004, Pharmacia and Monsanto objected to the Rejection
Motion (the "Rejection Objection"). In the Rejection Objection, Pharmacia and
Monsanto argued that the Distribution Agreement and the Spinoff Agreements
were one integrated contract. Thus, according to the Rejection Objection,
Solutia could only assume or reject the entire "package" of the Spinoff
Agreements. The Rejection Objection also claimed that Solutia's attempt to
reject the Distribution Agreement was unsound for business reasons, because
Solutia would not be able to operate without the Spinoff Agreements.
Alternatively, Pharmacia and Monsanto argued that the Distribution Agreement
was not "executory" within the meaning of section 365 of the Bankruptcy Code
and thus could not be rejected.
In February 2004, Solutia filed a response to the Rejection Objection
(the "Rejection Response"). In the Rejection Response, Solutia stated that the
Distribution Agreement was not an executory contract. Thus, Solutia requested
that the Bankruptcy Court issue a declaratory judgment allowing them to breach
the Distribution Agreement. Solutia also argued that the Distribution
Agreement was a distinct stand-alone agreement, and was separable from the
Spinoff Agreements. Alternatively, Solutia argued that the rejection of the
Distribution Agreement was supported by sound business judgment, because it
would not require Solutia to surrender its chemical assets transferred in the
Spinoff or otherwise force Solutia to terminate operations.
In February 2004, a hearing on the Rejection Motion, the Rejection
Objection and the Rejection Response was held in the Bankruptcy Court. No
decision has been rendered on these pleadings.
63
(b) The Adversary Proceedings
Solutia has commenced several adversary proceedings against Monsanto
and Pharmacia:
(i) The Benefits Adversary.
On the Petition Date, Solutia filed a complaint seeking a
declaratory judgment that Pharmacia was responsible for the payment of
benefits for certain Solutia Retirees in the event Solutia was relieved of
some or all of such obligations (the "Benefits Adversary").
(ii) The Indemnity Adversary.
In April 2004, Solutia commenced another adversary proceeding
against Pharmacia and Monsanto seeking a declaratory judgment that all
indemnity obligations pursuant to the Distribution Agreement and the
Separation Agreement were dischargeable (the "Indemnity Adversary"). Solutia
sought from the Bankruptcy Court a declaratory judgment that: (a) the
indemnity rights of Pharmacia and Monsanto against Solutia arising from the
Distribution Agreement are dischargeable prepetition "claims" under the
Bankruptcy Code; (b) any contingent indemnity Claims held by Pharmacia or
Monsanto against Solutia must be estimated or disallowed under the Bankruptcy
Code; and (c) the Distribution Agreement is not "executory" within the meaning
of section 365 of the Bankruptcy Code.
(iii) The Monsanto/Pharmacia Avoidance Action.
In December 2005, Solutia filed a complaint in the Bankruptcy
Court entitled Solutia Inc. vs. Monsanto Company and Pharmacia Corporation,
Case No. 05-03353 (PCB) (the "Monsanto/Pharmacia Avoidance Action"), seeking
to avoid certain allegedly preferential and fraudulent transfers to Monsanto
and Pharmacia as applicable. (See Section VI.A.7 hereof for a discussion of
preferential and fraudulent transfers).
(c) The Standstill Agreement and Treatment in the Amended Plan.
The Indemnity Adversary, the Benefits Adversary and the
Monsanto/Pharmacia Avoidance Action commenced against Monsanto and Pharmacia
have not been adjudicated in the Bankruptcy Court. Instead, Solutia, Monsanto
and Pharmacia, with the consent of the Creditors' Committee, have entered into
several successive standstill agreements (collectively, the "Standstill
Agreement") adjourning the actions indefinitely, as applicable. These actions,
together with the Rejection Motion and the other Settled Adversary
Proceedings, will be settled and withdrawn pursuant to the Amended Plan.
(d) Monsanto's Proof of Claim
In November 2004, Monsanto filed a proof of Claim with the Bankruptcy
Court asserting a contingent, unliquidated(29) and unsecured non-priority
Claim against Solutia (the "Monsanto
<FN>
- -------------------------
(29) The Monsanto Proof of Claim also included a liquidated portion.
64
Proof of Claim"). The Monsanto Proof of Claim is based on Solutia's indemnity
obligations under the Distribution Agreement and allegations that Solutia is a
successor in interest with respect to the Legacy Liabilities. As such, the
Monsanto Proof of Claim seeks indemnification for claims brought against or
paid by Monsanto, including Tort Claims, environmental Claims, retiree Claims
and third-party contract Claims and expenses incurred by Monsanto with respect
to such Claims.
(e) Pharmacia's Proof of Claim
In November 2004, Pharmacia filed a proof of Claim with the
Bankruptcy Court asserting a contingent, unliquidated and unsecured
non-priority Claim against Solutia (the "Pharmacia Proof of Claim"). The
Pharmacia Proof of Claim, like the Monsanto Proof of Claim, is based on
Solutia's indemnity obligations under the Distribution Agreement, and its
alleged status under the Distribution Agreement as the successor in interest
with respect to the Legacy Liabilities. Accordingly, the Pharmacia Proof of
Claim asserted indemnification Claims against Solutia for claims brought
against Pharmacia, including Tort Claims, environmental Claims, retiree Claims
and third-party contract Claims.
Pursuant to the Bar Date Order (as hereinafter defined), Monsanto and
Pharmacia were authorized to (a) amend each of their respective proofs of
claim to reflect additional claims and (b) file additional proofs of claim
pursuant to Bankruptcy Rule 3005 that they believe they are entitled to file
on behalf of additional creditors. Solutia, Monsanto and Pharmacia have
subsequently agreed, through a series of stipulations (the "3005
Stipulations"), to extend the deadline by which Monsanto and Pharmacia must
amend their proofs of claim, or file such additional proofs of claim. Pursuant
to the most recent 3005 Stipulation, Monsanto and Pharmacia's time to amend
their proofs of claim, or file additional proofs of claim, has been extended
through October 1, 2007. Solutia, Monsanto and Pharmacia intend to enter into
additional 3005 Stipulations as necessary. All such Claims will be resolved
pursuant to the Relationship Agreement and the Amended Plan. On April 11,
2007, the Equity Committee filed its motion seeking an order of the Bankruptcy
Court compelling Monsanto and Pharmacia to file final amended/and or
additional proofs of claims by a date no later than 21 days after entry of an
order directing them to do so. The Equity Committee subsequently agreed to
withdraw that portion of the motion which sought to compel, or set a deadline
for, Monsanto and Pharmacia to file surrogate claims on behalf of third
parties. The remaining portion of the Equity Committee's Motion is scheduled
to be heard by the Bankruptcy Court on May 18, 2007.
4. THE EPA ADVERSARY PROCEEDING
----------------------------
In February 2004, Solutia commenced an adversary proceeding against
the United States of America, acting on behalf of the EPA, seeking a
declaratory judgment that the remediation obligations pursuant to the Anniston
Consent Decree are claims subject to discharge pursuant to section 101(5) of
the Bankruptcy Code and the automatic stay pursuant to section 362 of the
Bankruptcy Code (the "EPA Adversary"). Solutia also sought the same relief
with respect to other sites not owned by Solutia. As a result of a motion for
partial summary judgment on these issues related to Anniston, Solutia and the
EPA entered into a stipulation on April 30, 2004 (the "EPA Stipulation"),
which provided that certain of Solutia's obligations under the Anniston
65
Consent Decree were subject to the automatic stay pursuant to section 362 of
the Bankruptcy Code and that the EPA could prosecute the amounts of such
obligations in the United States District Court for the Northern District of
Alabama. All of the issues in the EPA Adversary will be resolved pursuant to
the Amended Plan as a result of Solutia's assumption of their obligations
pursuant to the Anniston Consent Decree under the Amended Plan.
5. THE RETIREES ADVERSARY PROCEEDING
---------------------------------
In May 2004, the Retiree's Committee commenced an adversary
proceeding seeking (a) a declaratory judgment that Pharmacia and Monsanto are
liable for the Retirees' benefit claims in the event Solutia obtains relief
pursuant to Bankruptcy Code section 1114 and (b) that Pharmacia's and
Monsanto's claims for indemnity related to Retiree Claims should be equitably
subordinated (the "Retiree Adversary Proceeding"). The Retiree Adversary
Proceeding is subject to a standstill agreement and will be deemed to be
withdrawn with prejudice pursuant to the terms of Retiree Settlement described
in Section VIII.B herein.
6. CALPINE ARBITRATION
-------------------
Prior to the Petition Date, Solutia entered into a series of
long-term lease, sale, operating and other contracts (the "Calpine Contracts")
with Calpine Central, L.P., Calpine Power Services Company and Decatur Energy
Center, LLC (collectively, "Calpine") pursuant to which Calpine built a
natural gas co-generation facility (the "Co-gen Facility") on land leased from
Solutia at Solutia's plant in Decatur, Alabama. In 2004, Solutia determined
that the pricing terms of certain of the Calpine Contracts were no longer
cost-effective and, therefore, filed a motion seeking to reject the Calpine
Contracts on May 13, 2004. In November 2004, Calpine filed two proofs of claim
for damages relating to the rejection of the Calpine Contracts (the "Calpine
Claims"). The Calpine Claims asserted total damages of approximately $383
million, and in August 2005, Solutia objected to the Calpine Claims. By order
dated November 4, 2005, the Bankruptcy Court granted Solutia's request to
resolve its objections to the Calpine Claims through arbitration.
7. AVOIDANCE ACTIONS
-----------------
A number of transactions occurred prior to the Petition Date that
Solutia believes may have given rise to claims, including preference actions,
fraudulent transfer and conveyance actions, rights of setoff and other claims
or causes of action under sections 510, 544, 547, 548, 549, 550 and/or 553 of
the Bankruptcy Code and other applicable bankruptcy or non-bankruptcy law
(collectively, the "Avoidance Actions").
Pursuant to section 546(a) of the Bankruptcy Code, the statute of
limitations with respect to the commencement of avoidance or recovery actions
under sections 544, 545, 547, 548 and 553 of the Bankruptcy Code expired on
December 17, 2005, i.e., two years after the Petition Date. Starting on
December 14, 2005, and concluding on December 17, 2005, Solutia commenced
Avoidance Actions in connection with a variety of prepetition payments and
other transfers. Solutia commenced these Avoidance Actions to preserve the
causes of action for the benefit of Solutia's Estates. A schedule of the
Avoidance Actions commenced by Solutia is attached as Exhibit H. On January
10, 2006, Solutia filed a Motion for Order Extending
66
Deadline to Serve Avoidance Complaints and Canceling or Adjourning Pretrial
Conferences, seeking an extension of the deadline for serving summonses and
complaints in connection with the Avoidance Actions, which motion was granted.
While the summons and complaints have been issued and served on all
defendants, the defendants have no obligation to respond and no litigation
shall proceed until further notice in writing by Solutia that the Avoidance
Action will be pursued. If the Amended Plan is confirmed, certain of these
Avoidance Actions may be released, and others may continue to be pursued.
(a) Preference Actions
Under sections 547 and 550 of the Bankruptcy Code, a debtor may seek
to avoid and recover certain prepetition payments and other transfers made by
the debtor to or for the benefit of a creditor in respect of an antecedent
debt, if such transfer (i) was made when the debtor was insolvent and (ii)
enabled the creditor to receive more than it would receive in a hypothetical
liquidation of the debtor under Chapter 7 of the Bankruptcy Code where the
transfer had not been made. Transfers made to a creditor that was not an
"insider" of the debtor are subject to these provisions generally only if the
payment was made within 90 days prior to the debtor's filing of a petition
under Chapter 11 of the Bankruptcy Code (the "Preference Period"). Under
section 547, certain defenses, in addition to the solvency of the debtor at
the time of the transfer and the lack of preferential effect of the transfer,
are available to a creditor from which a preference recovery is sought. Among
other defenses, a debtor may not recover a payment to the extent such creditor
subsequently gave new value to the debtor on account of which the debtor did
not, among other things, make an otherwise unavoidable transfer to or for the
benefit of the creditor. A debtor may not recover a payment to the extent such
payment was part of a substantially contemporaneous exchange between the
debtor and the creditor for new value given to the debtor. Further, a debtor
may not recover a payment if such payment was made, and the related obligation
was incurred, in the ordinary course of business of both the debtor and the
creditor. The debtor has the initial burden of proof in demonstrating the
existence of all the elements of a preference and is presumed to be insolvent
during the Preference Period. The creditor has the initial burden of proof as
to the aforementioned defenses.
(b) Fraudulent Transfer and Conveyance Actions
Generally, a conveyance or transfer is fraudulent if: (i) it was made
with the actual intent to hinder, delay or defraud a creditor (i.e., an
intentional fraudulent conveyance); or (ii)(a) reasonably equivalent value was
not received by the transferee in exchange for the transfer and (b) the debtor
was insolvent at the time of the transfer, was rendered insolvent as a result
of the transfer or was left with insufficient capitalization as a result of
the transfer (i.e., a constructive fraudulent conveyance). Two primary sources
of fraudulent conveyance law exist in a chapter 11 case.
(i) Section 548 of the Bankruptcy Code
The first source is section 548 of the Bankruptcy Code, under which a
debtor in possession or bankruptcy trustee may avoid fraudulent transfers that
were made or incurred on or within one year before the date that a bankruptcy
case is filed.
67
(ii) Section 544 of the Bankruptcy Code
The second source is section 544 of the Bankruptcy Code--the
so-called "strong-arm provision"--under which the debtor in possession (or
creditors with bankruptcy court permission) may have the rights of a creditor
under state law to avoid transfers as fraudulent. State fraudulent conveyance
laws generally have statutes of limitations longer than one year and are
applicable in a bankruptcy proceeding pursuant to section 544 of the
Bankruptcy Code if the statute of limitations with respect to a transfer has
not expired prior to the filing of the bankruptcy case. If such statute of
limitations has not expired, the debtor in possession (or creditors with
bankruptcy court permission) may bring the fraudulent conveyance claim within
the time period permitted by section 546 of the Bankruptcy Code
notwithstanding whether the state statute of limitations period expires prior
to the expiration of such time.
B. PENDING LEGAL PROCEEDINGS OUTSIDE THE BANKRUPTCY COURT
------------------------------------------------------
1. CASH BALANCE PLAN LITIGATION
----------------------------
Since October 2005, current or former participants in the Solutia
Pension Plan have filed three class actions alleging that the Solutia Inc.
Employees' Pension Plan (the "Solutia Pension Plan") is discriminatory based
upon age and that the lump sum values of individual account balances in the
Solutia Pension Plan have been, and continue to be, miscalculated. Two of
these cases, captioned Davis v. Solutia, Inc. Employees' Pension Plan and
Hammond 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 and the Monsanto Company Pension Plan (Walker v. The Monsanto
Pension Plan) and the Pharmacia Cash Balance Pension Plan, Pharmacia
Corporation, Pharmacia and Upjohn, Inc., and Pfizer Inc. (Donaldson v.
Pharmacia Cash Balance Pension Plan). The plaintiffs in the Solutia 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 Solutia Pension Plan. Neither Solutia nor any of
the other Debtors have been named as a defendant in any of these cases.
A Consolidated Class Action Complaint was filed by all of the
plaintiffs in the consolidated case on September 4, 2006. The plaintiffs in
the complaint alleged three separate causes of action against the Pension
Plan: (a) the Pension Plan violates ERISA by terminating interest credits on
prior plan accounts at the age of 55; (b) the Pension Plan is improperly
backloaded in violation of ERISA; and (c) the Pension Plan is discriminatory
on the basis of age.
On August 7, 2006, the Seventh Circuit Court of Appeals issued its
decision in Cooper v. IBM Personal Pension Plan, finding that the calculation
of IBM's cash balance plan formula - which is comparable to the Solutia Plan -
did not constitute age discrimination under ERISA. On January 16, 2007, the
United States Supreme Court declined to hear an appeal of the Cooper case,
thus confirming the order of the Seventh Circuit.
Motions for class certification were filed in late 2006 by the
plaintiffs against each of the defendants. With respect to the Solutia Pension
Plan, plaintiffs moved to certify a class only
68
with respect to the claim that termination of interest credits violate ERISA.
Briefing on the class certification motions have been completed and a hearing
has been scheduled for July 2007.
Solutia is the sponsor and administrator of the Solutia Pension Plan.
A negative outcome in this litigation could affect Solutia because the Solutia
Pension Plan will not be terminated, and will continue after the Debtors'
emergence from the Chapter 11 Cases.
2. SIP PLAN LITIGATION
-------------------
On October 7, 2004, a purported class action titled Dickerson v.
Feldman was filed in the New York District Court against a number of
defendants, including former officers and employees of Solutia and Solutia's
Employee Benefits Plan Committee and Pension and Savings Fund Committee.
Neither Solutia nor any of the other Debtors is named as a defendant. The
action alleged breach of fiduciary duty under ERISA and sought to recover
alleged losses to the Solutia Inc. Savings and Investment Plan ("SIP Plan")
during the period from December 16, 1998 to the date the action was filed. The
investment of SIP Plan assets in Solutia's common stock was 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 in Section VI.B.3(b) of this
Disclosure Statement. The action sought monetary payment to the SIP Plan to
recover the losses resulting from the alleged breach of fiduciary duties, as
well as injunctive and other appropriate equitable relief, reasonable
attorney's fees and expenses, costs and interest. In addition, Dickerson filed
a proof of claim in the amount of $269 million against Solutia in the Chapter
11 Cases.
Dickerson then sought to withdraw the reference of his ERISA claim
from the Bankruptcy Court to the New York District Court so that the proof of
claim and the purported class action could be considered together by the
District Court. On March 11, 2005, the District Court denied without prejudice
Dickerson's motion to withdraw the reference. The Dickerson plaintiffs
subsequently amended their initial complaint to add several current officers
and directors of Solutia as defendants. On July 5, 2005, the defendants filed
motions to dismiss Dickerson's amended complaint. Dickerson also had filed an
amended proof of Claim in the amount of $290 million against Solutia on
September 1, 2005, based on his amended complaint. On September 7, 2005,
Dickerson filed a motion for class certification of his proof of Claim.
On March 30, 2006, the District Court granted the defendants' motion
to dismiss on the grounds that the Dickerson plaintiffs lacked standing to sue
and that the complaint failed to state a claim on which relief may be granted.
The dismissal of Dickerson's cause of action resulted in dismissal of the
entire purported class action, including claims asserted on behalf of the
unnamed purported class members. On April 3, 2006, Dickerson filed an appeal
of the 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 2007.
Solutia filed an objection to Dickerson's claim in June of 2006 on
the basis that the dismissal of the underlying lawsuit was dispositive of the
claim. Dickerson filed a response seeking a stay of the Court's consideration
of the objection pending the resolution of Dickerson's appeal in the Second
Circuit. Solutia believes that the Claims described above are claims arising
from the purchase or sale of securities and thus, even if such Claims survive
appeal and are
69
allowable, they would be subject to subordination pursuant to Bankruptcy Code
section 510(b). Accordingly, under the Amended Plan, these Claims are
classified in Class 19 as Security Claims and will be discharged without any
Distributions.
3. SIGNIFICANT LEGAL PROCEEDINGS INVOLVING NON-DEBTOR AFFILIATES OF
----------------------------------------------------------------
SOLUTIA
-------
(a) 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. Because the indemnification obligations with respect to these
matters are obligations of SESA, which is not a Debtor in the Chapter 11
Cases, such indemnification obligations, if any, will not be subject to
treatment or discharge in the Chapter 11 Cases and Solutia will, directly or
indirectly, bear the full cost of any fines assessed against SESA.
(b) Flexsys Related Litigation
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 practice 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. A
series of such purported class actions 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 the cases have been dismissed,
or are currently subject to tentative settlements. For information concerning
other significant Flexsys litigation, please see the description in the
70
"Commitments and Contingencies" footnote in Flexsys' financial statements, a
copy of which is attached as an Exhibit to Solutia's 2006 Annual Report on
Form 10K which is attached to this Disclosure Statement as Exhibit C.
Flexsys is not a Debtor in the Chapter 11 Cases and liabilities, if
any, associated with this or other Flexsys litigation will not be subject to
treatment or discharge in the Chapter 11 Cases.
4. COMMERCIAL LITIGATION
---------------------
(a) Litigation against 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 Canada 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 Canada agreed to exclude from the agreement the assets of
its LaSalle Plant in Quebec, and separately entered into the LaSalle Toll
Agreement ("LTA") with UCB. The LTA passed through all the benefits and risks
of ownership of the LaSalle operations to UCB, other than pre-closing
environmental liabilities. Solutia Canada agreed in the LTA 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 agreed to
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. INEOS' decision to terminate
the LTA will likely trigger the shutdown of all activities at the LaSalle
Plant, resulting in termination costs recoverable by Solutia Canada against
INEOS. Solutia Canada estimates that the overall termination costs associated
with the termination of the LTA and the shutdown of the LaSalle Plant will
total approximately $31 million (CAD). Solutia Canada provided INEOS with an
estimate of the expected termination costs prior to the notice of termination.
INEOS disputes the overall amount of Solutia Canada's termination costs.
Solutia Canada filed suit against INEOS for breach of the LTA with
respect to termination costs. On March 26, 2007, INEOS filed a cross-demand
against Solutia Canada for approximately $1.15 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' allegations.
Solutia Canada is not a Debtor in the Chapter 11 Cases and
liabilities, if any, associated with this litigation will not be subject to
treatment or discharge in the Chapter 11 Cases.
71
5. OTHER MATTERS
-------------
(a) Probst v. Monsanto and Solutia
On February 22, 2000, a group of 35 former Solutia employees who were
terminated by Solutia and became employees of Astaris, a former joint venture
between Solutia and FMC Corporation, filed a charge with the Equal Employment
Opportunity Commission ("EEOC") alleging age discrimination under the Age
Discrimination in Employment Act against Pharmacia and Solutia (collectively,
the "Probst Charge").
The Probst Charge alleged that the transfer of employees to Astaris
resulted in age discrimination because the employees were no longer covered by
the Solutia Pension Plan as of their transfer date. The Probst Charge also
alleged that Pharmacia's conversion of the (Old) Monsanto Pension Plan from a
final average pay formula to a cash balance formula defined benefit pension
plan was age discriminatory and that Solutia's adoption of a mirror cash
balance pension plan and continued administration of that plan is age
discriminatory. Further, the Probst Charge claimants alleged that Solutia and
Pharmacia misrepresented the effect that the conversion from a final average
pay formula to a cash balance formula defined benefit pension plan would have
on older workers.
The EEOC started its investigation of the Probst Charge in 2000, and
Solutia cooperated with the EEOC. After an initial period of investigation,
the inquiry was generally dormant for several years. The EEOC did not formally
conclude its investigation until September 2006, at which time the EEOC
dismissed the charges and issued separate right-to-sue notices to all 35
former employees. In the right-to-sue notices, the EEOC noted that the
employees had received a greater benefit under the new cash balance pension
plan than they would have under the previous plan, and that cash balance
pension plans are not, by their nature, discriminatory on the basis of age.
Pursuant to the terms of the right-to-sue notices, the employees were required
to file any suits under the ADEA within 90 days of receipt of the notices. The
90-day period expired in December 2006, and Solutia has not been served with
any lawsuits to date arising out of the Probst Charge.
On November 23, 2004, Probst filed a proof of claim in the Chapter 11
Cases, attaching the Probst Charge. The Probst proof of claim was filed as an
unsecured, non-priority, contingent and unliquidated disputed Claim. Solutia
intends to object to the Probst Claim now that the EEOC investigation has
concluded and the period during which the employees had the right to bring
suit under the ADEA has passed.
(b) Department of Labor Investigation
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
the facts gathered, it appeared that Solutia, through its fiduciaries,
breached its fiduciary obligations and violated
72
provisions of ERISA with respect to the SIP Plan. Specifically, the DOL stated
that it did not find sufficient evidence that: (i) 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 (ii) the
Solutia Board of Directors, CEO and PSFC, prior to December 15, 2003
adequately monitored the SIP Plan fiduciaries, including the PSFC, the
Employee Benefits Plan Committee, and the Northern Trust Company of
Connecticut. The DOL did not assert in its letter that the SIP Plan or its
participants had been harmed by these alleged breaches. Further, the DOL did
not find that the offering of the Solutia Stock Fund as an investment option
in the SIP Plan was itself a violation of ERISA, or that it caused any
participant to suffer investment losses. Further, the DOL did not assert any
monetary fines or penalties against the Company based on its findings to date.
The DOL stated in the letter that its findings were subject to the possibility
that additional information could lead the DOL to revise its views.
The DOL did not choose to file suit against the Solutia fiduciaries,
instead offering Solutia the opportunity to voluntarily discuss how the
alleged violations may be corrected. Solutia has submitted additional
information to the DOL to support the Company's request for reconsideration of
the DOL's findings.
On June 27, 2006, substantially past the November 30, 2004 bar date
for filing claims, the Department of Labor filed a proof of Claim for an
unsecured claim in an unliquidated amount. There is insufficient information
included in the Claim to determine whether it pertains to this investigation
of the SIP Plan.
VII.
REORGANIZED SOLUTIA
-------------------
A. BUSINESS OVERVIEW
-----------------
As described in Section IV.A of this Disclosure Statement, Solutia,
together with its Debtor and non-Debtor subsidiaries, is a global manufacturer
and marketer of high-performance chemical and polymer-based materials.
Reorganized Solutia will function as a single integrated operating company
with a foundation comprised of five significant business lines--Nylon, Saflex,
Flexsys, CPFilms and Specialty Products--each of which provides materials
principally to the transportation, construction and manufacturing industries.
Solutia's global headquarters is located in St. Louis, Missouri.
Solutia also has corporate offices in Belgium, Brazil and Singapore. Solutia
and its subsidiaries operate 27 manufacturing sites, eleven technical centers
and over 30 sales offices around the world. Upon the closing of Flexsys on May
1, 2007, Solutia's global workforce was comprised of approximately 5,800
employees. Approximately 200 employees served in various corporate
headquarters functions or in corporate functions not specifically related to
any single business. The remaining 5,600 employees were employed in one of
Solutia's five primary businesses. Approximately 4,100 employees were based in
the United States, with the remaining employees spread across Solutia's
facilities throughout the rest of the world.
73
B. THE NYLON BUSINESS
------------------
The Nylon business consists of nylon fiber, plastics and intermediate
chemical products used in construction, automotive, consumer and industrial
applications. The Nylon business is the second largest Nylon 6,6 manufacturer
in North America and the largest of Reorganized Solutia's businesses. The
overall market for Nylon 6,6 continues to grow worldwide and, while this
product is mature, its use has expanded to applications where its
characteristics provide the greatest value to customers.
For 2006, the Nylon business generated approximately $1.7 billion in
net sales, accounting for approximately 59% of Solutia's total net sales. The
Nylon business which had approximately 2,200 employees as of December 31,
2006, operates facilities in Alvin, Texas (Chocolate Bayou), Decatur, Alabama,
Foley, Alabama, Greenwood, South Carolina and Pensacola, Florida. Sales
outside the domestic United States are increasing with about 31% of
consolidated net sales in 2006 into markets outside the United States,
compared with 20% in 2005.
The Nylon business comprises an integrated family of nylon products,
as follows:
o Solutia's Vydyne(R) nylon molding resins, Ascend(R) nylon polymers
and nylon industrial fibers, which are sold into the automotive,
engineered thermoplastic, apparel, textile, commercial and
industrial markets in products such as knit clothing, dental
floss, tires, airbags, molded automotive parts, conveyor belts,
cooking bags, food packaging and camping gear.
o Solutia's nylon carpet staple and nylon bulk continuous filament
which are sold under the Wear-Dated(R) brand for residential
carpet and the Ultron(R) brand for commercial carpet, as well as
under private labels for the residential, commercial and
industrial markets.
o Solutia's chemical intermediates, including adipic acid,
hexamethylenediamine and acrylonitrile are used internally as
feedstock for fiber and resins production and are also sold on the
merchant market for use in nylon and acrylic fiber, nylon and ABS
plastic, synthetic resins, synthetic lubricants, paper chemicals
and plasticizers.
Solutia holds a complete set of fully integrated processes and a
highly flexible set of assets in the Nylon business. Importantly, there is a
growth market in Nylon for engineering thermoplastics in which Solutia can
compete. Management's strategic review of the Nylon business confirmed that
Nylon 6,6 remains a high-performance, cost-effective polymer providing
Solutia's customers superior performance in the areas of chemical, abrasion
and heat resistance and processability in a variety of end-use applications.
As one of the world's few fully integrated suppliers, Solutia's Nylon business
is well positioned to create and sustain a highly competitive cost position.
Managing the Nylon business, historically the most volatile of
Solutia's businesses, will require management to further improve Solutia's
cost position and continue to reduce its exposure to volatile raw material and
energy price risks. Solutia's management believes that by
74
altering the way in which Reorganized Solutia operates its assets, and through
selected investments in reliability, significant improvements to Solutia's
cost position are possible. Solutia has addressed perceived weaknesses in its
cost structure by focusing its resources on improving the operating efficiency
and reliability of its plants. To date, process technology improvements in the
Nylon intermediates areas have been implemented which materially improve the
quality, cost and reliability of these operations. Solutia also has restarted
its phenol to ketone alcohol assets which provide additional improvements to
cost, and importantly also provide improved reliability in its Nylon business.
In order to address Solutia's exposure to the volatility of natural gas and
oil prices, Solutia is focused on implementing a number of projects which will
significantly change the energy profile of its operations. Solutia expects
that by 2008, it will reduce its exposure to natural gas and fuel oil prices
and build up a corresponding increase in reliance on energy provided by coal,
nuclear and other fuels at its operating sites. In addition, restructuring
commercial contracts with emphasis on conversion margins while passing along
input prices via formulas will be another way in which price risk may be
mitigated.
Reorganized Solutia intends to focus its Nylon business on the
growing markets in nylon plastics, chemicals and fibers. Given Solutia's
already flexible and integrated set of Nylon assets and through additional low
cost investments, Solutia intends to become a more balanced player in all
three Nylon markets (reducing its emphasis on North American fiber markets).
Solutia intends to continue investing in low cost fiber to plastic asset
conversions in order to increase its supply and participation in the global
plastics market, particularly focusing its participation in the fast growing
China region. As a consequence of these conversions, Solutia's exposure to
commodity staple fiber markets will be reduced. Nylon intermediate chemicals
(for both nylon and non nylon applications) will continue to play an important
role as will a smaller more focused fiber business. Solutia, while
historically a large Nylon staple fiber supplier to the North American carpet
market will now focus on participating in the growing BCF portion of the
carpet market as well as supplying staple into branded segments where it
remains highly valued.
Reorganized Solutia intends to use the significant cash flow
generating ability of the Nylon business to fund growth opportunities in
Nylon, such as the fast growing markets for nylon engineering thermoplastics,
in addition to growth opportunities in the Saflex, CPFilms and specialty
chemicals sets of businesses. New commercial agreements and operating
improvements, combined with a more strategic, action-oriented approach to the
marketplace, lead management to conclude that Nylon will play an important
part of Reorganized Solutia.
C. THE SAFLEX BUSINESS
-------------------
The Saflex business is the world's largest producer of PVB sheet, a
plastic interlayer used in the manufacture of laminated glass for automotive
and architectural applications. Besides PVB sheet, which is mostly marketed
under the Saflex(R) brand, specialty intermediate PVB resin products sold
under the Butvar(R) brand, optical grade PVB resin and plasticizer are
marketed and sold worldwide. Saflex is a growing business and is positioned to
be the fastest growing segment of Solutia's post-emergence business portfolio.
The Saflex business generated approximately $663 million of net sales
in 2006, accounting for approximately 23% of Solutia's total net sales. The
Saflex business which had
75
approximately 1,200 employees as of December 31, 2006, operates facilities in
Antwerp, Belgium, Ghent, Belgium, Newport, Wales (U.K.), Puebla, Mexico, Sao
Jose dos Campos, Brazil, Singapore, Springfield, Massachusetts and Trenton,
Michigan. The Saflex business is particularly dependent on international
operations with 77% of consolidated net sales in 2006 into markets outside the
United States, with the European market the most significant market region
globally.
Growth in the Saflex business will be driven by the introduction of
new PVB products, increased penetration of geographic markets and the creation
of new primary demand for PVB interlayers and other film technologies
worldwide. Solutia anticipates that over 80% of global demand growth will be
in Europe and Asia and nearly half of demand growth will be in the
architectural market.
Solutia's research and development programs in the Saflex business
emphasize the development and commercialization of specialty products for the
window glazing and specialty materials markets, such as a new acoustic safety
interlayer for automotive windshields and bilayer products for automotive
sunroofs. Research programs also focus on new process development for the
manufacture of PVB resin and PVB sheet products, positioning Saflex as the
low-cost high-quality producer of the industry.
Solutia's focused technology investments during the Chapter 11 Cases
in new and enhanced products has positioned Saflex to deliver benefits to
consumers in important areas such as storm and hurricane protection,
thermal/solar benefits, acoustics, colors and other aesthetics in addition to
the safety and security role that laminated glass has played historically. The
market for PVB is very attractive as demand for flat glass has outperformed
global gross domestic product for many years, while demand for laminated glass
has outpaced the growth in flat glass. Demand for laminated glass continues to
grow globally with exceptionally strong growth foreseen in Europe and Asia
over the next five years.
Saflex will generate profitable new revenues resulting from
additional investments in plant and equipment initiated during the Chapter 11
Cases and aimed at serving the rapidly emerging Asian and European automotive
and architectural markets as well as delivering the capability enhancements
needed to supply newly developed products to the market. Expansions of
Solutia's laminated glass interlayer production capacity and capability in
China and construction of a third extrusion line at Solutia's Ghent facility
will significantly enhance Solutia's manufacturing presence in the growth
markets of Asia and Europe in automotive and architectural applications.
Solutia's acquisition of PVB capacity in Puebla, Mexico and its subsequent
improvements to this capacity provides lower overall systems cost and
unlimited access to the expanding market for laminated glass in Mexico. The
investments, coupled with Solutia's already substantial positions in North
America and Europe, lead management to believe that Solutia can create
cost-advantaged positions in every major world area while ensuring that it
meets the growing demand for laminated glass around the world.
Management believes that sustained investment in market development,
technology and new capacity throughout the restructuring period has positioned
the Saflex business for rapid, profitable growth following emergence.
76
D. THE FLEXSYS BUSINESS
--------------------
The newest piece of Solutia's post emergence portfolio is Flexsys, a
global leader in high quality chemicals for the rubber industry. These
chemicals help cure and protect rubber, impart desirable properties to cured
rubber, increase durability, and lengthen product life. Flexsys products play
an important role in the manufacture of tires and other rubber products such
as belts, hoses, seals and footwear.
For 2006, the Flexsys business generated approximately $606 million
in net sales. Flexsys employs more than 600 people and its headquarters are in
Brussels, Belgium. Flexsys products are manufactured at 15 facilities
worldwide: eight in Europe, three in North America, two in South America and
two in Asia. Flexsys has 8 offices and a sales force of approximately 20
employees plus a worldwide network of agents and distributors.
Flexsys manufactures more than 50 different products which are
classified into two main product groups: vulcanizing agents, principally
insoluble sulphur, and rubber chemicals. Insoluble sulphur is a key
vulcanizing agent manufactured predominantly for the tire industry. Flexsys is
the world's leading supplier of insoluble sulphur marketed under the trade
name of Crystex(R). Flexsys has three product groups within rubber chemicals:
anti-degradants; accelerators; and other rubber chemicals.
Flexsys has been enhancing profitability by focusing its portfolio on
products that demonstrate a competitive advantage, investing in new low-cost
world scale manufacturing facilities, and introducing new low cost
technologies to the rubber chemicals market. It has capitalized on its
historic technology leadership position, strong commercial relationships with
industry leading customers and global manufacturing and distribution network
to maintain and grow its business.
Solutia expects to take advantage of administrative and commercial
synergies between Solutia and Flexsys, which has operated as a standalone
company since 1995. Moreover, Solutia believes that it is uniquely qualified
to restructure Flexsys and capture the benefits of any resulting operational
and financial improvement. Like Solutia, Flexsys is a global specialty
chemicals business that specializes in the "know how" of manufacturing
market-leading products. In addition, Solutia's management is conducting a
comprehensive and systematic strategic review of the Flexsys business similar
to the strategic reviews carried out on Solutia's other material businesses
during the Chapter 11 Cases. This strategic review will help focus management
on integration and on the overall strategy related to this business going
forward.
E. THE CPFILMS BUSINESS
--------------------
CPFilms is another fast growing films business in Solutia which, like
Saflex, adds functionality to glass. As the world's leading producer of high
quality branded aftermarket window films, CPFilms will continue to focus on
growing primary demand for window films both in the United States and
globally. Solutia's CPFilms business manufactures and sells special custom
coated window films under the brands Llumar(R), the world's best-selling brand
of window film, Vista(R), a high performance line of products recognized by
the design community as a leader in residential and commercial buildings,
Gila(R), the leading brand of solar window
77
film for the do-it-yourself retail market, and Formula One(R) high performance
automotive films. CPFilms also manufactures various films for use in tapes,
automotive badging, optical and colored filters, shades, packaging, computer
touch screens, electroluminescent displays, and cathode ray tube and flat
panel monitors.
For 2006, the CPFilms business generated approximately $214 million
of net sales, accounting for approximately 7% of Solutia's total net sales.
The CPFilms business which had approximately 700 employees as of December 31,
2006, operates facilities in Martinsville, Virginia, Canoga Park, California,
and Runcorn, U.K. During 2006, Solutia relocated the CPFilms' business team
leads from Martinsville, Virginia to Solutia's corporate headquarters in St.
Louis, Missouri. This move gives CPFilms management greater access to
Solutia's senior executive management team and to other global resources. The
CPFilms business is largely domestic but increasingly focused on sales from
international operations with about 37% of consolidated net sales in 2006 into
markets outside the United States.
CPFilms has been growing at a rate of more than 6% annually. CPFilms
operates in a market where brands, product performance and innovation, quality
and customer service support premium pricing. Growth is driven by the
development of innovative solutions to meet consumer demand for safety and
security, energy efficiency and decorative qualities in both automotive and
architectural after-market window glazing applications and through the
continued global expansion of branded products. To help create and support
this growth, new investments in technology, marketing and plant and equipment
have been made in the CPFilms business.
Relatively low market penetration in many expanding global economies
and a relatively high utility and demand for the products' performance
qualities, suggest a substantial growth opportunity for the category and for
CPFilms as the global market leader. Reorganized Solutia will focus on driving
product awareness in more developed markets as well as developing new markets
around the world where the benefits of solar, control, energy efficiency,
safety, security and aesthetics, are increasingly valued. Reorganized Solutia
intends to place strategic emphasis on reinforcing and building CPFilms'
already strong position in the branded aftermarket window films segment.
Additionally, CPFilms will focus on restructuring its product distribution
channels, with particular emphasis on its domestic distribution, where it
believes greater efficiencies and additional cost savings can be achieved.
F. THE SPECIALTY PRODUCTS BUSINESS
-------------------------------
The Specialty Products business represents a unique set of niche
businesses serving a diverse set of markets and end-users in the aerospace,
manufacturing and industrial markets.(30) These businesses are well-positioned
and, in many cases, are world leaders, and historically have generated cash
flows beyond that required to fund their continued growth. Solutia has
<FN>
- -------------------------
(30) The Specialty Products business had also included Dequest(R), a water
treatment phosphonate business, however, this business will be sold
prior to Solutia's exit from Chapter 11. See section V.C.2(e)(ii) of the
Disclosure Statement regarding the Dequest(R) sale.
78
strengthened these leading positions during the Chapter 11 Cases by continuing
to invest in technology and customer service, and also through significant
investments in new plant and equipment. The Specialty Products businesses,
collectively, generated approximately $265 million of net sales in 2006,
accounting for approximately 9% of Solutia's total net sales.
As of December 31, 2006, approximately 800 people were employed in
the Specialty Products business. Plastic products are manufactured in Ghent,
Belgium and St. Louis, Missouri. Technical products are manufactured in
Newport, Wales (U.K.). Heat transfer fluids are manufactured in Anniston,
Alabama, Alvin, Texas (Chocolate Bayou), Newport, Wales (U.K.) and Sao Jose
dos Campos, Brazil. Aviation Fluids are manufactured in Anninston, Alabama.
The Specialty Products businesses are particularly dependent on international
operations with approximately 75% of consolidated net sales in 2006 into
markets outside the United States.
The principal product lines of the Specialty Products business are as
follows:
o PLASTIC PRODUCTS - a variety of products including entrance
matting and automotive spray suppression flaps sold under the
brands Astroturf(R), CLEAN Machine(R) and Clearpass(R).
o HEAT TRANSFER FLUIDS - Therminol(R) heat transfer fluids used for
indirect heating or cooling of chemical processes in various types
of industrial equipment and in solar energy power systems. The
fluids provide enhanced pumping characteristics, because they
remain thermally stable at high and low temperatures. Therminol(R)
fluids are leading products in the worldwide high temperature
liquid phase market.
o AVIATION FLUIDS - Skydrol(R) brand aviation hydraulic fluids and
Skykleen(R) brand of aviation solvents supplied across the
aviation industry. The Skydrol(R) line includes fire-resistant
hydraulic fluids, which are used in more than half of the world's
commercial aircraft.
Solutia competes in the plastic products business under various brand
names including Astroturf(R), Clean Machine(R) and Clearpass(R), and by using
continuous injection molding technologies to manufacture and market worldwide
spray suppression mats for heavy trucking and premium-priced, high-performance
entry matting, together with a range of other plastic products for use in the
pet, poultry and sound suppression markets. Growth in these businesses will be
primarily driven by new legislation regulating spray suppression systems for
heavy trucking and product innovations that capitalize on continuous injection
molding technology.
Solutia competes in the heat transfer fluid business by providing
engineering solutions for high temperature heat transfer applications. Sales
are typically made to engineering companies who design and build chemical and
plastics manufacturing facilities, with continuing sales to the operators of
facilities designed for use with Solutia's heat transfer fluids such as
synthetic fiber manufacturing, oil and gas processing, pharmaceutical
manufacturing, barge and terminal heating and solar energy power systems.
Growth is dependent on new product development and the rate of worldwide new
factory construction.
79
Solutia competes in the aviation fluid business by servicing
technical needs of and selling products to airframe manufacturers and
companies operating and/or servicing passenger or cargo airplane fleets.
Growth is driven by increases in worldwide miles flown by passenger and cargo
airline fleets.
Reorganized Solutia intends to identify and exploit opportunities to
reinforce and renew its industry leading positions within the Specialty
Products business.
G. CAPITAL OBLIGATIONS TO BE SATISFIED OR COMPROMISED UPON EMERGENCE
-----------------------------------------------------------------
As of the Petition Date, Solutia reported, on a consolidated basis,
approximately $1.2 billion in aggregate long-term indebtedness, primarily
consisting of secured and unsecured notes, a bank credit facility and a
synthetic lease financing arrangement. As set forth in the following table,
Solutia plans to satisfy this indebtedness including indebtedness incurred
under the DIP Credit Facility, the Senior Secured Notes, the Euro Facility
Agreement and the Flexsys Secured Facilities Agreement from the proceeds of
the Exit Financing Facility and other sources, as described in greater detail
in Section VII.H.2 of this Disclosure Statement.
80
- --------------------------------------------------------------------------------------------------------------------------
ANTICIPATED SOURCES AND USES OF CASH AT EMERGENCE ($ AMOUNT IN MILLIONS)(31)
- --------------------------------------------------------------------------------------------------------------------------
SOURCES: USES:
- -------- -----
- --------------------------------------------------------------------------------------------------------------------------
(1) Surplus Cash(32) 156 DIP (Drawn) 924(33)
- --------------------------------------------------------------------------------------------------------------------------
(2) Exit Revolver(34) 59 Flexsys Term/Revolver(35) 150
- ------------------------------------------------------------- ------------------------------------------------------------
Exit Term Loan B - USD Tranche 600 Senior Secured Notes(36) 223
- --------------------------------------------------------------------------------------------------------------------------
Exit Term Loan B - Euro Tranche 600 Pension Funding 103
- --------------------------------------------------------------------------------------------------------------------------
Exit Subordinated Bonds 400 Euro Loan 213
- --------------------------------------------------------------------------------------------------------------------------
Maryville Note 20 Other cash outflows to facilitate
emergence (Advisor fees, cure payments,
etc) 172
- --------------------------------------------------------------------------------------------------------------------------
Rights Offering Proceeds 250 Maryville Note 20
- --------------------------------------------------------------------------------------------------------------------------
Retiree Trust 175
- --------------------------------------------------------------------------------------------------------------------------
Funding Co 75
- --------------------------------------------------------------------------------------------------------------------------
Minimum Cash Balance 30
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SOURCES $2,085 TOTAL USES $2,085
- --------------------------------------------------------------------------------------------------------------------------
<FN>
- -------------------------
(31) Assumes emergence occurs on June 30, 2007.
(32) Cash balance reduced to $30 million at emergence with no restrictions.
(33) Pursuant to the Fifth Amendment, which was approved by the Bankruptcy
Court on January 25, 2007, the DIP Credit Facility consists of (a) a
$975 million fully drawn term loan and (b) a $250 million borrowing base
revolving credit facility. Upon consummation of the pending Dequest(R)
sale, a portion of the net proceeds of the sale will be used to pay down
$51 million of the $975 million term loan.
(34) Total Revolver $400 million: after letter of credits drawings pro forma
liquidity on June 30, 2007 would be approximately $300 million.
(35) As described above, of the $1.225 billion DIP Credit Facility, $150
million was utilized to partially finance Solutia's acquisition of Akzo
Nobel's interest in the 50/50 Flexsys joint venture between Akzo Nobel
and Solutia.
(36) The Allowed Amount of the Senior Secured Note Claims is subject to a
determination of the Senior Secured Noteholders' rights under applicable
law. Solutia believes that the Allowed amount of the Senior Secured
Notes Claim will fall in a range between $205.9 and 223 million, with
the low end of the range determined using the constant interest method
as of June 30, 2007. However, the Senior Secured Notes Trustee has
asserted that its claims on behalf of the Senior Secured Noteholders
could exceed this amount. As set forth in the table above, to the extent
that the Allowed amount of the Senior Secured Note Claims is $223
million, Solutia believes that it will be able to obtain sufficient Cash
from the Exit Financing Facility to pay these claims in full.
81
1. DIP CREDIT FACILITY & PREPETITION SECURED BANK DEBT
---------------------------------------------------
The DIP Credit Facility served to replace Solutia's prepetition
revolving credit facility. On October 8, 2003, the Borrowers entered into the
Bank Credit Agreement with Ableco Finance LLC, a unit of Cerberus Capital
Management, L.P. and other syndicate lenders, including Wells Fargo Foothill,
Inc. and Congress Financial Corporation. The Bank Credit Agreement provided
for a three-year, $350 million revolving credit facility guaranteed by the
Guarantors, and was secured by liens consisting of certain of the Borrowers'
and Guarantors' working capital assets and real property, facilities and
equipment. The funds borrowed under the Bank Credit Agreement were used to
refinance and retire Solutia's then-existing bank credit facility, for general
working capital purposes and to pay fees and expenses related to the Bank
Credit Agreement. On December 19, 2003, Solutia, Solutia Business Enterprises
Inc. and each of Solutia's other Debtor subsidiaries obtained the Interim DIP
Facility. The Interim DIP Facility provided up to $500 million in
debtor-in-possession financing, which was secured by substantially all of
Solutia's assets and from which Solutia made an initial borrowing of $75
million. The Interim DIP Facility was subsequently replaced by the DIP Credit
Facility which was used to retire the Borrowers' obligations pursuant to the
Bank Credit Agreement.
On January 16, 2004, pursuant to authorization from the Bankruptcy
Court, Solutia entered into the $525 million DIP Credit Facility. The DIP
Credit Facility was used by Solutia and its Debtor subsidiary Solutia Business
Enterprises Inc. to retire their respective obligations under the Bank Credit
Agreement and the Interim DIP Facility.
The DIP Credit Facility has subsequently been amended five times. The
various amendments to the DIP Credit Facility modified, among other things,
the mandatory prepayment terms and covenants regarding disposition of assets
and investments, certain notice provisions, the interest rate, the refinancing
of the Euro Notes and the term of the final maturity date from December 19,
2005 to March 31, 2008. See Section V.A.2 of this Disclosure Statement for
further details on amendments to the DIP Credit Facility.
The DIP Credit Facility, as amended, consists of: (a) a $975 million
fully drawn term loan and (b) a $250 million borrowing-based revolving credit
facility, which includes a $150 million letter of credit subfacility. Of the
$1.225 billion facility, $150 million 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. Upon consummation of the pending
Dequest(R) sale, a portion of the net proceeds of the sale will be used to pay
down $51 million of the $975 million term loan.
2. SENIOR SECURED NOTES
--------------------
As of the Petition Date, Solutia had outstanding approximately $223
million (which takes into account an unamortized original issue discount of
$20 million) of 11.25% senior secured notes due July 5, 2009 (the "Senior
Secured Notes") issued pursuant to that certain indenture between SOI Funding
Corporation and HSBC Bank USA, as indenture trustee, dated July 9,
82
2002, which was subsequently amended by a supplemental indenture among
Solutia, SOI Funding Corporation and certain of Solutia's subsidiary
guarantors as defined therein, and HSBC Bank USA, dated July 25, 2002
(together, the "2009 Indenture"). The Senior Secured Notes are secured by
liens on Solutia's accounts receivable, inventory, capital stock of certain
Debtor subsidiaries, capital stock of certain subsidiary guarantors, certain
intercompany loans, intellectual property and certain joint venture interests.
By agreement dated January 16, 2004, The Bank of New York replaced HSBC Bank
USA as indenture trustee for the Senior Secured Notes. Solutia expects to pay
the Allowed amount of the Senior Secured Note Claims with a portion of the
proceeds from the Exit Facility.
3. RETIREE TRUST
-------------
As described in more detail in the Retiree Settlement Agreement, on
the Effective Date Reorganized Solutia will contribute $175 million in Cash
proceeds from the Rights Offering to a trust (the "Retiree Trust") intended to
qualify as a "voluntary employees' beneficiary association" under section
501(c)(9) of the Internal Revenue Code. The Cash contributed to the Retiree
Trust will be used to reimburse Reorganized Solutia for costs associated with
providing OPEB to Pre-Spin Retirees in accordance with the terms of the
Retiree Settlement Agreement.
4. FUNDING CO
----------
On the Effective Date, Reorganized Solutia will establish a special
purpose, tax-efficient, bankruptcy remote limited liability company subsidiary
funded with the $75 million in proceeds from the Rights Offering remaining
after the creation and funding of the Retiree Trust. In accordance with the
terms of the Relationship Agreement: (a) $50 million will be available to pay
for Environmental Liabilities in connection with the Shared Sites; and (b) $25
million will be available to offset Reorganized Solutia's continuing Legacy
environmental, OPEB, or other Legacy Liability obligations.
5. HEADQUARTERS FINANCING
----------------------
On August 26, 1999, Solutia entered into a synthetic lease financing
arrangement for the construction of its principal headquarters located at 575
Maryville Centre Drive, St. Louis, Missouri (the "Headquarters Financing").
Pursuant to the terms of the Headquarters Financing and a related trust
agreement, dated as of February 23, 1999 (as subsequently amended as of August
1, 1999), Solutia, in its capacity as a lessee, and United Missouri Bank &
Trust, N.A., as a lessor and mortgage certificate trustee, issued mortgage
trust certificates to various purchasers. The trust certificates were issued
to obtain financing to purchase the headquarters property and pay certain
transaction costs in connection with the Headquarters Financing. As of the
Petition Date, Solutia had $43.3 million principal amount of outstanding
senior secured mortgage trust certificates, which have a composite interest
rate of 7.19% and maturity date of August 25, 2007. The lenders filed two
Proofs of Claim with respect to the Headquarters Financing. A Proof of Claim
was filed that asserted a Secured Claim of $43 million plus accruing interest
and fees for the outstanding amounts owing by Solutia under the Headquarters
Financing and a Proof of Claim was filed in an identical amount based on
Solutia's guarantee of the Headquarters Financing. Solutia believes that it
will ultimately resolve the lenders' claims in exchange for a
83
new secured note and an Allowed General Unsecured Claim in amounts agreed upon
by the parties.
6. EURO NOTES
----------
In August, 2006, Solutia's indirect 100% owned subsidiary Solutia
Services International S.C.A./Comm. V.A. ("SSI"), a subsidiary of SESA, closed
on a (euro)200 million Facility Agreement (the "Euro Facility Agreement")
guaranteed by SESA and CPFilms Vertriebs GmbH, a subsidiary of SESA. SESA used
the proceeds of the Euro Facility Agreement to refinance all of the Euro Notes
on August 1, 2006 at a prepayment premium of 3%, as required pursuant to the
Euro Notes, for a total redemption amount of approximately (euro)215 million,
including accrued interest.
The Euro Facility Agreement has a five-year term, with a termination
date of July 31, 2011. The Euro Facility Agreement originally consisted of a
(euro)160 million term loan and a (euro)40 million term loan. The (euro)40
million term loan was repaid from the proceeds of the sale of Solutia's
pharmaceutical services business and therefore only the (euro)160 million term
loan remains outstanding. The Euro Facility Agreement contains certain
financial covenants relating to the performance of SESA and its subsidiaries
as well as other customary terms and conditions.
Solutia retains the option to repay the Euro Facility Agreement in
full as of the Effective Date from the proceeds of the Exit Financing
Facility, as further described in Section VII.H.2 of this Disclosure
Statement.
7. FLEXSYS FINANCING
-----------------
In conjunction with the Flexsys Acquisition, Flexsys entered into a
$200 million Secured Facilities Agreement on April 27, 2007. This facility was
used together with a $150 million intercompany loan from Solutia to retire
Flexsys' existing credit facility and complete the Flexsys Acquisition. The
facility may be upsized by an additional $25 million. Flexsys retains the
option to repay this facility as of the Effective Date from the proceeds of
the Exit Financing Facility as described in Section VII.H.2 of the Disclosure
Statement.
8. 2027/2037 NOTES
---------------
As of the Petition Date, Solutia had outstanding $300 million in 2027
Notes and $150 million in 2037 Notes issued pursuant to the Prepetition
Indenture. Pursuant to the Amended Plan, as more fully described in Exhibit A
to this Disclosure Statement, the Holders of the 2027/2037 Notes will receive
equity in Reorganized Solutia in exchange for their notes.
9. TRADE CLAIMS AND OTHER UNSECURED OBLIGATIONS
--------------------------------------------
Prior to the Petition Date, Solutia incurred debt with several
Creditors in the ordinary course of its business. The Claims related to these
obligations are more fully described in Exhibit A to this Disclosure
Statement. Pursuant to the Amended Plan, the Holders of Trade Claims and other
Unsecured Obligations will receive equity in Reorganized Solutia in exchange
for their Claims.
84
10. EQUITY
------
Prior to the Petition Date, Solutia's common stock traded on the New
York Stock Exchange (the "NYSE") under the ticker symbol "SOI." As a result of
Solutia's bankruptcy filing, the NYSE suspended trading in Solutia's common
stock on December 17, 2003 and, on February 27, 2004, delisted the securities
from the exchange. Following suspension of trading on the NYSE, Solutia's
common stock has been quoted on the OTC Bulletin Board and on the Pink Sheets
Electronic Quotation Service maintained by The Pink Sheets LLC under the
ticker symbol "SOLUQ.OB."
As of February 28, 2007, Solutia had 104,459,578 shares of common
stock issued and outstanding, and had no preferred shares issued or
outstanding. All currently issued shares of Solutia common stock will be
cancelled pursuant to the Amended Plan. In addition, as of March 31, 2007,
Solutia had 7,197,059 stock options outstanding. All of these stock options
will either expire prior to the Confirmation Date or be cancelled pursuant to
the Amended Plan.
Based on public filings as of February 23, 2007, Solutia believes the
following persons or entities beneficially own 5% or more of the outstanding
common stock of Solutia:
- ------------------------------------------------------------------------------------------
STOCKHOLDER SHARES BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------------------------------------------------------------------------
Ardsley Advisory Partners(37) 7,303,500 6.99%
- ------------------------------------------------------------------------------------------
To preserve Solutia's NOLs (as defined herein), on February 21, 2006,
the Bankruptcy Court entered an Order ("the "NOL Order"), which, among other
things, requires: (a) certain beneficial owners of at least 4,700,681 shares
(representing approximately 4.5% of all issued and outstanding shares) of
Solutia's equity securities (a "Substantial Owner") to notify Solutia and the
Bankruptcy Court that they are Substantial Owners; (b) Substantial Owners to
file a notice with Solutia and the Bankruptcy Court before any acquisition or
disposition of Solutia equity securities or options to acquire or dispose of
Solutia equity securities; and (c) any other person or entity to file a notice
with Solutia and the Bankruptcy Court before any acquisition of Solutia equity
securities, or option to acquire Solutia equity securities, that would make
such person or entity a Substantial Owner. The NOL Order allows Solutia to
object in the Bankruptcy Court to any such transactions, within thirty days of
receipt of notice of such transactions, if the transaction poses a material
risk of adversely affecting Solutia's ability to utilize the NOLs or other tax
attributes. Any acquisition or disposition to which Solutia objects would not
become effective unless and until approved by an order the Bankruptcy Court.
Under the NOL Order, any purchase, sale or other transfer of Solutia
equity securities in violation of the restrictions in the NOL Order would be
void ab initio as an act in violation of the NOL Order and would therefore
confer no rights on the proposed transferee.
<FN>
- -------------------------
(37) Including the following affiliates of Ardsley Advisory Partners: Ardsley
Partners I, Philip J. Hempelman, Ardsley Offshore Fund Ltd., Ardsley
Partners Fund II, L.P. and Ardsley Partners Institutional Fund, L.P.
85
H. REORGANIZED SOLUTIA'S STRUCTURE
-------------------------------
As set forth above, all of Solutia's existing common stock will be
cancelled upon confirmation of the Amended Plan and the new common stock of
Reorganized Solutia will be issued pursuant to the Amended Plan on the terms
set forth below.
1. NEW COMMON STOCK
----------------
Following Solutia's emergence from bankruptcy, the capital stock of
Reorganized Solutia is expected to be listed on the New York Stock Exchange.
2. EXIT FINANCING FACILITY
-----------------------
Solutia will seek an Exit Financing Facility of up to $2.0 billion
(including undrawn availability on the revolving loan) to replace all of its
existing secured debt obligations, satisfy various bankruptcy related costs,
and provide adequate liquidity for on-going operations. The Exit Financing
Facility is expected to include some combination of institutional term loans,
a revolving loan, a letter of credit facility, high yield bonds or second lien
loans, depending on many factors, including the strength of the capital
markets. Solutia has not yet selected a lead exit facility lender but has
received numerous indications of interest.
VIII.
RESOLUTION OF THE LEGACY LIABILITIES
------------------------------------
One of Solutia's goals at the commencement of the Chapter 11 Cases
was to achieve a reallocation of the Legacy Liabilities. As such, when the
Original Plan was filed on February 14, 2006, its foundation was the Global
Settlement, i.e., a settlement among Solutia, the Creditors' Committee, the
----
Retirees' Committee, Monsanto and Pharmacia, which, among other things,
contemplated an appropriate reallocation of the Legacy Liabilities. The
operative agreements for this settlement are the Relationship Agreement (which
is described in Section VIII.B.4.(g)) and the Retiree Settlement Agreement
(which is described in Section VIII.B.1(c)). Certain of the terms of the
Global Settlement have been revised, and each of these are described below.
However, the Relationship Agreement and the Retiree Settlement Agreement are
preserved, allowing Solutia to maintain the reallocation of the Legacy
Liabilities, which is critical to the Amended Plan and the Debtors' emergence
from the Chapter 11 Cases.
A. EVENTS LEADING TO THE CURRENT RESOLUTION OF THE LEGACY LIABILITIES
------------------------------------------------------------------
1. THE AGREEMENT IN PRINCIPLE
--------------------------
After stabilizing its businesses, Solutia began negotiations with its
stakeholders to construct a plan of reorganization based on a consensual
resolution of the competing claims and interests against Solutia's estates and
their assets. Solutia's primary constituencies at the time were the Creditors'
Committee, the Retirees' Committee and Monsanto. During these negotiations,
the Creditors' Committee was represented by three of Solutia's then largest
holders of the 2027/2037 Notes. After approximately six months of intense and
at times acrimonious
86
negotiations, on June 7, 2005, Solutia, Monsanto and the Creditors' Committee
reached an agreement in principle (the "Agreement in Principle") that provided
for a reallocation of the Legacy Liabilities among Solutia and Monsanto, as
well as a framework for necessary negotiations regarding post-employment
benefit reductions with the Retirees' Committee and the treatment of claims
asserted by personal injury claimants, the unsecured creditors and Monsanto.
2. THE ORIGINAL PLAN
-----------------
During the months succeeding the announcement of the Agreement in
Principle, the original parties to the Agreement in Principle (with the
exception of the noteholder members of the Creditors' Committee who had sold
their position in the 2027/2037 Notes upon the public announcement of the
terms of the Agreement in Principle), as well as the Retirees' Committee,
engaged in continuing, intense discussions concerning the proposed
reallocation of the Legacy Liabilities, the post-confirmation rights and
obligations among the parties and the treatment of certain classes of claims.
As a result of these negotiations, among other things, the actual terms under
which Monsanto agreed to assume financial responsibility as between itself and
Solutia for the Legacy Claims and Environmental Liabilities were negotiated,
and Solutia, the Retirees' Committee, the Creditors' Committee and Monsanto
entered into the Retiree Settlement.
The Agreement in Principle, as modified by the negotiations among the
parties that occurred between June 2005 and January 2006, and the Retiree
Settlement, which are referred to collectively herein as the "Global
Settlement," provided the basis for Solutia to file the Original Plan.
The confirmation process for the Original Plan, however, did not
proceed. In part, the JPM Adversary Proceeding and the Equity Committee
Adversary Proceedings stalled the Original Plan process. The unresolved
adversary proceedings, however, were not the only reasons that the
confirmation process stalled. Many of the stakeholders with whom Solutia
negotiated the Global Settlement are no longer involved in the Chapter 11
Cases and their successors wanted to negotiate a new deal. Most notably, the
three significant holders of the 2027/2037 Notes who personally negotiated the
Agreement in Principle resigned from the Creditors' Committee. These holders
have been replaced by new holders that purchased the 2027/2037 Notes, who were
collectively represented by the Ad Hoc Notes Committee and not the Creditors'
Committee.
3. THE GLOBAL SETTLEMENT
---------------------
(a) Material terms of the Global Settlement remain unchanged by the
terms of the Amended Plan
The Amended Plan has resulted in certain modifications to the Global
Settlement as it was presented to the Bankruptcy Court and Solutia's
stakeholders in February 2006. However, significant material terms of the
Global Settlement have not changed, including:
o The Reallocation of the Legacy Liabilities. Under the terms of the
------------------------------------------
Amended Plan, Monsanto continues to assume financial
responsibility for all Tort Claims, all Legacy
87
Site Claims and certain portions of the Shared Site Claims, each
in accordance with the terms of the Relationship Agreement.
o The Relationship Agreement. The Relationship Agreement and its
--------------------------
terms have not been altered in any material respect since February
2006.
o The Retiree Settlement. The Amended Plan leaves the Retiree
----------------------
Settlement unaltered. Benefit payments for Solutia's 20,000
Retirees will be secured by a trust initially funded with $175
million in cash and the New Common Stock received on account of
the Retiree Claim. Reorganized Solutia will continue to benefit
from agreed reductions in Retiree benefits that will provide it
with over $100 million in cost savings.
(b) Changes to the Global Settlement since February 2006
The material changes to the Global Settlement since February 2006 are
set forth below:
o The Rights Offering. Under the Global Settlement, Monsanto agreed
-------------------
to backstop the Rights Offering; Monsanto will no longer backstop
the Rights Offering. Holders of General Unsecured Claims and the
2027/2037 Notes are entitled to participate in the Rights
Offering. The Rights will be allocated between these two classes
Pro Rata based on the estimated Claim amount for each class. The
Rights are being offered to Eligible Holders at a 25% discount to
Solutia's implied mid-point equity valuation. The discount applied
to the Rights may change as a result of negotiations among Solutia
and its stakeholders; provided that the Rights Offering generates
--------
$250 million and that Monsanto receives 20% of the New Common Stock
after taking into account any dilution as a result of the Rights
Offering.
o The Monsanto Claim. Under the Global Settlement, Monsanto's claim
------------------
amount was not determined. Under the Amended Plan, Monsanto has
agreed, as part of the Monsanto Settlement only, to accept an
Allowed Unsecured Claim equal to the value of (a) amounts related
to the management and settlement of Legacy Claims and other
expenses on the Debtors' behalf that (i) Monsanto has spent from
the Petition Date through March 31, 2007, which Solutia believes
to be $180.9 million, and (ii) Monsanto likely will spend,
pursuant to the Monsanto Settlement, following such date
(discounted to present value), which amount Solutia believes to be
$143.6 million, (b) the extension of the term of the Master
Operating Agreement, (c) the replacement of the Distribution
Agreement with the Relationship Agreement, (d) the settlement of
litigation related to Solutia's Anniston, Alabama plant, (e) the
elimination of all Tort Claims from Solutia's General Unsecured
Claims pool, (f) the waiver of the right to file surrogate claims
on behalf of legacy claimants, (g) the waiver of various indemnity
claims related to legacy liabilities for which Monsanto has agreed
to assume responsibility, (h) the Chocolate Bayou Settlement and
continuation of the Commercial and Operating Agreements subject to
the terms thereof, and (i) the resolution of all litigation and
potential litigation related to the Distribution Agreement, the
classification of Monsanto's Claim and other matters, between
Solutia and Monsanto.
88
o The Elimination of the General Unsecured Claims Pool Adjustment.
---------------------------------------------------------------
Under the Global Settlement the number of shares of New Common
Stock to be distributed to Monsanto and the Holders of General
Unsecured Claims was subject to adjustment based on the Allowed
Amount of General Unsecured Claims. This adjustment has been
eliminated from the Amended Plan.
o Treatment of CPFilms Claims. Under the Original Plan, CPFilms
---------------------------
Claims were treated as General Unsecured Claims. Pursuant to the
Amended Plan, CPFilms Claims will be separately classified and
paid cash in full on the Effective Date.
B. DETAILED DISCUSSION OF TERMS OF THE REALLOCATION OF THE LEGACY
--------------------------------------------------------------
LIABILITIES
-----------
1. SETTLEMENT OVERVIEW
-------------------
(a) The Monsanto Claim
Monsanto believes that its actual Claims against the Estates exceed
$1 billion. However, Monsanto has agreed, as part of the Monsanto Settlement
only, to accept an Allowed Unsecured Claim equal to the value of (a) amounts
related to the management and settlement of Legacy Claims and other expenses
on the Debtors' behalf that (i) Monsanto has spent from the Petition Date
through March 31, 2007, which Solutia believes to be $180.9 million, and (ii)
Monsanto likely will spend, pursuant to the Monsanto Settlement, following
such date (discounted to present value), which amount Solutia believes to be
$143.6 million, (b) the extension of the term of the Master Operating
Agreement, (c) the replacement of the Distribution Agreement with the
Relationship Agreement, (d) the settlement of litigation related to Solutia's
Anniston, Alabama plant, (e) the elimination of all Tort Claims from Solutia's
General Unsecured Claims pool, (f) the waiver of the right to file surrogate
claims on behalf of legacy claimants, (g) the waiver of various indemnity
claims related to legacy liabilities for which Monsanto has agreed to assume
responsibility, (h) the Chocolate Bayou Settlement and continuation of the
Commercial and Operating Agreements subject to the terms thereof, and (i) the
resolution of all litigation and potential litigation related to the
Distribution Agreement, the classification of Monsanto's Claim and other
matters, between Solutia and Monsanto. Monsanto will receive 20% of the New
Common Stock on account of its Claim. In addition, consistent with the Global
Settlement and the division of the Legacy Liabilities, Monsanto will have an
Allowed Administrative Claim for all amounts that it has spent (a) at the
Retained Sites and (b) in excess of $50 million for documented out of pocket
Environmental Liabilities in connection with the Shared Sites during the
Chapter 11 Cases and the Estate will pay a portion of Monsanto's professional
fees as described in Section VIII.C.1 hereof.
The allowance and treatment of the Monsanto Claim provides myriad
benefits to Solutia including:
o Treating the Monsanto Claim as a General Unsecured Claim, and not
an Administrative Expense Claim, despite the fact that a
substantial portion of the Monsanto Claim relates to monies that
Monsanto has spent on Solutia's behalf since the Petition Date;
89
o Capping Monsanto's recovery under the Amended Plan, regardless of
the future costs of the Legacy Liabilities being assumed by
Monsanto under the Amended Plan and the Relationship Agreement;
o Allowing Solutia to avoid significant litigation regarding
Monsanto's unliquidated Claims (Monsanto's Proof of Claim seeks
payment for indemnification obligations under the Distribution
Agreement);
o Removing a substantial Unliquidated Claim, which could be in
excess of $1 billion, from the General Unsecured Claims Class --
in this regard, fixing Monsanto's claim will accelerate
distributions to all creditors; and
o Eliminating the cost, uncertainty and risk associated with
litigation regarding the Monsanto Claim -- if Solutia were
unsuccessful in this litigation, it could be fatal to the Amended
Plan and significantly diminish, if not eliminate completely,
recoveries for General Unsecured Creditors (one element of the
Monsanto Claim related to the Anniston Consent Decree could result
in liabilities in excess of $550 million).
(b) Monsanto's Contributions to Solutia's Reorganization
The following is a summary of Monsanto's contributions to Solutia
pursuant to the terms of the Relationship Agreement and the Amended Plan. In
exchange for the Monsanto Claim Distribution, the releases provided to it
under the Amended Plan, and the payment of certain of its professional fees in
connection with the Chapter 11 Cases, Monsanto has agreed to make the
following contributions to Solutia's reorganization:
(i) As Between Itself and Solutia, Monsanto Is Taking Financial
Responsibility for All Tort Claims.
Benefits to Solutia:
o Eliminates Solutia's liabilities with respect to past and future
Tort Claims arising from conduct occurring prior to the Spinoff --
for those Tort Claims for which a proof of claim was filed in
Solutia's Chapter 11 Cases, Solutia estimates that these
liabilities will ultimately range between $15 and $40 million in
the aggregate;
o Obviates the need for Solutia to litigate and/or negotiate with
holders of Tort Claims and their representatives regarding the
approximately $17 billion in Tort Claims asserted against
Solutia's estates (as well as potentially billions of dollars in
additional Tort Claims which Monsanto could assert through
surrogate claims absent the Monsanto Settlement) -- allowing
Solutia to avoid expensive and protracted litigation in various
courts since such Tort Claims cannot be liquidated by the
Bankruptcy Court;
o Removes the Holders of Tort Claims from the General Unsecured
Claims Class, which (a) reduces the size of the General Unsecured
Claims Class, increasing recoveries for the General Unsecured
Creditors and (b) speeds up the timing of
90
distributions to General Unsecured Creditors by eliminating the
delays and reserve amounts associated with litigating over numerous
Disputed Claims; and
o Removes contingent liabilities from Solutia's balance sheet,
providing necessary certainty to the capital markets by
eliminating the Reorganized Debtors' future tort risk, which will
enable Solutia to obtain exit financing on competitive terms.
(ii) Monsanto Is Taking Financial Responsibility, As Between
Itself and Solutia Only, for Certain Environmental Remediation
and Clean-Up Obligations.
(a) Monsanto Is Taking Responsibility, As Between Itself and
Solutia Only, for All Environmental Liabilities at the
Legacy Sites
Benefits to Solutia:
o Saves Solutia a minimum of $150 million in potential environmental
cleanup and remediation costs.
o Removes any potential Claims asserted in connection with the
Legacy Sites from the General Unsecured Claims Class, which (a)
increases recoveries for General Unsecured Creditors and (b)
speeds up the timing of distributions to General Unsecured
Creditors by eliminating the delays and reserve amounts associated
with numerous Disputed and Unliquidated Claims.
o Saves Solutia the significant costs associated with the
administration and litigation of the environmental obligations at
the Legacy Sites; and
o Removes contingent liabilities from Solutia's balance sheet,
improving Solutia's access to Capital Markets at competitive
terms, which will increase Reorganized Solutia's liquidity.
(b) Monsanto Is Sharing Financial Responsibility with
Solutia for Obligations at Shared Sites.
Benefits to Solutia:
o The first $50 million of remediation and cleanup costs at the
Shared Sites will be paid through Funding Co;
o Monsanto will pay the next $50 million in costs (this amount will
be reduced by any amounts expended by Monsanto with respect to the
Shared Sites during the pendency of the Chapter 11 Cases)--Solutia
would otherwise have been responsible for paying these amounts in
full as Administrative Expense Claims;
o Reorganized Solutia will be responsible for the next $325 million,
however, Monsanto will provide Reorganized Solutia with the
ability to cap its liability in any
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calendar year at $30 million, which will improve Reorganized
Solutia's liquidity position and cash flow; and
o Monsanto and Solutia will share all costs associated with
remediation at Shared Sites in excess of $425 million evenly.
(iii) Settlement of Litigation Among Pharmacia, Monsanto and
Solutia.
Benefits to Solutia:
o The Amended Plan settles and resolves and necessarily withdraws
the following adversary proceedings and contested matters:
o The Rejection Motion;
o The Benefits Adversary;
o The Indemnity Adversary; and
o The Monsanto Pharmacia Avoidance Action.
o As the above-referenced actions are critical to a resolution of
the issues attendant to the allocation of the Legacy Liabilities
among Solutia, Monsanto and Pharmacia, absent a consensual
resolution, Solutia would be forced to engage in fact intensive,
expensive and protracted litigation regarding the Spinoff and the
Distribution Agreement;
o A settlement alleviates the risk associated with these
matters--were Solutia to litigate these matters and lose it could
impede its ability to emerge from the Chapter 11 Cases.
(iv) Monsanto Will Continue To Operate Under the Commercial and
Operating Agreements, and Will Extend the Terms of the Master
Operating Agreement.
Benefits to Solutia:
o On the Effective Date, the Commercial and Operating Agreements
shall be assumed by Reorganized Solutia, subject to the Chocolate
Bayou Settlement, and the Master Operating Agreement shall be
extended beyond its initial term. Accordingly, Solutia will
continue to reap the benefits associated with the Commercial and
Operating Agreements for an extended period of time. Not only are
the Commercial and Operating Agreements critical to Solutia's
business operations, they also contain very favorable terms and
enable Solutia to take advantage of certain efficiencies, which
result directly in additional profits for Solutia; and
o Solutia avoids the disruption in its business operations
associated with having to replace the Commercial and Operating
Agreements in the near term.
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o As described herein, under the Chocolate Bayou Settlement, Solutia
and Monsanto have agreed to resolve issues regarding their
relationship at the Chocolate Bayou facility, in a manner that
does not have a material impact on Solutia's business plan or its
restructuring. See Section VIII.B.7(a) of this Disclosure
Statement for a discussion regarding the Chocolate Bayou
Agreements.
(c) The Retiree Settlement
Another important component of Solutia's reallocation of the Legacy
Liabilities is the Retiree Settlement, which would not have been possible as a
stand-alone settlement. In exchange for the Retiree Claim and the creation of
the Retiree Trust, the Retirees will release their claims against Solutia,
Monsanto and Pharmacia.
Benefits to Solutia:
o Modifications agreed to pursuant to the Retiree Settlement provide
Reorganized Solutia with approximately $110 million in cost
savings in connection with the provision of medical and other post
employment benefits to Retirees. The modifications giving rise to
the savings could not have been imposed unilaterally;
o Resolves a significant number of Claims asserted against
Reorganized Solutia for Retiree Benefits and excludes such Retiree
Claims from the General Unsecured Claims Class;
o Creates the Retiree Trust funded with $175 million in Cash (and
the proceeds of the New Common Stock allocated on account of the
Retiree Claim) to pay benefits to Retirees, thus ensuring that the
Retirees' benefits, as modified by the terms of the Settlement,
will be paid in the future;
o Avoids the need for the costs and delays associated with
litigation with respect to the Unliquidated Claims of Retirees;
and
o The release provided to Monsanto for Legacy OPEB liabilities as
part of the Retiree Settlement served to induce Monsanto to enter
into the Relationship Agreement.
(d) Settlement With Pharmacia
The final component of the reallocation of the Legacy Liabilities is
the settlement of claims with Pharmacia. In exchange for certain releases
provided under the Amended Plan, Pharmacia will waive its claims and settle
its litigation against Solutia. Because of the inter-relationship of Pharmacia
and Monsanto, and the triangle of indemnities created by the Monsanto Spinoff
and the Separation Agreement, Pharmacia's agreement was necessary to
effectuate the releases of Claims contemplated by the Amended Plan.
Benefits to Solutia:
o The settlement with Pharmacia waives significant Unliquidated
Claims against Solutia relating to indemnification obligations
arising from the Spinoff and the
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Distribution Agreement--the only consideration for Pharmacia's
waiver of its Claims are the releases provided in the Amended Plan;
o The benefits from the resolution of litigation among Pharmacia,
Monsanto and Solutia described above also apply to the settlement
with Pharmacia; and
o Removes the Pharmacia Proof of Claim from the General Unsecured
Claims Class which provides the same benefits as described above
in connection with the resolution of the Monsanto Claim.
2. SETTLEMENT OF TORT CLAIMS
-------------------------
Pursuant to the Relationship Agreement and the Amended Plan, Monsanto
will take financial responsibility, as between itself and Reorganized Solutia
only, for all Tort Claims. In broad terms, the Tort Claims relate to property
damage, personal injury, products liability or premises liability or other
damages arising out of or related to exposure to asbestos, PCB, benzene, vinyl
chloride, silica, butadiene, pentachlorophenol, styrene tars and other
chemicals manufactured before the Spinoff. Solutia never manufactured, sold or
used any of these materials, except for small, controlled amounts of asbestos
insulation still in limited use at some of its plants.
More than 8,500 Tort Claims related to the Legacy Tort Liabilities
were filed against Solutia in the Chapter 11 Cases. In addition, hundreds of
other individuals have commenced actions directly against Pharmacia and/or
Monsanto. Tort Claims, as defined in the Amended Plan, and for which Monsanto
will be financially responsible under the terms of the Amended Plan include
any such claims of these individuals against Solutia to the extent the claims
of such individuals fit within the definition of "claim" under section 101(5)
of the Bankruptcy Code, whether or not a proof of Claim has been filed against
Solutia by such individuals.
The overwhelming majority of claimants filing Tort Claims have
provided only minimal information concerning their Claims, and hundreds have
provided no information whatsoever. Despite the absence of meaningful
information submitted by these claimants, a manual review of the Proofs of
Claim has permitted Solutia to divide these Claims into the following six
categories (reflecting the respective number of proofs of claim filed with
respect to each category): Asbestos (3,668); Dioxin (2,775); PCB (768); Silica
(277); Other (multiple chemical exposure) (411); and Unspecified (571).
As a result of the filing of the Chapter 11 Cases, Solutia
transferred the defense of and responsibility for all litigation associated
with Tort Claims to Monsanto, and Monsanto has taken responsibility, as
between itself and Solutia, for the management of these litigations, including
the payment of judgments, settlements, defense costs, and other administrative
costs. Monsanto's expenditures with respect to Tort Claims, both during the
Chapter 11 Cases and following the Effective Date (in connection with
Monsanto's agreement to take financial responsibility for Tort Claims under
the Amended Plan), form a portion of the Monsanto Claim.
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3. OVERVIEW OF TORT CLAIMS FOR WHICH MONSANTO HAS AGREED TO TAKE
-------------------------------------------------------------
FINANCIAL RESPONSIBILITY
------------------------
(a) Premises-Based Asbestos Claims
Like a great number of other companies that used high-temperature
manufacturing processes, Pharmacia used asbestos insulating materials in
piping and other equipment at its chemical plants. Under the Distribution
Agreement, Solutia has potential premises asbestos exposure arising
principally from four facilities: Chocolate Bayou, Texas; Nitro, West
Virginia; Texas City, Texas; and W.G. Krummrich in Sauget, Illinois. Asbestos
claimants have also asserted a smaller number of Claims arising from other
locations.
Solutia has been named as a defendant (along with Monsanto,
Pharmacia, and numerous other premises owners) in actions brought by employees
of contractors who allege that they were exposed to asbestos at Pharmacia's
facilities, at which Solutia took over operations long after the use of
asbestos was discontinued, and the facilities of those other owners. In the
vast majority of these cases, discovery is necessary to determine whether the
claimants actually worked on-site at any facility for which Solutia has
potential liability, the extent of that work, and the potential for exposure
to friable asbestos-containing materials.
In addition to the nearly 3,700 asbestos-related Claims that have
been filed in the Chapter 11 Cases, there are more than 520 different
asbestos-related lawsuits, involving an estimated 3,500 to 4,500 different
plaintiffs, that have been filed against Pharmacia or Monsanto, for which
Solutia may have indemnification exposure pursuant to the Distribution
Agreement.
As of the Petition Date, 12,000 plaintiffs had brought
asbestos-related lawsuits that implicated Solutia's indemnity obligations
under the Distribution Agreement, but only 3,700 Proofs of Claim asserting
Tort Claims have been filed in the Chapter 11 Cases. Most of the proof of
Claim forms that have been submitted are brought on behalf of individual
Claimants. A few Claim forms appear to seek to include a large number of
Claimants. Thus, while 3,700 proof of Claim forms have been filed in the
Chapter 11 Cases, the actual number of Claims (measured on a per-person basis)
is likely higher, and may exceed 12,000 Claims.
Pursuant to the Relationship Agreement and the Amended Plan, Monsanto
has agreed to take financial responsibility, as between itself and Reorganized
Solutia only, for all Tort Claims, and its expenditures in this regard, both
during the Chapter 11 Cases and following the Effective Date, form a portion
of the Monsanto Claim.
(b) Dioxin Claims
By number, the second largest category of Tort Claims asserted in the
Chapter 11 Cases relates to alleged dioxin contamination arising from the
operation of the Nitro Plant. Beginning in 1948, Pharmacia began manufacturing
an herbicide (2,4,5-trichlorophenoxyacetic acid, or 2,4,5-T) at the Nitro
Plant. The process used to manufacture 2,4,5-T resulted in the formation of a
waste byproduct called 2,3,7,8-tetrachlorodibenzoparadioxin ("2,3,7,8-TCDD" or
"2,3,7,8-dioxin"). Pharmacia discontinued the manufacture of 2,4,5-T and thus
eliminated the formation of 2,3,7,8-dioxin in 1969. Solutia never manufactured
2,4,5-T.
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The dioxin Tort Claims that have been filed in the Chapter 11 Cases
do not assert that the holders of such Claims suffer from any present physical
injury. Rather, these claimants seek the creation of an undefined "medical
monitoring fund," and also seek damages associated with alleged property value
diminution.
Despite the large number of dioxin Tort Claims filed, the
environmental evidence concerning dioxin exposure in Nitro, West Virginia is
sparse. In fact, the primary lawyer advancing the dioxin Tort Claims (The
Calwell Practice PLLC) recently performed interior dust sampling of the Nitro
Community Center, elementary school, and high school. Those samples were
reviewed by the EPA-Region III, which concluded recently that none of the
scenarios demonstrated an unacceptable risk from exposure to dioxin.
Past attempts to impart liability to Pharmacia have been similarly
rejected. Mr. Calwell tried and lost an 11-month jury trial against Pharmacia
alleging damages from dioxin exposure. See Boggess v. Monsanto Company, 829
F.2d 34 (4th Cir. 1987) (unpublished).
The lack of historical data regarding judgments or settlements is
consistent with the EPA's judgment that there is no evidence of an
unacceptable risk associated with dioxin related to the Nitro Plant.
Pursuant to the Relationship Agreement and the Amended Plan, Monsanto
has agreed to take financial responsibility, as between itself and Reorganized
Solutia only, for all Tort Claims, and its expenditures in this regard form a
portion of the Monsanto Claim.
(c) PCB Claims
Historically, Solutia has faced a significant number of Claims
alleging PCB exposure or contamination seeking damages for personal injury and
property damage. Pharmacia manufactured and sold PCBs to a number of large
industrial customers. Pharmacia discontinued the manufacture and sale of PCBs
in 1971 at the Anniston Plant and 1977 at the W.G. Krummrich Plant.
Solutia's largest prepetition exposure associated with PCB Claims
occurred in connection with litigation concerning the Anniston Plant.
Collectively, that litigation involved the Claims of more than 18,200
plaintiffs who sought compensatory and punitive damages for exposure to PCBs.
The plaintiffs asserted personal injury, medical monitoring, property damage
and emotional distress (the "Anniston PCB Cases").
Pursuant to the Anniston Global Settlement Agreement, as described in
Section IV.D.5.(a) of this Disclosure Statement, Solutia's total
responsibility with respect to the Anniston PCB Cases was capped at ten annual
$5 million payments, totaling $50 million in the aggregate. During the Chapter
11 Cases, Solutia has made 3 of these payments. Solutia will continue to be
obligated to make these payments following the Effective Date. Monsanto and
its insurers paid $550 million in cash, in exchange for an agreement which
included an obligation by Solutia to deliver to Monsanto certain warrants to
acquire Solutia common stock. Monsanto alleged that Solutia breached their
agreement by failing to deliver the warrants, and Solutia's alleged default
under this agreement constitutes a portion of the Monsanto Claim.
96
Many of the PCB Tort Claims filed in the Chapter 11 Cases were
brought by residents near the Anniston Plant. The remaining PCB Claims were
brought by other individuals located elsewhere, who seek compensation for
physical injuries and property damage.
In addition to the 768 PCB Tort Claims filed in the Chapter 11 Cases,
several lawsuits recently have been filed against Monsanto and/or Pharmacia
relating to PCB exposure including the GE litigation described in Exhibit M.
Estimation of the PCB Tort Claims that have been filed in the Chapter
11 Cases (or otherwise asserted) would have posed several challenges. For
example, because of the lack of information submitted with a PCB Tort Claim,
it is difficult to determine how many of these Claims are brought by multiple
Claimants. Additionally, there is uncertainty as to the value of each Claim
based on historical data. The historical average valuation for PCB-related
Claims before the Anniston Global Settlement Agreement was entered into is
lower than the average value for PCB Claims settled in the Anniston cases.
Monsanto's agreement to take financial responsibility for Tort Claims under
the Amended Plan alleviates the difficulties, and risks, attendant to any
attempt formally to estimate these claims as part of the Amended Plan process.
(d) Silica
A handful of silica Tort Claims have been filed in the Chapter 11
Cases. Typically brought by asbestos-plaintiffs' counsel, the silica Tort
Claims follow a similar pattern to the asbestos Tort Claims. Specifically,
these claimants assert that they may have been exposed to silica used by
Pharmacia, but also assert that potential liability may be found at dozens of
other potential defendants' operations. Silica Claims typically have been
resolved through voluntary dismissals by plaintiffs (when they acknowledge
that they do not have evidence relating to Pharmacia or Solutia) or settled
for the nuisance value of individual Claims.
Pursuant to the Amended Plan and Relationship Agreement, Monsanto has
agreed to take financial responsibility, as between itself and Reorganized
Solutia only, for silica-related Tort Claims.
(e) Other Claims/Unspecified Claims
The remaining Tort Claims asserted against Solutia are composed of
two general categories: (i) unique Claims relating to discrete chemical
exposure or (ii) Claims that lack any specificity to determine the nature of
the alleged harm. For example, Solutia has identified six Claims that assert
that the claimants were exposed to benzene, which is a common industrial
solvent and a component in gasoline. One claimant asserts exposure to vinyl
chloride. Monsanto has agreed to take financial responsibility, as between
itself and Solutia only, for such Tort Claims as part of the Amended Plan and
the Relationship Agreement.
4. SETTLEMENT OF LEGACY ENVIRONMENTAL LIABILITIES
----------------------------------------------
Pursuant to the Relationship Agreement, the sites giving rise to the
Legacy Environmental Liabilities generally fall into the following categories
(described in further detail below):
97
o Retained Sites: Sites owned and/or operated by Pharmacia prior to,
--------------
and by Solutia following, the Spinoff, and certain related
off-site contamination, and non-owned sites to which Solutia sent
waste at any time after the Spinoff (the "Retained Sites").
o Legacy Sites: Sites owned by Pharmacia but never owned or operated
------------
by Solutia, and certain related off-site contamination, and
disposal locations used, but not owned, by Pharmacia prior to the
Spinoff to which Solutia never sent waste (the "Legacy Sites").
o Shared Sites: Sites never owned or operated by Solutia (with minor
------------
exceptions) (the "Shared Sites"), but which have been affected by
historical contamination from the Anniston Plant or the W.G.
Krummrich Plant (Sauget).
o Certain Waste Sites: Sites which are not categorized as Retained
-------------------
Sites, Legacy Sites or Shared Sites and were never owned or
operated by either Pharmacia or Solutia but to which both (a)
Solutia and (b) Pharmacia (during the period prior to the Spinoff)
sent waste giving rise to CERCLA (or any state law equivalent)
liability shall qualify as both a Retained Site and a Legacy Site.
Another potentially significant source of potential Legacy
Environmental Liabilities, which relates to each of the four categories of
sites, are claims associated with natural resource damages ("NRD") pursuant to
Section 107(a)(4)(C) of CERCLA or equivalent state or local laws. NRD Claims
are discussed separately below.
(a) Retained Sites (Solutia-Owned or Operated Sites)
Retained Sites consist primarily of facilities and properties Solutia
has owned or operated following the Spinoff and certain related off-site
contamination.(38) This includes Solutia's (i) active operating facilities, as
well as former plants and landfills closed prior to the Spinoff, for which fee
simple title was transferred to Solutia under the Distribution Agreement, and
migration of contamination from such sites, (ii) certain other contaminated
property that is contiguous or proximate to properties owned or operated by
Pharmacia prior to the Spinoff, and migration of contamination from such sites
and (iii) sites to which Solutia sent waste after the Spinoff. The Retained
Sites are listed on Exhibit A to the Relationship Agreement.
Solutia's environmental remediation obligations at the Retained Sites
are not "claims," as defined by section 101(5) of the Bankruptcy Code, but
rather continuing obligations of Solutia that are unaffected by the Chapter 11
Cases. Consistent with this status, the proofs of Claim filed by the United
States of America (on behalf of the EPA) against Solutia and by other state
governments set forth that, with respect to remediation obligations at owned
and operated sites, such Claims are "filed in a protective manner."
Accordingly, Solutia expects that no Allowed Claim (and no distribution
thereon) will result from the United States' or other governmental entity's
proofs of Claim filed with respect to such obligations.
<FN>
- ------------------------
(38) As of this date, Monsanto has not spent any amounts on the Retained
Sites.
98
Solutia currently projects that it will incur remediation costs for
the Retained Sites in the aggregate amount of approximately $82 million over
the next five years. Although this projection only includes costs through
2011, remediation work will continue on Retained Sites under the federal
Resource Conservation and Recovery Act ("RCRA") program and related state
programs for several years. While the EPA has not yet determined final
remediation measures for many of these sites, Solutia projects that for the
Retained Sites, the highest annual expenditures will occur during the
2007-2011 period, with an average annual cost of $16 million. Beyond 2011,
Solutia expects that annual remediation costs will begin gradually declining
from $16 million a year as the amount of remedial work declines and is
replaced by the operation of treatment systems and maintenance activities. As
discussed in Section VIII.B.4.(a) herein, pursuant to the Amended Plan and the
Relationship Agreement, Solutia will continue to be responsible for the
environmental liabilities at the Retained Sites.
(b) Legacy Sites (Never Owned or Operated by Solutia)
Legacy Sites consist primarily of sites that Solutia has never owned
or operated or to which it never sent waste, with minor exceptions. In
general, the Legacy Sites are one of three types: (i) former Pharmacia
facilities that were sold or otherwise conveyed to other parties prior to the
Spinoff, (ii) waste disposal sites never owned or operated by Pharmacia but to
which Pharmacia sent waste prior to the Spinoff and (iii) property to which
contamination migrated from one of the foregoing facilities or sites. At the
time of the Petition Date, pursuant to the Distribution Agreement, Solutia was
managing more than 50 Legacy Sites with active remediation. There also may be
additional not-yet-identified Legacy Sites that were owned or operated or used
for disposal by Pharmacia or one of the predecessor companies it acquired. The
Legacy Sites are listed on Exhibit B to the Relationship Agreement.
Solutia ceased handling and paying Legacy Site obligations upon the
commencement of the Chapter 11 Cases. As discussed above, Pharmacia remains
directly liable at these sites due to its activities prior to the Spinoff, and
Monsanto remains contractually liable to Pharmacia under the Separation
Agreement in the event Solutia fails to satisfy the liabilities for these
sites. Solutia has, for the most part, transferred remedial work or payment
obligations at these sites to Monsanto, which, consistent with the Interim
Protocol, has agreed to undertake this work or payment obligation acting as
Pharmacia's agent. In most such instances where there are work obligations,
acting in that capacity, Monsanto has requested, and Solutia has permitted,
Solutia's remediation managers to continue managing the work on Monsanto's
behalf and Monsanto has paid all costs except for Solutia's remediation
managers' salaries and benefits. Solutia is aware of no Legacy Sites at which
cleanup work formerly being performed or managed by Solutia is going untended
as a result of Solutia's filing of the Chapter 11 Cases. The costs incurred by
Monsanto as a result of Solutia's cessation of performance of its Distribution
Agreement obligations with respect to these sites, both during the Chapter 11
Cases and following the Effective Date, represent a portion of the Monsanto
Claim.
Based on very rough estimates prepared prior to the Petition Date,
Solutia believes the cost of the long term remedial obligations at these sites
is over $100 million. As discussed in Section VIII.B.1.(ii)(a) herein,
pursuant to the Amended Plan and the Relationship Agreement, Monsanto will
take responsibility, as between itself and Reorganized Solutia, for the Legacy
Environmental Liabilities related to the Legacy Sites. In light of the
significant known and
99
contingent liabilities associated with the Legacy Sites, Monsanto's agreement
to undertake responsibility for such sites will be of considerable value in
reducing the burden of Legacy Environmental Liabilities for Solutia upon
emergence from bankruptcy.
(c) Shared Site Areas (Anniston and Sauget)
Shared Site Areas consist of the off-site areas adjacent to or near
two of the Retained Sites, the Anniston, Alabama Plant and the W.G. Krummrich
Plant in Sauget, Illinois. These Off-Site Areas are not owned by Solutia (with
the exception of "Site R," a narrow strip of property in Sauget Site Q, and
the Containment Cell in Sauget as well as the Central Staging and Soil
Management Area (the Miller Property) and the South Staging and Soil
Management Area in Anniston). The Shared Sites are listed on Exhibit C to the
Relationship Agreement.
During the Chapter 11 Cases, Solutia has ceased funding remediation
efforts at the Off-Site Areas. Pursuant to the Interim Protocol, Monsanto has
(as Pharmacia's agent) undertaken the work Solutia was performing at the
off-site areas prior to the Petition Date. As with several of the Legacy
Sites, Solutia's remediation managers are managing this work for Monsanto.
Monsanto, acting as Pharmacia's agent, currently bears all costs, as between
itself and Solutia, for the non-Solutia owned Shared Sites, except for the
salaries and benefits of Solutia's remediation managers.
The costs incurred by Monsanto as a result of Solutia's cessation of
performance of its obligations under the Distribution Agreement with respect
to the Shared Sites represent a portion of the Monsanto Claim.
Solutia currently projects aggregate remediation costs with respect
to Shared Sites to be approximately $104 million over the next five years.
Such costs will be shared between Solutia and Monsanto pursuant to the
arrangement discussed in Section VIII.B.1.(ii)(b) herein. Significant
additional costs will be required with respect to the Shared Sites after 2011.
Although the EPA has not yet determined final remedies for these sites,
Solutia estimates that the highest annual expenditures after the 2007-2011
period will occur during the five-year period immediately following 2011.
During that period, major remediation work at both Sauget and Anniston is
expected to be required and costs are projected to be consistently about $25
million a year. Thereafter, remedial work will continue for some time, but
annual costs should begin to decline as the amount of remedial work lessens
and only operation of treatment systems and maintenance activities remain.
(d) Certain Waste Sites
Pursuant to the Relationship Agreement, the responsibility for
environmental liabilities applicable to Solutia, Pharmacia and Monsanto at a
Certain Waste Site will be allocated among Solutia and Monsanto according to
the volume and toxicity of waste sent by Solutia, on the one hand, and
Pharmacia, on the other hand, to such Certain Waste Site or by such other
reasonable measures to which the Parties may agree consistent with customary
allocation principles.
100
(e) Natural Resource Damages at Anniston and Sauget
The Legacy Environmental Liabilities also include potential liability
for the NRDs resulting from Pharmacia's operations prior to the Spinoff.
CERCLA, the federal "superfund" law, creates a separate category of liability
for "damages for injury to, destruction of, or loss of natural resources,
including the reasonable costs of assessing such injury, destruction or loss."
See 42 U.S.C. Section 9607(a)(4)(C). In general, NRDs represent the residual
damage to natural resources after cleanup is complete, as well as certain
measures of damage prior to cleanup.
Proofs of Claim filed by the federal and state trustees for natural
resources (the "Natural Resource Trustees") facially assert NRD Claims of
between $366 million and $604 million for the Anniston off-site areas and
approximately $32 million for the Sauget off-site areas. Solutia believes
these Claims are aimed primarily at preserving the Natural Resource Trustees'
rights and are not the result of any NRD assessment having been completed by
the Natural Resource Trustees. Typically, NRD amounts are not assessed until
final site cleanup measures are known. Given Solutia's desire to emerge from
the Chapter 11 Cases with as much certainty as possible regarding its future
liabilities and the extensive data currently available as a result of the
environmental investigations that have already been performed at the Anniston
and the W.G. Krummrich Plants and related Off-Site Areas, Solutia developed
estimates of the range of its NRD liability at the Anniston and Sauget sites.
The Natural Resource Trustees do not necessarily agree with Solutia's
characterization of their claims as set forth in this paragraph.
Solutia has retained two experts, Dr. David Ludwig and Dr. William
Desvousges, to prepare NRD estimates. Dr. Ludwig of Blasland, Bouck and Lee,
Inc. ("BBL") is an expert in the assessment of ecological damages. Dr.
Desvousges, formerly of Triangle Research Associates, an affiliate of BBL, is
an economist with recognized expertise in determining lost natural resource
human use values, such as lost fishing or other recreational uses caused by
environmental contamination. Dr. Desvousges' and Dr. Ludwig's analyses
performed to date of the Anniston and Sauget NRD Claims conclude that the
potential NRD liability at Anniston and Sauget is in the range of $14.2
million to $51.3 million. The Natural Resource Trustees dispute these
estimates. The NRD Claims asserted in the Chapter 11 Cases will be unimpaired
under the Amended Plan, and will be treated as Shared Site liabilities under
the Relationship Agreement. Accordingly, Monsanto has agreed, solely as
between itself and Solutia, to contribute funds towards such liabilities
consistent with the terms of the Relationship Agreement.
(f) Miscellaneous Prepetition Environmental Claims
A variety of parties have filed proofs of claim for miscellaneous
costs that may qualify as prepetition environmental Claims. To the extent such
Claims constitute Allowed Claims, they will be treated as General Unsecured
Claims pursuant to the Amended Plan.
(g) The Terms of the Relationship Agreement
In accordance with the terms of the Relationship Agreement, Monsanto
agrees to take responsibility, as between itself and Reorganized Solutia only,
for a significant portion of the Legacy Environmental Liabilities, including
Monsanto's agreement to be responsible for all Legacy Environmental Claims
related to future cleanup at the Legacy Sites and to share all
101
Legacy Environmental Claims related to future cleanup responsibility at the
Shared Sites. The sharing by Monsanto and Solutia of Legacy Environmental
Claims related to future cleanup responsibility at the Shared Sites is in
accordance with the following formula, which is based upon agreed estimates of
potential remediation costs:
o The first $50 million will be paid by Funding Co;
o The next $50 million in Environmental Liabilities less
postpetition amounts expended by Monsanto during the pendency of
the Chapter 11 Cases with respect to Shared Sites, which totaled
approximately $64.2 million through March 31, 2007, will be paid
by Monsanto;
o Monsanto will receive an administrative expense claim for any
amounts it expends in excess of $50 million;
o The next $325 million will be paid by Reorganized Solutia;
o Any amounts in excess of the foregoing amounts, which is believed
to represent a "reasonable worst case" remediation estimate
(excluding future operation and maintenance costs), will be shared
equally by Reorganized Solutia and Monsanto;
o Reorganized Solutia's payments in connection with the Shared Sites
in any calendar year will be capped at $30 million, with
Reorganized Solutia having the option to defer amounts over $30
million and having such amounts be borne in the interim by
Monsanto, but subject to Reorganized Solutia's agreement to repay
such deferred amounts and a $25 million limit on the amount of
credit that may be outstanding at any time (thus Solutia will
again be obligated to pay amounts over $55 million).
5. MONSANTO'S SETTLEMENT OF ADVERSARY PROCEEDINGS, CONTESTED MATTERS,
------------------------------------------------------------------
DISPUTES AND THE MONSANTO PROOF OF CLAIM
----------------------------------------
In accordance with the terms of the Amended Plan, Solutia and
Monsanto agree to (a) resolve the litigation regarding the Distribution
Agreement, including proceedings related to the Rejection Motion, the Benefits
Adversary, the Indemnity Adversary and the Retiree Adversary, (b) resolve the
Avoidance Action Solutia commenced against Monsanto and (c) settle the
Monsanto Proof of Claim.
6. MONSANTO'S AGREEMENT TO WAIVE CLAIMS FOR INDEMNITY AND
------------------------------------------------------
CONTRIBUTION AGAINST SOLUTIA
----------------------------
In accordance with and subject to the terms of the Amended Plan and
the Relationship Agreement, Monsanto agrees to forever waive and release
Solutia from any and all indemnity obligations to Monsanto arising under the
Distribution Agreement or any other agreement, including any amendments to the
Distribution Agreement, related to the Legacy Liabilities or otherwise.
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7. MONSANTO'S AGREEMENT TO ENTER INTO THE RELATIONSHIP AGREEMENT AND
-----------------------------------------------------------------
CONTINUE THE COMMERCIAL AND OPERATING AGREEMENTS
------------------------------------------------
In accordance with and subject to the terms of the Amended Plan and
the Relationship Agreement, Monsanto agrees (a) not to take action in
connection with Solutia's failure to perform under the Distribution Agreement,
(b) to enter into the Relationship Agreement and (c) subject to the Chocolate
Bayou Settlement, to continue in effect the Commercial and Operating
Agreements and extend the Master Operating Agreement. Monsanto's Claims for
Solutia's breach of the Distribution Agreement shall be deemed to constitute a
portion of the Monsanto Claim. Reorganized Solutia and Monsanto will continue
to perform under the Commercial and Operating Agreements so that obligations
outstanding thereunder are performed in the future. Following is a summary of
the Commercial and Operating Agreements that are most significant to Solutia's
operations.
(a) Chocolate Bayou Agreements
There are four agreements that define the relationship between
Monsanto and Solutia at the Chocolate Bayou, Texas facility (the "Chocolate
Bayou Agreements"). The Master Operating Agreement is the primary governing
document of the relationship. The Master Operating Agreement defines the
operational rights and obligations of the parties whereby Solutia provides
manufacturing services for Monsanto's disodium iminodiacetic acid ("DSIDA")
facility at Chocolate Bayou. DSIDA is an intermediate for Roundup(R)
herbicide. Pursuant to the Master Operating Agreement, Monsanto pays for a
proportionate share of Solutia's fixed overhead costs at the Chocolate Bayou
facility. The Master Operating Agreement has an original term of 20 years from
September 1, 1997, to continue indefinitely thereafter until either party
gives at least 24 months prior written notice of termination. Either party may
terminate the Master Operating Agreement, subject to various notice
requirements, if either Monsanto or Solutia ceases operations at the Chocolate
Bayou facility.
The other three agreements that make up the Chocolate Bayou
Agreements are supply agreements whereby Solutia provides Monsanto's
requirements for these raw materials for Monsanto's DSIDA production. Each of
these agreements contains pricing terms that are based upon Solutia's cost of
production. Therefore, the supply agreements provide Solutia with a stable and
predictable profit margin on the supply of these raw materials to Monsanto.
The HMTA supply agreement has an initial term of 10 years from September 1,
1997, to continue indefinitely thereafter until either party gives at least
two years prior written notice of termination. Monsanto may also terminate the
agreement at any time with only 12 months prior written notice if it ceases to
use HMTA in the production of DSIDA at the Chocolate Bayou facility. The
Formalin supply agreement has an initial term from September 1, 1997 to
February 28, 2007, to continue indefinitely thereafter until either party
gives at least two years prior written notice of termination. The HCN supply
agreement has an initial term of 10 years from September 1, 1997, to continue
indefinitely thereafter until either party gives at least two years prior
written notice of termination.
Solutia and Monsanto have recently reached an agreement in principle
to amend the Chocolate Bayou Agreements. The parties are in the process of
finalizing definitive written amendments (the "Amendments") to the Chocolate
Bayou Agreements. The Amendments
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would modify the term of the Chocolate Bayou Agreements to automatically
expire on December 31, 2012, establish new minimum annual purchase commitments
for certain of the raw materials which would decline over the course of the
five year term at existing contract pricing, and redefine Monsanto's exit
obligations upon termination of the Master Operating Agreement. Under the
amended Chocolate Bayou Agreements, the existing termination rights would be
replaced, and Monsanto would have the right to terminate the Chocolate Bayou
Agreements upon 12 months' prior written notice given on or after January 1,
2009. In the event Monsanto exercised its right of early termination, upon the
effective date of such termination, Monsanto would be obligated to pay Solutia
a lump sum amount equal to the remaining minimum purchase commitments under
certain of the raw material agreements. Monsanto's exit obligations under the
Master Operating Agreement with respect to the DSIDA facility at Chocolate
Bayou would be defined as a one-time lump sum payment of $30 million (the
"Exit Payment") payable on the earlier of December 31, 2012 or the effective
date of any early termination. Solutia intends to submit the Amendments for
Bankruptcy Court approval.
(b) HMD Supply Agreement
Solutia also sells HMD to Monsanto pursuant to a supply agreement.
Monsanto uses HMD as a raw material to produce herbicides. The HMD supply
agreement requires Monsanto to purchase all of its requirements of HMD for its
Muscatine facility from Solutia. Therefore, the agreement provides Solutia
with a stable, long-term customer for its HMD production. The HMD supply
agreement has an initial term of 10 years from September 1, 1997, to continue
indefinitely thereafter until either party gives at least one year prior
written notice of termination.
8. THE RETIREE SETTLEMENT
----------------------
The Retiree Settlement will resolve the various litigations regarding
the Retirees' benefits, as well as the Claims the individual Retirees have
filed against Solutia. Pursuant to the Retiree Settlement, Solutia will modify
the post-employment benefits provided to Retirees. These modifications will
provide Solutia with a significant savings, and many of these modifications
would not be possible without the Retirees' consent. In addition, the Retiree
Settlement will alleviate Solutia's Legacy OPEB Liabilities with regard to
Retirees who retired prior to the Spinoff (the "Pre-Spin Retirees"), through
the funding of the Retiree Trust with $175 million to reimburse Reorganized
Solutia in connection with payments related to such liabilities.
The key terms of the Retiree Settlement include the implementation of
a defined dollar limit on the amount Reorganized Solutia will pay annually for
retiree medical expenses, changes to deductibles and co-payments under the
medical plan applicable to Retirees post-confirmation and a cap on the amount
of retiree life insurance provided to eligible Retirees. In addition,
Reorganized Solutia will continue to offer prescription drug benefits to
Medicare-eligible Retirees and will retain the government subsidy provided to
employers for their continued participation in such benefits. Reorganized
Solutia will continue to be subject to certain restrictions on its right to
make changes to retiree benefits for those Retirees covered under the Forsberg
Settlement. In consideration for Monsanto's contributions to Solutia's
reorganization under the Relationship Agreement and otherwise, the Retirees
will release claims against Monsanto and Pharmacia.
104
Pursuant to the terms of the Retiree Settlement, the Retirees will
receive the benefit of the Retiree Claim. The Retiree Claim will be an Allowed
non-priority Unsecured Claim in the aggregate amount of $35 million. In full
and complete satisfaction of the Retiree Claim, Reorganized Solutia shall
contribute shares of New Common Stock (the "Retiree Shares") to the Retiree
Trust equal to (a) 10% of the value of the Retiree Trust (determined in
accordance with ERISA and the IRC on the date such contribution is made) or
(b) the number of shares of New Common Stock necessary to provide a recovery
on account of the Retiree Claim equal to the recovery such Claim would receive
if it were treated as a General Unsecured Claim not subject to any dilutions
or adjustments and based on the midpoint of claims set forth in the Disclosure
Statement approved by the Bankruptcy Court and the Bankruptcy Court approved
Equity value of Reorganized Solutia (the "Implied Recovery"). In no event will
the recovery on the Retiree Claim exceed the Implied Recovery. The Retiree
Shares and any proceeds from the sale thereof, shall be used to reimburse
Reorganized Solutia for payments related to OPEB for Pre- and Post-Spin
Retirees. On the Effective Date, any and all claims filed by individual
Retirees on account of their OPEB shall be disallowed and expunged as being
duplicative of the Retiree Claim.
Solutia will file a motion pursuant to Bankruptcy Code section 1114
and Bankruptcy Rule 9019 (the "Retiree Settlement Motion") seeking entry of an
order (the "Retiree Approval Order") approving the Retiree Settlement. The
hearing on the Retiree Settlement Motion will be held contemporaneously with
the Confirmation Hearing. The Retiree Order will explicitly provide that the
Retiree Settlement supersedes the Forsberg Settlement and the Forsberg Plan,
and the Retiree Settlement and Approval Order will be filed with the United
States District Court for the Northern District of Florida, Pensacola, where
the Forsberg Litigation was pending. The Retiree Settlement does not encompass
any claims that arise in connection with or are related to Pharmacia's or
Solutia's non-qualified plans or arrangements at issue in Miller v. Pharmacia
Corporation, Case No. 4:04CV981.
9. THE PHARMACIA SETTLEMENT
------------------------
While not a principal party to the negotiations resulting in the
Relationship Agreement, Pharmacia has agreed to release Solutia from any
obligations owed to Pharmacia, including any indemnity obligations arising
under the Distribution Agreement or any other agreement or otherwise related
to the Legacy Liabilities or any other Claims (collectively, the "Pharmacia
Contribution"). In addition, Pharmacia has agreed to: (a) waive the Pharmacia
Claim and (b) receive no Distributions under the Amended Plan on account of
the Pharmacia Claim.
C. CONSIDERATION RECEIVED UNDER THE AMENDED PLAN
---------------------------------------------
1. MONSANTO'S CONSIDERATION
------------------------
In consideration for the Monsanto Contribution and the release of the
Monsanto Claim, Monsanto will receive (a) 20% of the New Common Stock on
account of the Monsanto Claim; (b) an Allowed Administrative Claim for all
documented out of pocket Environmental Liabilities amounts that it has spent
related to the Retained Sites, and to the Shared Sites in excess of $50
million during the Chapter 11 Cases; and (c) subject to the continuing
liability described in the Amended Plan and Relationship Agreement pertaining
to Tort Claims, Legacy Site Claims and NRD Claims, releases from and
injunctions against any and all Claims relating to Solutia or
105
the Legacy Liabilities, other than Tort Claims and Environmental Liability
Costs, and an agreement to condition the Amended Plan on similar releases
respecting Retirees and certain other claimants.
In addition, Reorganized Solutia has agreed to pay the reasonable
fees and to reimburse the reasonable expenses of Monsanto's Professionals for
work substantially related to the Chapter 11 Cases, in an amount equal to the
lesser of (a) Monsanto's actual out of pocket costs with respect to such
reasonable fees and expenses and (b) the aggregate fees of the Creditors'
Committee's professionals, as approved by the Bankruptcy Court. Monsanto will
not be required to file any fee application or other request with the
Bankruptcy Court in connection with the payment of such fees and expenses;
provided, however, that if there is any dispute between Solutia and Monsanto
- -------- -------
or the Creditors' Committee and Monsanto regarding Monsanto's professional
fees and which cannot be resolved in a reasonable period of time, then the
Bankruptcy Court shall determine the amount of reasonable professional fees to
be paid to Monsanto.
2. PHARMACIA'S CONSIDERATION
-------------------------
In consideration for the Pharmacia Contribution, Pharmacia will
receive, subject to Reorganized Solutia's continuing liability described in
the Amended Plan and Relationship Agreement, the releases from and injunctions
against any and all Claims relating to Solutia or the Legacy Liabilities other
than Tort Claims and Environmental Liability Costs.
3. GENERAL UNSECURED CREDITORS' CONSIDERATION
------------------------------------------
In exchange for their Allowed Claims, and for agreeing to support the
Amended Plan and the releases provided to Monsanto and Pharmacia, the Holders
of Allowed General Unsecured Claims will receive their Pro Rata share,
inclusive of Allowed Noteholder Claims, of the Stock Pool consisting of 50.4%
of the New Common Stock. In addition, each Holder of an Allowed General
Unsecured Claim that is an Eligible Holder will be entitled to participate in
the Rights Offering. Holders of Allowed General Unsecured Claims will receive
a recovery of approximately 84.9 cents on the dollar.
4. NOTEHOLDERS' CONSIDERATION
--------------------------
Holders of Allowed Noteholder Claims will receive their Pro Rata
share, inclusive of Allowed General Unsecured Claims, of the Stock Pool
consisting of 50.4% of the New Common Stock. In addition, each Holder of an
Allowed Noteholder Claim that is an Eligible Holder will be entitled to
participate in the Rights Offering. Holders of Allowed Noteholder Claims will
receive a recovery of approximately 84.9 cents on the dollar.
5. NEW INDEMNITIES
---------------
Pursuant to the Relationship Agreement, Reorganized Solutia will
indemnify Monsanto and Pharmacia for losses incurred in connection with the
following: (a) Environmental Liabilities in connection with the Retained
Sites; (b) Environmental Liabilities in connection with the Shared Sites for
which it is liable; (c) the failure of Reorganized Solutia to make payments
required to be paid by Reorganized Solutia pursuant to the Anniston Settlement
106
Agreement or under the Anniston Consent Decree; (d) the PENNDOT litigation up
to an amount not to exceed $20 million; and (e) the Chemicals Liabilities (as
defined in the Relationship Agreement) which Monsanto or Pharmacia have not
otherwise agreed to take responsibility for, except for Claims not satisfied
in full under the Amended Plan relating to Pharmacia or Solutia's
non-qualified plans at issue in Miller v. Pharmacia Corporation, Case No.
04:04CV981.
D. THE RELEASES AND THE MONSANTO/PHARMACIA INJUNCTION
--------------------------------------------------
ARE NECESSARY COMPONENTS OF THE AMENDED PLAN
--------------------------------------------
As described more fully in this section, the Relationship Agreement,
the Retiree Settlement and Monsanto's contributions pursuant thereto will
enable Solutia to emerge from the Chapter 11 Cases free from the heavy burdens
of the Legacy Liabilities. Monsanto's contributions are critical to Solutia's
ability to emerge from the Chapter 11 Cases. Monsanto would not enter into the
Relationship Agreement without being able to obtain a release from third
parties who hold Claims against Solutia. The scope and breadth of the releases
provided to Monsanto and Pharmacia were negotiated extensively at arms-length
by the parties, and Monsanto will not agree to the Relationship Agreement
absent these releases being obtained.
In the Second Circuit, a debtor requesting an injunction barring
suits against third parties must show that the injunction meets the standards
articulated in the seminal Drexel decision and its progeny. See In re Drexel
Burnham Lambert Group, Inc., 960 F.2d 285, 293 (2d. Cir. 1992), cert. denied,
506 U.S. 1088 (1993); In re Metromedia Fiber Network, Inc. (Docket No.
04-2112) (2d. Cir. July 21, 2005); see also In re XO Communications, Inc.,
2005 WL 2319155, Case No. 02-12947 (AJG) (Bankr. S.D.N.Y. Sept. 23, 2005). In
Drexel, the United States Court of Appeals for the Second Circuit approved an
injunction barring future securities fraud suits against the debtor's former
officers and directors. Specifically, the court noted that it could "enjoin a
creditor from suing a third party, provided the injunction plays an important
part in the debtor's reorganization plan." Drexel, 960 F.2d at 293. As part of
the Drexel reorganization, the debtor and its directors and officers had
entered into a settlement agreement with the SEC and two groups of securities
fraud claimants. The settlement agreement provided, among other things, for
the creation of a $350 million fund to compensate the victims of certain
fraudulent transactions and for an injunction barring future suits by third
parties against the debtor's officers and directors. The bankruptcy court had
removed the settlement proceedings to the District Court, which had approved
the settlement, including the injunction. On appeal, the Second Circuit
approved the injunction, reasoning that it was necessary to induce the
directors and officers to enter into the settlement agreement, which itself
was an essential element of the debtor's reorganization and made hundreds of
millions of dollars available to fund creditor recoveries. See Drexel, 960
F.2d at 293 ("The Settlement Agreement is unquestionably an essential element
of [the debtor's] ultimate reorganization. In turn, the injunction is a key
component of the Settlement Agreement."); see also In re Ionosphere Clubs,
Inc. v. Shugrue, 184 B.R. 648, 655 (Bankr. S.D.N.Y. 1995) (district court
affirmed injunction, reasoning that it was "integral to a final resolution of
claims and . . . necessary to give finality to the plan."); Chateaugay, 167
B.R. at 780 ("courts have permanently enjoined future lawsuits against
non-debtors . . . where such a step was essential to confirmation of the
Plan").
The Second Circuit recently reaffirmed its principal holding in
Drexel, finding that releases enjoining creditor suits against third party
non-debtors are permissible when such
107
releases are supported by specific factual findings, are based on the unique
circumstances of a particular debtor's case, and are important to the success
of the debtor's plan. See Metromedia, at 10-16. Significantly, the United
States Court of Appeals for the Second Circuit held that non-debtor releases
would be upheld if the court found that "truly unusual circumstances" made the
release "important to the success of the plan." Id. at 16; see also XO
Communications, 2005 WL 2319155, at *31-34 (finding that nondebtor releases
were appropriate within the mandate of Metromedia and related Second Circuit
case law).
The Chapter 11 Cases embody such "truly unusual circumstances." Under
the terms of the Relationship Agreement, Monsanto has agreed to take financial
responsibility for Tort Claims and certain environmental liabilities and
compromise indemnity Claims, which will enable Solutia to emerge from the
Chapter 11 Cases as a viable enterprise and provide meaningful distributions
to its creditors under the Amended Plan. The Amended Plan, the Relationship
Agreement and the Retiree Settlement reallocates the Legacy Liabilities, which
served as a driving factor in Solutia's commencement of the Chapter 11 Cases.
Moreover, the Monsanto Contribution will provide for the settlement and
resolution of some of Solutia's most significant monetary and non-monetary
liabilities. Thus, the Monsanto Contribution as the basis for the Relationship
Agreement, is the sine qua non of the Amended Plan, without which Solutia
would encounter tremendous hurdles that would hinder and delay its ability to
complete a successful reorganization. Accordingly, under Drexel and its
progeny, including the recent Metromedia and XO Communications decisions, the
"financial contribution" element is satisfied.
In the Chapter 11 Cases, the Monsanto/Pharmacia Injunction and
related releases are critical to induce Monsanto to make the Monsanto
Contribution, which is the cornerstone of the Amended Plan. Courts in the
Second Circuit have approved injunctions when such injunctions would make
third parties more likely to enter into a settlement agreement critical to the
success of the debtor's reorganization plan. See Drexel, 960 F.2d at 293
("[T]he injunction limits the number of lawsuits that may be brought against
Drexel's former directors and officers. This enables the directors and
officers to settle these suits without fear that future suits will be filed.
Without the injunction, the directors and officers would be less likely to
settle."). In another case, the District Court reaffirmed that injunctions are
appropriate when they are necessary to induce a third party to make an
important contribution to a debtor's reorganization. See In re Gaston & Snow,
1996 WL 694421, Case No. 93-CIV-8517 (JGK), at *5 (S.D.N.Y. Dec. 4, 1996). The
District Court in Gaston approved a permanent injunction in a settlement
agreement that released certain third parties. Citing Drexel, the court held
that the injunction was properly issued because it was essential to encourage
the participating third parties to contribute to the debtor by ensuring that
their payments would protect them from any future actions arising from their
relationship with the debtor. Gaston & Snow, 1996 WL 694421, at *5 (injunction
was appropriate because settling third parties "will have incentive to pay
their respective [contributions] ... if they can take comfort that such
payments will shield them from all future exposure for any action brought by
any person for the purpose of ... contribution or indemnification."); see also
In re Labrum & Doak, LLP, 237 B.R. 275, 306 (Bankr. E.D. Pa. 1999) (holding
that injunction was justified because, absent injunctive relief, several of
the settling third parties would not have had sufficient incentives to
contribute the sums called for under the settlement agreement).
108
Monsanto will not make the Monsanto Contribution without receiving
the releases from, and injunctions against, claims relating to Solutia or the
Legacy Liabilities and (because of its Separation Agreement obligations to
Pharmacia) unless Pharmacia receives the releases from and injunctions against
any and all claims relating to Solutia or the Legacy Liabilities. Since
without the required releases and injunctions for Monsanto and Pharmacia,
those entities would be incurring obligations for which Solutia is ultimately
responsible under the Distribution Agreement, in the absence of the required
releases and injunctions in favor of Monsanto and Pharmacia, Solutia will have
no relief from the Legacy Liability obligations and will not receive the
required financial relief and funding provided by the Relationship Agreement.
The reallocation of the Legacy Liabilities accomplished through the
Relationship Agreement and the Retiree Settlement, serves as the basis for the
Amended Plan, which, among other things: (a) provides for the satisfaction of
all secured debt of Solutia, a substantial recovery on the Claims of unsecured
creditors as negotiated with the Creditors' Committee, and other distributions
in the priority and manner prescribed by the Bankruptcy Code and (b) allows
for Solutia to emerge from bankruptcy as a viable entity and in an efficient
manner in compliance with the requirements of the Bankruptcy Code and well
positioned to produce solid financial returns.
E. THE RELATIONSHIP AGREEMENT IS CRITICAL TO THE AMENDED PLAN
----------------------------------------------------------
The Relationship Agreement resolves numerous issues that have
burdened Solutia since the Spinoff. The Amended Plan is premised on the
Monsanto Contribution and the Pharmacia Contribution, and the Monsanto and
Pharmacia Contributions, in turn, are premised on the releases and injunctions
to be issued in favor of Monsanto and Pharmacia pursuant thereto. Without the
Monsanto/Pharmacia Injunction and related releases, Monsanto would not agree
to make the necessary contribution to Solutia's estates. Absent a settlement
with Monsanto and Pharmacia, Solutia would have to litigate the numerous
Claims relating to responsibility for Legacy Liabilities described herein
before Solutia could even consider its emergence from the Chapter 11 Cases.
The complexity surrounding these disputes and the protracted and costly
litigation that would ensue would have a significant detrimental impact on
Solutia's ability to preserve value for its creditors and would result in
Solutia's estates incurring significant administrative costs.
The Chapter 11 Cases are unique. Solutia has been hampered since its
creation by virtue of the triangle of indemnity obligations associated with
the Legacy Liabilities. The litigation issues surrounding these indemnity
obligations are extremely complicated. There is no certainty that the
indemnity obligations would be resolved in favor of Solutia if Solutia
continued to litigate them. The existing litigation proceedings surrounding
these issues have already imposed significant burdens on Solutia and, absent
the Bankruptcy Court's confirmation of the Amended Plan, will continue to do
so in the future.
The Amended Plan, the Relationship Agreement and the Retiree
Settlement represent a realistic opportunity for Solutia and its creditor
constituencies to reallocate and reduce the burden of the Legacy Liabilities
on Solutia to a commercially reasonable level. Accordingly, Solutia believes
that the settlements and compromises embodied in the Amended Plan satisfy the
requirements for approval of settlements under the Bankruptcy Code and should
therefore be approved by the Bankruptcy Court. Bankruptcy Rule 9019(a)
provides, in relevant part, that "[o]n motion by the trustee and after notice
and a hearing, the court may approve a compromise
109
and settlement." Fed. R. Bankr. P. 9019(a). Compromises and settlements are "a
normal part of the process of reorganization." See Protective Comm. for Indep.
Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968)
(quoting Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 130 (1939)).
The Amended Plan facilitates Solutia's restructuring and its
emergence from bankruptcy. The Amended Plan provides for a reallocation of
Legacy Liabilities and resolves the treatment of thousands of Claims, provides
for the implementation of the Relationship Agreement and the continuation of
the Commercial and Operating Agreements, all of which are vital to Reorganized
Solutia's ongoing business operations and which will further Solutia's ability
to obtain financing for the implementation of the Amended Plan and for its
future operations. The Creditors' Committee supports the Amended Plan. The
Creditors' Committee represents one of the most fundamental economic interests
at stake in Solutia's reorganization, since its constituents will receive a
significant portion of the New Common Stock pursuant to the Amended Plan. As
such, the significance of the Creditors' Committee's support of the Amended
Plan cannot be overstated.
F. APPROVAL OF THE SETTLEMENT OF THE LITIGATION AMONG MONSANTO,
------------------------------------------------------------
PHARMACIA AND SOLUTIA IS CLEARLY WARRANTED
------------------------------------------
To approve a settlement under Bankruptcy Rule 9019, a bankruptcy
court must find that the settlement is fair and equitable, reasonable, and is
in the best interests of the debtor's estate. The decision to approve a
particular settlement lies within the sound discretion of the bankruptcy
court. See Nellis v. Shugrue, 165 B.R. 115, 122-23 (S.D.N.Y. 1994). In
exercising its discretion, the bankruptcy court must make an independent
determination that the settlement is fair and reasonable. Id. at 122. The
court may consider the opinions of the debtor in possession and its counsel
that the settlement is fair and reasonable. Id.; see also In re Purofied Down
Prods. Corp., 150 B.R. 519, 522 (S.D.N.Y. 1993). This discretion should be
exercised by the bankruptcy court "in light of the general public policy
favoring settlements." In re Hibbard Brown & Co., Inc., 217 B.R. 41, 46
(Bankr. S.D.N.Y. 1998); Shugrue, 165 B.R. at 123 ("the general rule [is] that
settlements are favored and, in fact, encouraged by the approval process
outlined above."). In determining whether to approve a proposed settlement, a
bankruptcy court need not decide the numerous issues of law and fact raised by
the settlement, but rather should "canvass the issues and determine whether
the settlement falls within "the range of reasonableness." See In re W.T.
Grant Co., 699 F.2d 599, 608 (2d Cir. 1983); see also Purified Down Prods.,
150 B.R. at 522 ("the court need not conduct a `mini-trial' to determine the
merits of the underlying [dispute]").
In deciding whether a proposed settlement falls within the "range of
reasonableness," courts consider several factors, such as (a) the probability
of success in the litigation; (b) the difficulties associated with collection;
(c) the complexity of the litigation, and the attendant expense, inconvenience
and delay caused by it; and (4) the paramount interests of creditors. Id.
(citing Drexel v. Loomis, 35 F.2d 800, 806 (8th Cir. 1989)); Six West Retail
Acquisition, Inc. v. Loews Cineplex Entm't Corp., 286 B.R. 236, 248 n.13
(S.D.N.Y. 2002); see also In re Drexel Burnham Lambert Group, Inc., 960 F.2d
285, 292 (2d Cir. 1992); Ionosphere Clubs, 156 B.R. at 428 ("The
`reasonableness' of a settlement depends upon all factors, including
probability
110
of success, the length and cost of the litigation, and the extent to which the
settlement is truly the product of `arms-length' bargaining, and not of fraud
or collusion").
As set forth above, the litigation in the Chapter 11 Cases concerning
Solutia's liabilities and indemnification obligations to Monsanto and
Pharmacia is complex. Resolving this litigation, and the related matters
arising from the triangle of indemnity relationships, would be difficult, as
well as time-consuming and expensive. The settlement of the litigation among
Monsanto, Pharmacia and Solutia is the product of arm's-length good faith
negotiations among the parties affected by Solutia's restructuring. To that
end, the Creditors' Committee observed and participated in the negotiations of
the terms leading up to the Global Settlement which served as the foundation
for the Original Plan, and the basis for the current settlement between
Monsanto, Pharmacia and Solutia, ensuring that the interests of Solutia's
unsecured creditors are adequately represented and protected. Moreover, if the
Bankruptcy Court approves Solutia's settlement with Pharmacia and Monsanto, as
described herein, the Equity Committee Adversary Proceeding will necessarily
be dismissed with prejudice.
Given the substantial benefits to Solutia's reorganization process
from the Relationship Agreement and the settlement of the litigation among
Monsanto, Pharmacia and Solutia--and in light of the alternative of costly and
protracted litigation, with uncertain results--Solutia believes that the
settlement embodied in the Amended Plan is fair and equitable, is in the best
interests of Solutia's creditors, and falls well within the "the range of
reasonableness." Accordingly, Solutia believes that the Amended Plan, which is
premised upon and incorporates the resolution of the litigation among
Monsanto, Solutia and Pharmacia, the Relationship Agreement, the Retiree
Settlement and the resulting reallocation of the Legacy Liabilities, should be
approved by the Bankruptcy Court.
IX.
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE AMENDED PLAN
-----------------------------------------------------------------
Solutia believes that the Amended Plan affords Holders of Claims the
greatest opportunity for realization on Solutia's assets and, therefore, is in
the best interests of such Holders. If the Amended Plan is not confirmed,
however, the theoretical alternatives include (A) liquidation of Solutia under
chapter 7 of the Bankruptcy Code or (B) alternative plans of reorganization or
liquidation under chapter 11 of the Bankruptcy Code.
A. LIQUIDATION UNDER CHAPTER 7
---------------------------
Solutia believes that, under the Amended Plan, each Holder of
Impaired Claims will receive property of a value not less than the value such
Holder would receive in a liquidation of Solutia under chapter 7 of the
Bankruptcy Code. Solutia's belief is based primarily upon extensive
consideration of the effects that a chapter 7 liquidation would have on the
ultimate proceeds available for distribution to Holders of Claims, including,
but not limited to (a) the increased costs and expenses of a liquidation under
chapter 7 arising from fees payable to a chapter 7 trustee and professional
advisors to the trustee, including investment bankers, (b) the erosion in
value of assets in a chapter 7 case in the context of the rapid liquidation
required under
111
chapter 7 and the "forced sale" atmosphere that would prevail, (c) the adverse
effects on Solutia's businesses as a result of the likely departure of key
employees, and (d) the reduction of value associated with a chapter 7
trustee's operation of Solutia's businesses. Solutia's belief is also based
upon the Liquidation Analysis, which is annexed to this Disclosure Statement
as Exhibit F.(39) The Liquidation Analysis does not reflect the likely delay
in distributions to Holders of Claims in a liquidation scenario, which, if
considered, would only further reduce the present value of any liquidation
proceeds.
Solutia believes that any liquidation analysis is speculative, as
such an analysis is necessarily premised upon assumptions and estimates which
are inherently subject to significant uncertainties and contingencies, many of
which would be beyond the control of Solutia. Thus, there can be no assurance
as to values that would actually be realized in a chapter 7 liquidation, nor
can there be any assurance that the Bankruptcy Court will accept Solutia's
conclusions or concur with such assumptions in making its determinations under
section 1129(a)(7) of the Bankruptcy Code.
For example, the Liquidation Analysis necessarily contains an
estimate of the amount of Claims that will ultimately become Allowed Claims.
This estimate is based solely upon a review of Solutia's books and records,
the Claims filed in the Chapter 11 Cases and Solutia's estimates as to
additional Claims that might be asserted in the Chapter 11 Cases or that would
arise in the event of a conversion of the Chapter 11 Cases to a chapter 7
liquidation proceeding. No order or finding has been entered by the Bankruptcy
Court estimating or otherwise fixing the amount of Claims at the projected
amounts of Allowed Claims, as set forth in the Liquidation Analysis. The
estimate of the amount of Allowed Claims set forth in the Liquidation Analysis
should not be relied on for any other purpose, including, without limitation,
any determination of the value of any Distribution to be made on account of
Allowed Claims under the Amended Plan. The annexed Liquidation Analysis is
provided solely to disclose to Holders of Claims and Equity Interests the
effects of a hypothetical chapter 7 liquidation of Solutia, subject to the
assumptions set forth herein and in the Liquidation Analysis.
To the extent that confirmation of the Amended Plan requires the
establishment of amounts for the chapter 7 liquidation value of Solutia and
funds available to pay Claims and the reorganization value of Solutia, the
Bankruptcy Court will determine those amounts at the Confirmation Hearing.
B. ALTERNATIVE PLAN TO REORGANIZATION OR LIQUIDATION
-------------------------------------------------
If the Amended Plan is not confirmed, Solutia may be liquidated
pursuant to the provisions of a chapter 11 liquidating plan. In liquidations
under chapter 11, Solutia's assets could be sold in an orderly fashion over a
more extended period of time than in liquidations under chapter 7. Thus, a
chapter 11 liquidation might result in larger recoveries than in a chapter 7
liquidation, but the delay in distributions could result in lower present
values received and
<FN>
- ------------------------
(39) A liquidation analysis was included as an exhibit to the Original
Disclosure Statement filed on February 14, 2006. A revised exhibit,
updated to reflect changes to the liquidation analysis since February
14, 2006, will be filed with the Bankruptcy Court and provided to
parties in interest prior to the Disclosure Statement Hearing.
112
higher administrative costs. Because a trustee's appointment is not required
in a chapter 11 case, expenses for professional fees could be lower than in a
chapter 7 case, in which a chapter 7 trustee must be appointed. Any
distribution to Holders of Claims under a chapter 11 liquidation plan probably
would be delayed substantially. Most importantly, Solutia believes that any
distributions to creditors in a liquidation scenario would fail to capture the
significant "going concern" value of their business, which is reflected in the
New Common Stock to be distributed under the Amended Plan. Accordingly,
Solutia believes that chapter 11 liquidation would not result in distributions
as favorable as those under the Amended Plan.
X.
PROJECTED FINANCIAL INFORMATION
-------------------------------
Attached as Exhibit D is a Projected Consolidated Income Statement,
Projected Consolidated Balance Sheet and Projected Consolidated Cash Flow
Statement, each of which includes the following: (A) Solutia's consolidated
historical financial statement information for the period ended December 31,
2006; and (B) consolidated projected financial statement information (the
"Projections") for Reorganized Solutia's five year period from 2007 through
2011 (the "Projection Period").(40)
THE PROJECTIONS HAVE BEEN PREPARED BY SOLUTIA'S MANAGEMENT WITH THE
ASSISTANCE OF ROTHSCHILD, SOLUTIA'S FINANCIAL ADVISORS. SUCH PROJECTIONS WERE
NOT PREPARED TO COMPLY WITH THE GUIDELINES FOR PROSPECTIVE FINANCIAL
STATEMENTS PUBLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
AND THE RULES AND REGULATIONS OF THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION. SOLUTIA'S INDEPENDENT ACCOUNTANTS HAVE NEITHER EXAMINED NOR
COMPILED THE ACCOMPANYING PROJECTIONS AND, ACCORDINGLY, DO NOT EXPRESS AN
OPINION OR ANY OTHER FORM OF ASSURANCE WITH RESPECT TO THE PROJECTIONS, ASSUME
NO RESPONSIBILITY FOR THE PROJECTIONS AND DISCLAIM ANY ASSOCIATION WITH THE
PROJECTIONS. EXCEPT FOR PURPOSES OF THIS DISCLOSURE STATEMENT, SOLUTIA DOES
NOT PUBLISH PROJECTIONS OF ITS ANTICIPATED FINANCIAL POSITION OR RESULTS OF
OPERATIONS.
MOREOVER, THE PROJECTIONS CONTAIN CERTAIN STATEMENTS THAT ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE SUBJECT TO A NUMBER OF
ASSUMPTIONS, RISKS, AND UNCERTAINTIES, MANY OF WHICH ARE AND WILL BE BEYOND
THE CONTROL OF REORGANIZED SOLUTIA, INCLUDING THE IMPLEMENTATION OF THE
AMENDED PLAN, THE CONTINUING AVAILABILITY OF SUFFICIENT BORROWING CAPACITY OR
OTHER
<FN>
- ------------------------
(40) Because the Projections assume an Effective Date of June 30, 2007, the
Projections for 2007 include six months of projected results for Solutia
(January through June) and 6 months of projected results for Reorganized
Solutia (July through December).
113
FINANCING TO FUND OPERATIONS, ACHIEVING OPERATING EFFICIENCIES, CURRENCY
EXCHANGE RATE FLUCTUATIONS, EXISTING AND FUTURE GOVERNMENTAL REGULATIONS AND
ACTIONS OF GOVERNMENT BODIES, NATURAL DISASTERS AND UNUSUAL WEATHER CONDITIONS
AND OTHER MARKET AND COMPETITIVE CONDITIONS. HOLDERS OF CLAIMS ARE CAUTIONED
THAT THE FORWARD-LOOKING STATEMENTS SPEAK AS OF THE DATE MADE AND ARE NOT
GUARANTEES OF FUTURE PERFORMANCE. ACTUAL RESULTS OR DEVELOPMENTS MAY DIFFER
MATERIALLY FROM THE EXPECTATIONS EXPRESSED OR IMPLIED IN THE FORWARD-LOOKING
STATEMENTS, AND SOLUTIA AND REORGANIZED SOLUTIA UNDERTAKE NO OBLIGATION TO
UPDATE ANY SUCH STATEMENTS.
THE PROJECTIONS, WHILE PRESENTED WITH NUMERICAL SPECIFICITY, ARE
NECESSARILY BASED ON A VARIETY OF ESTIMATES AND ASSUMPTIONS WHICH, THOUGH
CONSIDERED REASONABLE BY SOLUTIA, MAY NOT BE REALIZED AND ARE INHERENTLY
SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC, COMPETITIVE, INDUSTRY, REGULATORY,
MARKET AND FINANCIAL UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE AND
WILL BE BEYOND REORGANIZED SOLUTIA'S CONTROL. SOLUTIA CAUTIONS THAT NO
REPRESENTATIONS CAN BE MADE OR ARE MADE AS TO THE ACCURACY OF THE PROJECTIONS
OR TO REORGANIZED SOLUTIA'S ABILITY TO ACHIEVE THE PROJECTED RESULTS. SOME
ASSUMPTIONS INEVITABLY WILL BE INCORRECT. MOREOVER, EVENTS AND CIRCUMSTANCES
OCCURRING SUBSEQUENT TO THE DATE ON WHICH THESE PROJECTIONS WERE PREPARED MAY
BE DIFFERENT FROM THOSE ASSUMED, OR, ALTERNATIVELY, MAY HAVE BEEN
UNANTICIPATED, AND THUS THE OCCURRENCE OF THESE EVENTS MAY AFFECT FINANCIAL
RESULTS IN A MATERIALLY ADVERSE OR MATERIALLY BENEFICIAL MANNER. SOLUTIA AND
REORGANIZED SOLUTIA DO NOT INTEND AND UNDERTAKE NO OBLIGATION TO UPDATE OR
OTHERWISE REVISE THE PROJECTIONS TO REFLECT EVENTS OR CIRCUMSTANCES EXISTING
OR ARISING AFTER THE DATE THIS DISCLOSURE STATEMENT IS INITIALLY FILED OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. THE PROJECTIONS, THEREFORE,
MAY NOT BE RELIED UPON AS A GUARANTY OR OTHER ASSURANCE OF THE ACTUAL RESULTS
THAT WILL OCCUR. IN DECIDING WHETHER TO VOTE TO ACCEPT OR REJECT THE AMENDED
PLAN, HOLDERS OF CLAIMS OR INTERESTS MUST MAKE THEIR OWN DETERMINATIONS AS TO
THE REASONABLENESS OF SUCH ASSUMPTIONS AND THE RELIABILITY OF THE PROJECTIONS.
The Projections have been prepared with the assumption that the
Effective Date is June 30, 2007, and are based on, and assume the successful
implementation of, Reorganized Solutia's business plan. Although Solutia
presently intends to cause the Effective Date to occur as soon as practical
following confirmation of the Amended Plan, there can be no assurance as to
when the Effective Date will actually occur given the conditions for the
Effective Date to occur pursuant to the terms of the Amended Plan. In
accordance with fresh start reporting, the Projections reflect the assets and
liabilities of Reorganized Solutia as of the Effective Date, in accordance
114
with generally accepted accounting principles and are based upon their
estimated fair market values.
The Projections are based on, among other things: (a) current and
projected market conditions in each of Reorganized Solutia's respective
markets; (b) the ability to maintain sufficient working capital to fund
operations; (c) final approval of the Exit Financing Facility; and (d)
confirmation of the Amended Plan.
The Projections include consolidated results for Reorganized
Solutia's domestic and international operations (Debtor and Non-Debtor
entities).
XI.
RISK FACTORS
------------
HOLDERS OF CLAIMS SHOULD READ AND CONSIDER CAREFULLY THE RISK FACTORS
SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS DISCLOSURE
STATEMENT AND THE DOCUMENTS DELIVERED TOGETHER HEREWITH, REFERRED TO OR
INCORPORATED BY REFERENCE HEREIN, PRIOR TO VOTING TO ACCEPT OR REJECT THE
AMENDED PLAN. ALTHOUGH THESE RISK FACTORS ARE MANY, THESE FACTORS SHOULD NOT
BE REGARDED AS CONSTITUTING THE ONLY RISKS PRESENT IN CONNECTION WITH THE
DEBTORS' BUSINESSES OR THE AMENDED PLAN AND ITS IMPLEMENTATION.
A. CERTAIN BANKRUPTCY CONSIDERATIONS
---------------------------------
PROLONGED CONTINUATION OF THE CHAPTER 11 CASES MAY HARM SOLUTIA'S BUSINESSES
The prolonged continuation of the Chapter 11 Cases could adversely
affect Solutia's businesses and operations. So long as the Chapter 11 Cases
continue, senior management of Solutia will be required to spend a significant
amount of time and effort dealing with Solutia's reorganization instead of
focusing exclusively on business operations. Prolonged continuation of the
Chapter 11 Cases will also make it more difficult to attract and retain
management and other key personnel necessary to the success and growth of
Solutia's businesses. In addition, the longer the Chapter 11 Cases continue,
the more likely it is that Solutia's customers, suppliers, distributors, and
agents will lose confidence in Solutia's ability to successfully reorganize
their businesses and seek to establish alternative commercial relationships.
Furthermore, so long as the Chapter 11 Cases continue, Solutia will be
required to incur substantial costs for professional fees and other expenses
associated with the proceedings. The prolonged continuation of the Chapter 11
Cases may also require Solutia to seek additional financing, either as part of
the DIP Credit Facility or otherwise, in order to service their debt and other
obligations. It may not be possible for Solutia to obtain additional financing
during the pendency of the Chapter 11 Cases on commercially favorable terms or
at all. If Solutia were to require additional financing during the Chapter 11
Cases and were unable to obtain the financing on favorable terms or at all, it
is unlikely Solutia could successfully reorganize.
115
SOLUTIA MAY NOT BE ABLE TO OBTAIN CONFIRMATION OF THE AMENDED PLAN
To successfully emerge from Chapter 11 bankruptcy protection as a
viable entity, Solutia, like any debtor, must obtain approval of a plan of
reorganization from its creditors, confirmation of the plan through the
Bankruptcy Court and successfully implement this confirmed plan. The foregoing
process requires Solutia to (a) meet certain statutory requirements with
respect to the adequacy of disclosure with respect to any proposed plan, (b)
solicit and obtain creditor acceptances of the proposed plan and (c) fulfill
other statutory conditions with respect to plan confirmation.
With regard to any proposed plan of reorganization Solutia may not
receive the requisite acceptances to confirm a plan. Even if the requisite
acceptances of a proposed plan are received, the Bankruptcy Court may not
confirm the plan as proposed. A dissenting holder of a claim against Solutia
could challenge the balloting procedures and results as not being in
compliance with the Bankruptcy Code. Finally, even if the Bankruptcy Court
determined that the balloting procedures and results were appropriate, the
Bankruptcy Court could still decline to confirm a proposed plan if it found
that any of the statutory requirements for confirmation had not been met.
Specifically, section 1129 of the Bankruptcy Code sets forth the requirements
for confirmation and requires, among other things, a finding by the Bankruptcy
Court that (a) the debtor's plan "does not unfairly discriminate" and is "fair
and equitable" with respect to any non-accepting classes, (b) confirmation of
the debtor's plan is not likely to be followed by a liquidation or a need for
further financial reorganization and (c) the value of distributions to
non-accepting holders of claims within a particular class under the debtor's
plan will not be less than the value of distributions such holders would
receive if the debtor was liquidated under Chapter 7 of the Bankruptcy Code.
The Bankruptcy Court may determine that a proposed plan does not satisfy one
or more of these requirements, in which case the proposed plan would not be
confirmed by the Bankruptcy Court.
If the Amended Plan, is not confirmed by the Bankruptcy Court, it is
unclear whether Solutia would be able to reorganize its businesses and what,
if any, distributions holders of claims against or equity interests in Solutia
ultimately would receive with respect to their claims or equity interests.
There also can be no assurance that Solutia will be able to successfully
develop, prosecute, confirm, and consummate an alternative plan of
reorganization with respect to the Chapter 11 cases that is acceptable to the
Bankruptcy Court and Solutia's creditors, equity holders and other parties in
interest. There can be no assurance that such an alternative plan of
reorganization would preserve the reallocation of the Legacy Liabilities that
is achieved in the Amended Plan, which eliminates legacy tort liability
exposure, reduces environmental obligations, and significantly reduces
Solutia's exposure with regard to retiree obligations. Additionally, it is
possible that third parties may seek and obtain approval to terminate or
shorten the exclusivity period during which only Solutia may propose and
confirm a plan of reorganization. Finally, Solutia's emergence from bankruptcy
is not assured. While Solutia expects to emerge from bankruptcy in the future,
there can be no assurance that Solutia will successfully reorganize, or when
this reorganization will occur.
116
THE CONDITIONS PRECEDENT TO THE CONFIRMATION AND CONSUMMATION OF THE AMENDED
PLAN MAY NOT OCCUR
As more fully set forth in Exhibit A, the occurrence of Confirmation
of the Amended Plan and the Effective Date of the Amended Plan each is subject
to a number of conditions precedent. If the conditions precedent to
Confirmation are not met or waived, the Amended Plan will not be confirmed;
and if the conditions precedent to the Effective Date are not met or waived,
the Effective Date will not take place.
Specifically, and as more fully described in Section VII.H.2, Solutia
expects to enter into the Exit Financing Facility of approximately $2.0
billion (including undrawn availability on the revolving loan) which is
expected to include some combination of institutional term loans, a revolving
loan, a letter of credit facility, high yield bonds or second lien loans,
depending on many factors including the strength of the capital markets.
Solutia's entering into the Exit Financing Facility is a condition precedent
to the Effective Date.
THE VALUATION OF REORGANIZED SOLUTIA MAY NOT BE ADOPTED BY THE BANKRUPTCY COURT
Solutia believes that based on, among other things, the valuation
included in this Disclosure Statement, the approximate midpoint equity value
of Reorganized Solutia is $1.2 billion. Creditors who are not being paid in
full on their Allowed Claims, as well as Equity Interest Holders, among
others, may oppose confirmation of the Amended Plan by alleging that the
midpoint equity value of Reorganized Solutia is higher than $1.2 billion and
that the Amended Plan thereby improperly limits or extinguishes their rights
to recoveries under the Amended Plan. At the Confirmation Hearing, the
Bankruptcy Court will hear evidence regarding the views of Solutia and
opposing parties, if any, with respect to the valuation of Reorganized
Solutia. Based on that evidence, the Bankruptcy Court will determine the
appropriate valuation for Reorganized Solutia for purposes of the Amended
Plan. Although Solutia believes that $1.2 billion is the appropriate midpoint
equity valuation for Reorganized Solutia, the Bankruptcy Court may not adopt
this valuation.
THE RECOVERY FOR HOLDERS OF THE GENERAL UNSECURED CLAIMS AGAINST SOLUTIA MAY
BE DILUTED AND THE ULTIMATE AMOUNT OF ALLOWED CLAIMS AGAINST SOLUTIA MAY NOT
BE FINALIZED UNTIL AFTER THE EFFECTIVE DATE
As set forth in Exhibit A to this Disclosure Statement, approximately
14,800 proofs of Claim were filed against Solutia. Additionally, approximately
2,500 Claims were scheduled by Solutia. The asserted amounts of such Claims is
approximately $28 billion. Solutia has analyzed each scheduled and filed proof
of Claim, and has used its best judgment to estimate the value of such Claims.
To prepare Claim estimates for this Disclosure Statement, Solutia has
considered the strengths and weaknesses of its positions and the respective
positions of Holders of Claims under applicable law. Further, where Claim
amount estimates have been stipulated to by Solutia and a claimant for
purposes of reserving distributions under the Amended Plan or otherwise, the
ultimate allowed amount of such Claim shall not exceed, but may be less than,
such estimated amount.
117
Despite Solutia's efforts, its Claim estimates could prove incorrect.
In addition, the outcome of certain pending litigation proceedings, as further
described in Article VI of this Disclosure Statement, may decrease the
ultimate recovery for certain Holders of Claims. Further, if the Bankruptcy
Court were to determine that certain Claims may not be reclassified as Equity
Interests or that certain Claims that Solutia believes to be General Unsecured
Claims are determined by the Bankruptcy Court to constitute Priority Claims or
Claims entitled to payment in full based on the Bankruptcy Court's finding of
an administrative priority with respect to such Claims or that a particular
Claim is not dischargeable, the recovery for Holders of General Unsecured
Claims could be less than estimated.
PARTIES IN INTEREST MAY OBJECT TO SOLUTIA'S CLASSIFICATION OF CLAIMS
Section 1122 of the Bankruptcy Code provides that a plan of
reorganization may place a claim or an equity interest in a particular class
only if such claim or equity interest is substantially similar to the other
claims or equity interests in such class.
Solutia believes that the classification of Claims and Equity
Interests under the Amended Plan complies with the requirements set forth in
the Bankruptcy Code. However, the Bankruptcy Court may reach a different
conclusion.
SOLUTIA MAY OBJECT TO THE AMOUNT OR CLASSIFICATION OF A CLAIM
Solutia reserves the right to object to the amount or classification
of any Claim. The estimates set forth in this Disclosure Statement cannot be
relied on by any Holder of Claim whose Claim is subject to an objection. Any
such Holder of a Claim may not receive its specified share of the estimated
Distributions described in this Disclosure Statement. Holders of Equity
Interests will receive no Distributions pursuant to the Amended Plan.
B. FACTORS AFFECTING THE VALUE OF THE SECURITIES TO BE ISSUED UNDER THE
--------------------------------------------------------------------
AMENDED PLAN
------------
REORGANIZED SOLUTIA MAY NOT BE ABLE TO ACHIEVE ITS PROJECTED FINANCIAL RESULTS
The financial projections set forth on Exhibit D to this Disclosure
Statement represent Solutia management's best estimate of Reorganized
Solutia's future financial performance based on currently known facts and
assumptions about Reorganized Solutia's future operations as well as the
United States and world economy in general and the industry segments in which
Solutia operates in particular. Reorganized Solutia's actual financial results
may differ significantly from the projections. Specifically, Reorganized
Solutia may not be able to achieve the projected revenues or cash flows upon
which the projections are based. Solutia may also encounter difficulties in
integrating acquired businesses and assets within its operations (including
Flexsys). If Reorganized Solutia does not achieve its projected financial
results or the anticipated benefits of certain acquisitions, the trading
prices of the New Common Stock may be negatively affected and Reorganized
Solutia may lack sufficient liquidity to continue operating as planned after
the Effective Date.
118
A LIQUID TRADING MARKET FOR THE NEW COMMON STOCK MAY NOT DEVELOP
Reorganized Solutia intends to apply to list the New Common Stock on
the New York Stock Exchange. However, Reorganized Solutia may not be able to
satisfy the requirements for listing the New Common Stock on the exchange.
Even if Reorganized Solutia is able to list the New Common Stock on the New
York Stock Exchange, a liquid trading market for the New Common Stock may not
develop. The liquidity of the trading market for the New Common Stock will
depend, among other things, upon the number of holders of New Common Stock,
Reorganized Solutia's financial performance and the number of research
analysts covering Reorganized Solutia, none of which can be determined or
predicted with certainty.
THE TRADING PRICE FOR THE NEW COMMON STOCK MAY BE DEPRESSED AFTER THE
EFFECTIVE DATE
Assuming confirmation of the Amended Plan by the Bankruptcy Court,
the New Common Stock will be issued to Holders of the Notes, Allowed General
Unsecured Claims and Monsanto. Following the Effective Date, many of these
Holders may seek to dispose of all or a portion of their New Common Stock,
which could cause the trading prices for the New Common Stock to be depressed.
THE ESTIMATED VALUATION OF REORGANIZED SOLUTIA MAY NOT BE REFLECTED IN THE
TRADING PRICES OF THE NEW COMMON STOCK FOLLOWING THE EFFECTIVE DATE
The estimated valuation of Reorganized Solutia set forth in Exhibit A
to this Disclosure Statement is based on certain generally accepted valuation
analyses and is not intended to represent the expected trading prices of the
New Common Stock following the Effective Date. This valuation is based on
numerous assumptions, many of which are beyond Solutia's control, including,
among other things, the successful reorganization of Solutia, an assumed
Effective Date of on or about June 30, 2007, Reorganized Solutia's ability to
achieve the financial results included in the projections, its ability to
maintain adequate liquidity to fund operations, and that the capital markets
remain consistent with current conditions.
CERTAIN HOLDERS OF CLAIMS MAY ACQUIRE A SUBSTANTIAL AMOUNT OF NEW COMMON STOCK
UPON CONSUMMATION OF THE AMENDED PLAN
During the Chapter 11 Cases, there is no limitation on the trading of
Claims. Accordingly, upon consummation of the Amended Plan, certain Holders of
Claims are likely to receive Distributions of the New Common Stock
representing a substantial amount of the outstanding shares of the New Common
Stock. If holders of a significant number of shares of the New Common Stock
were to act as a group, they could be in a position to control the outcome of
actions requiring stockholder approval, including, among other things,
election of directors. This concentration of ownership could also facilitate
or hinder a negotiated change of control of Reorganized Solutia and,
consequently, impact the value of the New Common Stock. Furthermore, the
possibility that one or more holders of a significant number of shares of New
Common Stock may sell all or a large portion of its shares of New Common Stock
in a short period of time may adversely affect the trading prices of the New
Common Stock.
119
THE NEW COMMON STOCK MAY BE ISSUED IN ODD LOTS
Certain Holders of Allowed Claims in Classes 12 and 13 may receive,
where necessary, odd lot distributions (less than 100 shares) of the New
Common Stock. Such Holders may find it more difficult to dispose of odd lots
in the marketplace and may face increased brokerage charges in connection with
any such disposition.
CERTAIN TAX CONSEQUENCES OF SOLUTIA'S PLAN RAISE UNSETTLED AND COMPLEX LEGAL
ISSUES AND INVOLVE VARIOUS FACTUAL DETERMINATIONS
Some of the material consequences of the Amended Plan regarding
United States federal income taxes are summarized in Article XIV of this
Disclosure Statement. Many of these tax issues raise unsettled and complex
legal issues, and also involve various factual determinations, such as
valuations, that raise additional uncertainties. No ruling from the United
States Internal Revenue Service ("IRS") has been or will be sought by Solutia
or Reorganized Solutia regarding the tax consequences described in this
Disclosure Statement. The IRS may challenge the various positions Solutia or
Reorganized Solutia has taken, or intends to take, with respect to its tax
treatment, and a court may sustain such a challenge or objection by the IRS.
For a more detailed discussion of risks relating to the specific positions
Solutia or Reorganized Solutia intends to take with respect to various tax
issues, please review Article XIV of this Disclosure Statement.
THE CHANGE OF CONTROL PRODUCED BY THE RESTRUCTURING OF SOLUTIA MAY RESULT IN A
LIMITATION ON OR LOSS OF THE NET OPERATING LOSSES
As further discussed in Section VII.H.1 of this Disclosure Statement,
the issuance under the Amended Plan of the New Common Stock, along with the
cancellation of existing Equity Interests through the Amended Plan, is
expected to cause an ownership change to occur with respect to the Reorganized
Debtors as of the Effective Date. As a result, Section 382 of the Internal
Revenue Code ("IRC") may apply to limit Reorganized Solutia's use of its
consolidated net operating losses after the Effective Date. Additionally,
Reorganized Solutia's ability to use any remaining capital loss carryforwards
and tax credits may be limited. The annual limitation imposed by the
particular provision of Section 382 of the IRC that Reorganized Solutia
expects to apply to its ownership change generally equals the product of (a)
the fair market value of the net equity value of Reorganized Solutia's stock
at the time of the ownership change, taking into account the increase in value
of the corporation as a result of the surrender or cancellation of creditor's
claims in the transaction (rather than the value without taking into account
such increases, as is the case under the general rule for non-bankruptcy
ownership changes) multiplied by (b) the long-term tax-exempt rate in effect
for the month in which the ownership change occurs. The long-term tax-exempt
rate is published monthly by the IRS and is intended to reflect current
interest rates on long-term tax-exempt debt obligations. Accordingly, under
this rule the Section 382 limitation would generally reflect the increase in
the value of Reorganized Solutia's stock resulting from the conversion of debt
to equity in the proceeding. Section 383 of the IRC applies a similar
limitation to a capital loss carryforward and tax credits. Although it is
impossible to predict with absolute certainty the net equity value of
Reorganized Solutia immediately after the exchanges contemplated by the
Amended Plan, Reorganized Solutia's use of its net operating losses is
expected to be substantially limited after those exchanges.
120
REORGANIZED SOLUTIA'S CHARTER AND BYLAWS COULD DETER TAKEOVER ATTEMPTS THAT
SOME SHAREHOLDERS MAY CONSIDER DESIRABLE, WHICH COULD ADVERSELY AFFECT THE
PRICE OF THE NEW COMMON STOCK
Various provisions of Reorganized Solutia's New Certificate of
Incorporation and New Bylaws, and Delaware law, as well as a proposed
antitakeover rights plan, could make acquiring control of Reorganized Solutia
without the requisite support of its board of directors difficult for a third
party, even if the change of control would be beneficial to a recipient of the
New Common Stock. The existence of these provisions and/or the proposed
antitakeover rights plan could deprive certain recipients of the New Common
Stock of an opportunity to sell their shares of New Common Stock at a premium
over the prevailing market price. The potential inability of holders of New
Common Stock to obtain a control premium could, in certain instances, depress
the trading prices of New Common Stock.
REORGANIZED SOLUTIA WILL HAVE SIGNIFICANT INDEBTEDNESS UPON ITS EMERGENCE FROM
BANKRUPTCY
Upon emergence from bankruptcy, Reorganized Solutia will have a
significant amount of indebtedness. Specifically, Reorganized Solutia expects
to have an exit facility of up to $2.0 billion (including undrawn availability
on the revolving loan), including some combination of institutional term
loans, a revolving loan, a letter of credit facility, high yield bonds or
second lien loans. The significant indebtedness that Reorganized Solutia will
have upon its emergence from bankruptcy could have important consequences,
including the following:
o Reorganized Solutia will have to dedicate a significant portion of
its cash flow to making interest and principal payments on its
indebtedness, thereby reducing the availability of its cash flow
to fund working capital, capital expenditures, acquisitions or
other general corporate purposes.
o The post-emergence levels of indebtedness may make Reorganized
Solutia less attractive to potential acquirors or acquisition
targets.
o The post-emergence levels of indebtedness may limit Reorganized
Solutia's flexibility to adjust to changing business and market
conditions, and make Reorganized Solutia more vulnerable to a
downturn in general economic conditions as compared to competitors
that may be less leveraged.
o As described in more detail below, the documents providing for
Reorganized Solutia's post-emergence indebtedness will contain
restrictive covenants that may limit Reorganized Solutia's
financing and operational flexibility.
o The post-emergence levels of indebtedness include outstanding
indebtedness that is unimpaired under the Amended Plan, as well as
new indebtedness incurred pursuant to the Exit Financing Facility
may make it more difficult for Reorganized Solutia to satisfy its
obligations with respect to its other outstanding indebtedness
that is unimpaired under the Amended Plan.
121
Furthermore, Reorganized Solutia's ability to satisfy its debt
service obligations will depend, among other things, upon its future operating
performance and ability to refinance indebtedness when necessary. These
factors depend partly on economic, financial, competitive and other factors
beyond Reorganized Solutia's control. Reorganized Solutia may not be able to
generate sufficient cash from operations to meet its debt service obligations
as well as fund necessary capital expenditures, pension funding obligations
and investments in research and development. In addition, if Reorganized
Solutia needs to refinance its debt, obtain additional financing or sell
assets or equity, it may not be able to do so on commercially reasonable
terms, if at all.
REORGANIZED SOLUTIA'S OPERATIONS MAY BE RESTRICTED BY THE TERMS OF ITS EXIT
FINANCING FACILITY
Solutia's Exit Financing Facility, as further described in Section
VII.H.2 of this Disclosure Statement, may include a number of significant
restrictive covenants. These covenants could impair Reorganized Solutia's
financing and operational flexibility and make it difficult for Reorganized
Solutia to react to market conditions and satisfy its ongoing capital needs
and unanticipated cash requirements. Specifically, such covenants may restrict
Reorganized Solutia's ability and, if applicable, the ability of its
subsidiaries to, among other things:
o incur additional debt;
o make certain investments;
o enter into certain types of transactions with affiliates;
o limit dividends or other payments by Reorganized Solutia's
restricted subsidiaries to Reorganized Solutia;
o use assets as security in other transactions;
o pay dividends on the New Common Stock or repurchase Reorganized
Solutia's equity interests;
o sell certain assets or merge with or into other companies;
o guarantee the debts of others;
o enter into new lines of business;
o make capital expenditures;
o prepay, redeem or exchange Reorganized Solutia's debt; and
o form any joint ventures or subsidiary investments.
122
In addition, the Exit Financing Facility may require Reorganized
Solutia to periodically meet various financial ratios and tests, including
maximum leverage, minimum net worth, and interest coverage levels. These
financial covenants and tests could limit Reorganized Solutia's ability to
react to market conditions or satisfy extraordinary capital needs and could
otherwise restrict Reorganized Solutia's financing and operations.
Reorganized Solutia's ability to comply with the covenants and other
terms of the Exit Financing Facility will depend on Reorganized Solutia's
future operating performance. If Reorganized Solutia fails to comply with such
covenants and terms, Reorganized Solutia would be required to obtain waivers
from its lenders to maintain compliance under the Exit Financing Facility. If
Reorganized Solutia is unable to obtain any necessary waivers and the debt
under the Exit Financing Facility is accelerated, it would have a material
adverse effect on Reorganized Solutia's financial condition and future
operating performance.
C. RISKS RELATED TO SOLUTIA'S BUSINESS AND INDUSTRY
------------------------------------------------
THE PRICES OF RAW MATERIALS AND ENERGY REQUIRED FOR SOLUTIA TO PRODUCE ITS
PRODUCTS ARE VOLATILE AND CANNOT ALWAYS BE PASSED ON TO CUSTOMERS
Solutia purchases large amounts of commodity raw materials, including
natural gas, propylene, cyclohexane and benzene. Temporary shortages of these
raw materials and energy may occasionally occur. In addition, Solutia
typically purchases major requirements for key raw materials under medium-term
contracts. Pricing under these contracts may fluctuate as a result of
unscheduled plant interruptions, United States and worldwide market conditions
and government regulation. Given Solutia's competitive markets, it is often
not possible to pass all of these increased costs on to Solutia's customers.
In addition, natural gas prices and other raw material and energy costs are
currently more than double the average ten-year levels. Elevated raw material
and energy costs could significantly reduce Reorganized Solutia's operating
margins in the future.
SOLUTIA OPERATES IN A HIGHLY COMPETITIVE INDUSTRY THAT INCLUDES COMPETITORS
WITH GREATER RESOURCES THAN SOLUTIA'S
The markets in which Reorganized Solutia will compete are highly
competitive. Competition in these markets is based on a number of factors,
such as price, product quality and service. Some of Reorganized Solutia's
competitors may have greater financial, technological and other resources than
Reorganized Solutia and may be better able to withstand changes in market
conditions. In addition, some of Reorganized Solutia's competitors may be able
to respond more quickly to new or emerging technologies and changes in
customer requirements than Reorganized Solutia. Consolidation of Reorganized
Solutia's competitors or customers may also adversely affect Reorganized
Solutia's businesses. Furthermore, global competition and customer demands for
efficiency will continue to make price increases difficult.
SOLUTIA OPERATES IN CYCLICAL BUSINESS SEGMENTS AND ITS FINANCIAL RESULTS ARE
LIKELY TO FLUCTUATE ACCORDINGLY
Solutia operates in cyclical business segments. Specifically, a
substantial portion of Solutia's sales are to customers involved, directly or
indirectly, in the housing and automotive
123
industries, both of which are, by their nature, cyclical industries. A
downturn in either or both of these industries would result in lower demand
for Reorganized Solutia's products among customers involved in those
industries and a reduced ability to pass on cost increases to those customers.
TURNOVER IN THE SENIOR MANAGEMENT TEAM AND LOSSES OF OTHER KEY PERSONNEL COULD
HAVE A SIGNIFICANT ADVERSE EFFECT ON SOLUTIA'S RESULTS OF OPERATIONS AND
ABILITY TO EMERGE FROM CHAPTER 11
The services of Solutia's senior management team, as well as other
key personnel, have been integral in Solutia's improving results during the
Chapter 11 Case and will be critical to the implementation of Reorganized
Solutia's business strategies going forward and the success of Reorganized
Solutia. If Solutia's emergence from the Chapter 11 Cases is delayed,
Solutia's financial results diminish, the terms of incentive compensation
programs are not adequate or any adverse events occur in the Chapter 11 Cases,
Solutia may have difficulty retaining current senior management and other key
personnel and be unable to hire qualified personnel to fill any resulting
vacancies, which could have a significant adverse effect on Solutia's results
of operations and ability to emerge from Chapter 11.
LEGAL PROCEEDINGS, INCLUDING PROCEEDINGS RELATED TO ENVIRONMENTAL OBLIGATIONS,
COULD IMPOSE SUBSTANTIAL COSTS ON REORGANIZED SOLUTIA
As a manufacturer of chemical-based materials, Solutia has been
subject to various lawsuits involving environmental, hazardous waste, personal
injury and product liability claims. As described in greater detail in Article
VI of this Disclosure Statement, Solutia is named in a number of legal
proceedings primarily relating to former operations, including claims for
personal injury and property damage arising out of releases of or alleged
exposure to materials that are classified as hazardous substances under
federal environmental law or alleged to be hazardous by plaintiffs. Adverse
judgments in these legal proceedings, or the filing of additional
environmental or other damage claims against Solutia, may have a negative
impact on Reorganized Solutia's future results of operations. Additionally,
administrative and legal costs associated with defending or settling large
claims, or large numbers of claims, could have a negative impact on
Reorganized Solutia's future results of operations. It is possible that the
Bankruptcy Court could disagree with Solutia's treatment of those Claims. It
is also possible that third parties, including the U.S. federal government,
state regulatory agencies, or others, may challenge the dischargeability of
these claims. If these litigation matters or Claims are not discharged as
expected by Solutia, or if the actual costs are materially greater than
estimates associated with those Claims, it would have a material adverse
effect on Reorganized Solutia's financial condition and future operating
performance.
Environmental Remediation Obligations
-------------------------------------
Under the Amended Plan, environmental remediation obligations and NRD
Claims associated with Covered Sites, other than Legacy Sites (as defined in
Relationship Agreement) will not be discharged. Solutia's management has
estimated the cost associated with the remediation of those sites. Actual cost
of remediation associated with Covered Sites may be affected by changes in the
regulatory environment, discovery of additional areas requiring
124
remediation, technological developments or limitations associated with
remediation, or other events beyond Reorganized Solutia's control. As a
result, actual remediation costs associated with the Covered Sites may be
materially greater than current estimates provide. If the actual costs are
materially greater than estimates associated with these remediation expenses,
it would have a material adverse effect on Solutia's financial condition and
future operating performance.
Other Litigation
----------------
Because of the size and nature of Solutia's business, Solutia is
party to numerous legal proceedings. Most of these legal proceedings have
arisen in the ordinary course of business and involve Claims for money
damages. Whether these Claims are or will be litigated in the Bankruptcy
Court, or in some other jurisdiction, depends upon the nature of the Claims.
Generally, if the debt associated with such Claims was incurred prior to the
Effective Date, the Claims will be treated as provided for under the Amended
Plan, depending upon the nature of the relief sought, regardless of whether
the Claim is resolved before or after Solutia's emergence from bankruptcy.
Claims arising from conduct occurring after the Effective Date, unless
provided for under the Amended Plan, are generally not dischargeable through
bankruptcy, and will be handled by Solutia in the ordinary course of business
after emergence. The proposed treatment of Claims arising from litigation
matters is described in Exhibit A to this Disclosure Statement. The Bankruptcy
Court could disagree with Solutia's treatment of those Claims. Additionally,
under the Amended Plan, Claims arising from certain litigation matters are not
expected to be discharged. Adverse results in litigation, newly filed Claims,
or other adverse developments in existing litigation may have a material
adverse effect on Reorganized Solutia's financial condition and future
operating performance.
With respect to the Solutia Pension Plan litigation described in
Section VI.B.2, it is not known what funding liabilities may be required of
Reorganized Solutia under ERISA, 26 U.S.C. Section 412, 29 U.S.C. Section 1082
and any other applicable law if a judgment is entered against the Solutia
Pension Plan, given that Solutia is the sponsor of the Solutia Pension Plan.
THE APPLICABILITY OF NUMEROUS ENVIRONMENTAL LAWS TO SOLUTIA'S MANUFACTURING
FACILITIES COULD CAUSE SOLUTIA TO INCUR MATERIAL COSTS AND LIABILITIES
Solutia is subject to extensive federal, state, local and foreign
environmental, safety and health laws and regulations concerning, among other
things, emissions to the air, discharges to land and water and the generation,
handling, treatment and disposal of hazardous waste and other materials. Under
certain environmental laws, Solutia can be held strictly liable for hazardous
substance contamination of any real property it has ever owned, operated or
used as a disposal site or for natural resource damages associated with such
contamination. Solutia is also required to maintain various environmental
permits and licenses, many of which require periodic modification and renewal.
Solutia's operations entail the risk of violations of those laws and
regulations, many of which provide for substantial fines and criminal
sanctions for violations.
In addition, these requirements and their enforcement may become more
stringent in the future. Non-compliance could subject Reorganized Solutia to
material liabilities, such as government fines, third-party lawsuits or the
suspension of non-compliant operations. Reorganized Solutia may also be
required to make significant site or operational modifications at
125
substantial cost. Future developments could also restrict or eliminate
Reorganized Solutia's ability to continue to manufacture certain products or
could require Reorganized Solutia to make modifications to its products.
At any given time, Solutia is involved in litigation, administrative
proceedings and investigations of various types in a number of jurisdictions
involving potential environmental liabilities, including clean-up costs
associated with hazardous waste disposal sites, natural resource damages,
property damages and personal injury. Reorganized Solutia may be required to
spend substantial sums to defend or settle these actions, to pay any fines
levied against it or satisfy any judgments or other rulings rendered against
it.
Liability under environmental laws relating to contaminated sites can
be imposed retroactively and on a joint and several basis. One liable party
could be held responsible for all costs at a site, regardless of fault,
percentage of contribution to the site or the legality of the original
disposal. Reorganized Solutia may also face liability for violations under
environmental laws occurring prior to the date of its acquisition of
properties subject thereto. Reorganized Solutia could incur significant costs,
including cleanup costs, natural resources damages, civil or criminal fines
and sanctions and third-party claims as a result of past or future violations
of, or liabilities under, environmental laws.
REORGANIZED SOLUTIA WILL HAVE SUBSTANTIAL ENVIRONMENTAL AND REGULATORY
COMPLIANCE COSTS
Due to the nature of its business, Solutia makes substantial
expenditures for environmental and regulatory compliance. For example, during
2006, Solutia spent approximately $9 million on capital projects for various
environmental matters, $60 million for the management of environmental
programs, including the operation and maintenance of facilities for
environmental control and $10 million for remediation activities. Monsanto
currently funds a number of the environmental remediation sites consistent
with the terms of the Amended Plan and the Relationship Agreement. However, if
the Amended Plan is not approved, Solutia could become responsible for some of
the sites previously funded by Monsanto and these unexpected expenses could
affect Solutia's results of operations and financial condition.
The substantial amounts that Reorganized Solutia may be required to
spend on environmental capital projects and programs could cause substantial
cash outlays by Reorganized Solutia and, accordingly, may limit Reorganized
Solutia's financial and operating flexibility. In addition, although Solutia
believes that it has correctly budgeted and, to the extent appropriate under
applicable accounting principles, reserved for these amounts, factors beyond
Reorganized Solutia's control may render these budgeted and reserved amounts
inadequate. These factors include changing governmental policies and
regulations, the commencement of new governmental proceedings or third party
litigation regarding environmental remediation, hazardous waste or personal or
property damage resulting from environmentally harmful activity, the discovery
of unknown conditions and unforeseen problems encountered in environmental
remediation programs.
In addition, as discussed above, under the terms of the Relationship
Agreement, Reorganized Solutia will share environmental remediation
obligations with Monsanto with
126
respect to the Shared Sites (as defined in the Relationship Agreement).
Although Reorganized Solutia will be responsible for performing certain
remediation efforts at the Shared Sites, a special environmental committee
established pursuant to the Relationship Agreement and to which Monsanto will
appoint a majority of members will supervise these efforts and set the budget
for their funding.
PROBLEMS ENCOUNTERED IN OPERATING ITS PRODUCTION FACILITIES COULD NEGATIVELY
IMPACT REORGANIZED SOLUTIA'S BUSINESS
Solutia's production facilities are subject to hazards associated
with the manufacture, handling, storage and transportation of chemical
materials and products, including leaks and ruptures, explosions, fires,
inclement weather and natural disasters, unscheduled down time and
environmental hazards. From time to time in the past, Solutia has had
incidents that have temporarily shut down or otherwise disrupted its
manufacturing, causing production delays and resulting in liability for
workplace injuries and fatalities. Solutia is dependent upon the continued
safe operation of its production facilities.
In addition, some of Solutia's products involve the manufacture or
handling of a variety of reactive, explosive and flammable materials. Use of
these products by Reorganized Solutia's customers, employees and contractors
could result in liability to Reorganized Solutia if an explosion, fire, spill
or other accident were to occur.
LABOR DISRUPTIONS WITH THE UNIONIZED PORTION OF SOLUTIA'S WORKFORCE COULD HAVE
A NEGATIVE EFFECT
As of December 31, 2006, approximately 14% of Solutia's U.S.
employees located in the performance products business segment were unionized.
They are represented by various labor unions with local agreements set to
expire between November 2007 and March 2010. While Solutia's management
believes that Solutia's relations with its employees are good, Reorganized
Solutia may not be able to negotiate these or other collective bargaining
agreements on the same or more favorable terms as the current agreements, or
at all, and without production interruptions, including labor stoppages. A
prolonged labor dispute, which could include a work stoppage, could impact
Solutia's ability to satisfy its customers' requirements and negatively affect
its financial condition.
SOLUTIA FACES CURRENCY AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES
Solutia generates revenue from export sales, as well as from
operations conducted outside the United States. For example, approximately 46
percent of consolidated sales in 2006 were made into markets outside the
United States, including Europe, Canada, Latin America and Asia. Approximately
69 percent of the sales of the Performance Products segment were made into
markets outside the United States. Operations outside the United States expose
Solutia to risks which could adversely affect its results of operations and
financial conditions including fluctuations in currency values, trade
restrictions, tariff and trade regulations, foreign tax laws, shipping delays,
and economic and political instability.
The functional currency of each of Solutia's non-United States
operations is generally the local currency. Exchange rates between some of
these currencies and U.S. dollars have
127
fluctuated significantly in recent years and may do so in the future. It is
possible that fluctuations in foreign exchange rates will have a negative
effect on Solutia's results of operations.
MANY OF SOLUTIA'S PRODUCTS AND MANUFACTURING PROCESSES ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGE AND REORGANIZED SOLUTIA'S BUSINESS WILL SUFFER IF
REORGANIZED SOLUTIA FAILS TO KEEP PACE
Many of Solutia's products (and their corresponding manufacturing
processes) participate in markets that are subject to rapid technological
change and new product introductions and enhancements. Reorganized Solutia
must continue to enhance its existing products and to develop and manufacture
new products with improved capabilities to continue to be a market leader.
Reorganized Solutia must also continue to make improvements in its
manufacturing processes and productivity to maintain its competitive position.
When Reorganized Solutia invests in new technologies, processes or production
facilities, it will face risks related to construction delays, cost over-runs
and unanticipated technical difficulties related to start-up. Reorganized
Solutia's inability to anticipate, respond to, capitalize on or utilize
changing technologies could have an adverse effect on its consolidated results
of operations, financial condition and cash flows in any given period.
IF SOLUTIA IS UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS, ITS SALES
AND FINANCIAL PERFORMANCE COULD BE ADVERSELY AFFECTED
Solutia owns a large number of patents that relate to a wide variety
of products and processes and has a substantial number of patent applications
pending. Solutia owns a considerable number of established trademarks in many
countries under which it markets its products. These patents and trademarks in
the aggregate are of material importance to Solutia's business and operations.
Reorganized Solutia's performance may depend in part on its ability to
establish, protect and enforce such intellectual property and to defend
against any claims of infringement, which involve complex legal, scientific
and factual questions and uncertainties.
In the future, Reorganized Solutia may have to rely on litigation to
enforce its intellectual property rights and contractual rights. In addition,
Reorganized Solutia may face claims of infringement that could interfere with
its ability to use technology or other intellectual property rights that are
material to its business operations. If litigation that Solutia or Reorganized
Solutia initiates is unsuccessful, Reorganized Solutia may not be able to
protect the value of some of its intellectual property. In the event a claim
of infringement against Reorganized Solutia is successful, Reorganized Solutia
may be required to pay royalties or license fees to continue to use technology
or other intellectual property rights that it has been using or it may be
unable to obtain necessary licenses from third parties at a reasonable cost or
within a reasonable period of time. If Reorganized Solutia is unable to obtain
licenses on reasonable terms, Reorganized Solutia may be forced to cease
selling or using any of its products that incorporate the challenged
intellectual property, or to redesign or, in the case of trademark claims,
rename its products to avoid infringing the intellectual property rights of
third parties, which may not be possible and may be time-consuming if
possible. Any litigation of this type, whether successful or unsuccessful,
could result in substantial costs to Reorganized Solutia and diversions of
some of Reorganized Solutia's resources. Reorganized Solutia's intellectual
property rights may not have
128
the value that Solutia believes them to have, which could result in a
competitive disadvantage or adversely affect Reorganized Solutia's business
and financial performance.
REORGANIZED SOLUTIA'S INSURANCE MAY BE INADEQUATE AND REORGANIZED SOLUTIA MAY
NOT BE ABLE TO OBTAIN INSURANCE IN THE FUTURE ON REASONABLE TERMS OR AT ALL
Solutia evaluates risk retention and insurance levels for product
liability, workplace health and safety, property damage and other potential
areas of risk. Solutia relies on third-party insurance to protect it from some
of these risks. Additionally, Solutia historically has relied upon
Owner-Controlled Insurance Programs ("OCIP") to satisfy certain regulatory
requirements for the maintenance of insurance, including (for example)
compliance with state laws mandating coverage for workers' compensation
exposure. Under the terms of these arrangements, Solutia is responsible for
paying the costs associated with all insurance claims, and engages the
services of insurance companies to provide claims-handling services. If
Reorganized Solutia becomes incapable of continuing to rely on the OCIP for
these exposures, Reorganized Solutia would be forced to consider alternative
arrangements. Reorganized Solutia may, however, incur losses beyond the
limits, or outside the coverage, of such insurance. In addition, the insurance
industry has become more selective in offering insurance, and insurance costs
have risen significantly in recent years. Reorganized Solutia may not be able
to obtain insurance in the future on reasonable terms or at all.
SIGNIFICANT PAYMENTS MAY BE REQUIRED TO MAINTAIN THE FUNDING OF SOLUTIA'S
DOMESTIC QUALIFIED PENSION PLAN
Solutia maintains a qualified Pension Plan under which certain of
Solutia's employees and retirees are entitled to receive benefits. Although
Solutia has frozen future benefit accruals under the U.S. Pension Plan,
significant liabilities still remain. To fund the Pension Plan, Solutia has
made significant contributions to the Pension Plan in 2006 amounting to
approximately $179 million and will have to fund more going forward. Solutia
may be unable to obtain financing to make these Pension Plan contributions. In
addition, even if financing for these contributions is obtained, the funding
obligations and the carrying costs of debt incurred to fund the obligations
could have a significant adverse effect on Solutia's results of operations.
In addition, Solutia is party to certain litigation with respect to
its domestic pension plan as more fully described in Article VI of this
Disclosure Statement. It is not known what funding liabilities may be required
of Solutia under the Employee Retirement Income Security Act (ERISA) 26 U.S.C.
Section 412, 29 U.S.C. Section 1082 and any other applicable law if a judgment
is entered against the Pension Plan in this litigation, given that Solutia is
the sponsor of the Pension Plan. If a final judgment is entered against the
Solutia Pension Plan, the liability resulting from such judgment could have a
material adverse effect on its financial results and continuing operations.
129
XII.
CONFIRMATION OF THE PLAN
------------------------
A. THE CONFIRMATION HEARING
------------------------
Section 1128(a) of the Bankruptcy Code requires the bankruptcy court,
after notice, to hold a hearing on confirmation of the plan of reorganization.
Section 1128(b) of the Bankruptcy Code provides that any party-in-interest may
object to confirmation of the plan of reorganization.
The Bankruptcy Court has scheduled the Confirmation Hearing for
[DATE], 2007 at [TIME] Prevailing Eastern Time before the Honorable Prudence
Carter Beatty, United States Bankruptcy Judge, in the United States Bankruptcy
Court for the Southern District of New York, located at Alexander Hamilton
Custom House, One Bowling Green, New York, New York 10004. The Confirmation
Hearing may be adjourned from time to time without further notice except for
an announcement of the adjourned date made at the Confirmation Hearing or any
adjournment thereof.
B. DEADLINE TO OBJECT TO CONFIRMATION
----------------------------------
Objections to the Bankruptcy Court's confirmation of the Amended Plan
must be filed and served at or before 4:00 p.m. Prevailing Eastern Time on
[DATE], 2007 in accordance with the Confirmation Hearing Notice that
accompanies this Disclosure Statement. UNLESS OBJECTIONS TO CONFIRMATION ARE
TIMELY SERVED AND FILED, THEY MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
C. REQUIREMENTS FOR CONFIRMATION OF THE PLAN
-----------------------------------------
Among the requirements for the confirmation of the Amended Plan are
that the Amended Plan (1) is accepted by all impaired Classes of Claims and
Equity Interests, or if rejected by an impaired Class, that the Amended Plan
"does not discriminate unfairly" and is "fair and equitable" as to such Class,
(2) is feasible, and (3) is in the "best interests" of Holders of Claims and
Equity Interests that are impaired under the Amended Plan.
1. REQUIREMENTS OF SECTION 1129(a) OF THE BANKRUPTCY CODE
------------------------------------------------------
The following requirements must be satisfied pursuant to section
1129(a) of the Bankruptcy Code before the Bankruptcy Court may confirm a plan
of reorganization:
o The plan complies with the applicable provisions of the Bankruptcy
Code.
o The proponents of the plan comply with the applicable provisions
of the Bankruptcy Code.
o The plan has been proposed in good faith and not by any means
forbidden by law.
o Any payment made or to be made by the proponent, by the debtor or
by a person issuing securities or acquiring property under a plan,
for services or for costs and
130
expenses in or in connection with the case, in connection with the
plan and incident to the case, has been approved by, or is subject
to the approval of, the Bankruptcy Court as reasonable.
o The proponent of the plan has disclosed the identity and
affiliations of any individual proposed to serve, after
confirmation of the plan, as a director, officer or voting trustee
of the debtor, an affiliate of the debtor participating in a joint
plan with the debtor or a successor to the debtor under the plan,
and the appointment to, or continuance in, such office of such
individual, is consistent with the interests of creditors and
equity security holders and with public policies.
o The proponent of the plan has disclosed the identity of any
insider (as defined in section 101 of the Bankruptcy Code) that
will be employed or retained by the reorganized debtor and the
nature of any compensation for such insider.
o With respect to each holder within an impaired class of claims or
equity interests --
o each such holder (a) has accepted the plan; or (b) will
receive or retain under the plan on account of such claim
or interest property of a value, as of the effective date
of the plan, that is not less than the amount that such
holder would so receive or retain if the debtor were
liquidated under chapter 7 of the Bankruptcy Code on such
date; or
o if section 1111(b)(2) of the Bankruptcy Code applies to
the claims of such class due to its election to retain a
lien, each holder of a claim of such class will receive or
retain under the plan on account of such claim property of
a value, as of the effective date of the plan, that is not
less than the value of such holder's interest in the
estate's interest in the property that secures such
claims.
o With respect to each class of claims or equity interests, such
class (i) has accepted the plan; or (ii) is not impaired under the
plan (subject to the "cramdown" provisions discussed below).
o Except to the extent that the holder of a particular claim has
agreed to a different treatment of such claim, the plan provides
that:
o with respect to a claim of a kind specified in sections
507(a)(1) or 507(a)(2) of the Bankruptcy Code, on the
effective date of the plan, the holder of the claim will
receive on account of such claim cash equal to the allowed
amount of such claim;
o with respect to a class of claim of the kind specified in
sections 507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6) or
507(3)(7) of the Bankruptcy Code, each holder of a claim
of such class will receive (A) if such class has accepted
the plan, deferred cash payments of a value, on the
effective date of the plan, equal to the allowed amount of
such claim; or (B) if such class has not
131
accepted the plan, cash on the effective date of the plan
equal to the allowed amount of such claim; and
o with respect to a priority tax claim of a kind specified
in section 507(a)(8) of the Bankruptcy Code, the holder of
such claim will receive on account of such claim deferred
cash payments, over a period not exceeding six years after
the date of assessment of such claim, of a value, as of
the effective date of the plan, equal to the allowed
amount of such claim.
o If a class of claims is impaired under the plan, at least one
class of claims that is impaired under the plan has accepted the
plan, determined without including any acceptance of the plan by
any "insider," as defined in section 101 of the Bankruptcy Code.
o Confirmation of the plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of
the debtor or any successor to the debtor under the plan, unless
such liquidation or reorganization is proposed in the plan.
o All fees payable under 28 U.S.C. Section 1930, as determined by
the Bankruptcy Court at the hearing on confirmation of the plan,
have been paid or the plan provides for the payment of all such
fees on the effective date of the plan.
o The plan provides for the continuation after its effective date of
payment of all retiree benefits, as that term is defined in
section 1114 of the Bankruptcy Code, at the level established
pursuant to subsection (e)(i)(B) or (g) of section 1114 of the
Bankruptcy Code, at any time prior to confirmation of the plan,
for the duration of the period the debtor has obligated itself to
provide such benefits.
The Debtors believe that the Amended Plan meets all the applicable
requirements of section 1129(a) of the Bankruptcy Code other than those
pertaining to disclosures to be made between the date hereof and the
Confirmation Date and to voting, which has not yet taken place.
2. BEST INTERESTS OF CREDITORS
---------------------------
Notwithstanding acceptance of the plan of reorganization by each
impaired class, to confirm the plan of reorganization, the Bankruptcy Court
must determine that it is in the best interests of each holder of a claim or
interest in any such impaired class that has not voted to accept the plan of
reorganization. Accordingly, if an impaired class does not unanimously accept
the plan of reorganization, the "best interests" test requires that the
Bankruptcy Court find that the plan of reorganization provides to each member
of such impaired class a recovery on account of the member's claim or equity
interest that has a value, as of the effective date of the plan of
reorganization, at least equal to the value of the distribution that each such
member would receive if the debtors were liquidated under chapter 7 of the
Bankruptcy Code on such date.
To estimate what members of each impaired class of claims would
receive if the debtors were liquidated under chapter 7 of the Bankruptcy Code,
the Bankruptcy Court must first determine the aggregate dollar amount that
would be available if each of the chapter 11 cases
132
were converted to a chapter 7 case under the Bankruptcy Code and each of the
respective debtor's assets were liquidated by a chapter 7 trustee (the
"Liquidation Value"). The Liquidation Value of a debtor would consist of the
net proceeds from the disposition of the assets of the debtor, augmented by
any cash held by the debtor.
The Liquidation Value available to holders of general unsecured
claims or equity interests would be reduced by, among other things: (a) the
claims of secured creditors to the extent of the value of their collateral;
(b) the costs, fees and expenses of the liquidation, as well as other
administrative expenses of the debtors' chapter 7 cases; (c) unpaid
administrative expense claims of the chapter 11 cases; and (d) priority claims
and priority tax claims. The debtors' costs of liquidation in chapter 7 cases
would include the compensation of a chapter 7 trustee, as well as of counsel
and other professionals retained by such trustee, asset disposition expenses,
applicable taxes, litigation costs, claims arising from the operation of the
debtors during the chapter 7 cases, and all unpaid administrative expense
claims incurred by the debtors during the chapter 11 cases that are allowed in
the chapter 7 cases. The liquidation itself would trigger certain priority
claims, such as claims for severance pay, and would likely accelerate the
payment of other priority claims and priority tax claims that would otherwise
be payable in the ordinary course of business. These priority claims and
priority tax claims would be paid in full out of the net liquidation proceeds,
after payment of secured claims, before the balance would be made available to
pay other claims or to make any distribution in respect of equity interests.
Based on the liquidation analyses set forth in Exhibit F of this
Disclosure Statement, the Debtors believe that Holders of Claims will receive
equal or greater value as of the Effective Date under the Amended Plan than
such Holders would receive in a chapter 7 liquidation. Moreover, in an actual
liquidation of the Debtors, distributions to Holders of Claims would be made
substantially later than the Effective Date designated in the Amended Plan.
This delay would materially reduce the amount determined on a present value
basis available for distribution to Holders of General Unsecured Claims. The
hypothetical chapter 7 liquidations of the Debtors, for purposes of
determination of the Debtors' Liquidation Value, are assumed to commence on
June 30, 2007.(41)
In summary, the Debtors and their management believe that chapter 7
liquidations of the Debtors would result in substantial diminution in the
value to be realized by Holders of General Unsecured Claims entitled to
distribution, as compared to the distributions contemplated under the Amended
Plan, because of, among other factors:
o the increased cost and expenses of liquidation under chapter 7
arising from fees payable to the chapter 7 trustee and the
attorneys and other professional advisors to such trustee;
o additional expenses and Claims, some of which would be entitled to
priority and which would be generated during the liquidation and
from the rejection of Unexpired
<FN>
- -------------------------
(41) A liquidation analysis was included as an exhibit to the Original
Disclosure Statement filed on February 14, 2006. A revised exhibit,
updated to reflect changes to the liquidation analysis since February 14,
2006, will be filed with the Bankruptcy Court and provided to parties in
interest prior to the Disclosure Statement Hearing.
133
Leases and Executory Contracts in connection with the cessation
of the Debtors' operations;
o the erosion of the value of the Debtors' assets in the context of
an expedited liquidation required under chapter 7 and the "forced
sale" atmosphere that would prevail;
o the adverse effects on the salability of portions of the business
resulting from the possible departure of key employees and the
attendant loss of customers and vendors;
o the cost and expense attributable to the time value of money
resulting from a potentially more protracted chapter 7 proceeding
than the estimated length of the Chapter 11 Cases; and
o the application of the rule of absolute priority under the
Bankruptcy Code to distributions made in a chapter 7 liquidation.
Consequently, the Debtors and their management believe that confirmation of
the Amended Plan will provide a substantially greater return to Holders of
Claims than would chapter 7 liquidations.
3. ACCEPTANCE
----------
Section 1126(c) of the Bankruptcy Code provides that a class of
claims has accepted a plan of reorganization if such plan has been accepted by
creditors that hold at least two-thirds in amount and more than one-half in
number of the allowed claims of such class.
4. FEASIBILITY
-----------
Section 1129(a)(11) of the Bankruptcy Code requires that confirmation
of the plan of reorganization is not likely to be followed by the liquidation,
or the need for further financial reorganization of the debtors, or any
successor to the debtors (unless such liquidation or reorganization is
proposed in the plan of reorganization).
To determine whether the Amended Plan meets this feasibility
requirement, the Debtors have analyzed their ability to meet their respective
obligations under the Amended Plan. As part of this analysis, the Debtors have
prepared the Projections, as such term is defined in Article X below. Based
upon the Projections, the Debtors believe that Reorganized Solutia will be a
viable operation following the Chapter 11 Cases, and that the Amended Plan
will meet the feasibility requirements of the Bankruptcy Code.
5. REQUIREMENTS OF SECTION 1129(b) OF THE BANKRUPTCY CODE
------------------------------------------------------
The Bankruptcy Code permits confirmation of a plan of reorganization
even if it is not accepted by each impaired class so long as (a) the plan of
reorganization otherwise satisfies the requirements for confirmation, (b) at
least one impaired class of claims has accepted the plan of reorganization
without taking into consideration the votes of any insiders in such class, and
(c) the plan of reorganization is "fair and equitable" and does not
"discriminate unfairly" as to
134
any impaired class that has not accepted such plan. These so-called "cramdown"
provisions are set forth in section 1129(b) of the Bankruptcy Code.
(a) "Fair and Equitable"
The Bankruptcy Code establishes different "cramdown" tests for
determining whether a plan is "fair and equitable" to dissenting impaired
classes of secured creditors, unsecured creditors and equity interest holders
as follows:
(b) Secured Creditors
A plan of reorganization is fair and equitable as to an impaired
class of secured claims that rejects the plan if the plan provides: (i) that
each of the holders of the secured claims included in the rejecting class (A)
retains the liens securing its claim to the extent of the allowed amount of
such claim, to the extent of the allowed amount of such claims, whether the
property subject to those liens is retained by the debtor or transferred to
another entity, and (B) receives on account of its secured claim deferred cash
payments having a present value, as of the effective date of the plan of
reorganization, at least equal to the value of such holder's interest in the
estate's interest in such property; (ii) that each of the holders of the
secured claims included in the rejecting class realizes the "indubitable
equivalent" of its allowed secured claim; or (iii) for the sale, subject to
section 363(k) of the Bankruptcy Code, of any property that is subject to the
liens securing the claims included in the rejecting class, free and clear of
such liens, with such liens to attach to the proceeds of the sale and the
treatment of such liens on proceeds in accordance with clause (i) or (ii) of
this paragraph.
(c) Unsecured Creditors
A plan of reorganization is fair and equitable as to an impaired
class of unsecured claims that rejects the plan if the plan provides that: (i)
each holder of a claim included in the rejecting class receives or retains
under the plan property of a value, as of the effective date of the plan of
reorganization, equal to the amount of its allowed claim; or (ii) the holders
of claims and equity interests that are junior to the claims of the rejecting
class will not receive or retain any property under the plan of reorganization
on account of such junior claims or interests.
(d) Holders of Equity Interests
A plan of reorganization is fair and equitable as to an impaired
class of equity interests that rejects the plan if the plan provides that: (i)
each holder of an equity interest included in the rejecting class receives or
retains under the plan property of a value, as of the effective date of the
plan of reorganization, equal to the greatest of the allowed amount of (A) any
fixed liquidation preference to which such holder is entitled, (B) the fixed
redemption price to which such holder is entitled, or (C) the value of the
equity interest; or (ii) the holder of any equity interest that is junior to
the equity interests of the rejecting class will not receive or retain any
property under the plan of reorganization on account of such junior interest.
The Debtors believe the Amended Plan is fair and equitable as to
Holders of Claims or Interests in Classes that vote to reject the Amended
Plan, or that are deemed to reject the Amended Plan because the Amended Plan
provides that their Allowed Claims or Interests will be
135
either unimpaired, or they will receive their "absolute priority" entitlements
under the Bankruptcy Code. The Debtors believe the Amended Plan is fair and
equitable as to Holders of Unsecured Claims and Equity Interests because
Holders of Claims and Equity Interests junior to Unsecured Claims will not
receive or retain any property under the Amended Plan on account of such
Claims or Equity Interests, and there are no Classes junior to the Holders of
Equity Interests.
(e) "Unfair Discrimination"
A plan of reorganization does not "discriminate unfairly" if a
dissenting class is treated substantially equally to other classes similarly
situated and no such class receives more than it is legally entitled to
receive for its claims or equity interests.
The Debtors do not believe that the Amended Plan discriminates
unfairly against any impaired Class of Claims or Equity Interests. The Debtors
believe that the Amended Plan and the treatment of all Classes of Claims and
Equity Interests under the Amended Plan satisfy the foregoing requirements for
nonconsensual confirmation of the Amended Plan.
D. VALUATION OF REORGANIZED SOLUTIA
--------------------------------
In conjunction with formulating the Amended Plan, the Debtors
determined that it was necessary to estimate the post-confirmation going
concern value of Reorganized Solutia. Accordingly, such valuation is set forth
in Exhibit E attached hereto.
E. IDENTITY OF INSIDERS
--------------------
Within ten days of the Voting Deadline, or as soon thereafter as is
practicable, Solutia will file with the Bankruptcy Court a list of proposed
directors of Reorganized Solutia, which list shall set forth the identity of
any Insiders proposed to serve as officers or directors of Reorganized
Solutia.
F. EFFECT OF CONFIRMATION OF THE PLAN
----------------------------------
1. TERM OF BANKRUPTCY INJUNCTION OR STAYS
--------------------------------------
All injunctions or stays provided for in the Chapter 11 Cases
pursuant to sections 105 and/or 362 of the Bankruptcy Code or otherwise and in
effect on the Confirmation Date, shall remain in full force and effect until
the Effective Date. Subject to the occurrence of the Effective Date, the entry
of the Confirmation Order shall permanently enjoin all Persons, including
Pharmacia and Monsanto, that have held, currently hold or may hold a Claim,
including a Legacy Claim, against or an Equity Interest in the Debtors from
taking any of the following actions based on such Claim or Equity Interest,
whether directly, indirectly, derivatively, contractually, statutorily or
otherwise, other than Pharmacia's and/or Monsanto's right to enforce the terms
of the Amended Plan, the Relationship Agreement or the Plan Documents: (a)
commencing, conducting or continuing in any manner, directly or indirectly,
any suit, action or other proceeding of any kind against any or all of the
Debtors or the Reorganized Debtors, or their respective property or assets;
(b) enforcing, levying, attaching, collecting or otherwise recovering in any
manner or by any means, whether directly or indirectly, any judgment, award,
136
decree or order against any or all of the Debtors, the Reorganized Debtors or
their respective property or assets; (c) creating, perfecting or enforcing in
any manner, directly or indirectly, any Lien against any or all of the
Debtors, the Reorganized Debtors or their respective property or assets; (d)
exercising any setoff, right of subrogation or recoupment of any kind,
directly or indirectly, against any debt, liability or obligation due to the
Debtors, the Reorganized Debtors or their respective property; or (e)
proceeding in any manner in any place whatsoever that does not conform to or
comply with or is inconsistent with the provisions of the Amended Plan;
provided, however, that the terms of this injunction shall not prevent the
- -------- -------
Reorganized Debtors, Monsanto, Pharmacia or, unless the Creditors' Committee
has been dissolved, the Creditors' Committee, from enforcing the terms of the
Global Settlement, this Plan and the Plan Documents or any rights arising
after the Confirmation Date.
2. PRESERVATION OF AVOIDANCE ACTIONS
---------------------------------
On and after the Effective Date, any and all Avoidance Actions (other
than the Avoidance Action against Monsanto and Pharmacia, which shall be
resolved pursuant to the Global Settlement) shall be preserved and retained by
the Reorganized Debtors, which shall have the exclusive right to enforce,
settle and prosecute any such Avoidance Actions. Reorganized Solutia may
pursue, abandon, settle or release any or all retained Avoidance Actions, as
it deems appropriate, subject to the reasonable consent of Monsanto and the
Creditors' Committee and Bankruptcy Court approval. Any recovery received on
account of an Avoidance Action may be retained by the Reorganized Debtors.
Reorganized Solutia may offset any claim supporting an Avoidance Action
against any payment due to any Holder of a Claim under the Amended Plan. In
addition, if a Distribution is made in error, the Reorganized Debtors can
bring an action pursuant to section 502(d) of the Bankruptcy Code to recoup
such Distribution.
3. DISCHARGE OF CLAIMS AND TERMINATION OF EQUITY INTERESTS
-------------------------------------------------------
Except as provided in the Amended Plan, the Plan Documents or the
Confirmation Order, pursuant to section 1141(d) of the Bankruptcy Code, (1)
the rights afforded under the Amended Plan and the treatment of all Claims,
including the Legacy Site Claims, and Equity Interests shall be in exchange
for and in complete satisfaction, discharge and release of such Claims and
Equity Interests of any nature whatsoever, including any interest accrued on
such Claims from and after the Petition Date, against any Debtor or any of the
Debtors' assets or properties, (2) on the Effective Date, all such Claims and
Equity Interests in, any Debtor shall be satisfied, discharged and released in
full and (3) all persons and entities shall be precluded from asserting
against the Reorganized Debtors and their respective successors or their
assets or properties any other or further such Claims or Equity Interests
based upon any act or omission, transaction or other activity of any kind or
nature that occurred prior to the Effective Date; provided, however, that the
-------- -------
Reorganized Debtors shall not receive a discharge from Tort Claims, NRD Claims
or any Environmental Liability or Environmental Liability Costs related to the
Retained Sites or the Shared Sites.
137
XIII. SECTION 1145 EXEMPTION FOR OFFER AND SALE OF THE NEW COMMON STOCK
-----------------------------------------------------------------
UNDER THE PLAN
--------------
In reliance upon section 1145 of the Bankruptcy Code, the offer and
issuance of New Common Stock and the Rights will be exempt from the
registration requirements of the Securities Act and equivalent provisions in
state securities laws except as set forth below.
Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale
of securities under a plan of reorganization from registration under Section 5
of the Securities Act and state laws if three principal requirements are
satisfied: (i) the securities must be offered and sold under a plan of
reorganization and must be securities of the debtor, of an affiliate
participating in a joint plan with the debtor, or of a successor to the debtor
under the plan; (ii) the recipients of the securities must hold claims against
or equity interests in the debtor; and (iii) the securities must be issued in
exchange (or principally in exchange) for the recipient's claims against or
equity interests in the debtor. The Debtors believe that the offer and sale of
the New Common Stock and the Rights (other than to Monsanto) under the Plan
satisfy the requirements of section 1145(a)(1) of the Bankruptcy Code and are,
therefore, exempt from registration under the Securities Act and state
securities laws.
Section 1145(a)(2) of the Bankruptcy Code also exempts from such
registration requirements offers of securities through warrants and similar
rights distributed pursuant to the exemption set forth in section 1145(a)(1).
Since the Debtors believe that the Rights will be issued in accordance with
section 1145(a)(1), the Debtors believe that New Common Stock issuable upon
the exercise of Rights to persons who are not underwriters within section 1145
of the Bankruptcy Code also will be exempt from registration under the
Securities Act and state securities laws pursuant to section 1145(a)(2) of the
Bankruptcy Code.
To the extent that the New Common Stock is issued under the Plan
(including pursuant to the exercise of Rights issued under the Plan) and is
covered by section 1145(a)(1) or section 1145(a)(2) of the Bankruptcy Code, it
may be resold by the holders thereof without registration unless, as more
fully described below, the holder is an "underwriter" with respect to such
securities. Generally, section 1145(b)(1) of the Bankruptcy Code defines an
"underwriter" as any person who: (i) purchases a claim against, an interest
in, or a claim for an administrative expense against the debtor, if such
purchase is with a view to distributing any security received in exchange for
such a claim or interest; (ii) offers to sell securities offered under a plan
for the holders of such securities; (iii) offers to buy such securities from
the holders of such securities, if the offer to buy is: (A) with a view to
distributing such securities; and (B) under an agreement made in connection
with the plan, the consummation of the plan, or with the offer or sale of
securities under the plan; or (iv) is an "issuer" with respect to the
securities, as the term "issuer" is defined in Section 2(a)(11) of the
Securities Act.
Under Section 2(a)(11) of the Securities Act, an "issuer" includes
any person directly or indirectly controlling or controlled by the issuer, or
any person under direct or indirect common control of the issuer. "Control"
(as defined in Rule 405 under the Securities Act) means the possession, direct
or indirect, of the power to direct or cause the direction of the management
and policies of a person, whether through the ownership of voting securities,
by contract, or otherwise.
138
Accordingly, an officer or director or a controlling stockholder of a
reorganized debtor or its successor under a plan of reorganization may be
deemed to be a "control person" of such debtor or successor. To the extent
that Persons who receive New Common Stock pursuant to the Plan are deemed to
be "underwriters" as defined in section 1145(b) of the Bankruptcy Code,
resales by such Persons would not be exempted by section 1145 of the
Bankruptcy Code from registration under the Securities Act or other applicable
law. Such Persons would, however, be permitted to sell such New Common Stock
or other securities without registration if they are able to comply with the
provisions of Rule 144 under the Securities Act. These rules permit the public
sale of securities received by such Person if current information regarding
the issuer is publicly available and if volume limitations and certain other
conditions are met. Any person who is an "underwriter" but not an "issuer"
with respect to an issue of securities is, however, entitled to engage in
exempt "ordinary trading transactions" within the meaning of section 1145(b)
of the Bankruptcy Code.
Whether or not any particular person would be deemed to be an
"underwriter" with respect to the New Common Stock to be issued pursuant to
the Plan would depend upon various facts and circumstances applicable to that
person. Accordingly, the Debtors express no view as to whether any particular
person receiving New Common Stock under the Plan would be an "underwriter"
with respect to such New Common Stock.
To the extent that persons deemed to be "underwriters" receive New
Common Stock, pursuant to the Plan (the "Restricted Holders"), resales by
Restricted Holders would not be exempted by section 1145 of the Bankruptcy
Code from registration under the Securities Act or other applicable law.
Restricted Holders may, however, be able, at a future time and under certain
conditions described below, to sell securities without registration pursuant
to the resale provisions of Rule 144 under the Securities Act.
Under certain circumstances, holders of New Common Stock deemed to be
"underwriters" may be entitled to resell their securities pursuant to the
limited safe harbor resale provisions of Rule 144 of the Securities Act, to
the extent available, and in compliance with applicable state and foreign
securities laws. Generally, Rule 144 of the Securities Act provides that
persons who are affiliates of an issuer who resell securities will not be
deemed to be underwriters if certain conditions are met. These conditions
include the requirement that current public information with respect to the
issuer be available, a limitation as to the amount of securities that may be
sold in any three-month period, the requirement that the securities be sold in
a "brokers transaction" or in a transaction directly with a "market maker" and
that notice of the resale be filed with the SEC. The Debtors cannot assure,
however, that adequate current public information will exist with respect to
any issuer of New Common Stock and, therefore, that the safe harbor provisions
of Rule 144 of the Securities Act will be available.
Pursuant to the Plan, certificates evidencing shares of New Common
Stock, received by Restricted Holders or by a holder that the Debtors
determine may be an underwriter within the meaning of section 1145 of the
Bankruptcy Code may bear a legend substantially in the form below:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE
139
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD,
OFFERED FOR SALE OR OTHERWISE TRANSFERRED UNLESS REGISTERED
OR QUALIFIED UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR UNLESS THE COMPANY AND THE COMPANY'S TRANSFER AGENT
RECEIVE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT
THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED.
Any person or entity entitled to receive shares of New Common Stock
who Reorganized Solutia determines to be a statutory underwriter that would
otherwise receive legended securities as provided above, may instead receive
certificates evidencing New Common Stock without such legend if, prior to the
distribution of such securities, such person or entity delivers to Reorganized
Solutia, (i) an opinion of counsel reasonably satisfactory to Reorganized
Solutia to the effect that the shares of New Common Stock to be received by
such person or entity are not subject to the restrictions applicable to
"underwriters" under section 1145 of the Bankruptcy Code and may be sold
without registration in a single transaction under the Securities Act and (ii)
a certification that such person or entity is not an "underwriter" within the
meaning of section 1145 of the Bankruptcy Code.
Any holder of a certificate evidencing shares of New Common Stock
bearing such legend may present such certificate to the transfer agent for the
shares of New Common Stock in exchange for one or more new certificates not
bearing such legend or for transfer to a new holder without such legend at
such time as (i) such securities are sold pursuant to an effective
registration statement under the Securities Act, or (ii) such holder delivers
to the issuer of such securities an opinion of counsel reasonably satisfactory
to Reorganized Solutia to the effect that such securities are no longer
subject to the restrictions applicable to "underwriters" under section 1145 of
the Bankruptcy Code or (iii) such holder delivers to Reorganized Solutia an
opinion of counsel reasonably satisfactory to Reorganized Solutia to the
effect that (x) such securities are no longer subject to the restrictions
under the Securities Act or (y) such transfer is exempt from registration
under the Securities Act, in which event the certificate issued to the
transferee shall not bear such legend.
Upon confirmation of the Plan, Reorganized Solutia will enter into a
registration rights agreement with certain Persons who may, as a result of
their ownership of New Common Stock, be Restricted Holders, including
Monsanto. Pursuant to the terms of these registration rights agreements
Monsanto and others will be given the right to request, among other things,
Reorganized Solutia to file a registration statement with the SEC to allow
these Restricted Holders to sell their New Common Stock without any volume
limitations.
GIVEN THE COMPLEX AND SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A
PARTICULAR HOLDER MAY BE AN UNDERWRITER, THE DEBTORS MAKE NO REPRESENTATION
CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN THE NEW COMMON STOCK. THE
DEBTORS RECOMMEND THAT
140
POTENTIAL RECIPIENTS OF THE NEW COMMON STOCK CONSULT THEIR OWN COUNSEL
CONCERNING WHETHER THEY MAY FREELY TRADE THE NEW COMMON STOCK IN COMPLIANCE
WITH THE SECURITIES ACT, THE EXCHANGE ACT OR SIMILAR FEDERAL, STATE, LOCAL OR
FOREIGN LAWS.
XIV. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE AMENDED PLAN
----------------------------------------------------------------
The following discussion is a summary of certain U.S. federal income
tax consequences of the consummation of the Plan to Holders of Claims, Equity
Interests and the Debtors. This summary is based on the IRC, the U.S. Treasury
Regulations promulgated thereunder, judicial authorities, published
administrative positions of the IRS and other applicable authorities, all as
in effect on the date of this Disclosure Statement and all of which are
subject to change or differing interpretations, possibly with retroactive
effect. No rulings or determinations of the IRS or any other taxing
authorities have been sought or obtained with respect to the tax consequences
discussed herein, and the discussion below is not binding upon the IRS or the
courts. No assurance can be given that the IRS would not assert, or that a
court would not sustain, a different position than any position discussed
herein.
This discussion does not apply to Holders of Claims and Equity
Interests that are not "U.S. persons" (as such phrase is defined in the IRC)
and does not purport to address all aspects of U.S. federal income taxation
that may be relevant to the Debtors or to such Holders in light of their
individual circumstances. This discussion does not address tax issues with
respect to such Holders subject to special treatment under the U.S. federal
income tax laws (including, for example, banks, governmental authorities or
agencies, pass-through entities, dealers and traders in securities, insurance
companies, financial institutions, tax-exempt organizations, small business
investment companies and regulated investment companies). No aspect of state,
local, estate, gift, or non-U.S. taxation is addressed.
ACCORDINGLY, THE FOLLOWING SUMMARY OF CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A
SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL
CIRCUMSTANCES PERTAINING TO A HOLDER OF AN ALLOWED CLAIM. ALL HOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE U.S. FEDERAL, STATE, LOCAL
AND NON-UNITED STATES TAX CONSEQUENCES OF THE PLAN.
IRS CIRCULAR 230 DISCLOSURE: TO ENSURE COMPLIANCE WITH REQUIREMENTS
IMPOSED BY THE IRS, ANY TAX ADVICE CONTAINED IN THIS DISCLOSURE STATEMENT
(INCLUDING ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT
BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING TAX-RELATED PENALTIES
UNDER THE IRC. TAX ADVICE CONTAINED IN THIS DISCLOSURE STATEMENT (INCLUDING
ANY ATTACHMENTS) IS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE
TRANSACTIONS OR MATTERS ADDRESSED BY THE DISCLOSURE STATEMENT. EACH TAXPAYER
SHOULD SEEK ADVICE BASED
141
ON THE TAXPAYER'S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
1. CONSEQUENCES TO HOLDERS OF CLAIMS AND EQUITY INTERESTS
---------------------------------------------------------
(a) Consequences to Holders of Secured Claims
The following discussion assumes that each Holder of an Allowed
Secured Claim holds such claim as a "capital asset" within the meaning of
Section 1221 of the IRC. Pursuant to the Plan, each Allowed Secured Claim, at
the election of the applicable Debtor, may be (i) Reinstated, (ii) paid in
full in Cash (including post-petition interest), (iii) satisfied by the
applicable Debtor's surrender of the collateral securing such Allowed Secured
Claim, (iv) offset against, and to the extent of, the applicable Debtor's
claims against the Holder or (v) otherwise rendered unimpaired. If an Allowed
Secured Claim is Reinstated, the Holder of such Claim should not recognize
gain or loss except to the extent collateral securing such Claim is changed,
and the change in collateral constitutes a "significant modification" of the
Allowed Secured Claim within the meaning of Treasury Regulations promulgated
under Section 1001 of the IRC. If an Allowed Secured Claim is paid in full in
Cash, the Holder should recognize capital gain or loss (which capital gain or
loss would be long-term capital gain or loss to the extent that the Holder has
held the debt instrument underlying its claim for more than one year) in an
amount equal to the amount of Cash received over the Holder's adjusted basis
in the debt instruments underlying its Allowed Secured Claim. To the extent
that a portion of the Cash received represents accrued but unpaid interest
that the Holder has not already taken into income, the Holder may recognize
ordinary interest income. See "Accrued Interest" below.
If a Holder of an Allowed Secured Claim exchanges its Claim for the
collateral securing such Claim, or for Cash in an amount equal to the proceeds
actually realized from the sale of such collateral, the exchange should be
treated as a taxable exchange under Section 1001 of the IRC. The Holder should
recognize capital gain or loss (which capital gain or loss would be long-term
capital gain or loss if the Holder has held the debt instrument underlying its
Claim for more than one year) equal to the difference between (i) the fair
market value of the collateral received (or, as the case may be, the amount of
Cash received from the sale of such collateral), and (ii) the Holder's
adjusted tax basis in the debt instrument constituting its Claim. To the
extent that a portion of the collateral received (or, as the case may be, the
amount of Cash received from the sale of such collateral) in the exchange is
allocable to accrued interest that has not already been taken into income by
the Holder, the Holder may recognize ordinary interest income. See "Accrued
Interest," below. If, on the Effective Date, the Holder receives the
collateral (rather than Cash) in exchange for its Claim, the Holder's tax
basis in the collateral should be equal to the fair market value of the
collateral on the Effective Date, and the Holder's holding period in the
collateral should begin on the day following the Effective Date.
(b) Consequences to Holders of Senior Secured Note Claims
The following discussion assumes that each Holder of an Allowed
Senior Secured Note Claim holds such claim as a "capital asset" within the
meaning of Section 1221 of the IRC. Pursuant to the Plan, each Allowed Senior
Secured Note Claim will be paid in Cash in the amount of the Allowed Senior
Secured Note Claims. The satisfaction of an Allowed Senior
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Secured Note Claim for Cash should be treated as a taxable exchange under
Section 1001 of the IRC. The Holder should recognize capital gain or loss
(which capital gain or loss would be long-term capital gain or loss if the
Holder has held the debt instrument underlying its Claim for more than one
year) equal to the difference between (x) the amount of Cash received and (y)
the Holder's adjusted tax basis in the debt instrument underlying its Claim.
To the extent that the Cash received in the exchange is allocable to accrued
interest that has not already been taken into income by the Holder, the Holder
may recognize ordinary interest income. See "Accrued Interest" below.
(c) Consequences to Holders of Noteholder Claims and General
Unsecured Claims
Pursuant to the Plan, each Holder of an Allowed Noteholder Claim
shall receive, on account of such Allowed Claim (a) its Pro Rata share of the
shares of New Common Stock in the Stock Pool, and (b) the right to participate
in the Rights Offering, subject to certain conditions specified in the Rights
Offering Procedures. Pursuant to the Plan, each Holder of an Allowed General
Unsecured Claim shall receive, on account of such Allowed Claim (A) its Pro
Rata share of the shares of New Common Stock in the Stock Pool, and (B) the
right to participate in the Rights Offering, subject to certain conditions
specified in the Rights Offering Procedures. The following discussion assumes
that (i) each Holder of an Allowed Noteholder Claim or an Allowed General
Unsecured Claim holds its Claim as a "capital asset" within the meaning of
Section 1221 of the IRC and (ii) the obligation underlying each Allowed
Noteholder Claim and Allowed General Unsecured Claim is properly treated as
debt (rather than equity) of the applicable Debtor.
Whether a Holder of an Allowed Noteholder Claim or an Allowed General
Unsecured Claim recognizes gain or loss as a result of the exchange of its
Claim for New Common Stock depends on whether (a) the exchange qualifies as a
tax-free recapitalization, which in turn depends on whether the debt
underlying the Allowed Noteholder Claim or the Allowed General Unsecured Claim
surrendered is treated as a "security" for the reorganization provisions of
the IRC, (b) the Holder has previously included in income any accrued but
unpaid interest with respect to the Allowed Noteholder Claim or the Allowed
General Unsecured Claim, (c) the Holder has claimed a bad debt deduction or
worthless security deduction with respect to such Allowed Noteholder Claim or
such General Unsecured Claim and (d) the Holder uses the accrual or cash
method of accounting for tax purposes.
(i) Treatment of a Debt Instrument as a "Security"
Whether a debt instrument constitutes a "security" for U.S. federal
income tax purposes is determined based on all the relevant facts and
circumstances, but most authorities have held that the length of the term of a
debt instrument is an important factor in determining whether such instrument
is a security for federal income tax purposes. These authorities have
indicated that a term of less than five years is evidence that the instrument
is not a security, whereas a term of ten years or more is evidence that it is
a security. There are numerous other factors that could be taken into account
in determining whether a debt instrument is a security, including the security
for payment, the creditworthiness of the obligor, the subordination or lack
thereof to other creditors, the right to vote or otherwise participate in the
management of the obligor, convertibility of the instrument into an equity
interest of the obligor, whether payments of
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interest are fixed, variable or contingent, and whether such payments are made
on a current basis or accrued. Each Holder of an Allowed Noteholder Claim or
an Allowed General Unsecured Claim should consult with its own tax advisor to
determine whether or not the debt underlying its Allowed Noteholder Claim or
its Allowed General Unsecured Claim is a "security" for U.S. federal income
tax purposes.
(ii) The Rights
The tax treatment of an Eligible Holder that receives Rights will
depend on whether such Holder exercises the Rights. Although not free from
doubt, the issuance of, and the exercise of or failure to exercise, the Rights
should be treated as an integrated transaction for tax purposes but not as a
transaction that is integrated with any of the exchanges described below.
Accordingly, an Eligible Holder that exercises a Right should be treated as
directly exchanging the subscription price for New Common Stock allocable to
such Right in an exchange in which the Eligible Holder recognizes no gain or
loss. The Eligible Holder should have a tax basis in the New Common Stock
received upon exercise of the Rights equal to the subscription price paid
therefor.
(iii) Treatment of a Holder of an Allowed Noteholder Claim or a
General Unsecured Claim if the Exchange of Its Claim Is
Treated as a Reorganization
If a debt instrument constituting a surrendered Allowed Noteholder
Claim or an Allowed General Unsecured Claim is treated as a "security" for
U.S. federal income tax purposes, the exchange of a Holder's Allowed
Noteholder Claim or Allowed General Unsecured Claim for the shares of New
Common Stock should be treated as a recapitalization, and therefore a
reorganization, under the IRC. A Holder of a surrendered Allowed Noteholder
Claim or an Allowed General Unsecured Claim may recognize gain, but not loss,
on the exchange. Specifically, the Holder may recognize (a) capital gain,
subject to the "market discount" rules discussed below, to the extent of the
lesser of (i) the amount of gain realized from the exchange or (ii) the amount
- ------ --
of "other property" (i.e., property that is not a "security" for U.S. federal
income tax purposes and "securities" to the extent that the principal amount
of securities received exceeds the principal amount of securities surrendered)
received, if any, and (b) ordinary interest income to the extent that the
shares of New Common Stock are treated as received in satisfaction of accrued
but untaxed interest on the debt instrument underlying the Allowed Noteholder
Claim or the Allowed General Unsecured Claim (see "Accrued Interest"
discussion below). In such case, a Holder's tax basis in its shares of New
Common Stock should be equal to the tax basis of the obligation constituting
the Allowed Noteholder Claim or the Allowed General Unsecured Claim
surrendered therefor (increased by the amount of any gain recognized and
decreased by the fair market value of "other property" received, if any), and
a Holder's holding period for its shares of New Common Stock should include
the holding period for the obligation constituting the surrendered Allowed
Noteholder Claim or the Allowed General Unsecured Claim; provided that the tax
--------
basis of any share of New Common Stock treated as received in satisfaction of
accrued but untaxed interest should equal the amount of such accrued but
untaxed interest, and the holding period for such share of New Common Stock
should not include the holding period of the debt instrument constituting the
surrendered Allowed Noteholder Claim or the Allowed General Unsecured Claim.
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(iv) Treatment of a Holder of an Allowed Noteholder Claim or an
Allowed General Unsecured Claim if the Exchange of its Claim
Is Not Treated as a Reorganization
If a debt instrument constituting a surrendered Allowed Noteholder
Claim or an Allowed General Unsecured Claim is not treated as a security, a
---
Holder of such a Claim should be treated as exchanging its Allowed Noteholder
Claim or an Allowed General Unsecured Claim for shares of New Common Stock in
a fully taxable exchange. A Holder of an Allowed Noteholder Claim or an
Allowed General Unsecured Claim who is subject to this treatment should
recognize gain or loss equal to the difference between (i) the fair market
value of the shares of New Common Stock it receives that is not allocable to
accrued interest, and (ii) the Holder's adjusted tax basis in the obligation
constituting the surrendered Allowed Noteholder Claim or the Allowed General
Unsecured Claim. Such gain or loss should be capital in nature (subject to the
"market discount" rules described below) and should be long-term capital gain
or loss if the debts constituting the surrendered Allowed Noteholder Claim or
the Allowed General Unsecured Claim were held for more than one year. To the
extent that a Holder also receives Cash in respect of dividends paid while
such stock was held in reserve, the treatment of that Cash is unclear. To the
extent that a portion of the shares of New Common Stock received in the
exchange is allocable to accrued but untaxed interest, the Holder may
recognize ordinary interest income. See "Accrued Interest" below. A Holder's
tax basis in the shares of New Common Stock received on the Effective Date
should equal the fair market value of the shares of New Common Stock as of the
Effective Date. A Holder's holding period for its shares of New Common Stock
received on the Effective Date should begin on the day following the Effective
Date. Each Holder should consult its own tax advisor on the basis, holding
period and other tax implications of receiving New Common Stock after the
Effective Date.
(v) Accrued Interest
To the extent that any amount received by a Holder of a surrendered
Allowed Claim under the Plan is attributable to accrued but unpaid interest
and such amount has not previously been included in the Holder's gross income,
such amount should be taxable to the Holder as ordinary interest income.
Conversely, a Holder of a surrendered Allowed Claim may be able to recognize a
deductible loss (or, possibly, a write-off against a reserve for worthless
debts) to the extent that any accrued interest on the debt instruments
constituting such Claim was previously included in the Holder's gross income
but was not paid in full by the Debtors. Such loss may be ordinary, but the
tax law is unclear on this point.
The extent to which the consideration received by a Holder of a
surrendered Allowed Claim will be attributable to accrued interest on the
debts constituting the surrendered Allowed Claim is unclear. Certain Treasury
Regulations generally treat a payment under a debt instrument first as a
payment of accrued and untaxed interest and then as a payment of principal.
Application of this rule to a final payment on a debt instrument being
discharged at a discount in bankruptcy is unclear. Pursuant to the Plan, all
distributions in respect of any Claim will be allocated first to the principal
amount of such Claim, to the extent otherwise permitted and as determined for
federal income tax purposes, and thereafter to the remaining portion of such
Claim, if any. The provisions of the Plan are not binding on the IRS or a
court with respect to the appropriate tax treatment for creditors.
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(vi) Market Discount
Under the "market discount" provisions of Sections 1276 through 1278
of the IRC, some or all of any gain realized by a Holder exchanging the debt
instruments constituting its Allowed Claim may be treated as ordinary income
(instead of capital gain), to the extent of the amount of "market discount" on
the debt constituting the surrendered Allowed Claim.
In general, a debt instrument is considered to have been acquired
with "market discount" if its holder's adjusted tax basis in the debt
instrument is less than (i) the sum of all remaining payments to be made on
the debt instrument, excluding "qualified stated interest" or, (ii) in the
case of a debt instrument issued with OID, its adjusted issue price, by at
least a de minimis amount (equal to 0.25% of the sum of all remaining payments
to be made on the debt instrument, excluding qualified stated interest,
multiplied by the number of remaining whole years to maturity).
Any gain recognized by a Holder on the taxable disposition
(determined as described above) of debts that it acquired with market discount
should be treated as ordinary income to the extent of the market discount that
accrued thereon while such debts were considered to be held by the Holder
(unless the Holder elected to include market discount in income as it
accrued). To the extent that the surrendered debts that had been acquired with
market discount are exchanged in a tax-free or other reorganization
transaction for other property (as may occur here), any market discount that
accrued on such debts but was not recognized by the Holder may be required to
be carried over to the property received therefor and any gain recognized on
the subsequent sale, exchange, redemption or other disposition of such
property may be treated as ordinary income to the extent of the accrued but
unrecognized market discount with respect to the exchanged debt instrument.
(d) Consequences to Holders of CPFilms Claims
The following discussion assumes that each Holder of an Allowed
CPFilms Claim holds such claim as a "capital asset" within the meaning of
Section 1221 of the IRC. Pursuant to the Plan, each Allowed CPFilms Claim will
be paid in Cash in the amount of the Allowed CPFilms Claim. The receipt of
Cash by the Holder of an Allowed CPFilms Claim should be treated as a taxable
exchange under Section 1001 of the IRC. The Holder should recognize capital
gain or loss (which capital gain or loss would be long-term capital gain or
loss if the Holder has held the debt underlying its Claim for more than one
year) equal to the difference between (x) the amount of Cash received and (y)
the Holder's adjusted tax basis in the debt instrument underlying its Claim.
To the extent that the Cash received in the exchange is allocable to accrued
interest that has not already been taken into income by the Holder, the Holder
may recognize ordinary interest income. See "Accrued Interest" below.
(e) Consequences to Holders of Tort Claims
In accordance with the Global Settlement, Monsanto is assuming
financial responsibility, as between itself and Solutia, for the payment of
Tort Claims. Holders of Tort Claims should consult their own tax advisors as
to the tax consequences to them of any payment received from Monsanto on
account of a Tort Claim.
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(f) Consequences to Holders of Security Claims
On the Effective Date, all Security Claims will be canceled, and
Holders of such Claims will receive no Distributions under the Plan. Section
166(a) of the IRC generally permits a "worthless debt deduction" for any debt,
either in whole or in part, to the extent charged off within the taxable year.
Thus, Holders of Security Claims may be entitled to worthless debt deductions
with respect to such Claims. A worthless debt deduction will only be available
to a Holder of a Security Claim if such Claim constitutes a "bona fide debt"
within the meaning of Treasury Regulations promulgated under Section 166 of
the IRC. These Treasury Regulations define a "bona fide debt" as "a debt which
arises from a debtor-creditor relationship based upon a valid and enforceable
obligation to pay a fixed or determinable sum of money." In addition, the
rules governing the timing and amount of worthless debt deductions place
considerable emphasis on the facts and circumstances of the Holder, the
obligor and the instrument with respect to which the deduction is claimed.
Holders of Security Claims are, therefore, urged to consult their tax advisors
with respect to their ability to take such a deduction.
(g) Consequences to Holders of Equity Interests
On the Effective Date, all Equity Interests in Solutia will be
canceled, and Holders of such Equity Interests will receive no distribution
under the Plan. Section 165(g) of the IRC permits a "worthless security
deduction" for any security in the taxable year that the security becomes
worthless. For the purposes of Section 165(g), Equity Interests should be
treated as securities. Thus, Holders of Equity Interests in Solutia may be
entitled to worthless security deductions no later than on the Effective Date.
However, the rules governing the timing and amount of worthless security
deductions place considerable emphasis on the facts and circumstances of the
Holder, the obligor and the instrument with respect to which the deduction is
claimed. Holders of Equity Interests in Solutia are, therefore, urged to
consult their tax advisors with respect to their ability to take such
deductions.
(h) Consequences to Holders of Retiree Claims
In accordance with the terms of the Retiree Settlement Agreement,
Solutia shall contribute 2.1 million shares of the New Common Stock to a trust
established for the benefit of the Retirees. Holders of Retiree Claims should
consult their own tax advisors as to the tax consequences to them of the
contribution by Solutia to this trust and any distributions from this trust to
them.
B. CERTAIN U.S. FEDERAL INCOME TAX
-------------------------------
CONSEQUENCES OF THE PLAN TO THE DEBTORS
----------------------------------------
1. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE AMENDED PLAN
----------------------------------------------------------------
TO SOLUTIA
----------
(a) Cancellation of Indebtedness and Reduction of Tax Attributes
As a result of the Plan, including the Monsanto Contribution, the
Debtors' aggregate outstanding indebtedness will be substantially reduced. In
general, absent an exception, a debtor will recognize cancellation of debt
income ("CODI") upon discharge of its outstanding indebtedness for an amount
less than its adjusted issue price. The amount of CODI, in general, is
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the excess of (a) the adjusted issue price of the indebtedness discharged,
over (b) the sum of the issue price of any new indebtedness of the taxpayer
issued, the amount of cash paid and the fair market value of any other
consideration, including stock of the Debtor(s), given in exchange for such
indebtedness at the time of the exchange.
A debtor is not, however, required to include any amount of CODI in
gross income if such debtor is under the jurisdiction of a court in a chapter
11 bankruptcy proceeding and the discharge of debt occurs pursuant to that
proceeding. Instead, as a price for the exclusion of CODI under the foregoing
rule, Section 108 of the IRC requires the debtor to reduce (as of the first
day of the taxable year following the year of the debt discharge) its tax
attributes by the amount of CODI which it excluded from gross income. As a
general rule, tax attributes will be reduced in the following order: (a) net
operating losses ("NOLs"), (b) most tax credits, (c) capital loss carryovers,
(d) tax basis in assets (but not below the amount of liabilities to which the
debtor remains subject), and (e) foreign tax credits. A debtor with CODI may
elect first to reduce the basis of its depreciable assets under Section
108(b)(5) of the IRC.
The amount of CODI (and, accordingly, the amount of tax attributes
required to be reduced), will depend, inter alia, on the fair market value of
New Common Stock to be issued. This value cannot be known with certainty until
after the Effective Date. Thus, although it is expected that a reduction of
tax attributes will be required, the exact amount of such reduction cannot be
predicted with certainty.
Any required reduction in tax attributes of a member of a
consolidated group applies first to any tax attributes attributable to the
debtor realizing the CODI at issue. To the extent the debtor reduces its tax
basis in the stock of another member of the consolidated group (which basis
may not be reduced below zero), such other member is required to reduce its
tax attributes by an equivalent amount.
(b) Limitation of Net Operating Loss Carryovers and Other Tax
Attributes
Section 382 of the IRC generally imposes an annual limitation on a
corporation's use of its net operating losses ("NOLs") (and may limit a
----
corporation's use of certain built-in losses if such built-in losses are
recognized within a five-year period following an ownership change) if a
corporation undergoes an "ownership change." This discussion describes the
limitation determined under Section 382 of the IRC in the case of an
"ownership change" as the "Section 382 Limitation." The annual Section 382
Limitation on the use of pre-change losses (the NOLs and built-in losses
recognized within the five year post-ownership change period) in any "post
change year" is generally equal to the product of the fair market value of the
loss corporation's outstanding stock immediately before the ownership change
multiplied by the long term tax-exempt rate in effect for the month in which
the ownership change occurs. The long-term tax-exempt rate is published
monthly by the IRS and is intended to reflect current interest rates on
long-term tax-exempt debt obligations. Section 383 of the IRC applies a
similar limitation to capital loss carryforward and tax credits. As discussed
below, however, special rules may apply in the case of a corporation which
experiences an ownership change as the result of a bankruptcy proceeding.
148
In general, an ownership change occurs when the percentage of the
corporation's stock owned by certain "5 percent shareholders" increases by
more than 50 percentage points in the aggregate over the lowest percentage
owned by those shareholders at any time during the applicable "testing period"
(generally, the shorter of (a) the 36-month period preceding the testing date
or (b) the period of time since the most recent ownership change of the
corporation). A "5 percent shareholder" for this purpose includes, generally,
an individual or entity that directly or indirectly owns 5% or more of a
corporation's stock during the relevant period and one or more groups of
shareholders that own less than 5% of the value of the corporation's stock.
Under applicable Treasury Regulations, an ownership change with respect to an
affiliated group of corporations filing a consolidated return that have
consolidated NOLs is generally measured by changes in stock ownership of the
parent corporation of the group.
The issuance under the Plan of the New Common Stock, along with the
cancellation of existing Equity Interests through the Plan, is expected to
cause an ownership change to occur with respect to the Debtors' consolidated
group on the Effective Date. As a result, Section 382 of the IRC will apply to
limit the Debtors' use of their consolidated NOLs after the Effective Date.
This limitation is independent of, and in addition to, the reduction of tax
attributes described in the preceding Section resulting from the exclusion of
CODI. Similarly, the ability of the Debtors' consolidated group to use any
remaining capital loss carryforwards and tax credits will also be limited.
Section 382(l)(5) of the IRC provides a special rule applicable in
the case of a bankruptcy reorganization (the "Section 382(l)(5) Rule"). If a
corporation qualifies for the Section 382(l)(5) Rule, the annual Section 382
Limitation will not apply to the corporation's NOL on account of an ownership
change occurring as a result of the bankruptcy reorganization. The Section
382(l)(5) Rule does, however, require that the corporation's NOL and credit
carryovers be computed without taking into account the aggregate amount of all
interest deductions during the three prior taxable years and the portion of
the current taxable year ending on the date of the ownership change in respect
of debt exchanged for the corporation's stock (such interest hereinafter
called "Disqualified Interest"). The corporation will qualify under the
Section 382(l)(5) Rule if the corporation's pre-bankruptcy shareholders and
holders of certain debt (the "Qualifying Debt") own at least 50% of the stock
of the corporation after the bankruptcy reorganization, and the corporation
does not elect not to apply the Section 382(l)(5) Rule. Qualifying Debt is a
claim which (i) was held by the same creditor for at least 18 months prior to
the bankruptcy filing or (ii) arose in the ordinary course of a corporation's
trade or business and has been owned, at all times, by the same creditor.
Indebtedness will be treated as arising in the ordinary course of a
corporation's trade or business if such indebtedness is incurred by the
corporation in connection with the normal, usual or customary conduct of the
corporation's business. For the purpose of determining whether a claim
constitutes Qualifying Debt, special rules may in some cases apply to treat a
subsequent transferee as the transferor creditor.
If the exchanges contemplated by the Plan qualify for tax treatment
under the Section 382(l)(5) Rule and the Debtors do not elect out of the
Section 382(l)(5) Rule, the Debtors' NOL carryover will be available for
future use without any Section 382 Limitation (after reduction of the Debtors'
NOLs by Disqualified Interest). However, under the Section 382(l)(5) Rule, if
there is a second ownership change during the two-year period immediately
following consummation of the Plan, the Section 382 Limitation after the
second ownership change shall be zero. The
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determination of the application of the Section 382(l)(5) Rule is highly fact
specific and dependent on circumstances that are difficult to assess
accurately; however, the Debtors do not believe they will qualify for the
Section 382(l)(5) Rule. In addition, due in part to the risk that a second
ownership change might occur during the two year period following the
Effective Date, even if they do qualify, the Debtors intend to elect out of
the Section 382(l)(5) Rule as described below.
If the exchanges do not qualify for tax treatment under the Section
382(l)(5) Rule or the Debtors elect not to apply the Section 382(l)(5) Rule,
the Debtors' use of NOLs to offset taxable income earned after an ownership
change will be subject to the annual Section 382 Limitation. Since the Debtors
are in bankruptcy, however, Section 382(l)(6) of the IRC will apply. Section
382(l)(6) of the IRC provides that, in the case of an ownership change
resulting from a bankruptcy proceeding of a debtor, the value of the debtor's
stock for the purpose of computing the Section 382 Limitation will generally
be calculated by reference to the net equity value of debtor's stock taking
into account the increase of the value of the corporation as a result of the
surrender or cancellation of creditors' claims in the transaction (rather than
the value without taking into account such increases, as is the case under the
general rule for non-bankruptcy ownership changes). Accordingly, under this
rule the Section 382 Limitation would generally reflect the increase in the
value of a debtor's stock resulting from the conversion of debt to equity in
the proceeding. The Debtors intend to elect to apply the rules of Section
382(l)(6) of the Code. Although it is impossible to predict what the net
equity value of the Debtors will be immediately after the exchanges
contemplated by the Plan, the Debtors' use of NOLs is expected to be
substantially limited after those exchanges.
(c) Alternative Minimum Tax
In general, an alternative minimum tax ("AMT") is imposed on a
corporation's alternative minimum taxable income ("AMTI") at a 20% rate to the
extent such tax exceeds the corporation's regular federal income tax for the
year. AMTI is generally equal to regular taxable income with certain
adjustments. For purposes of computing AMTI, certain tax deductions and other
beneficial allowances are modified or eliminated. For example, except for
alternative tax NOLs generated in or deducted as carryforwards in taxable
years ending in 2001 and 2002 which can offset 100% of a corporation's AMTI,
only 90% of a corporation's AMTI may be offset by available alternative tax
NOL carryforwards. Additionally, under Section 56(g)(4)(G) of the IRC, an
ownership change (as discussed above) that occurs with respect to a
corporation having a net unrealized built-in loss in its assets will cause,
for AMT purposes, the adjusted basis of each asset of the corporation
immediately after the ownership change to be equal to its proportionate share
(determined on the basis of respective fair market values) of the fair market
value of the assets of the corporation, as determined under Section 382(h) of
the IRC, immediately before the ownership change. The Debtors do not believe
they will have a net unrealized built-in loss in their assets immediately
after the ownership change.
(d) Funding Co
Funding Co, a wholly owned "flow-through" affiliate of Solutia, will
be treated as an entity disregarded from its owner for U.S. federal income tax
purposes. Therefore, Solutia's contribution of a portion of the proceeds of
the Rights Offering to Funding Co will be
150
disregarded for U.S. federal income tax purposes. When Funding Co releases
funds to Solutia to allow Solutia to make payments in accordance with the
terms of the Relationship Agreement, Solutia should account for such amounts
as if paid directly by Solutia. To the extent that Funding Co earns income on
funds contributed to it, Solutia will take those amounts into gross income as
if Solutia had earned the income.
2. BACKUP WITHHOLDING AND REPORTING
--------------------------------
The Debtors will withhold all amounts required by law to be withheld
from payments of interest and dividends. The Debtors will comply with all
applicable reporting requirements of the IRC. In general, information
reporting requirements may apply to distributions or payments made to a Holder
of a Claim. Additionally, backup withholding of taxes, currently at a rate of
28%, will apply to such payments if such Holder fails to provide an accurate
taxpayer identification number or otherwise fails to comply with the
applicable requirements of the backup withholding rules. Any amounts withheld
under the backup withholding rules will be allowed as a credit against such
Holder's U.S. federal income tax liability and may entitle such Holder to a
refund, provided that the required information is provided to the IRS.
THE FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN ARE COMPLEX. THE
FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT
MAY BE RELEVANT TO A PARTICULAR HOLDER IN LIGHT OF SUCH HOLDER'S CIRCUMSTANCES
AND INCOME TAX SITUATION. ALL HOLDERS OF CLAIMS AND EQUITY INTERESTS SHOULD
CONSULT WITH THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM
OF THE TRANSACTIONS CONTEMPLATED BY THE PLAN, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY CHANGE IN
APPLICABLE TAX LAWS.
151
XV.
RECOMMENDATION
--------------
In the opinion of Solutia, the Amended Plan is preferable to the
alternatives described in this Disclosure Statement because it provides for a
larger distribution to Solutia's creditors than would otherwise result in a
liquidation under chapter 7 of the Bankruptcy Code. In addition, any
alternative other than confirmation of the Amended Plan could result in
extensive delays and increased administrative expenses resulting in smaller
distributions to Holders of Allowed Claims than proposed under the Amended
Plan. Accordingly, Solutia recommends that Holders of Claims entitled to vote
on the Amended Plan support confirmation of the Amended Plan and vote to
accept the Amended Plan.
Dated: [____] [___], 2007 Respectfully submitted,
SOLUTIA INC.
(for itself and on behalf of each of the Debtors)
By:
-------------------------------------------
Name: Jeffry N. Quinn
Title: President & Chief Executive Officer
Prepared by:
KIRKLAND & ELLIS LLP
Citigroup Center
153 East 53rd Street
New York, New York 10022-4611
(212) 446-4800 (telephone)
ATTORNEYS FOR DEBTORS AND DEBTORS IN POSSESSION
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