Exhibit 99.2
================================================================================
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' SECOND 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
- ----------------------------------------------------x
:
IN RE : Chapter 11
:
SOLUTIA INC., ET AL., : Case No. 03-17949 (PCB)
:
Debtors. : (Jointly Administered)
:
- ----------------------------------------------------x
THIS DISCLOSURE STATEMENT APPLIES TO:
X All Debtors Axio Research Corporation
- --- ---
Solutia Inc. Solutia Investments, LLC
- --- ---
Solutia Business Enterprises Inc. Beamer Road Management Company
- --- ---
Solutia Systems, Inc. Monchem, Inc.
- --- ---
Solutia Overseas, Inc. Solutia Inter-America, Inc.
- --- ---
CPFilms Inc. Solutia International Holding, LLC
- --- ---
Solutia Management Company, Inc. Solutia Taiwan, Inc.
- --- ---
Monchem International, Inc. Solutia Greater China, Inc.
- --- ---
- --------------------------------------------------------------------------------
DEBTORS' SECOND AMENDED DISCLOSURE STATEMENT PURSUANT
TO SECTION 1125 OF THE BANKRUPTCY CODE
- --------------------------------------------------------------------------------
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: July 9, 2007
TABLE OF CONTENTS
PAGE
----
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. HEARING TO APPROVE THE LEGACY LIABILITY SETTLEMENT WITH MONSANTO AND THE RETIREES...............6
E. KEY ELEMENTS OF THE AMENDED PLAN................................................................8
1. Reallocation of the Legacy Liabilities.................................................8
2. Resolution of Outstanding Adversary Litigations and Claims............................10
3. Chapter 11 Claims.....................................................................12
(a) Asserted and Scheduled Claims................................................12
(b) Estimates of Certain Classes of Claims.......................................12
(c) Implied Equity Value Available For Distribution..............................15
(d) Distributions to Creditors Under the Amended Plan............................15
(i) Certain Creditors Will Be Paid In Full...............................15
(ii) Certain Creditors Will Receive Shares of New Common Stock............15
4. Distributions to Holders of Common Stock in Solutia Inc...............................17
5. Releases..............................................................................17
6. The Exit Financing Facility...........................................................18
F. SUMMARY OF CLASSIFICATION AND TREATMENT OF ALLOWED CLAIMS AND EQUITY INTERESTS UNDER
THE AMENDED PLAN...............................................................................19
G. PARTIES ENTITLED TO VOTE ON THE AMENDED PLAN...................................................22
H. SOLICITATION PACKAGE...........................................................................23
I. VOTING INSTRUCTIONS............................................................................24
J. THE CONFIRMATION HEARING.......................................................................28
K. CONFIRMATION OF THE PLAN IS THE CULMINATION OF THE CHAPTER 11 CASES............................28
-i-
L. EFFECT OF THE AMENDED PLAN ON SOLUTIA'S ONGOING BUSINESS.......................................29
III. IMPORTANT INFORMATION.......................................................................................29
IV. EVENTS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11 CASES..................................................33
A. OVERVIEW OF SOLUTIA'S BUSINESS.................................................................33
B. SOLUTIA'S CORPORATE HISTORY....................................................................34
1. The Creation of Solutia...............................................................34
2. The Spinoff...........................................................................34
3. The Monsanto Spinoff - Old Monsanto Becomes Pharmacia.................................35
4. Pfizer's Acquisition of Pharmacia.....................................................36
C. THE ASSUMPTION OF LEGACY LIABILITIES...........................................................36
1. Legacy OPEB Liabilities...............................................................36
2. Legacy Environmental Liabilities......................................................37
3. Legacy Tort Liabilities...............................................................38
4. Legacy Pension Liabilities............................................................38
5. Legacy Liability Allocation...........................................................38
D. EVENTS LEADING UP TO BANKRUPTCY................................................................39
1. The Initial Period Following the Spinoff..............................................39
2. Beginning of the Economic Downturn....................................................40
3. Continued Decline in Results, Burden of the Legacy Liabilities and
Difficulties Obtaining Favorable Financing............................................41
4. The Period Prior to Filing Bankruptcy.................................................42
5. Prepetition Attempts to Restructure the Business......................................44
(a) Anniston PCB Cases Settlement................................................44
(b) Anniston Partial Consent Decree..............................................45
(c) The Bank Credit Agreement....................................................45
(d) Negotiations with Monsanto, Pharmacia and Noteholders........................46
(e) Restructuring of the Euro Notes..............................................46
E. THE COMMENCEMENT OF THE CHAPTER 11 CASES.......................................................46
V. EVENTS DURING THE CHAPTER 11 CASES..........................................................................47
A. STABILIZATION OF BUSINESS OPERATIONS...........................................................47
1. First Day Relief......................................................................47
2. DIP Financing.........................................................................48
3. Employee Retention....................................................................48
4. Retention of Restructuring and Other Professionals....................................49
B. NEW SENIOR MANAGEMENT TEAM.....................................................................50
-ii-
C. REORGANIZATION STRATEGY........................................................................53
1. Enhancing the Performance of Solutia's Businesses.....................................54
(a) New Corporate Culture........................................................54
(b) Strategic Review of Solutia's Material Businesses............................54
(c) Proactive Commercial Perspective.............................................54
(d) Cost Reduction and Efficiency Initiatives....................................55
(e) Operational Excellence Initiative............................................55
(f) Headcount Reductions.........................................................55
(g) Changes to Employee and Retiree Benefit Programs.............................55
(i) Changes in Active Employee Welfare Benefits..........................55
(ii) Actions Regarding the Forsberg Settlement............................56
(iii) Changes in Qualified U.S. Pension Plan Benefits......................57
(iv) Termination of Non-Qualified Pension Benefits........................57
(v) Changes in Other Post-Employment Benefits for Active
Employees............................................................58
(vi) Collective Bargaining Agreements with U.S. Union-Represented
Employees............................................................58
(h) Changes in Compensation Philosophy and Annual Incentive Programs.............58
(i) Remediation Management of Legacy Environmental Liabilities...................58
(j) Executory Contracts and Unexpired Leases.....................................59
2. Changes to the Asset Portfolio........................................................61
(a) Acquisition of Akzo Nobel's Interest in the Flexsys joint venture............61
(b) Changes in the Nylon Business................................................62
(i) Closure of the Acrylic Fibers Business...............................62
(ii) Closure of the Pensacola Industrial Fiber Business...................62
(iii) Conversion of the Pensacola Industrial Fiber Assets..................62
(iv) Improved Nylon Operational Reliability...............................63
(c) Changes in the Saflex Business...............................................63
(i) Acquisition of Vitro's interest in the Quimica Joint Venture.........63
(ii) Construction of Saflex(R) Interlayer Plant in China..................63
(iii) Construction of Third Extrusion Line at Ghent........................64
(d) Changes in the CPFilms Business..............................................64
(i) Installation of New CPFilms Metallizing Production Line..............64
(ii) Installation of New CPFilms Dye Line.................................64
(e) Changes in the Specialty Products Business...................................65
(i) Expansion of Therminol(R) Production in China........................65
(ii) Divestiture of the Dequest(R) Business...............................65
(iii) Closure of the Queeny Plant..........................................65
(iv) Closure of the Chlorobenzene Business................................65
(v) Closure of Other Operations..........................................65
(f) Strategic Actions Regarding Non-Core Assets..................................66
-iii-
(i) Divestiture of the Pharmaceutical Services Business..................66
(ii) Divestiture of the Astaris Joint Venture.............................66
(iii) Divestiture of Axio Research Corporation.............................66
3. Reallocation of the Legacy Liabilities................................................66
(a) Legacy OPEB Liabilities......................................................67
(i) Modification of Benefits Provided to Existing Retirees...............67
(b) Legacy Environmental Liabilities.............................................68
(c) Legacy Tort Liabilities......................................................68
(d) Legacy Pension Liabilities...................................................69
4. Appropriate Capital Structure and Conversion of Debt..................................69
(a) Capital Structure as of Petition Date........................................69
(b) Capital Structure upon Emergence; Exit Financing Facility....................70
D. FINANCIAL PERFORMANCE DURING BANKRUPTCY........................................................70
VI. SUMMARY OF LEGAL PROCEEDINGS................................................................................70
A. LEGAL PROCEEDINGS IN THE BANKRUPTCY COURT......................................................71
1. The JPM Adversary Proceeding..........................................................71
2. Equity Committee Adversary Proceeding Against Monsanto and Pharmacia..................72
3. The Equity Committee's View of the Equity Committee Adversary Proceeding..............73
4. Litigation Among Pharmacia, Monsanto and Solutia......................................77
(a) Distribution Agreement Rejection.............................................77
(b) The Adversary Proceedings....................................................77
(c) The Standstill Agreement and Treatment in the Amended Plan...................78
(d) Monsanto's Proof of Claim....................................................79
(e) Pharmacia's Proof of Claim...................................................79
5. The EPA Adversary Proceeding..........................................................80
6. The Retirees Adversary Proceeding.....................................................80
7. Calpine Arbitration...................................................................80
8. Avoidance Actions.....................................................................82
(a) Preference Actions...........................................................83
(b) Fraudulent Transfer and Conveyance Actions...................................83
(i) Section 548 of the Bankruptcy Code...................................83
(ii) Section 544 of the Bankruptcy Code...................................83
B. PENDING LEGAL PROCEEDINGS OUTSIDE THE BANKRUPTCY COURT.........................................84
1. Cash Balance Plan Litigation..........................................................84
2. SIP Plan Litigation...................................................................85
3. Significant Legal Proceedings Involving Non-Debtor Affiliates of Solutia..............86
(a) Flexsys Patent and Related Litigation........................................86
-iv-
(b) Other Flexsys Related Litigation.............................................88
(c) Ferro Antitrust Investigation................................................88
4. Commercial Litigation.................................................................89
(a) Litigation against INEOS Americas LLC........................................89
5. Other Matters.........................................................................89
(a) Probst v. Monsanto and Solutia...............................................89
(b) Department of Labor Investigation............................................90
VII. REORGANIZED SOLUTIA........................................................................................91
A. BUSINESS OVERVIEW..............................................................................91
B. THE NYLON BUSINESS.............................................................................91
C. THE SAFLEX BUSINESS............................................................................93
D. THE FLEXSYS BUSINESS...........................................................................94
E. THE CPFILMS BUSINESS...........................................................................95
F. THE SPECIALTY PRODUCTS BUSINESS................................................................96
G. CAPITAL OBLIGATIONS TO BE SATISFIED OR COMPROMISED UPON EMERGENCE..............................98
1. DIP Credit Facility & Prepetition Secured Bank Debt.................................100
2. Senior Secured Notes.................................................................100
(a) Additional Claims...........................................................101
(b) Impairment..................................................................101
(c) Cramdown....................................................................102
3. Retiree Trust........................................................................102
4. Funding Co...........................................................................102
5. Headquarters Financing...............................................................102
6. Euro Notes...........................................................................103
7. Flexsys Financing....................................................................103
8. 2027/2037 Notes......................................................................104
9. Trade Claims and Other Unsecured Obligations.........................................104
10. Common Stock and Common Stock Derivatives............................................104
(a) TRADING RESTRICTIONS TO PRESERVE SOLUTIA'S NET OPERATING LOSS INCOME
ATTRIBUTES..................................................................105
H. REORGANIZED SOLUTIA'S STRUCTURE...............................................................105
1. New Common Stock.....................................................................105
2. Exit Financing Facility..............................................................106
VIII. RESOLUTION OF THE LEGACY LIABILITIES......................................................................106
A. EVENTS LEADING TO THE CURRENT RESOLUTION OF THE LEGACY LIABILITIES............................106
-v-
1. The Agreement in Principle...........................................................106
2. The Original Plan....................................................................107
3. The Global Settlement................................................................107
(a) Material terms of the Global Settlement remain unchanged by the terms
of the Amended Plan.........................................................107
(b) Changes to the Global Settlement since February 2006........................108
B. DETAILED DISCUSSION OF TERMS OF THE REALLOCATION OF THE LEGACY LIABILITIES....................109
1. Settlement Overview..................................................................109
(a) The Monsanto Claim..........................................................109
(b) Monsanto's Contributions to Solutia's Reorganization........................111
(i) As Between Itself and Solutia, Monsanto Is Taking Financial
Responsibility for All Tort Claims..................................111
(ii) Monsanto Is Taking Financial Responsibility, As Between
Itself and Solutia Only, for Certain Environmental
Remediation and Clean-Up Obligations................................112
(a) Monsanto Is Taking Responsibility, As Between
Itself and Solutia Only, for All Environmental
Liabilities at the Legacy Sites............................112
(b) Monsanto Is Sharing Financial Responsibility with
Solutia for Obligations at Shared Sites....................112
(iii) Settlement of Litigation among Pharmacia, Monsanto and
Solutia.............................................................113
(iv) Monsanto Will Continue To Operate Under the Commercial and
Operating Agreements, and Will Extend the Terms of the
Master Operating Agreement..........................................113
(c) The Retiree Settlement......................................................114
(d) Settlement With Pharmacia...................................................114
2. Settlement of Tort Claims............................................................115
3. Overview of Tort Claims For Which Monsanto Has Agreed to Take Financial
Responsibility.......................................................................116
(a) Premises-Based Asbestos Claims..............................................116
(b) Dioxin Claims...............................................................116
(c) PCB Claims..................................................................117
(d) Silica......................................................................118
(e) Other Claims/Unspecified Claims.............................................119
4. Settlement of Legacy Environmental Liabilities.......................................119
(a) Retained Sites (Solutia-Owned or Operated Sites)............................120
(b) Legacy Sites (Never Owned or Operated by Solutia)...........................120
(c) Shared Site Areas (Anniston and Sauget).....................................121
(d) Certain Waste Sites.........................................................122
(e) Natural Resource Damages at Anniston and Sauget.............................122
-vi-
(f) Miscellaneous Prepetition Environmental Claims..............................123
(g) The Terms of the Relationship Agreement.....................................123
5. Monsanto's Settlement of Adversary Proceedings, Contested Matters, Disputes
and the Monsanto Proof of Claim......................................................124
6. Monsanto's Agreement to Waive Claims for Indemnity and Contribution Against
Solutia..............................................................................124
7. Monsanto's Agreement to Enter into the Relationship Agreement and Continue the
Commercial and Operating Agreements..................................................124
(a) Chocolate Bayou Agreements..................................................124
(b) HMD Supply Agreement........................................................125
8. The Retiree Settlement...............................................................126
9. The Pharmacia Settlement.............................................................127
C. CONSIDERATION RECEIVED UNDER THE AMENDED PLAN.................................................127
1. Monsanto's Consideration.............................................................127
2. Pharmacia's Consideration............................................................128
3. General Unsecured Creditors' Consideration...........................................128
4. Noteholders' Consideration...........................................................128
5. Retirees' Consideration..............................................................129
6. New Indemnities......................................................................129
D. THE RELEASES AND THE MONSANTO/PHARMACIA INJUNCTION ARE NECESSARY COMPONENTS OF THE
AMENDED PLAN..................................................................................129
E. THE RELATIONSHIP AGREEMENT IS CRITICAL TO THE AMENDED PLAN....................................132
F. APPROVAL OF THE SETTLEMENT OF THE LITIGATION AMONG MONSANTO, PHARMACIA AND SOLUTIA IS
CLEARLY WARRANTED.............................................................................133
G. THE EQUITY COMMITTEE OPPOSES THE MONSANTO AND RETIREE SETTLEMENTS.............................134
IX. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE AMENDED PLAN.........................................135
A. LIQUIDATION UNDER CHAPTER 7...................................................................137
B. ALTERNATIVE PLAN TO REORGANIZATION OR LIQUIDATION.............................................138
X. PROJECTED FINANCIAL INFORMATION...........................................................................139
A. THE EQUITY COMMITTEE'S VIEWS CONCERNING REORGANIZED SOLUTIA'S VALUATION.......................141
-vii-
B. SOLUTIA'S RESPONSE TO THE EQUITY COMMITTEE'S "SUM OF INDICATIONS" VALUATION METHODOLOGY.......141
XI. RISK FACTORS...............................................................................................141
A. CERTAIN BANKRUPTCY CONSIDERATIONS.............................................................142
B. FACTORS AFFECTING THE VALUE OF THE SECURITIES TO BE ISSUED UNDER THE AMENDED PLAN.............147
C. RISKS RELATED TO SOLUTIA'S BUSINESS AND INDUSTRY..............................................151
XII. CONFIRMATION OF THE PLAN...................................................................................159
A. THE CONFIRMATION HEARING......................................................................159
B. DEADLINE TO OBJECT TO CONFIRMATION............................................................159
C. REQUIREMENTS FOR CONFIRMATION OF THE PLAN.....................................................159
1. Requirements of Section 1129(a) of the Bankruptcy Code...............................159
2. Best Interests of Creditors..........................................................161
3. Acceptance...........................................................................163
4. Feasibility..........................................................................163
5. Requirements of Section 1129(b) of the Bankruptcy Code...............................163
(a) "Fair and Equitable"........................................................164
(b) Secured Creditors...........................................................164
(c) Unsecured Creditors.........................................................164
(d) Holders of Equity Interests.................................................164
(e) "Unfair Discrimination".....................................................165
D. VALUATION OF REORGANIZED SOLUTIA..............................................................165
E. IDENTITY OF INSIDERS..........................................................................165
F. EFFECT OF CONFIRMATION OF THE PLAN............................................................165
1. Term of Bankruptcy Injunction or Stays...............................................165
2. Preservation of Avoidance Actions....................................................166
3. Discharge of Claims and Termination of Equity Interests..............................166
4. Exculpation and Limitation of Liability..............................................167
5. Assumption of the ACE Insurance Program and the Treatment of the ACE
Companies' Claims....................................................................167
XIII. SECTION 1145 EXEMPTION FOR OFFER AND SALE OF THE NEW COMMON STOCK UNDER THE PLAN..........................169
XIV. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE AMENDED PLAN..........................................172
1. Consequences to Holders of Claims and Equity Interests...............................173
-viii-
(a) Consequences to Holders of Secured Claims...................................173
(b) Consequences to Holders of Senior Secured Note Claims.......................174
(c) Consequences to Holders of Noteholder Claims and General Unsecured
Claims......................................................................174
(i) Treatment of a Debt Instrument as a "Security"......................175
(ii) The Rights..........................................................175
(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.........................................176
(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..................................176
(v) Accrued Interest....................................................177
(vi) Market Discount.....................................................177
(d) Consequences to Holders of CPFilms Claims...................................178
(e) Consequences to Holders of Tort Claims......................................178
(f) Consequences to Holders of Security Claims..................................179
(g) Consequences to Holders of Equity Interests.................................179
(h) Consequences to Holders of Retiree Claims...................................179
B. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO THE DEBTORS.......................180
1. Certain U.S. Federal Income Tax Consequences of the Amended Plan to Solutia..........180
(a) Cancellation of Indebtedness and Reduction of Tax Attributes................180
(b) Limitation of Net Operating Loss Carryovers and Other Tax Attributes........180
(c) Alternative Minimum Tax.....................................................182
(d) Funding Co..................................................................183
2. Backup Withholding and Reporting.....................................................183
XV. RECOMMENDATION............................................................................................184
-ix-
EXHIBITS(1)
--------
EXHIBIT A Second Amended Plan of Reorganization
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
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
EXHIBIT K Valuation Summary, Debt Summary and Updated Business Plan Summary
(Exhibits 99.2 through and including 99.4 of Solutia Inc. Form 8-K
dated April 27, 2007)
<FN>
- ---------------------------
(1) The Exhibits to the Debtors' Second Amended Disclosure Statement Pursuant
to Section 1125 of the Bankruptcy Code (the "Disclosure Statement") are
voluminous. Accordingly, these 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.
-x-
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,(2) pursuant to section 1125 of
title 11 of the United States Code (the "Bankruptcy Code"), to Holders of
Claims and Equity Interests(3) in connection with (A) the solicitation of
acceptances of the Debtors' Second Amended Joint Plan of Reorganization, dated
July 9, 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>
- ---------------------------
(2) 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.
(3) As set forth in this Disclosure Statement, and pursuant to the Disclosure
Statement Order (as hereinafter defined), only those Holders of Claims in
Classes 3, 5, 11, 12, 13, 14, 15 and 20 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 imposing significant financial burdens on the Company. The terrorist
attacks on September 11, 2001 compounded the financial burdens on Solutia.
Because Solutia's raw materials are derivatives of crude oil, Solutia's costs
for raw materials skyrocketed after September 11th. At the same time, demand
for Solutia's end products (particularly nylon) plummeted in the economic
downturn following September 11th. 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.
The first element of Solutia's reorganization strategy was to
stabilize the businesses and position them for growth. Solutia's immediate
focus 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 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 was 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 (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, its Dequest(R)
phosphonates business and its Astaris joint venture interest.
The third element of Solutia's reorganization strategy was to achieve
a reallocation of the significant tort, environmental and retiree Legacy
Liabilities that it assumed as part of the
4
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.(4) 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 Agreement. Even with the reallocation of the Legacy Liabilities,
certain Legacy Liabilities remain Solutia's responsibility.
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 ("Reorganized Solutia"), 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.
<FN>
- ------------------------
(4) The Equity Committee, a party in interest in these Chapter 11 Cases, did
not participate in many of these negotiations.
5
D. HEARING TO APPROVE THE LEGACY LIABILITY SETTLEMENT WITH MONSANTO AND
--------------------------------------------------------------------
THE RETIREES
------------
On June 29, 2007, Solutia filed its motion and memorandum of law
seeking approval of the Monsanto Settlement and Retiree Settlement. (See Dkt.
Nos. 3974 and 3977). The reallocation and/or satisfaction of the Legacy
Liabilities set forth in the Amended Plan and described in this Disclosure
Statement form the foundation for the Amended Plan. The Monsanto Settlement
and the Retiree Settlement are supported by nearly all of Solutia's primary
stakeholders, including the Creditors' Committee, the Retirees' Committee, the
Ad Hoc Trade Committee, Pharmacia and Monsanto. Solutia anticipates that the
Equity Committee and the Ad Hoc Notes Committee will oppose the Monsanto
Settlement. Solutia does not anticipate any opposition to the Retiree
Settlement; however, the two settlements are interdependent -- if one fails,
the other will no longer remain viable.
The Bankruptcy Court has scheduled a hearing (the "Settlement
Approval Hearing") with respect to the approval of the Monsanto Settlement and
the Retiree Settlement. The hearing will commence on September 5, 2007. Thus,
Solutia is seeking acceptances of the terms of the Amended Plan from Persons
entitled to vote to accept or reject the Amended Plan in advance of approval
of the Monsanto Settlement and the Retiree Settlement. There is a risk that
the Court will not approve or will require modifications to the Monsanto
Settlement and/or the Retiree Settlement in connection with the Settlement
Approval Hearing. In such an event, the solicitation of votes on the Amended
Plan may be ineffective and Solutia may be required to either resolicit votes
or formulate a new plan of reorganization.
Solutia believes that the Settlement Approval Hearing generally could
have three possible outcomes: (i) the Monsanto Settlement and the Retiree
Settlement will be approved; (ii) the Monsanto Settlement and the Retiree
Settlement will be denied; or (iii) the Monsanto Settlement and the Retiree
Settlement will be modified either at the Court's direction or as a result of
further negotiations between the parties supporting and opposing the Monsanto
Settlement.
o If the Monsanto Settlement and the Retiree Settlement are
approved, Solutia will seek to confirm the Amended Plan based on
the votes received through the solicitation process.
o If the Monsanto Settlement and Retiree Settlement are denied,
Solutia will need to reformulate and renegotiate the terms of a
new plan. This process could be protracted, due to the
possibility of extended complex litigation and negotiation, and
would likely delay Solutia's emergence from the Chapter 11 Cases
for the foreseeable future.
o If the Monsanto Settlement and Retiree Settlement are modified,
and such modifications materially and adversely affect parties
who previously voted in favor of the Amended Plan, Solutia may
need to resolicit votes from such parties. However, if the
modifications are not material and adverse, no resolicitation
will be necessary. In the context of resolicitation, "material"
refers to a modification which makes a party who previously
accepted the plan "apt to reconsider his vote." See In re
American
6
Solar King Corp., 90 B.R. 808, 824 (Bankr. W.D. Tex. 1988); see
also In re Eastern Sys., 118 B.R. 223 (Bankr. S.D.N.Y. 1990)
(mentioning both Bankruptcy Rule 3019 and Solar King during
discussion about whether a creditor should be permitted to
change his vote in violation of the timeframe allowed by
Bankruptcy Rule 3018(a)).
Solutia submits that solicitation of votes on the Amended Plan prior
to or simultaneously with the prosecution of the Monsanto Settlement and the
Retiree Settlement is warranted for the following reasons:
o The Cost of Solicitation is Not Significant in the Context of
-------------------------------------------------------------
the Chapter 11 Cases
--------------------
The cost of solicitation is approximately $500,000. As a result,
Solutia believes that the cost of soliciting votes now is a
prudent investment due to the potential return of obtaining an
exit financing facility on the best possible terms and
conditions.
o Denial of the Monsanto Settlement and/or the Retiree Settlement
---------------------------------------------------------------
Will Impact More than Solicitation
----------------------------------
If the Monsanto Settlement and/or Retiree Settlement are denied,
Solutia's accomplishment in reallocating significant Legacy
Liabilities back to Monsanto will be lost. In this event,
Solutia will need to go back to the proverbial "drawing board"
to determine how to appropriately reallocate the Legacy
Liabilities. Solutia believes that the denial of the Monsanto
Settlement and/or Retiree Settlement will damage the Estates and
result in tremendous costs to the stakeholders. Specifically,
Solutia believes that negotiating a new agreement on the
reallocation and satisfaction of the Legacy Liabilities would be
very difficult. In addition, it is very likely that complex,
lengthy and costly litigation would ensue if the Monsanto
Settlement and/or Retiree Settlement are not approved. As a
result, if either of the Monsanto Settlement or the Retiree
Settlement are denied, Solutia will be forced to propose a new
plan, which would likely result in significant delay to
emergence and may ultimately jeopardize Solutia's exit from
chapter 11.
o Confirmation Through Cramdown is an Alternative to
--------------------------------------------------
Resolicitation
--------------
To the extent that there is at least one non-insider, impaired
accepting Class that is not materially and adversely affected by
modifications to the Amended Plan that may occur in connection
with the Settlement Approval Hearing, Solutia may be able to
confirm the Amended Plan over the objection of any dissenting
class without needing to resolicit votes. Solutia may be able to
confirm the Amended Plan (as modified) based on the votes
already solicited through the "cramdown" provisions of the
Bankruptcy Code. The Bankruptcy Court may confirm a modified
plan pursuant to the "cramdown" provision contained in section
1129(b) of the Bankruptcy Code if it determines that the plan
satisfies the requirements of that section. See Article XII.C.
7
E. KEY ELEMENTS OF THE AMENDED PLAN
--------------------------------
The Amended Plan is the result of protracted arms-length negotiations
among Solutia and its stakeholders.(5) 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
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
--------------------------------------
Having concluded several years of arduous arm's-length negotiations,
Solutia now seeks approval of the Monsanto Settlement and the Retiree
Settlement. These settlements are supported by nearly all of Solutia's primary
stakeholders, for good reason. The Monsanto Settlement achieves the overriding
goal of Solutia's reorganization: the permanent reallocation of significant
Legacy Liabilities. Monsanto is taking financial responsibility as between
itself and Solutia for all of Solutia's legacy tort liabilities and a
substantial portion of its legacy environmental liabilities. Monsanto's
contributions in this regard make possible Solutia's Settlement with its
approximately 20,000 Retirees concerning the provision of future medical and
other benefits at modified levels.
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 of 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. Solutia currently
estimates that the ultimate liability for asserted Tort Claims
will range between $15 and $40 million. This estimate does not
account for: (a) future Tort Claims that could be asserted for
pre-Spinoff conduct; (b) the hundreds of additional lawsuits
asserting thousands of claims, which have been commenced
directly against Monsanto (for which Monsanto, under the
Distribution Agreement, could have asserted potentially billions
in dollars in surrogate claims against Solutia's Estates absent
the Monsanto Settlement); and (c) defense costs.
<FN>
- -------------------
(5) The Equity Committee opposes the Monsanto Settlement on which the Amended
Plan is based.
8
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 owned or operated after the Spinoff; (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.(6) The projected liabilities relate to these
three types of sites set forth below:
o Retained Sites
--------------
Solutia projects that it will incur remediation costs
for the Retained Sites in the aggregate amount of
approximately $82 million over the next five years.
o Legacy Sites
------------
Solutia estimates that Monsanto's agreement to take
financial responsibility for the Legacy Sites will
remove approximately $150 million worth of complex
environmental claims from Solutia's Estates.
Additionally, Monsanto has agreed to be responsible for
remediation of dioxin contamination in the Kanawha River
and surrounding areas.
o Shared Sites
------------
Solutia projects that the aggregate remediation costs at
the Shared Sites will be approximately $104 million
through 2011. Although the EPA has not yet determined
final remedies for these sites, Solutia estimates that
remediation costs at Sauget and Anniston will increase
to approximately $25 million per year from 2012 through
2016. After 2016, their costs should decrease.
o Legacy OPEB Liabilities. Solutia's liabilities with respect to
-----------------------
providing its Retirees with medical and other post-employment
benefits are 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
<FN>
- -------------------
(6) The description of sites in this paragraph and the Disclosure Statement
generally is qualified by reference to the Relationship Agreement.
9
Offering, and will be used solely to reimburse Solutia for costs
associated with the payment of benefits for pre-spin Retirees,
and (c) grants the Retirees an Allowed non-priority general
unsecured claim in the aggregate amount of $35 million, the
Distribution on account of which will be contributed to the
Retiree Trust. The Retiree Settlement is made possible only as a
result of Monsanto's agreement to assume financial
responsibility for legacy tort and environmental claims pursuant
to the Monsanto Settlement.
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"),(7) as the predecessor to 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.
<FN>
- -------------------
(7) Wilmington Trust Company ("Wilmington Trust") has replaced JPMorgan as
the Prepetition Indenture Trustee. On March 12, 2007, the Bankruptcy
Court entered a Stipulation and Order substituting Wilmington Trust as
plaintiff in the JPM Adversary Proceeding.
10
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. Solutia believes
that it has already settled the Equity Committee's objections to
Monsanto and Pharmacia's claims. At a hearing on May 18, 2007,
the Bankruptcy Court ruled that it would consider the
reasonableness of Solutia's proposed settlement of claims
asserted by and against Pharmacia and Monsanto in these Chapter
11 Cases. The Settlement Approval Hearing is scheduled to
commence on September 5, 2007. At this hearing, the Equity
Committee will challenge the terms of the Monsanto Settlement
and the Retiree Settlement. In the event that the Equity
Committee is successful at the Settlement Approval Hearing, the
Monsanto Settlement and Retiree Settlement will not be approved
and the Amended Plan may not be confirmable. If, however, the
Bankruptcy Court approves the terms of the Monsanto Settlement
and the Retiree Settlement, 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. On January 17,
2006, these litigations were stayed. 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"). On November 1, 2004 the parties entered
into a standstill agreement and the litigation has been stayed
since October 26, 2004. Pursuant to the terms of the Amended
Plan and the Retiree Settlement Agreement, the Retirees'
Adversary Proceeding will be withdrawn with prejudice.
11
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.
(b) Estimates of Certain Classes of Claims
Claims in Classes 1, 2, 4, 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 in Classes 3 and 5 will be
paid in Cash in full on the Effective Date, but are deemed impaired by the
terms of the Amended Plan. Claims in Classes 18 and 19 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 or other
Distributions under the terms of the Amended Plan. Holders of Common Stock in
Solutia Inc. in Class 20 will receive their Pro Rata share of the Warrants,
provided that Classes 11, 12, 13, 14, 15 and 20 vote to accept the Amended
Plan. If any of Classes 11, 12, 13, 14, 15 and 20 vote to reject the Amended
Plan, then the Holders of Common Stock in Solutia Inc. in Class 20 will not
receive any Distributions under the Amended Plan. The estimated aggregate
amount of Claims and Equity Interests in each of Classes 3, 5, 11, 12, 13, 14,
15 and 20 is set forth below:
o Senior Secured Notes Claims. As of the Petition Date, Solutia
---------------------------
had outstanding approximately $223 million (which takes into
account an unamortized original issue discount (the "OID") of
$41.3 million) of the Senior Secured Notes issued pursuant to
the 2009 Indenture (as defined herein). On June 22, 2007,
Solutia objected to claim no. 6210 filed by the Senior Secured
Notes Trustee. Solutia's objection seeks to reduce and allow the
Senior Secured Notes Trustee's claim to approximately $208
million as of the Effective Date, which consist of (a) $181.7
million funded on account of the Senior Secured Notes at their
issuance and (b) amortized OID of $26.3 million (assuming an
Effective Date of September 30, 2007).
o CPFilms Claims. Solutia estimates that the total amount of
--------------
Allowed CPFilms Claim, will be approximately $8.4 million.
Holders of CPFilms Claims are also entitled to assert Claims for
simple interest against the CPFilms estate.
12
o Monsanto Claim. Monsanto asserts Claims against Solutia in the
--------------
aggregate amount of at least $824.5 million. Importantly, the
Monsanto Claim includes additional unliquidated claims, fees,
costs and charges that are not reflected below:(8)
- --------------------------------------------------------------------------------------------
MONSANTO LIQUIDATED CLAIM CALCULATION
- --------------------------------------------------------------------------------------------
Amounts Spent on Solutia's behalf as of (May 31, 2007) (in $ millions)
- --------------------------------------------------------------------------------------------
Environmental
Environmental Remediation (Legacy Sites) 15.7
Environmental Remediation (Shared Sites) 46.3
------------------
Subtotal 62.0
- --------------------------------------------------------------------------------------------
Litigation Defense Costs
Fees & Expenses 87.1
Settlements 66.8
------------------
Subtotal 153.9
==================
Total Spending as of May 31, 2007 215.9(9)
- --------------------------------------------------------------------------------------------
Other Claim Elements
- --------------------------------------------------------------------------------------------
Estimated Future Tort/Environmental Spending 179(10)
- --------------------------------------------------------------------------------------------
Anniston Settlement 428.7(11)
- --------------------------------------------------------------------------------------------
Other (PCL3 Claims) 0.9
- --------------------------------------------------------------------------------------------
TOTAL LIQUIDATED MONSANTO CLAIM 824.5
- --------------------------------------------------------------------------------------------
o Monsanto Contribution. As part of the Monsanto Settlement,
---------------------
Monsanto has agreed, to (a) extend the term of the Master
Operating Agreement, (b) replace the Distribution
<FN>
- -------------------
(8) On June 29, 2007, Monsanto filed its amended claim.
(9) Under section 502(e) of the Bankruptcy Code, the $215.9 million that
Monsanto has spent during these Chapter 11 Cases on Solutia's behalf for
litigation defense and environmental remediation at the Legacy Sites and
Shared Sites may constitute allowed General Unsecured Claims based on the
terms of the Distribution Agreement. See In re Drexel Burnham Lambert
Group, Inc., 146 B.R. 98, 102 (Bankr. S.D.N.Y. 1992) (claims for
reimbursement or contribution that are paid, therefore fixed, are treated
as prepetition claims). Moreover, absent the Monsanto Settlement,
Monsanto would likely argue that the $215.9 million that Monsanto has
spent on Solutia's behalf since the Petition Date constitutes an
Administrative Claim under section 507(a)(2) under the Bankruptcy Code.
See In re Jartran, Inc., 886 F.2d 859, 871 (7th Cir. 1989) (expenditures
may be treated as administrative expense claims if they are actual and
necessary costs and expenses of preserving the estate that benefit the
estate as a whole).
(10) Monsanto expects to spend $179 million in connection with future legacy
tort and legacy environmental liabilities. The estimated future tort
liability component is based on historical settlement and judgment costs
and past attorney's fees related to such actions. The estimated future
environmental liability component is based on the amount Monsanto expects
to spend on Legacy Site environmental remediation (discounted to present
value at a rate of 3.5%).
(11) Monsanto alleges that Solutia breached the Anniston Settlement Agreement
and asserts a claim for $428.7 million (net of insurance proceeds) as a
result of this alleged breach.
13
Agreement with the Relationship Agreement, (c) settle the
litigation related to Solutia's Anniston, Alabama plant, (d)
remove all Tort Claims from Solutia's General Unsecured Claims
pool, (e) waive the right to file surrogate claims on behalf of
legacy claimants, (f) waive the various indemnity claims related
to Legacy Liabilities for which Monsanto has agreed to take
financial responsibility, (g) enter into the Chocolate Bayou
Settlement and amend and assume the Commercial and Operating
Agreements subject to the terms thereof,(12) and (h) resolve all
litigation and potential litigation related to the Distribution
Agreement, the classification of Monsanto's Claim and other
matters, between Solutia and Monsanto (with (a) through (h), the
"Monsanto Contribution").
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 Classification
--------------
The Noteholders' Claims are being separately classified
from the General Unsecured Claims because, for among
other reasons, (a) the Prepetition Indenture Trustee
has filed an appeal of the Bankruptcy Court's May 1,
2007 ruling holding that the Holders of 2027/2037 Notes
do not have, and are not entitled to, a lien on the
Debtors' assets; (b) the ultimate recovery on account
of the Noteholders' Claims is subject to the charging
lien arising under the Prepetition Indenture; and (c)
the underlying obligations for such Claims constitute
funded debt as opposed to general trade Claims.
o General Unsecured Claims. The Debtors estimate that the total
------------------------
amount of Allowed General Unsecured Claims will range between
$317 million and $367 million.(13)
o Retiree Claim. The Retirees, as a class, will receive an
-------------
Allowed, non-priority unsecured claim in the aggregate amount of
$35 million, which amount is based on the value of agreed-upon
reductions to retiree benefits that Solutia could not have
unilaterally imposed on the Retirees. The recovery on account of
the Retiree Claim will be contributed to the Retiree Trust to
enhance its ability to maintain benefit payments for both pre-
and post-spin Retirees.
o Pharmacia. Holders of Pharmacia Claims will receive
---------
Distributions in the form of a limited indemnity and release.
<FN>
- -------------------
(12) The Chocolate Bayou Settlement is expected to be "cost-neutral" such that
there will be no impact on Solutia's business projections upon the
consummation of this agreement.
(13) This range does not include $290 million asserted as a borrowed Unsecured
Claim by the Dickerson plaintiffs. Solutia believes that this claim
should be subordinated by operation of section 510(b) of the Bankruptcy
Code. For a more detailed discussion of this claim and Solutia's
objections, thereto, see Section VI.B.2.
14
o Common Stock in Solutia Inc. As of February 28, 2007, there were
---------------------------
104,459,578 shares of common stock in Solutia Inc. issued and
outstanding. Solely for purposes of tabulating votes to accept
or reject the Amended Plan in accordance with section 1126(d) of
the Bankruptcy Code, each share of common stock in Solutia Inc.
will be deemed to have a value of $0.01.
(c) Implied Equity Value Available For Distribution
As more fully described in the valuation materials attached as
Exhibits E and K 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.(14) Accordingly, Reorganized Solutia's implied
midpoint equity value available for distribution to creditors is approximately
$1.2 billion.
The Equity Committee's financial advisor believes that Solutia's
value may be significantly higher than the Debtors' estimate. The Equity
Committee intends to vigorously challenge the Debtors' valuation at
confirmation.
(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 Senior Secured Notes
Claims, Allowed CPFilms Claims, Allowed Secured Claims and Convenience Claims
will be paid in full.
(ii) Certain Creditors Will Receive Shares of New Common
Stock
Pursuant to the Amended Plan, the following Creditors 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 $342 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):(15)
<FN>
- -------------------
(14) Pro forma debt of $1.7 billion less pro forma cash of $30 million.
(15) 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.
15
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 49.9% 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 that do not participate in the Rights Offering will
receive a recovery of approximately 74.8 cents on the dollar.
Holders of Allowed Noteholder Claims in Class 12 that do
participate in the Rights Offering will receive a recovery of
approximately 85.3 cents on the dollar.
o Monsanto will receive (a) 20% of the New Common Stock,(16) which
Solutia estimates will be worth approximately $240 million at
the midpoint of total enterprise value; (b) an Allowed
Administrative Expense Claim for all amounts that it has spent
on (x) the Retained Sites and (y) Environmental Liabilities in
excess of $50 million at the Shared Sites;(17) (c) payment of
reasonable fees and expenses of Monsanto's professionals for
work related to the Chapter 11 Cases, capped at the aggregate
fees (as approved by the Bankruptcy Court) of the Creditors'
Committee's professionals;(18) and (d) subject to taking
financial responsibility for liability relating to legacy tort
and environmental claims, releases and injunctions against
claims relating to Solutia or Legacy Liabilities retained by
Solutia.
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 49.9% 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 that do not participate in the Rights
Offering will receive a recovery of approximately 74.8 cents on
the dollar. Holders of Allowed General Unsecured Claims in Class
13 that do participate in the Rights Offering will receive a
recovery of approximately 85.3 cents on the dollar.
o The Retirees will receive their future post-employment
healthcare, medical or life insurance benefits as modified by
the Retiree Settlement Agreement. On the Effective
<FN>
- -------------------
(16) Pursuant to the Monsanto Settlement, Monsanto's recovery on account of
this Claim is materially less than if the Monsanto Claim was allowed in
its full asserted amount.
(17) Monsanto's administrative expense claim includes claims for Environmental
Liabilities (as defined in the Relationship Agreement) at the Shared
Sites. Environmental Liabilities include, among other things, amounts
that Monsanto has spent for environmental remediation and fees and
expenses related to contribution actions against potential responsible
parties in connection with the Shared Sites. Based on information
received from Monsanto, the Environmental Liabilities at the Shared
Sites, as of May 31, 2007, equal $65.9 million (of which $46.3 million is
for environmental remediation). Pursuant to the Relationship Agreement,
any amounts recovered by Monsanto through its contribution actions
against potentially responsible third-parties are allocated 33.3% to
Monsanto and 66.6% to Solutia.
(18) The professionals for the Creditors' Committee have incurred
approximately $16.7 million in fees and expenses as of May 31, 2007, plus
a transaction fee payable to Houlihan Lokey, the Creditors' Committee's
financial advisors, upon the confirmation of the Amended Plan with a base
fee of at least $1 million plus an incentive fee, based on the interim
compensation orders granted by the Bankruptcy Court.
16
Date, Solutia will contribute $175 million in cash proceeds from
the Rights Offering to the Retiree Trust, which funds will be
used solely to reimburse Solutia for costs associated witht the
payment of benefits for pre-spin Retirees. In addition, the
Retirees, as a class, will receive an Allowed, non-priority
unsecured Claim in the aggregate amount of $35 million, which
amount is based on the value of agreed-upon reductions to
benefits that Solutia could not have unilaterally imposed on the
Retirees.(19) The recovery on account of the Retiree Claim will
be contributed to the Retiree Trust. In accordance with the
terms of the Retiree Settlement Agreement, the Retirees, as a
class, will receive 2.2% of the New Common Stock, resulting in a
recovery of 74.8 cents on the dollar, which is comparable with
the implied value afforded other holders of unsecured claims
after excluding the value associated with the right to acquire
additional New Common Stock through the Rights Offering and
without considering the value to be received through the Retiree
Trust in the form of future retiree medical, life and disability
benefits. The recovery on account of the Retiree Claim will be
contributed to the Retiree Trust to enhance its ability to
maintain benefit payments for both pre- and post-spin Retirees
and does not account for potential variations to General
Unsecured Creditor recoveries based on whether Solutia's General
Unsecured Claims estimate proves to be correct.(20)
4. DISTRIBUTIONS TO HOLDERS OF COMMON STOCK IN SOLUTIA INC.
--------------------------------------------------------
Holders of Common Stock in Solutia Inc. will receive their Pro Rata
share of Warrants to purchase up to 3.5% of the New Common Stock with a strike
price of $14.16, provided that Holders of Claims and/or Equity Interests in
each of Classes 11, 12, 13, 14, 15 and 20 vote to accept the Plan. If any of
Classes 11, 12, 13, 14, 15 and 20 vote to reject the Plan, the Holders of
Common Stock in Solutia Inc. will not receive any Distributions under the
Amended Plan. On the Effective Date, all existing common stock of, and
existing warrants and options to purchase common stock, in Solutia Inc. will
be cancelled.
5. RELEASES
--------
The Amended Plan provides for the following releases:(21)
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
<FN>
- -------------------
(19) The Retiree Claim and all rights and obligations associated therewith,
including voting rights, will be held and managed by the Retirees'
Committee as the authorized representative for the Retirees.
(20) Any and all claims filed by individual Retirees on account of reductions
in their post-employment healthcare, medical or life insurance benefits
as a result of Solutia's Chapter 11 Cases will be disallowed and expunged
as duplicative of the Retiree Claim.
(21) This summary of the releases set forth in Article VIII.D 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.
17
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 (g) the Retirees' Committee and (h) 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, (f) the Retirees' Committee and (g) 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, 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, as between itself and Solutia, to
take financial responsibility for 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. Monsanto and Pharmacia will receive releases
from the Legacy Liabilities at the Retained Sites. These releases are of
significant value.
6. 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.
18
F. SUMMARY OF CLASSIFICATION AND TREATMENT OF ALLOWED CLAIMS AND EQUITY
--------------------------------------------------------------------
INTERESTS UNDER THE AMENDED PLAN
--------------------------------
The following table(22) 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.
- --------------------------------------------------------------------------------------------------------------------------------
ESTIMATED PERCENTAGE
TREATMENT OF ESTIMATED AGGREGATED AMOUNT OF RECOVERY OF ALLOWED
CLASS CLAIM/EQUITY INTEREST CLAIM/EQUITY ALLOWED CLAIMS OR EQUITY CLAIMS OR EQUITY
INTEREST INTERESTS INTERESTS(23)
- --------------------------------------------------------------------------------------------------------------------------------
Class 1 Priority Non-Tax Claims Unimpaired $2.2 million 100%
- --------------------------------------------------------------------------------------------------------------------------------
Class 2 Secured Claims(24) Unimpaired $40-$50 million 100%
- --------------------------------------------------------------------------------------------------------------------------------
Class 3 Senior Secured Note Claims Impaired $208 million to 100%
$223 million(25)
- --------------------------------------------------------------------------------------------------------------------------------
Class 4 Convenience Claims Unimpaired $1 to $2.5 million 100%(26)
- --------------------------------------------------------------------------------------------------------------------------------
Class 5 CPFilms Claims Impaired $8.4 million plus simple 100%
interest at a rate of 8% per
annum.
- --------------------------------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
- -------------------
(22) 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.
(23) The estimated percentage recoveries provided by the Debtors with respect
to Classes 12 (Noteholder Claims), 13 (General Unsecured Claims), and 14
(Retiree Claims) each contain the assumption that the ultimate aggregate
amount of Allowed General Unsecured Claims will be $342 million. This
estimated amount includes an estimate of the allowed amount of the
Calpine Claims in the amount of $140 million based upon the Calpine
Settlement described in Section VI.A.7 of this Disclosure Statement.
(24) Secured Claims include Claims premised upon mechanics' liens and
materialmen's liens.
(25) 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 million, however, the Senior Secured Notes
Trustee has asserted that its claims on behalf of the Senior Secured
Noteholders could exceed this amount. The $208 million is determined
using the effective interest method as of Sept. 30, 2007. For voting
purposes only, the Senior Secured Note Claims will be allowed in their
full face amount of $223 million.
(26) See Exhibit A.
19
- --------------------------------------------------------------------------------------------------------------------------------
ESTIMATED PERCENTAGE
TREATMENT OF ESTIMATED AGGREGATED AMOUNT OF RECOVERY OF ALLOWED
CLASS CLAIM/EQUITY INTEREST CLAIM/EQUITY ALLOWED CLAIMS OR EQUITY CLAIMS OR EQUITY
INTEREST INTERESTS INTERESTS(23)
- --------------------------------------------------------------------------------------------------------------------------------
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. Tort Claims See Exhibit A.
are being Reinstated and will
be resolved by Monsanto in the
ordinary course of business.
- --------------------------------------------------------------------------------------------------------------------------------
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
Debtors other than Solutia Unimpaired Not applicable. Not applicable.
- --------------------------------------------------------------------------------------------------------------------------------
Class 11 Monsanto Claim Impaired See Note 27.(27) See Note 27.
- --------------------------------------------------------------------------------------------------------------------------------
Class 12 Noteholder Claims(28) Impaired $455.4 million(29) 85.3%(30)
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
- -------------------
(27) Monsanto has asserted Claims against Solutia of at least $824.5 million.
Importantly, these Claims include additional unliquidated claims, fees,
costs and charges. Additionally, pursuant to the Monsanto Settlement,
Monsanto has agreed to make significant contributions to Solutia's
Estates as described in more detail in section VIII.B. In satisfaction of
its Claim and based on its Contribution, Monsanto will receive 20% of the
New Common Stock of Reorganized Solutia. At the Amended Plan's midpoint
implied equity value of $1.2 billion, this stock is worth approximately
$240 million.
(28) As described in Sections II.E.3 and VI.A.1, the status of the Noteholder
Claims is subject to an appeal of the Bankruptcy Court's Final Judgment
(as defined herein) determining that the Noteholders do not have, and are
not entitled to, a lien on any of the Debtors' assets. For this and other
reasons, under the Amended Plan, the Noteholders Claims are being
separately classified from the General Unsecured Claims.
(29) Based on principal amount of $450 million plus accrued and unpaid
interest of $5.4 million as of the Petition Date.
(30) The recovery calculation is based on the following assumptions: (a) a
General Unsecured Claims pool of $342 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
- --------------------------------------------------------------------------------------------------------------------------------
ESTIMATED PERCENTAGE
TREATMENT OF ESTIMATED AGGREGATED AMOUNT OF RECOVERY OF ALLOWED
CLASS CLAIM/EQUITY INTEREST CLAIM/EQUITY ALLOWED CLAIMS OR EQUITY CLAIMS OR EQUITY
INTEREST INTERESTS INTERESTS(23)
- --------------------------------------------------------------------------------------------------------------------------------
Class 13 General Unsecured Claims Impaired $317 million to $367 million 85.3%(31) (32)
- --------------------------------------------------------------------------------------------------------------------------------
Class 14 Retiree Claim Impaired $35 million(33) 74.8%(34)
- --------------------------------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
- -------------------
(31) The recovery calculation is based on the following assumptions: (a) a
General Unsecured Claims pool of $342 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.
(32) 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
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.
(33) The Retirees will receive their future post-employment benefits as
modified by the Retiree Settlement. On the Effective Date, $175 million
in cash proceeds, raised through the Rights Offering, will be placed in
the Retiree Trust, which funds will be used solely to reimburse
Reorganized Solutia for costs associated with the payment of benefits for
pre-spin Retirees. The Retirees, as a class, will also receive an
Allowed, non-priority unsecured Claim in the aggregate amount of $35
million, which is based on the value of agreed-upon reductions to
benefits that Solutia could not have unilaterally imposed on the
Retirees. In accordance with the terms of the Retiree Settlement
Agreement, the Retirees, as a class, will receive 2.2% of the New Common
Stock, resulting in a recovery of 74.8 cents on the dollar. The recovery
on account of the Retiree Claim will be contributed to the Retiree Trust
to enhance its ability to maintain benefit payments for all Retirees for
both pre- and post-spin Retirees.
(34) The estimated recovery for the Retiree Claim does not include the future
value of retiree, medical, life and disability benefits to be provided by
Reorganized Solutia. Holders of the Retiree Claim are not Eligible
Holders and will not participate in the Rights Offering. Proceeds from
the later sale of the New Common Stock distributed on account of the
Retiree Claim will help to ensure that Reorganized Solutia is able to
meet its future obligations to Retirees under the Retiree Settlement; the
value of the New Common Stock therefore does not limit Reorganized
Solutia's commitment to provide future welfare benefits pursuant to the
terms of the Retiree Settlement.
21
- --------------------------------------------------------------------------------------------------------------------------------
ESTIMATED PERCENTAGE
TREATMENT OF ESTIMATED AGGREGATED AMOUNT OF RECOVERY OF ALLOWED
CLASS CLAIM/EQUITY INTEREST CLAIM/EQUITY ALLOWED CLAIMS OR EQUITY CLAIMS OR EQUITY
INTEREST INTERESTS INTERESTS(23)
- --------------------------------------------------------------------------------------------------------------------------------
Class 16 Non-Debtor Intercompany Impaired $108 million 40%(36)
Claims(35)
- --------------------------------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------------------------------------
Class 20 Common Stock in Solutia Impaired Solely for purposes of N/A(37)
tabulating votes to accept or
reject the Amended Plan in
accordance with Section
1126(d) of the Bankruptcy
Code, each share of common
stock of Solutia Inc. will be
Inc. deemed to be worth $0.01.
- --------------------------------------------------------------------------------------------------------------------------------
G. 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:
<FN>
- -------------------
(35) Non-Debtor Intercompany Claims are Claims between Solutia and its foreign
non-debtor subsidiaries. The Plan treatment for these claims is intended
to maximize tax and financial efficiencies between Solutia and its
foreign subsidiaries. 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 Claims.
(37) Holders of Common Stock in Solutia Inc. will receive their Pro Rata Share
of the Warrants if, and only if, Classes 11, 12, 13, 14, 15 and 20 vote
to accept the Amended Plan.
22
o Solutia is NOT soliciting votes from the Holders of Claims
in Classes 1, 2, 4, 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 and 19 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 and Equity Interests 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 3, 5, 11, 12, 13, 14, 15
and 20 because Claims and Equity Interests as in these
Classes are Impaired under the Amended Plan and the Holders
of those Claims will receive Distributions under the Amended
Plan.(38) 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.
H. SOLICITATION PACKAGE
--------------------
Accompanying this Disclosure Statement are copies of:
o the Amended Plan;
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;
<FN>
- -------------------
(38) The Retiree Claim and all rights and obligations associated therewith,
including voting on the Amended Plan, will be held and managed by the
Retirees' Committee as the authorized representative for the Retirees.
23
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 and Equity Interests
in Classes 3, 5, 11, 12, 13, 14, 15 and 20.(39)
I. 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 and Equity Interests in Classes 3, 5, 11, 12, 13, 14, 15 and 20. Only
the Holders of Claims or Equity Interests 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, balloting, and solicitation 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) August 30, 2007 (the "Voting Deadline").
<FN>
- -------------------
(39) Holders of common Stock in Solutia Inc. in Class 20 will only receive a
solicitation package to the extent that they hold at least 24 shares of
common stock in Solutia Inc. Persons who hold less than 24 shares of
common stock in Solutia Inc., do not own sufficient shares to receive a
Warrant. Under the terms of the Amended Plan, Reorganized Solutia is not
required to make Distributions of less than whole Warrants.
24
-----------------------------------------------------------
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 5:00 P.M., (PREVAILING EASTERN TIME), ON
AUGUST 30, 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 OR EQUITY
INTEREST IN CLASSES 3, 5, 11, 12, 13, 14, 15 AND 20 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.
25
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.
26
By returning a Master Ballot, each Nominee will be certifying to
Solutia and the Bankruptcy Court, among other things, that:(40)
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.
<FN>
- -------------------
(40) For purposes of soliciting votes on the Amended Plan, Wilmington Trust
shall not constitute a "Nominee" and is not responsible for sending any
solicitation packages to or collecting and voting a Master Ballot for
any Beneficial Owner or holder of the 2027/2037 Notes.
27
J. 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
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.
K. 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
28
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.
L. 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.
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
AMENDED PLAN IS IN THE BEST INTERESTS OF ALL CREDITORS. 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 CREDITORS' COMMITTEE SUPPORTS THE AMENDED PLAN AND URGES ALL
HOLDERS OF GENERAL UNSECURED CLAIMS TO VOTE IN FAVOR OF THE AMENDED PLAN. THE
RETIREES' COMMITTEE SUPPORTS THE RETIREE SETTLEMENT AGREEMENT AND THE AMENDED
PLAN AND URGES ALL RETIREES TO SUPPORT THE RETIREE SETTLEMENT AGREEMENT AND
THE AMENDED PLAN. THE AD HOC TRADE COMMITTEE SUPPORTS THE AMENDED PLAN AND
URGES ALL HOLDERS OF TRADE CLAIMS TO VOTE IN FAVOR OF THE AMENDED 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
OTHER MATERIAL CONDITIONS PRECEDENT, AS STATED IN ARTICLE VIII OF THIS
DISCLOSURE STATEMENT. THERE IS NO ASSURANCE THAT THESE CONDITIONS WILL BE
SATISFIED OR WAIVED.
THE EQUITY COMMITTEE DOES NOT BELIEVE THAT THE AMENDED PLAN IS IN THE
BEST INTERESTS OF ALL CREDITORS OR IN THE BEST INTEREST OF THE ESTATES.
29
APPROVAL OF THE AMENDED PLAN IS SUBJECT TO A HEARING ON THE
REASONABLENESS OF THE MONSANTO SETTLEMENT AND THE RETIREE SETTLEMENT, WHICH
ARE INCORPORATED INTO THE AMENDED PLAN. AN EVIDENTIARY HEARING ON THE
REASONABLENESS OF THE SETTLEMENTS IS SCHEDULED TO COMMENCE ON SEPTEMBER 5,
2007. THE EQUITY COMMITTEE INTENDS TO OBJECT TO THE REASONABLENESS OF THE
MONSANTO AND RETIREE SETTLEMENTS AT THAT HEARING. IF THE BANKRUPTCY COURT
DETERMINES THAT THE SETTLEMENTS ARE NOT REASONABLE, THE AMENDED PLAN WILL NOT
GO FORWARD AS PROPOSED BECAUSE IT WILL NOT BE CONFIRMABLE UNDER THE BANKRUPTCY
CODE.
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 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
30
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 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
31
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 of o results of litigation;
the 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. 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:
32
o Solutia's ability to demonstrate that the o exposure to product liability and other
Monsanto Settlement and Retiree Settlement are litigation, environmental remediation obligations
reasonable pursuant to Bankruptcy Rule 9019 and other and other environmental liabilities;
applicable bankruptcy law;
o lower prices for Solutia's products or a
o Solutia's ability to develop, confirm and decline in Solutia's market share due to
consummate the Amended Plan; competition or price pressure by customers;
o Solutia's ability to reduce its overall financial o ability to implement cost reduction
leverage; initiatives in a timely manner;
o the potential adverse impact of the Chapter 11 o ability to divest existing businesses;
Cases on Solutia's operations, management and
employees, and the risks associated with operating o efficacy of new technology and facilities;
businesses in the Chapter 11 Cases;
o limited access to capital resources;
o the applicable Debtors' ability to comply with
the terms of the DIP Credit Facility; o changes in domestic and foreign laws and
regulations;
o customer response to the Chapter 11 Cases;
o general market conditions;
o general economic, business and market conditions;
o geopolitical instability;
o currency fluctuations;
o changes in pension and other post-retirement
o interest rate fluctuations; benefit plan assumptions; and
o price increases or shortages of raw materials and o the enactment of legislation increasing
energy; funding obligations to the Solutia Pension Plan.
o disruption of operations;
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:
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.
33
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. 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 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").(41)
<FN>
- -------------------
(41) Article VIII 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.
34
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, 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
35
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 Legacy Liabilities relate
to the chemicals business that Solutia inherited in the Spinoff and include
certain liabilities related to many products that were never produced by
Solutia. 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 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. Many of these retired employees never worked
for Solutia. As of the Petition Date, Solutia was providing such
36
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.
The Monsanto Settlement and Retiree Settlement provide Monsanto and
Pharmacia with substantial protection from the Retirees. Without the Retiree
Settlement embodied in the Amended Plan, Monsanto and Pharmacia face the risk,
under the terms of the Forsberg Settlement, that if Solutia is, in fact,
insolvent, and fails to make the required payments, that the Retirees could
refile the Forsberg and Baird Litigations against Pharmacia and Monsanto.
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.
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
or operated by Solutia as of the Petition Date and others not owned or
37
operated 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. Solutia has never manufactured
or sold PCBs. 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
and likely never worked for Solutia. 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.
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:
38
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 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
39
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 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
40
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 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.
41
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 alleging claims for trespass, negligence,
nuisance, outrage and other torts relating to alleged PCB contamination at the
Anniston plant. Plaintiffs were seeking damages and injunctive relief. 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.
Notably, all of the underlying facts giving rise to these causes of action
were in place well before the Spinoff. Solutia had no role in producing PCBs.
42
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 and Monsanto 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 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
43
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 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
44
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 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
45
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 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.
46
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.
The Equity Committee believes that the burden imposed on Solutia as a
result of the Spinoff to pay the Legacy Liabilities was the primary reason for
the filing of these 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
47
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, 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 net
proceeds from the sale of the Solutia's Dequest(R) water treatment
phosphonates business were used to pay-down the balance of the term loan. The
maturity date of the DIP Credit Facility is March 31, 2008.
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
48
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
49
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.(42) Mr. Quinn also served from 1989 to
<FN>
- -------------------
(42) Premcor Inc. was acquired by Valero Energy Corporation in 2005.
50
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
51
Director, Manufacturing Accounting with responsibility over all of
Solutia's manufacturing facilities. Mr. DeBolt joined the Company in
1982.
HAL E. WALLACH, JR. joined Solutia as Senior Vice President of Human
Resources in July 2007. For seven years, Mr. Wallach previously
served as a principal and head of the St. Louis office of Mercer
Human Resources Consulting, one of the world's largest human
resources consulting firms. Prior to joining Mercer, Mr. Wallach held
management positions with two other leading human resources
consulting firms, Buck Consultants and Hewitt Inc.
Certain executives and two other key employees have a component of
their Annual Incentive Plan (the "2007 AIP") which is linked to Solutia's
emergence from bankruptcy. This emergence metric applies to Jeffry N. Quinn,
Kent J. Davies, Luc De Temmerman, James R. Voss, Jonathon P. Wright, Robert T.
DeBolt, Rosemary L. Klein, James M. Sullivan and two other key employees (the
"Emergence Metric Employees").
The incentive to be awarded to the Emergence Metric Employees
pursuant to the 2007 AIP is calculated by multiplying the eligible employee's
actual bonus awarded under the 2007 AIP (in accordance with historical
practices of Solutia and which shall not be less than the employee's target
bonus multiplied by the relevant funding factor) by a factor based on the
Emergence Date. The multiplier factors are set forth below as the Emergence
Metric. The Emergence Metric for each Emergence Metric Employee is based
solely on objective factors, and is not discretionary.
The metrics for 2007 are set forth as follows:
Core Pool and Business Pools
- ---------------------------------------------------------------------------------------------------------
UNIT MEASURE WEIGHT MEASURE WEIGHT
- ---------------------------------------------------------------------------------------------------------
CORE POOL Enterprise 75% Enterprise 25%
Average Working
EBITDAR Capital %
- ---------------------------------------------------------------------------------------------------------
INTEGRATED NYLON POOL EBITDAR 75% Average working 25%
Capital %
- ---------------------------------------------------------------------------------------------------------
SAFLEX POOL EBITDAR 50% Average working 25%
Gross Margin Capital %
% 25%
- ---------------------------------------------------------------------------------------------------------
CPFILMS POOL Gross Profit 75% Average working 25%
Capital %
- ---------------------------------------------------------------------------------------------------------
OTHER PPD POOL EBITDAR 75% Average working 25%
Capital %
- ---------------------------------------------------------------------------------------------------------
52
ENTERPRISE DISCRETIONARY BONUS POOL
--------------------------------------------------------------------------
UNIT MEASURE WEIGHT
--------------------------------------------------------------------------
All Enterprise EBITDAR 100%
--------------------------------------------------------------------------
EMERGENCE MATRIX
--------------------------------------------------------------------------------------
EMERGENCE QUINN SULLIVAN KLEIN WRIGHT DAVIES DE
--------- ----- -------------- ----------------
MATRIX DEBOLT AND TWO TEMMERMAN
------ -------------- ---------
OTHER KEY VOSS
--------- ----
EMPLOYEES
---------
--------------------------------------------------------------------------------------
Q2 `07 1.5x 1.5x 1.3x
--------------------------------------------------------------------------------------
Q3 `07 1.3x 1.3x 1.2x
--------------------------------------------------------------------------------------
Q4 `07 1.1x 1.1x 1.1x
--------------------------------------------------------------------------------------
NO EMERGENCE 0.8x 0.9x 1.0x
------------
--------------------------------------------------------------------------------------
Awards will be paid out no later than two and a half months following
the close of calendar year 2007. An employee who has a component of their
2007AIP award comprised of the Emergence Metric shall be entitled to his or
her award even if his or her employment is terminated (voluntarily or
involuntarily) on or after the Emergence Date, or if the Emergence Metric
Employee is terminated without cause (as defined in his or her employment
agreement) prior to the Emergence Date.
After the Debtors emerge from chapter 11, it is anticipated that all
of the senior management team will continue to work for Solutia in their
current capacity.
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
53
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.
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
54
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, 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
55
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 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
56
"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 recognizing
that, consistent with the Forsberg Settlement, Solutia was authorized to
terminate retiree welfare benefits for two classes of Medicare eligible
participants on January 1, 2007, and for those under age 65 in the two Retiree
classes on later dates identified in 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 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.
57
(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 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
58
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
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
59
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
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.
60
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.
o Assumption and amendment of propylene supply agreement between
Solutia and Equistar Chemicals, LP.
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
61
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 footwear. 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.
(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
62
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.
(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
63
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.
(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.
64
(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 31, 2007, Solutia sold its Dequest(R) water treatment
phosphonates business to Thermphos Trading GmbH, a Swiss corporation
("Thermphos") for $67 million in cash, subject to a working capital
adjustment. As part of the closing, affiliated companies of Solutia and
Thermphos entered into a lease and operating agreement under which Solutia
will continue to operate the Dequest production facility for Thermphos at
Solutia's plant in Newport, Wales, U.K.
(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.
65
(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 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
66
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) 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 Agreement is annexed to the Amended Plan as Exhibit B. Key terms of
the Retiree Settlement Agreement include:
o Creation of the Retiree Trust. On the Effective Date,
-----------------------------
Solutia will contribute $175 million in cash proceeds
from the Rights Offering to the Retiree Trust, which is
intended to qualify as a "voluntary employees'
beneficiary association" under Section 501(c)(9) of the
IRC. These funds will be used solely to reimburse
Solutia for costs associated with the payment of
benefits for pre-spin Retirees. The Retiree Trust
provides continuing and substantial protections for
continued payments of retirees' benefits. The Amended
Plan shall not be effective unless the Retiree Trust is
fully funded.
o Modification to Medical Benefits. Reorganized Solutia
--------------------------------
can limit the amount it pays each year for retiree
medical expenses, change deductibles and prescription
drug co-payments and cap the amount of benefits paid to
individual retirees after the age of 65. In addition,
Retiree representatives will maintain certain
monitoring rights with respect to the Retiree Trust and
2007 Retiree Welfare Benefit Plan.
o Modification to Life Insurance Benefits. Life insurance
---------------------------------------
benefits have been capped for employees who retired
before December 31, 2001 and eliminated for those who
retired after that date.
o Retiree Claim. The Retirees, as a class, will receive
-------------
an allowed, non-priority unsecured claim in the
aggregate amount of $35 million, which is based on the
value of agreed-upon reductions to benefits that
Solutia could not have unilaterally imposed on the
Retirees. The recovery on account of the Retiree Claim
will be contributed to the Retiree Trust. The funds
from the Retiree Trust will be used solely to reimburse
Reorganized Solutia for costs associated witht the
payment of benefits for pre-spin Retirees.
o Retiree Release. The Retirees have agreed to release
---------------
Solutia, Monsanto and Pharmacia, any employee benefit
plans of Monsanto or Pharmacia and their respective
officers, directors, employees, affiliates, successors,
assigns, representatives, agents, advisors and
professionals from all claims related to "retiree
benefits" (as defined in section 1114(a) of the
Bankruptcy Code).
67
This release protects Monsanto and Pharmacia from risk
that any portion of the Retiree liabilities could be
asserted directly against them.
The agreed modifications to the Retirees' OPEB benefits set forth in
the Retiree Settlement Agreement will result in a significant savings to
Reorganized Solutia, estimated at approximately $110 million in value, while
preserving vital medical, health and life insurance benefits for Retirees. In
addition, the Retirees' benefits will be further protected by the Retiree
Trust funded with $175 million from the Rights Offering.
(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.(43)
(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 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. The Debtors currently estimate that the ultimate liability for
asserted Tort Claims will range between $15 and $40 million. This estimate
does not account for: (a) future Tort Claims that could be asserted for
<FN>
- -------------------
(43) The ability to defer up to $25 million of certain expenses in excess of
$30 million annually provides certainty with respect to these
obligations, which, among other things, is important to Solutia's ability
to seek exit financing on favorable terms.
68
pre-Spinoff conduct; (b) the hundreds of additional lawsuits asserting
thousands of claims, which have been commenced directly against Monsanto (for
which Monsanto, under the Distribution Agreement, could have asserted
potentially billions in dollars in surrogate claims against Solutia's Estates
absent the Monsanto Settlement); and (c) defense costs.
(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 fifth amendment increased the DIP Credit Facility to $1.225 billion,
consisting 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. The net proceeds
from the sale of the Solutia's Dequest(R) water treatment phosphonates
business were used to pay-down the balance of the 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 was subsequently upsized by an additional
$25 million.
69
(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, which will be converted to equity.
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 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,
70
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:(44)
A. LEGAL PROCEEDINGS IN THE BANKRUPTCY COURT
-----------------------------------------
1. THE JPM ADVERSARY PROCEEDING
----------------------------
On May 27, 2005, JP Morgan as the predecessor to the Prepetition
Indenture Trustee under the Prepetition Indenture, filed the JPM Adversary
Proceeding, seeking declaratory judgment that the 2027/2037 Notes are entitled
to valid and perfected security interests in certain of Solutia's assets and
seeking adequate protection pursuant to section 363 of the Bankruptcy Code.
The JPM Adversary Proceeding relates 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. Solutia contended that, 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). Solutia contended that 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 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. Thereafter, on May 17, 2007, the
Bankruptcy Court
<FN>
- -------------------
(44) 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.
71
entered the final judgment (the "Final Judgment") in the JPM Adversary
Proceeding. As a result of the Final Judgment in Solutia's favor, under the
Amended Plan, Solutia has proposed to give the Holders of the 2027/2037 Notes
the same level of recovery as the General Unsecured Creditors.
Before the Bankruptcy Court's decision, Wilmington Trust was
substituted as the plaintiff in the JPM Adversary Proceeding.(45) On May 29,
2007, Wilmington Trust filed a timely notice of appeal of the Final Judgment.
On the same date, the Ad Hoc Notes Committee, which previously had intervened
in the JPM Adversary Proceeding, also filed a timely notice of appeal of the
Final Judgment. The appeal filed by Wilmington Trust is pending before the
Honorable George B. Daniels, United States District Judge of the United States
District Court for the Southern District of New York. The appeal filed by the
Ad Hoc Notes Committee is pending before the Honorable Loretta A. Preska,
United States District Judge of the United States District Court for the
Southern District of New York. It is likely that both appeals will be
consolidated. In both appeals, the appellants' opening brief is due on July
13, 2007. Oral argument has not been set, and it is uncertain when any
decision will be rendered. Any decision by the District Court could be further
appealed to the Second Circuit Court of Appeals.
Unless the Final Judgment is affirmed or the appeal is otherwise
----------------------------------------------------------------
dismissed, an appellate court could determine that the 2027/2037 Notes are
- ---------
secured. In that event, the claims of the Prepetition Indenture Trustee could
be reclassified and recoveries by the Noteholders and General Unsecured
Creditors may be adjusted accordingly.
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
<FN>
- -------------------
(45) On March 12, 2007, the Court entered a Stipulation and Order substituting
Wilmington Trust, which replaced JPMorgan as the Prepetition Indenture
Trustee, as plaintiff in the JPM Adversary Proceeding.
72
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.
At a hearing on May 18, 2007, the Bankruptcy Court ruled that it
would consider the reasonableness of Solutia's proposed settlement of claims
asserted by and against Pharmacia and Monsanto in these Chapter 11 Cases. The
Settlement Approval Hearing is scheduled to commence on September 5, 2007. At
this hearing, the Equity Committee will challenge the terms of the Monsanto
Settlement and the Retiree Settlement. In the event that the Equity Committee
is successful at the Settlement Approval Hearing, the Monsanto Settlement and
the Retiree Settlement will not be approved and the Amended Plan may not be
confirmable. If, however, the Bankruptcy Court approves the terms of the
Monsanto Settlement and the Retiree Settlement, 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.
3. THE EQUITY COMMITTEE'S VIEW OF THE EQUITY COMMITTEE ADVERSARY
-------------------------------------------------------------
PROCEEDING(46)
--------------
In its first-day filings, Solutia reported that it filed for Chapter
11 relief principally because of the Legacy Liabilities that Pharmacia
unilaterally imposed through the Spinoff. Yet Solutia - which is closely bound
to Monsanto and Pharmacia by operating agreements and as Pharmacia's former
Chemicals division - has declined throughout these cases to seriously or
actively challenge the claims and rights of Monsanto and Pharmacia. The Equity
Committee believes that the Creditors' Committee has also failed to challenge
Monsanto and Pharmacia.
<FN>
- -------------------
(46) The views asserted in this section are solely those of the Equity
Committee. Solutia, the Creditors' Committee, the Ad Hoc Trade Committee,
the Retirees' Committee, Monsanto and Pharmacia do not agree with,
support or adopt in any way whatsoever, the allegations made by the
Equity Committee in this section.
73
Therefore, responsibility for reclaiming value for all parties-in-interest by
challenging Monsanto and Pharmacia has been devolved upon the Equity
Committee.
During the early stages of these Chapter 11 cases, the Equity
Committee requested discovery of the Debtors, Pharmacia, Monsanto and Goldman
Sachs in mid-2004. As a result of that process, the Equity Committee
determined that at the time of the Spinoff, Pharmacia created Solutia as a
vehicle to take on potentially devastating Legacy Liabilities and leave
Pharmacia with a clean balance sheet, and that Pharmacia did so knowing that
Solutia lacked adequate capital to satisfy the liabilities being allocated to
it. The Equity Committee and its advisors concluded that Solutia was
undercapitalized from its inception due to the undisclosed remediation costs
and toxic tort liabilities that were transferred to it from Pharmacia.
The Equity Committee believes that Pharmacia's awareness of and
concern regarding Solutia's undercapitalization is evidenced by, among other
things, Pharmacia's failure to disclose the full extent of the Legacy
Liabilities being palmed off on to Solutia to either the debt rating agencies
that determined Solutia's investment grade credit rating or to the then and
future public shareholders of Solutia.
Based on the Equity Committee's review of the underlying documents,
it appears that in structuring the Spinoff, Pharmacia knew or should have
known that significant residual environmental contamination existed at its
historical chemicals plants due to Pharmacia's failure to invest in
environmental controls at the time it manufactured such infamous chemicals and
other hazardous materials as dioxin, agent orange and PCBs. However, the
Equity Committee believes that the true risks associated with Pharmacia's
historical production of these infamous chemicals had never been disclosed to
its own shareholders/investors, including the risks that certain events, if
they occurred, could cause the environmental liabilities to exceed $1 billion.
Instead, the Equity Committee believes that the information Pharmacia provided
to the public in connection with the Spinoff and the ultimate sale of Solutia
stock was incomplete and misleading. The Equity Committee believes that the
public disclosures by Pharmacia painted a picture of a company with manageable
environmental and tort exposure in the $250 million range. In particular, the
Equity Committee believes that the disclosures made to unsuspecting equity
holders failed to adequately describe the significant environmental challenges
and costs that Pharmacia knew it faced.
After its investigation and evaluation of claims, on March 7, 2005,
the Equity Committee filed the a complaint (the "Equity Committee Complaint")
seeking (i) recharacterization of Monsanto and Pharmacia's indemnity claim as
equity; (ii) equitable subordination of Monsanto and Pharmacia's interests to
equity interests; (iii) equitable disallowance of Monsanto and Pharmacia's
claims based on the Legacy Liabilities; (iv) disallowance of Monsanto and
Pharmacia's claims based on unjust enrichment; (v) disallowance of Monsanto
and Pharmacia's claims based on equitable estoppel; (vi) disallowance of
Monsanto and Pharmacia's claims under Section 502(d); (vii) contribution under
CERCLA Section 113(f); (viii) a declaration that certain provisions of the
Agreement that created Solutia (the "Distribution Agreement") are
unconscionable and therefore unenforceable; (ix) implied indemnity for
Solutia; (x) avoidance of fraudulently transferred liabilities; and (xi)
disallowance of contingent liability claims under Section 502(e)(1)(B).
74
Ultimately, the Equity Committee seeks the disallowance of the claims
filed by Monsanto and Pharmacia against Solutia's bankruptcy Estates and a
reallocation of hundreds of millions of dollars 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.
In addition to the Equity Committee Complaint, at the Bankruptcy
Court's direction, the Equity Committee has diligently evaluated Solutia's
continued exposure to environmental and tort liability. The Equity Committee
retained an environmental expert to assist in this evaluation and analysis.
While there are significant points of agreement with the Debtors, the Equity
Committee's environmental expert believes that the ultimate cost to remediate
off-site contamination at Anniston will be substantially higher than the
Debtors' estimate.
The Equity Committee alleges that, with respect to the Anniston,
Alabama site, Pharmacia knew well before the Spinoff the following:
o From 1929 until 1971, most of the PCB's manufactured in the
United States were produced at the Anniston plant. During this
period, adequate environmental controls were not in place at
Anniston to prevent the release of PCBs into the environment.
o Consequently, the Equity Committee believes that Anniston is one
of the most contaminated PCB sites in the country. There are
over 30 miles of impacted waterways downstream from the former
manufacturing facility, including waters in the State of Alabama
that are used for drinking water and recreational purposes.
Fishing in waterways downstream of Anniston has been prohibited
since 1996 because of high PCB concentrations in aquatic
organisms.
o The Equity Committee's environmental expert believes that if
regulators were to require the excavation of the PCB
contaminated sediments that are impacting fish and the
floodplain, it would likely have a material impact on Solutia's
financial condition.
o Under Section 107 of CERCLA, the Equity Committee believes that
Monsanto was liable to federal and state natural resource
trustees for natural resource damages resulting from its PCB
manufacturing activities at Anniston.
o As early as 1987, the environmental manager for the Anniston
facility warned the head of the chemical business that "[i]t
should be made clear, however, that no monies have been reserved
for a major site cleanup program." The manager's memorandum went
on to note that "[a] requirement for removal and disposal of
contaminated soil ... would require major, undefined
expenditures."
o The Equity Committee believes that since the 1960's, Pharmacia
has been aware that fish in Choccolocco Creek downstream of the
facility have PCB levels in excess of
75
the Food and Drug Administration tolerance level. In 1993, the
State of Alabama banned fishing in Choccolocco Creek.(47)
o In 1970, Pharmacia analyzed hogs in the Anniston area and found
PCB concentrations in the hog fat of roughly 2%. There are
significant livestock grazing areas in the flood plains along
Choccolocco Creek. Yet, after the 1970 hog analysis, The Equity
Committee believes that Pharmacia never conducted any follow-up
work to assess the possible uptake by livestock and crops in the
flood plains of Choccolocco Creek. In addition, the Equity
Committee believes that Pharmacia never notified regulators or
warned farmers who might have conducted their own
investigations.
o In 1996, the Agency for Toxic Substances and Disease Registry
("ATSDR") and ADPH classified the segment of Choccolocco Creek
impacted by Pharmacia's PCBs as a "public health hazard." This
classification was "based on evidence that individuals living
around ... Snow Creek and fishing in Choccolocco Creek could
have adverse health effects from exposure to contaminants in
sediment, soil, fish and water." During that same time period,
in apparent recognition of the hazards presented by PCB's in the
environment, the Equity Committee believes that Old Monsanto
instituted a property purchase program in which it offered to
buy out entire Anniston neighborhoods to facilitate ease of
construction.
Currently, pursuant to Order of the Court entered on May 18, 2007,
the Equity Committee's Adversary Proceeding is stayed pending a hearing on the
reasonableness of the Monsanto and Retiree Settlement. That hearing is
scheduled to commence on September 5, 2007. At that hearing, the Equity
Committee intends to present the Bankruptcy Court with evidence as to the
Equity Committee's allegations and intends to vigorously challenge the
reasonableness of the Monsanto and Retiree Settlement. The Equity Committee
believes that the Monsanto and Retiree Settlement (and, as a result, the
Amended Plan) is far too generous to Monsanto and Pharmacia in light of their
potential exposure for the Legacy Liabilities and poses far too heavy of a
burden on Reorganized Solutia. The Monsanto and Retiree Settlement cannot meet
the standard for approval of settlements under the Bankruptcy Code and Rules.
The Equity Committee believes that the Monsanto and Retiree Settlement is
wholly unreasonable and therefore, should be rejected.
If the Monsanto and Retiree Settlement is not approved, the current
Amended Plan will not be confirmable. The Equity Committee believes that it
would then be free to pursue actions, including the Equity Committee Adversary
Proceeding, that could effectively return over a billion dollars in value to
the Estates, providing full recoveries for Allowed Unsecured Claims
<FN>
- -------------------
(47) The Agency for Toxic Substances and Disease Registry, a public health
agency of the U.S. Department of Health and Human Services, "agrees that
the current no-consumption advisories issued by the Alabama Department of
Public Health (ADPH) are warranted." See ATSDR Media Announcement, Jan.
---
15, 2004, available at www.atsdr.cdc.gov/NEWS/annistonal011504.html (last
visited July 9, 2007).
76
and meaningful recoveries for the holders of Equity Interests in Solutia in
excess of the Debtors' current projections.
4. 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.
(b) The Adversary Proceedings
Solutia has commenced several adversary proceedings against Monsanto
and Pharmacia:
(i) The Benefits Adversary.
77
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"). Solutia asserted that Pharmacia
was responsible for these obligations because (a) Pharmacia promised the
Retirees certain lifetime and vested retiree benefits, (b) Pharmacia
improperly assigned to Solutia the obligation to provide certain retiree
benefits in violation of Pharmacia's contractual promises and its fiduciary
duties under ERISA, and (c) Pharmacia promised the Retirees lifetime and
vested benefits on which the Retirees relied.
(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 including preferential transfers to Monsanto totaling $2,272,704 in
satisfaction of unsecured credit extended to the Debtors and the transfer of
the Legacy Liabilities to Solutia. (See Section VI.A.8 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"), which has stayed the actions. These actions, together with the
Rejection Motion and the other Settled Adversary Proceedings, will be settled
and withdrawn pursuant to the Amended Plan.
The Equity Committee believes that if the Debtors were successful
with these actions, the judgments could have resulted in the elimination of
significant claims asserted by Monsanto and Pharmacia and the reallocation of
hundreds of millions of dollars of liabilities back to Monsanto's and
Pharmacia's balance sheets.
78
(d) Monsanto's Proof of Claim
In November 2004, Monsanto filed a proof of Claim with the Bankruptcy
Court asserting a contingent, unliquidated(48) and unsecured non-priority
Claim against Solutia (the "Monsanto 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. These alleged
claims (including Pharmacia's claim discussed immediately below) are
significant and many arise from the indemnification obligations imposed on
Solutia at the time of the Spinoff. The Equity Committee agreed to allow
Monsanto to bring its Claim current on or before June 30, 2007. As a result,
on June 29, 2007, Monsanto filed its revised claim with the Bankruptcy Court.
The Equity Committee believes that the Debtors have significant
defenses to these claims based on the inequitable transfer of the Legacy
Liabilities to Solutia at that time.
In satisfaction of its Claims and based on its contributions,
Monsanto will receive 20% of the New Common Stock of Reorganized Solutia,
which will be worth approximately $240 million at the midpoint enterprise
value.
(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
<FN>
- -------------------
(48) The Monsanto Proof of Claim also included a liquidated portion.
79
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 Equity
Committee also agreed to allow Pharmacia to bring its claims current on or
before June 30, 2007. As a result, on June 29, 2007, Pharmacia filed its
revised claim with the Bankruptcy Court.
5. 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
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.
6. 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"). Both Pharmacia and Monsanto
opposed the litigation. 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.
7. CALPINE ARBITRATION
-------------------
Prior to the Petition Date, Solutia entered into a series of
long-term agreements with Calpine Central, L.P. ("Calpine Central"), Decatur
Energy Center, LLC ("Decatur" and together with Calpine Central, "Calpine")
and certain affiliates of Calpine pursuant to which a natural gas
co-generation facility (the "Co-gen Facility") was built on land leased from
Solutia at Solutia's plant in Decatur, Alabama.
The agreements between the parties included the following: (1) the
Second Amended and Restated Lease, Steam Sales and Shared Services Agreement,
dated January 31, 2001 (as amended, the "Principal Agreement"); (2) a Facility
Lease Addendum to the Principal
80
Agreement (as amended, the "Facility Lease Addendum"); (3) a Steam Sales
Addendum to the Principal Agreement (as amended, the "Steam Sales Addendum");
and (4) the Second Amended and Restated Operating and Maintenance Agreement
(as amended, the "O&M Agreement") (collectively, the "Calpine Agreements").
Each of the Calpine Agreements was for a 20-year term, subject to early
termination under certain circumstances.
Pursuant to the Calpine Agreements, Solutia agreed, among other
things, (a) lease from Decatur an undivided 20% interest in the Co-gen
Facility for a fixed monthly payment of $357,000; (b) to purchase from Decatur
100% of its steam requirements (with the exception of steam Solutia was
permitted to self-generate) in return for both a variable and fixed capacity
payment based on the amount of steam Solutia required and (c) to pay Calpine
Central a fixed monthly fee of $332,150 and a monthly fuel payment for the
operation and maintenance of Solutia's 20% interest in the Co-gen Facility
during the term of the Agreements.
On May 13, 2004, Solutia filed a Motion seeking to reject, inter
alia, the Steam Sales Addendum, the Facility Lease Addendum and the O&M
Agreement. The rejection of these agreements was approved by a Stipulation and
Order of the Court dated May 26, 2004.
On November 24, 2004, Decatur filed its proof of claim against
Solutia, asserting claims totaling $351,220,357 for damages resulting from
Solutia's rejection of the Steam Sales Addendum and the Facility Lease
Addendum. Calpine Central filed its proof of claim in the amount of
$31,496,976 for damages resulting from Solutia's rejection of the O&M
Agreement.
On August 25, 2005, Solutia filed an objection to the proofs of claim
filed by Decatur and Calpine Central (the "Calpine Claims") and requested that
its objection be resolved by arbitration. By Order dated November 4, 2005,
this Court granted Solutia's request to resolve its objections to the Calpine
Claims by arbitration pursuant to the arbitration provisions contained in the
Calpine Agreements.
Between November 20, 2005 and January 20, 2006, Solutia commenced
three arbitration proceedings (one for each contract) against Decatur and
Calpine Central. On September 12, 2006, these three arbitration proceedings
were consolidated into a single arbitration proceeding before a panel of three
arbitrators before the International Institute of Conflict Prevention and
Resolution, CPR File G-05-60H (the "Arbitration Proceeding").
The parties have engaged in extensive discovery (exchanging over
800,000 pages of documents) in the Arbitration Proceeding and have exchanged
initial and supplemental expert reports. According to the report of Calpine's
expert witness, Decatur's damages, not counting mitigation, are $429,711,762
and Calpine Central's damages are $73,054,619. According to the report of
Solutia's expert witness, Decatur and Calpine Central suffered no damages,
unless one analyzes Decatur and Calpine Central as a single entity, in which
case the consolidated entity's damages are approximately $13,654,000. On June
29, 2007, Decatur and Calpine Central filed
81
amended proofs of claim with the Court asserting damages in the amount
estimated by Calpine's expert.(49)
On June 5, 2007, Solutia agreed upon a settlement in principle (the
"Calpine Settlement") with Decatur and Calpine Central to resolve Solutia's
objection to the Calpine Claims. Under the Calpine Settlement, Decatur and
Calpine Central will be granted an Allowed Class 13 General Unsecured Claim
for $140 million against Solutia, which claim will be treated similarly to all
other Allowed General Unsecured Claims. The Calpine Settlement is subject to
the execution of formal documentation, approval by the Board of Directors of
Calpine Corporation (scheduled for July 16, 2007), approval by this Court and
approval by the bankruptcy court presiding over the chapter 11 cases of
Decatur and Calpine Central. After the Calpine Board of Directors has approved
the Calpine Settlement, Solutia will seek this Court's approval of the Calpine
Settlement pursuant to, inter alia, Bankruptcy Rule 9019 by separate motion,
which will describe the Calpine Settlement in more detail. If the Calpine
Board of Directors does not approve the Calpine Settlement, then the parties
have agreed to proceed with the Arbitration Proceeding, which is currently
scheduled for hearing on August 27-30 and September 5-7, 2007.
8. 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 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.
<FN>
- -------------------
(49) Solutia reserves the right to contest the amendment of Decatur and
Calpine Central's claims in the event that the settlement of the Calpine
litigation described below is not approved.
82
(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.
(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
83
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 and briefing on such motions has
been completed. With respect to the Solutia Pension Plan, plaintiffs moved to
certify a class only with respect to the claim that termination of interest
credits violate ERISA.
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.
84
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 plaintiff 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, the oral argument occurred
on May 21, 2007 and the appeal is pending.
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. On June 21, 2007, Solutia filed a supplemental objection to
Dickerson's Claim asserting that the Claim arises from the purchase or sale of
securities and thus, even if such Claim survives appeal and is allowable, it
is subject to subordination pursuant to Bankruptcy Code section 510(b).
Accordingly, under the Amended Plan, the Dickerson Claim is classified in
Class 19 as "Security Claims" and will be discharged without any
Distributions.
On June 25, 2007, a new purported class action entitled Reiff v. Metz
was filed in the United States District Court, Southern District of New York
against the same defendants named
85
in the Dickerson lawsuit. The factual allegations and legal claims in Reiff
appear to be virtually identical to those of Dickerson, however, the purported
class representative in Reiff is a current Solutia employee whereas the
purported class representative in Dickerson is not.
[In the event Dickerson's Claim is not subordinated pursuant to
section 510(b) of the Bankruptcy Code and Dickerson is ultimately successful
in his lawsuit, it could result in Dickerson's Claim asserted in the amount of
$29 million being allowed as a General Unsecured Claim. Solutia and Dickerson
are discussing a resolution of the objection and a settlement of the Dickerson
Claim. The proposed settlement would, (a) allow Dickerson relief from the
automatic stay and plan injunction provisions to pursue his alleged
prepetition and postpetition claims against Solutia, but (b) limit any
recovery available to Dickerson to insurance proceeds.]
3. SIGNIFICANT LEGAL PROCEEDINGS INVOLVING NON-DEBTOR
--------------------------------------------------
AFFILIATES OF SOLUTIA
---------------------
(a) Flexsys Patent and Related Litigation
Flexsys America L.P. ("Flexsys America"), recently acquired by
Solutia as part of the Flexsys Acquisition, holds various patents covering
inventions in the manufacture of rubber chemicals, including patents
describing and claiming a manufacturing process for 4-aminodiphenylamine
("4-ADPA"), a key building block for the manufacture of 6PPD and IPPD, as well
as a manufacturing process for 6PPD and IPPD, which function as
anti-degradants and are used primarily in the manufacture of rubber tires.
Legal Proceedings in the United States
The ITC proceeding. In February 2005, Flexsys America filed a
complaint with the U.S. International Trade Commission ("ITC"), requesting
that the ITC initiate an investigation against Sinorgchem Co. Shangdong, a
Chinese entity ("Sinorgchem"), Korea Kumho Petrochemical Company, a Korean
company ("KKPC"), and third party distributors of Sinorgchem. Flexsys America
claims that the process Sinorgchem used to make 4-ADPA and 6PPD, its sale of
6PPD for importation into the U.S., and Singorchem's sale of 4-ADPA to KKPC
and KKPC's importation of 6PPD into the U.S. were covered by Flexsys America's
patents. Accordingly, Flexsys America requested that the ITC issue a limited
exclusion order prohibiting the importation into the United States of 4-ADPA
and 6PPD originating from these entities. In February 2006, an Administrative
Law Judge ("ALP") of the ITC determined that Flexsys America's patents were
valid, that the process used by Sinorgchem to make 4-ADPA and 6PPD was covered
by Flexsys America's patents, and that Sinorgchem and its distributor, but not
KKPC, had violated section 1337 of the U.S. Tariff Act. In July 2006, the ITC
substantially upheld the ALJ's decision, and subsequently issued a limited
exclusion order against Sinorgchem and its distributor prohibiting them from
importing 4-ADPA and 6PPD manufactured by Sinorgchem into the United States.
Sinorgchem has appealed the ITC decision to the United States Court of Appeals
for the Federal Circuit. Briefing has been completed and oral arguments are
scheduled for August 2007.
Flexsys America L.P. v. Kumho Tire U.S.A., Inc. et al. In January
2005, Flexsys America filed suit in United States District Court for the
Northern District of Ohio for patent infringement against Sinorgchem, KKPC,
Kumho Tire Korea and Kumho Tire US, affiliates of KKPC, and
86
certain other tire distributors seeking monetary damages as well as injunctive
relief. This action is currently stayed pending resolution of the ITC matter
described above.
In re Rubber Chemicals Antitrust Litigation. In April 2006, KKPC
filed suit against Flexsys America in the United States District Court for the
Central District of California for alleged violations of the Sherman Act,
breach of contract, breach of the implied covenant of good faith and fair
dealing, declaratory relief, intentional interference with prospective
economic advantage, disparagement and violations of the California Business &
Professions Code. This matter was subsequently transferred to the United
States District Court, Northern District of California. Flexsys America has
filed a motion to dismiss KKPC's complaint, which is currently pending before
the Court.
Legal Proceedings in Korea
In April 2004, Flexsys America filed a patent infringement action in
Korean Civil Court against KKPC seeking to enjoin it from manufacturing 6PPD
in violation of Flexsys America's Korean patent. Flexsys America believes
Sinorgchem manufactures 4-ADPA using Flexsys America's patented process, that
KKPC imports Sinorgchem's 4- ADPA into Korea and uses it to manufacture 6PPD
for the production of rubber tires for sale in Korea. In late 2004, the Korean
District Court dismissed the action and found Flexsys America's Korean patent
invalid. The District Court's decision was upheld on appeal by the Korean High
Court. Flexsys America has appealed the decision to the Supreme Court of
Korea.
Also in April 2004, Sinorgchem filed an action with the Korean
Intellectual Property Tribunal ("IPT") seeking to invalidate Flexsys America's
Korean patent. The IPT issued a decision invalidating significant claims of
Flexsys America's Korean patent. The IPT decision was reversed on appeal by
the Patent Court of Korea. Sinorgchem has appealed the decision to the Supreme
Court of Korea.
Solutia expects the Supreme Court of Korea to render decisions in
both cases in early 2008.
Legal Proceedings in Europe and China
Various parties, including Sinorgchem and other competitors of
Flexsys America, have filed other, separate actions in patent courts in Europe
and China seeking to invalidate certain of Flexsys America's patents issued in
those jurisdictions. One decision has been issued to date by the European
Patent Office under which it upheld the validity of significant claims of
Flexsys America's patent. Decisions in the other pending cases are not
expected before the end of 2007.
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.
87
(b) Other 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.
However, all of these cases have been dismissed, or are currently subject to
confirmed or tentative settlements. For information concerning other
significant Flexsys litigation, please see the description in the "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.
As noted above, 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.
(c) 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
88
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.
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.
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
89
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 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,
90
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 submitted additional information
to the DOL in January 2007 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.
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
91
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 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
92
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 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.
93
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.
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
94
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 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.
95
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. 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
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 Anniston, Alabama. The
96
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.
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.
97
G. CAPITAL OBLIGATIONS TO BE SATISFIED OR COMPROMISED UPON EMERGENCE
-----------------------------------------------------------------
As of the Petition Date, Solutia reported, on a consolidated basis,
approximately $1.2 billion in aggregate long-term indebtedness, primarily
consisting of secured and unsecured notes, a bank credit facility and a
synthetic lease financing arrangement. As set forth in the following table,
Solutia plans to satisfy this indebtedness including indebtedness incurred
under the DIP Credit Facility, the Senior Secured Notes, the Euro Facility
Agreement and the Flexsys Secured Facilities Agreement from the proceeds of
the Exit Financing Facility and other sources, as described in greater detail
in Section VII.H.2 of this Disclosure Statement.
98
- --------------------------------------------------------------------------------------------------------------------------
ANTICIPATED SOURCES AND USES OF CASH AT EMERGENCE ($ AMOUNT IN MILLIONS)(50)
- --------------------------------------------------------------------------------------------------------------------------
SOURCES: USES:
- -------- -----
- --------------------------------------------------------------------------------------------------------------------------
(1) Surplus Cash(51) 156 DIP (Drawn) 924(52)
- --------------------------------------------------------------------------------------------------------------------------
(2) Exit Revolver(53) 59 Flexsys Term/Revolver(54) 150
- --------------------------------------------------------------------------------------------------------------------------
Exit Term Loan B - USD Tranche 600 Senior Secured Notes(55) 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 172
emergence (Advisor fees, cure payments,
etc)
- --------------------------------------------------------------------------------------------------------------------------
Rights Offering Proceeds 250 Maryville Note 20
- --------------------------------------------------------------------------------------------------------------------------
Retiree Trust 175
- --------------------------------------------------------------------------------------------------------------------------
Funding Co 75
- --------------------------------------------------------------------------------------------------------------------------
Minimum Cash Balance 30
- --------------------------------------------------------------------------------------------------------------------------
<FN>
- -------------------
(50) Assumes emergence occurs on June 30, 2007.
(51) Cash balance reduced to $30 million at emergence with no restrictions.
(52) 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. The net proceeds of the sale of Dequest(R)
water treatment phosphonates business were used to pay-down the term loan
portion of the DIP Credit Facility.
(53) Total Revolver $400 million: after letter of credits drawings pro forma
liquidity on June 30, 2007 would be approximately $300 million.
(54) 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.
(55) 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 $208 and $223 million, with the low
end of the range determined using the constant interest method as of
September 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.
99
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SOURCES $2,085 TOTAL USES $2,085
- --------------------------------------------------------------------------------------------------------------------------
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. The net proceeds from the sale of the
Solutia Dequest(R) water treatment phosphonates business were used to pay-down
the balance of the 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
$41.3 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, 2002, which
was subsequently amended by a supplemental indenture among Solutia, SOI
100
Funding Corporation and certain of Solutia's subsidiary guarantors as defined
therein, and HSBC Bank USA, dated July 25, 2002 (together, the "2009
Indenture"). By agreement dated January 16, 2004, The Bank of New York
replaced HSBC Bank USA as indenture trustee for the Senior Secured Notes. 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. In connection with the order
approving the DIP Credit Facility, the Senior Secured Notes Trustee was
granted, for the benefit of the 2009 Noteholders, superpriority administrative
expense claims and junior replacement liens in the 2009 Post-Petition
Collateral (as described in the DIP Credit Facility).
On June 22, 2007, Solutia objected to claim no. 6210 filed by the
Senior Secured Notes Trustee in the aggregate amount of $223 million.
Solutia's objection seeks to reduce and allow the Senior Secured Notes
Trustee's claim to $208 million as of the Effective Date, which consist of (a)
$181.7 million funded on account of the Senior Secured Notes at their issuance
and (b) amortized OID of $26.3 million (assuming an Effective Date of
September 30, 2007). Solutia expects to pay the Allowed amount of the Senior
Secured Note Claims with a portion of the proceeds from the Exit Facility.
Distribution to the Noteholders will be made through the Senior Secured Notes
Trustee and will be subject to the Senior Secured Notes Trustee's charging
lien.
(a) Additional Claims
In addition to its secured claim for $223 million, the Senior Secured
Notes Trustee also alleges that it is entitled to assert General Unsecured
Claims for (i) 101% of the aggregate principal amount of the Senior Secured
Notes as a result of a "Change of Control" allegedly occurring under the
Amended Plan, and (ii) at least $25 million in damages allegedly arising from
the interruption of the Noteholders' expectation of an uninterrupted payment
stream under the Senior Secured Notes. Neither of these claims is specifically
identified in the Notes Trustees' proof of claim, which was filed as a secured
claim.
Solutia believes that the Senior Secured Notes Trustee is required to
seek leave from the Bankruptcy Court to amend claim no. 6210 now that this
claim is the subject of a pending claim objection. See In re Argus Group 1700,
Inc., 206 B.R. 737, 748 (Bankr. E.D. Pa. 1996); and See In re Drexel Burnham
Lambert Group, Inc., 159 B.R. 420, 425 (Bankr. S.D.N.Y. 1993). Solutia intends
to oppose both of these additional claims in connection with its objection to
the Senior Secured Notes Trustee's Claim.
(b) Impairment
As an impaired class, the Senior Secured Notes are entitled to vote
to accept or reject the Amended Plan. For voting purposes only, the Holders of
the Senior Secured Notes will be entitled to vote the full face amount of
their claim, or $223 million.
To the extent that the Senior Secured Notes Trustee successfully
amends claim no. 6210 to include its alleged General Unsecured Claims, which
claims will remain subject to a pending objection, and wants to vote this
General Unsecured Claim to accept or reject the Amended Plan, then the Senior
Secured Notes Trustee will need to seek allowance of this claim for voting
101
purposes pursuant to Bankruptcy Rule 3018. The Senior Secured Notes Trustee
also has asserted that it is entitled to vote contingent guarantee claims that
the Senior Secured Notes Trustee may hold against certain of Solutia's
subsidiaries. These contingent guarantee claims are likely to remain
unliquidated because Solutia, Inc., the obligor on account of the Senior
Secured Notes, expects to pay the Allowed amount of the Senior Secured Note
Claims in cash in full. Any allowance of these claims for voting purposes will
similarly need to be determined by separate motion before the Bankruptcy Court
pursuant to Bankruptcy Rule 3018.
(c) Cramdown
To the extent that the Holders of the Senior Note Claims vote to
reject the Amended Plan, Solutia nevertheless believes that it can still
proceed to confirm the terms of the Amended Plan pursuant to the "cram down"
provisions of section 1129(b) of the Bankruptcy Code. See Section XII.C. This
section of the Bankruptcy Code requires, among other things, that Solutia
provide the Holders of the Senior Secured Note Claims with the "indubitable
equivalent" of such claims. A cash payment in the Allowed amount of the Senior
Secured Notes claims is the indubitable equivalent of such claims. See In re
Temple Zion, 125 B.R. 910 (Bankr. E.D. Pa 1991) (holding that cash payment of
the allowed amount of a claim is the indubitable equivalent).
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 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. Moreover, as a class, the Retirees will receive an Allowed,
non-priority unsecured claim in the amount of $35 million, based on the value
of agreed upon reductions to Retiree benefits that Solutia could not
unilaterally impose on the Retirees. The recovery on account of the Retiree
Claim will be contributed to the Retiree Trust.
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
102
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. On June 20, 2007, Solutia
and the lenders entered into an agreement, subject to Bankruptcy Court
approval, resolving the lenders' claims in exchange for a new secured note and
an Allowed General Unsecured Claim in amounts agreed upon by the parties.
Specifically, the lenders will have an Allowed Secured Claim in the amount of
$20 million and an Allowed General Unsecured Claim in the amount of $27.1
million. On July 6, 2007, Solutia filed a motion and accompanying memorandum
of law seeking approval of its agreement with the lenders. (Dkt. Nos. 4005 and
4006).
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 was subsequently 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.
103
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.
10. COMMON STOCK AND COMMON STOCK DERIVATIVES
-----------------------------------------
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; in addition, as of March 31, 2007, Solutia had 7,197,059 stock
options outstanding.
Pursuant to the Amended Plan, each Holder of Common Stock in Solutia
Inc. will receive their Pro Rata share of the Warrants to purchase up to 3.5%
of the New Common Stock with a strike price of $14.16, provided that Holders
of Claims and/or Equity Interests in each of Classes 11, 12, 13, 14, 15 and 20
vote to accept the Amended Plan. If any of Classes 11, 12, 13, 14, 15 and 20
vote to reject the Amended Plan, the, Holders of Common Stock in Solutia Inc.
will not receive any Distributions under the Amended Plan. On the Effective
Date, all existing common stock of, and existing warrants and options to
purchase common stock in Solutia Inc. will be cancelled.
104
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(56) 7,303,500 6.99%
- ---------------------------------------------------------------------------------------------------------------
(a) TRADING RESTRICTIONS TO PRESERVE SOLUTIA'S NET OPERATING
--------------------------------------------------------
LOSS INCOME ATTRIBUTES
----------------------
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.
H. REORGANIZED SOLUTIA'S STRUCTURE
-------------------------------
As set forth above, all of Solutia's existing common stock and
options and warrants to purchase Solutia's existing common stock will be
cancelled on the Effective Date. Shares of the New Common Stock of Reorganized
Solutia will be issued pursuant to the Amended Plan on the terms set forth
below. Holders of existing shares of Common Stock in Solutia Inc. will receive
their Pro Rata Share of the Warrants, if, and only if, classes 11, 12, 13, 14,
15 and 20 vote to accept the Amended Plan
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.
<FN>
- -------------------
(56) 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.
105
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.(57)
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 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
<FN>
- -------------------
(57) The Equity Committee did not participate in the majority of the
negotiations concerning the terms of the Global Settlement. The Equity
Committee believes that the current allocation of the Legacy Liabilities
as set forth in the Amended Plan and described in this Disclosure
Statement is unreasonable, particularly in light of the defenses and
objections that the Debtors possess against Monsanto and Pharmacia, as
well as the affirmative claims for reallocation of the Legacy Liabilities
which the Equity Committee believes could be brought by the Debtors
against Monsanto and Pharmacia.
106
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 February 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 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.
107
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 proceeds from the Rights Offering 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 $110 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.
108
o Monsanto Claim. Monsanto filed an amended claim on June 29,
--------------
2007, asserting Claims against Solutia in the aggregate
amount of at least $824.5 million.
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 asserts claims against Solution in the aggregate
amount of at least $824.5 million plus unliquidated claims, fees, costs and
charges. Monsanto's asserted liquidated claim is comprised of the following:
- -------------------------------------------------------------------------------------------
MONSANTO LIQUIDATED CLAIM CALCULATION
- -------------------------------------------------------------------------------------------
Amounts Spent on Solutia's behalf as of (May 31, 2007) (in $ millions)
- -------------------------------------------------------------------------------------------
Environmental
Environmental Remediation (Legacy Sites) 15.7
Environmental Remediation (Shared Sites) 46.3
------------------
Subtotal 62.0
- -------------------------------------------------------------------------------------------
Litigation Defense Costs
Fees & Expenses 87.1
Settlements 66.8
------------------
Subtotal 153.9
==================
- -------------------------------------------------------------------------------------------
<FN>
- -------------------
(58) Under section 502(e) of the Bankruptcy Code, the $215.9 million that
Monsanto has spent during these Chapter 11 Cases on Solutia's behalf for
litigation defense and environmental remediation at the Legacy Sites and
Shared Sites may constitute allowedGeneral Unsecured Claims based on the
terms of the Distribution Agreement. See In re Drexel Burnham Lambert
Group, Inc., 146 B.R. 98, 102 (Bankr. S.D.N.Y. 1992) (claims for
reimbursement or contribution that are paid, therefore fixed, are treated
as prepetition claims). Moreover, absent the Monsanto Settlement,
Monsanto would likely argue that the $215.9 million that Monsanto has
spent on Solutia's behalf since the Petition Date constitutes an
Administrative Claim under section 507(a)(2) under the Bankruptcy Code.
See In re Jartran, Inc., 886 F.2d 859, 871 (7th Cir. 1989) (expenditures
may be treated
(Continued...)
109
- -------------------------------------------------------------------------------------------
Total Spending as of May 31, 2007 215.9(58)
- -------------------------------------------------------------------------------------------
Other Claim Elements
- -------------------------------------------------------------------------------------------
Estimated Future Tort/Environmental Spending 179(59)
- -------------------------------------------------------------------------------------------
Anniston Settlement 428.7(60)
- -------------------------------------------------------------------------------------------
Other (PCL3 Claims) 0.9
- -------------------------------------------------------------------------------------------
TOTAL LIQUIDATED MONSANTO CLAIM 824.5
- -------------------------------------------------------------------------------------------
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. Solutia believes that because such claims
arise from the prepetition indemnity obligations, the claims
should be treated as general unsecured claims; however,
without the Monsanto Settlement and Retiree Settlement,
Monsanto would assert that it is entitled to an
administrative expense claim for such amounts;
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
<FN>
- -------------------
as administrative expense claims if they are actual and necessary costs
and expenses of preserving the estate that benefit the estate as a
whole).
(59) Monsanto expects to spend $179 million in connection with future legacy
tort and legacy environmental liabilities. The estimated future tort
liability component is based on historical settlement and judgment costs
and past attorney's fees related to such actions. The estimated future
environmental liability component is based on the amount Monsanto expects
to spend on Legacy Site environmental remediation (discounted to present
value at a rate of 3.5%).
(60) Monsanto alleges that Solutia breached the Anniston Settlement Agreement
and asserts a claim for $428.7 million (net of insurance proceeds) as a
result of this alleged breach.
110
for General Unsecured Creditors (one element of the Monsanto
Claim related to the Anniston Consent Decree could result in
liabilities in excess of $425 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:(61)
(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 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.
<FN>
- ------------------
(61) Under the Monsanto Settlement, Monsanto has agreed to make contributions
to Solutia's reorganization pursuant to the terms of the Relationship
Agreement and the Amended Plan and such obligations will be included in
the express terms of the Bankruptcy Court's Confirmation Order. Monsanto
is not providing a cash reserve or any other form of security to assure
its performance under these agreements.
111
(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 calendar year
at $30 million, which will improve Reorganized Solutia's
liquidity position and cash flow; and(62)
<FN>
- -------------------
(62) The annual $30 million cap on Reorganized Solutia's liabilities with
respect to the Shared Sites provides certainty for Solutia with respect
to these obligations, which, among other things, is important to
Solutia's, ability to seek exit financing on favorable terms.
112
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.
o As described herein, under the Chocolate Bayou Settlement,
Solutia and Monsanto have agreed to resolve issues regarding
their relationship at the Chocolate Bayou
113
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
proceeds from the Rights Offering (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 Retiree
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 induced 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 (other than
claims for indemnification arising under Exhibit N of the Relationship
Agreement as described in Section VIII.B) 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
114
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.
115
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.
116
Approximately 2,300 current and former residents from several
communities surrounding the Nitro Plant (the "Nitro Tort Plaintiffs") have
filed proofs of claim in the Chapter 11 Cases asserting claims against Solutia
for property damage, personal injuries and medical monitoring arising from
alleged exposure to dioxin. In addition to the claims filed against Solutia,
two separate lawsuits are pending in Putnam County, West Virginia, against
Pharmacia and Monsanto. These suits similarly allege injuries suffered from
exposure to dioxin produced at the Nitro Plant. Counsel to the Nitro Tort
Plaintiffs, the Calwell Practice, PLLC and James F. Humphrey, and Associates,
LC (collectively, the "Calwell Practice") assert that the claims of the Nitro
Tort Plaintiffs, and the claims pending in the Putnam County cases are worth
hundreds of millions of dollars.
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 Calwell Practice 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.
Solutia believes, subject to confirmatory due diligence, that all of
the Nitro Tort Plaintiffs' claims are Tort Claims (as defined in the Amended
plan). As Tort Claims, the Nitro Tort Plaintiffs' claims will be Reinstated
and will "pass-through" Solutia's Chapter 11 Cases to be resolved by Monsanto
in the ordinary course of business.(63) 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
<FN>
- -------------------
(63) To the extent that confirmatory due diligence reveals that any of the
Nitro Tort Plaintiffs' claims are not Tort Claims, these claims would be
General Unsecured Claims. The Nitro Tort Plaintiffs' General Unsecured
Claims, if any would be entitled to the same treatment as all other
General Unsecured Claims in Class 13 under the Amended Plan.
117
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.
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.
118
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):
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.
119
(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.(64) This includes (i) facilities owned and/or operated post
Spinoff,(65) 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.
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
<FN>
- -------------------
(64) As of this date, Monsanto has not spent any amounts on the Retained
Sites.
(65) Such facilities include, without limitation, the Idaho phosphate mining
and processing facilities of P4 Production LLC operated by Solutia after
the Spinoff until May 31, 2000.
120
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 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 Shared Sites are not owned by Solutia (with
the exception of "Site R" a narrow strip of property in Site Q, and the
Containment Cell (in Cahokia and Sauget, Illinois), as well as the Central
Staging and Soil Management Area (the Miller Property) and the South Staging
and Soil Management Area (both in Anniston, Alabama). 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 Shared Sites not owned by Solutia. Pursuant to the Interim
Protocol, Monsanto has (as Pharmacia's agent) undertaken the work Solutia was
performing at these 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.
121
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 the Sauget and Anniston
Shared Sites 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.
The Equity Committee asserts that the largest exposure in the future
relates to these Shared Sites. The Equity Committee has requested that the
Debtor provide disclosure of costs post 2011. The Equity Committee's
environmental expert estimates that the total of such liability could be
higher than the Debtors' estimates.
(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.
(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 (i.e.,
the Anniston Shared Site) and approximately $32 million for the Sauget
off-site areas (i.e., the Sauget Shared Site). 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
122
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 a portion of the
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 proceeds from the
Rights Offering and contributed to 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;
123
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.
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
124
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 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
125
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. The Retiree Settlement does not affect
non-OPEB claims held by Retirees, including any Tort Claims that may be held
by individual Retirees.
The Retiree Settlement is conditioned upon, and made possible only
because of, Monsanto's Agreement to take financial responsibility, as between
itself and Solutia, for Legacy Liabilities as part of the Monsanto Settlement.
The Retiree Settlement preserves post employment medical and other benefits
for Solutia's 20,000 retirees, subject to consensual benefit reductions that
Solutia estimates will save Reorganized Solutia approximately $110 million.
o In particular, the Retiree Settlement provides for:
o Creation of the Retiree Trust. On the Effective
-----------------------------
Date, Solutia will contribute $175 million in cash
proceeds from the Rights Offering to the Retiree
Trust. These funds will be used solely to reimburse
Solutia for costs associated with the payment of
benefits for Pre-Spinoff Retirees. The Retiree
Trust provides continuing and substantial
protections for continued payments of Retirees'
benefits.
o Modification to Medical Benefits. Reorganized
--------------------------------
Solutia can limit the amount it pays each year for
retiree medical expenses, change deductibles and
prescription drug co-payments and cap the amount of
benefits paid to individual retirees after the age
of 65.
o Modification to Life Insurance Benefits. Life
---------------------------------------
insurance benefits has been capped for employees
who retired before December 31, 2001 and eliminated
for those who retired after that date.
o Retiree Claim. The Retirees, as a class, will
-------------
receive an allowed, non-priority unsecured claim in
the aggregate amount of $35 million, which is based
on the value of agreed-upon reductions to benefits
that Solutia could not have unilaterally imposed on
the Retirees. The shares of New Common Stock and
any proceeds from their later sale shall reimburse
Reorganized Solutia for
126
payments related to OPEB for Pre- and Post-Spin
Retirees. The Retiree Claim and all rights and
obligations associated therewith, including voting
rights, will be held and managed by the Retirees'
Committee as the authorized representative for the
Retirees. On the Effective Date, all OPEB claims
filed by individual Retirees shall be disallowed
and expunged as duplicative of the Retiree Claim.
o Retiree Release. The Retirees have agreed to
---------------
release Solutia, Monsanto and Pharmacia, any
employee benefit plans of Monsanto or Pharmacia and
their respective officers, directors, employees,
affiliates, successors, assigns, representatives,
agents, advisors and professionals from all claims
related to "retiree benefits" (as defined in
section 1114(a) of the Bankruptcy Code).
Solutia will seek approval of the Retiree Settlement at the
Settlement Approval Hearing.
9. THE PHARMACIA SETTLEMENT
------------------------
While not a principal party to the negotiations resulting in the
Relationship Agreement, Pharmacia has agreed to release Solutia from certain
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"). As described in Section VIII.C.9, Solutia has agreed, pursuant
to the terms of the Relationship Agreement, to provide Pharmacia with certain
new indemnities. 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; worth approximately $240 million at the
midpoint of the enterprise value (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(66); 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 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
<FN>
- -------------------
(66) Based on the information received from Monsanto, the Environmental
Liabilities at the Shared Sites, as of May 31, 2007, equal $65.9 million.
127
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. The
professionals for the Creditors' Committee have incurred approximately $16.7
million in fees and expenses as of May 31, 2007, plus a transaction fee
payable to Houlihan Lokey, the Creditors' Committee's financial advisors, upon
the confirmation of the Amended Plan with a base fee of at least $1 million
plus an incentive fee, based on the interim compensation orders granted by the
Bankruptcy Court.
The Equity Committee asserts that the Amended Plan, the Monsanto
Settlement and Retiree Settlement incorporated therein provide substantial
benefits to Monsanto in return for only a limited, insufficient contribution.
However, if the Amended Plan is confirmed, Monsanto will receive 20% of the
New Common Stock as reimbursement for the portion of the Legacy Liabilities
that Monsanto has agreed to take back. In light of the Equity Committee
Complaint, the Equity Committee believes that Monsanto's recovery is too
beneficial and should be rejected by the Debtors' creditors.
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 49.9%
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 that do not
participate in the Rights Offering will receive a recovery of approximately
74.8 cents on the dollar. Holders of Allowed General Unsecured Claims that do
participate in the Rights Offering will receive a recovery of approximately
85.3 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 49.9% 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 that
do
128
not participate in the Rights Offering will receive a recovery of
approximately 74.8 cents on the dollar. Holders of Allowed Noteholder Claims
that do participate in the Rigths Offering will receive a recovery of
approximately 85.3 cents on the dollar.
5. RETIREES' CONSIDERATION
-----------------------
The Retirees will receive their future post-employment benefits as
modified by the Retiree Settlement. On the Effective Date, Solutia will
contribute $175 million in cash proceeds from the Rights Offering to the
Retiree Trust to assure that such future OPEB obligations are met. The
Retirees, as a class, will also receive an Allowed, non-priority unsecured
claim in the aggregate amount of $35 million, which is based on the value of
agreed-upon reductions to benefits that Solutia could not have unilaterally
imposed. In accordance with the terms of the Retiree Settlement Agreement, the
Retirees, as a class, will receive 2.2% of the New Common Stock, resulting in
a recovery of 74.8 cents on the dollar. The recovery on account of the Retiree
Claim will be contributed to the Retiree Trust to enhance its ability to
maintain benefit payments to all Retirees for both pre- and post-spin
Retirees. The Retiree Claim and all rights and obligations associated
therewith will be held and managed by the Retirees' Committee as the
authorized representative for the Retirees. Any and all claims filed by
individual Retirees on account of reductions in their post-employment benefits
as a result of Solutia's Chapter 11 Cases will be disallowed and expunged as
duplicative of the Retiree Claim.
6. 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
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.
129
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 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
130
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).
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.
131
The Equity Committee believes that these releases are improper and
unnecessary components of the Amended Plan. The Equity Committee intends to
challenge the broad releases provisions set forth in the Amended Plan.
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 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
132
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.
The Equity Committee does not support the Amended Plan. The Equity
Committee has been an active participant during the course of the Chapter 11
proceedings and the Equity Committee believes it has been the only party in
interest to conduct a meaningful investigation into the Spinoff, the Debtors'
environmental liabilities and Monsanto's claims. The Equity Committee does not
believe the Monsanto Settlement and the Retirement Settlement are reasonable
and therefore intends to challenge the reasonableness of these settlements at
the Settlement Approval Hearing.
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 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
133
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.
G. THE EQUITY COMMITTEE OPPOSES THE MONSANTO AND RETIREE SETTLEMENTS(67)
---------------------------------------------------------------------
The Equity Committee and its advisors believe that the actual amount
of financial responsibility being assumed by Monsanto under the Amended Plan
for the Legacy Liabilities is unreasonably small in comparison to the amount
of the Legacy Liabilities that will remain on Reorganized Solutia's balance
sheet. The Equity Committee also believes that the Amended Plan and the Global
Settlement were orchestrated by and for the benefit of Monsanto and Pharmacia,
to the detriment of Solutia's other general unsecured creditors and
shareholders. For example, the Amended Plan generously gifts Monsanto with an
estimated general unsecured claim totaling $824.5 million, which will entitle
Monsanto to own 20% of Reorganized Solutia. Solutia also has agreed to pay
reasonable fees incurred by Monsanto's professionals for work related to the
Chapter 11 Cases, capped at the aggregate fees of the Creditors' Committee's
professionals.
The Equity Committee believes that the Amended Plan is far too
generous to Monsanto and Pharmacia, because, like the Spinoff, affords
Monsanto and Pharmacia significant continuing protection from the Legacy
Liabilities. While Monsanto is taking back a limited amount of the Legacy
Liabilities, it is receiving a valuable recovery in stock of Reorganized
Solutia. The Equity Committee believes that reorganized Solutia will remain
liable for hundreds of millions of dollars in connection with a large portion
of the Legacy Liabilities.
<FN>
- -------------------
(67) The views asserted in this section are solely those of the Equity
Committee. Solutia, the Creditors' Committee, the Ad Hoc Trade Committee,
the Retirees' Committee, Monsanto and Pharmacia do not agree with,
support or adopt in any way whatsoever, the allegations made by the
Equity Committee in this section.
134
Under the terms of the Amended Plan, Monsanto is receiving one-fifth
of the value of Reorganized Solutia on account of its claims. The Equity
Committee believes that the Debtors have never mounted a meaningful challenge
to Monsanto's claims. The Equity Committee believes that the debtors have not
even seriously challenged Monsanto's and Pharmacia's conduct in connection
with the Spinoff which gave rise to these indemnification obligations and
which ultimately forced Solutia into bankruptcy.
In sharp contrast to the Debtors' "treatment" of Monsanto's claims,
the Equity Committee has been vigorously challenging Monsanto's claims and
seeks to disallow of those claims in their entirety by, among other things,
seeking to invalidate the indemnification provisions on which the claims are
based. The Equity Committee asserts that doing so would effectively return the
Legacy Liabilities to Monsanto's and Pharmacia's balance sheets because they
will be liable for contribution and other claims by Solutia to recover any and
all amounts that it has already paid for the Legacy Liabilities. The Equity
Committee believes that without the indemnity, Monsanto and Pharmacia will be
exclusively liable for the Legacy Liabilities related to their former PCB and
dioxin manufacturing activities as owner operators at the time of the
contamination. The Equity Committee believes that with Monsanto's and
Pharmacia's claims eliminated, there are hundreds of millions of dollars in
value that can be returned to the Estates for distribution to the Debtors'
legitimate unsecured creditors and shareholders.
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.
In the Fall of 2006, Solutia decided to explore an alternative plan
of reorganization that, if successful, would have been funded by the proceeds
of the sale of the equity of Reorganized Solutia to a third party purchaser
(the "Sale Plan"). The Sale Plan contemplated maintaining the valuable
benefits achieved through the Monsanto Settlement and Retirees Settlement.
Under the Sale Plan, Solutia also contemplated distributing cash to its
creditors instead of distributing equity in Reorganized Solutia to them.
As first described by Solutia in the Response of the Debtors to the
Ad Hoc Committee of Solutia Noteholders' Opposition to Debtors' Ninth Motion
to Extend the Exclusivity Period, dated November 15, 2006 (Dkt. No. 3522) and
at the subsequent hearing, in late November 2006, Solutia began a month-long
exploratory sales process. During this sales process, Solutia
135
contacted 18 potential strategic and/or financial purchasers.(68) These
potential purchasers were selected either because they had expressed interest
regarding Solutia during these Chapter 11 Cases or because they were known to
invest in the chemical sector. During this initial phase, Solutia and/or its
advisors (a) made in-person management presentations to each potential
purchaser, (b) responded to follow-up questions and inquiries from each
potential purchaser, (c) provided detailed updates to and sought input from
each of its major stakeholders regarding the sales process, (d) enabled
potential purchasers to conduct due diligence, and (e) discussed various
issues relating to the potential sale and Chapter 11 Cases with the
stakeholders and potential purchasers.
As a result of these efforts, on December 19, 2006, Solutia received
six non-binding indications of interest. Each of the indications of interest
was provided to Solutia's major stakeholders (subject to strict
confidentiality). Three of the indications of interest conformed to Solutia's
request that potential purchasers bid on the common stock of Reorganized
Solutia, while the remaining three were non-conforming. The three
non-conforming indications of interest led Solutia to explore the potential of
selling certain businesses in an attempt to generate additional value (the
"Modified Sale Plan").
As previously described by Solutia in the Exclusivity Pleading, dated
April 20, 2007 (Dkt. No. 3726), and at the Exclusivity Hearing conducted on
May 1, 2007, under the Modified Sale Plan, Solutia would sell certain
businesses, use the cash proceeds from such sales to satisfy liabilities, and
pay off creditors. Solutia would then reorganize around the remaining
businesses and the stakeholders whose claims were not satisfied in cash would
receive the equity of Reorganized Solutia. Solutia discussed the Modified Sale
Plan with its various constituents and analyzed the viability of this option.
Specifically, Solutia met with and engaged in in-depth discussion about the
Modified Sale Plan with, among others, the Equity Committee, including the
sharing and reviewing of prepared analyses based on assumptions about the
Modified Sale Plan. Ultimately, after significant consideration, discussion
and analysis, Solutia's Board of Directors decided against pursuing the
Modified Sale Plan for the following key reasons: (a) the indications of
interests were not high enough (especially after potential purchasers refined
them following due diligence), (b) the sale process would be complex due to
the regulatory concerns and the Legacy Liabilities, and, as a result, the
execution risk was high, (c) employee attrition due to an announced sale of
industrial businesses was a major concern, and (d) because the Modified Sale
Plan, including the Equity Committee's proposed structure, required Monsanto
to continue to be financially responsible for a significant amount of Legacy
Liabilities, while needing to rely on a significantly smaller business to take
responsibility for other Legacy Liabilities, the Monsanto Settlement would be
put at risk.
On April 11, 2007, the Equity Committee in an attempt to force
Solutia to conduct the Modified Sale Plan filed its motion to terminate
Solutia's exclusive periods. On April 20, 2007, Solutia objected to the Equity
Committee's motion and sought an extension of its exclusive periods. On May 1,
2007, after a contested hearing, the Court extended Solutia's exclusive
<FN>
- -------------------
(68) In subsequent motions (1/29/07 and 4/20/07; Dkts. 3623 and 3726) (the
"Exclusivity Pleadings"), and hearings on such motions, to further extend
Solutia's exclusive periods (the "Exclusivity Hearings"), Solutia updated
the Court and parties in interest on the ongoing sale process.
136
periods and reasoned that any decision to conduct a sale belongs to Solutia's
Board of Directors and that there was nothing in the record to cause the Court
to direct Solutia to pursue a path against the determination of Solutia's
Board of Directors. (See Tr. 5/1/07 at 42)
On June 21, 2007, an investor group of Solutia's equity holders with
the support of the Equity Committee, provided Solutia with an investment
proposal, which proposes to provide Solutia with (a) a cash investment of $250
million in exchange for an initial 26.2% of the convertible preferred stock of
Reorganized Solutia and (b) a fully backstopped $200 million rights offering
(the "Investment Proposal"). Among other things, the Investment Proposal
contemplates the sale of certain of Solutia's businesses and for Reorganized
Solutia to acquire an approximately $1.4 billion debt facility, with $1.25
billion expected to be drawn at closing based on a June 30, 2007 reference
point. Moreover, the Equity Committee Investment Proposal requires Monsanto to
accept a recovery of 13.5% of the New Common Stock (as compared to 20% of the
New Common Stock under the Monsanto Settlement).
Solutia and its advisors have considered the Investment Proposal and
decided against pursuing it because of several deficiencies associated with
the proposal. The Investment Proposal is another attempt to impose the
Modified Sale Plan on Solutia, which Solutia, in its business judgment, does
not believe will increase value. Solutia believes that the Investment Proposal
fails for at least the following reasons: (a) the proposal does not address
the reallocation of the Legacy Liabilities, which is key to any successful
reorganization of Solutia, (b) the proposal requires a sale of one of
Solutia's businesses to an unknown purchaser at a price above indications
received for that business from the exploratory sale process conducted in Fall
of 2006, and (c) the proposal is contingent on Monsanto accepting 13.5% of the
New Common Stock of a company much smaller than Reorganized Solutia.
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 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.(69) The Liquidation Analysis does not reflect the
likely delay in distributions to Holders
<FN>
- -------------------
(69) 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.
137
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 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.
138
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").(70)
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 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
<FN>
- -------------------
(70) 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).
139
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
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).
140
A. THE EQUITY COMMITTEE'S VIEWS CONCERNING REORGANIZED SOLUTIA'S
-------------------------------------------------------------
VALUATION.
----------
The Equity Committee submits that the Amended Plan and these
Projections substantially undervalue Solutia. The Equity Committee's financial
advisors believe that Solutia's total enterprise value is significantly higher
than $2.8 billion. The Equity Committee intends to vigorously challenge this
valuation as it allows Monsanto and other unsecured creditors to receive a
substantial windfall while depriving public shareholders of value to which
they are legally entitled.
Based on indications of interest the Debtors received for various
businesses, the Equity Committee's financial advisors believe that the
Debtors' enterprise value is at least $3.2 billion. This figure is not
speculative - it essentially sums up the actual price indications already
offered to Solutia from interested, financially strong potential buyers. These
were unsolicited offers; Solutia did not encourage potential buyers to bid on
individual business segments. Further, the $3.2 billion figure does not
reflect the ultimate purchase prices that may be achieved through a
competitive sale process open to financially strong parties who are willing to
engage in rigorous negotiations. Thus, the Equity Committee's financial
advisors believe that the Debtors' true enterprise value is well above $3.2
billion. Recognition of the true value of Solutia would provide creditors with
a full recovery on account of their Claims.
Furthermore, the Equity Committee believes that to the extent that it
is successful in its pursuit seeking to disallow Monsanto's and Pharmacia's
claims (in whole or in part), the distributable value of Solutia will also
increase and thus, distributions to creditors will significantly increase.
Accordingly, the Equity Committee does not believe that the Amended Plan is in
the best interests of creditors and interest holders and the settlement
underlying the Amended Plan is unreasonable.
B. SOLUTIA'S RESPONSE TO THE EQUITY COMMITTEE'S "SUM OF INDICATIONS"
-----------------------------------------------------------------
VALUATION METHODOLOGY
---------------------
Contrary to the Equity Committees' characterization above, selected
preliminary non-binding indications of interest received from potential
strategic and financial buyers do not sum (even if one wanted to theoretically
------
sum them) to an enterprise value of $3.2 billion - never mind a figure in
excess of $3.2 billion. In addition, the preliminary, non-binding indications
of interest that were received assume a consensual settlement with Monsanto
concerning certain environmental, mass tort, OPEB and pension liabilities
consistent with the Global Settlement -- a settlement that is not available
under a multiple sale scenario. Further more, the Equity Committee neglects to
acknowledge the magnified execution risk related to multiple potential sales
and the potential ramifications of only a partial sale scenario.
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
141
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.
SOLUTIA MAY NOT BE ABLE TO OBTAIN APPROVAL OF THE MONSANTO SETTLEMENT AND THE
RETIREE SETTLEMENT
The Amended Plan is premised upon and incorporates the Monsanto
Settlement and the Retiree Settlement, which, among other things, contemplate
an appropriate reallocation of the Legacy Liabilities. The terms of the
Monsanto Settlement and Retiree Settlement are described in Section VIII.B. To
obtain approval of the Monsanto Settlement and Retiree Settlement under
Bankruptcy Rule 9019, Solutia will need to demonstrate that these Settlements
are in the best interests of its Estates. See Fed. R. Bankr. P. 9019;
Protective Comm. for Indep. S'holders of TMT Trailer Ferry Inc., v. Anderson,
390 U.S. 414, 424 (1968); Vaughn v. Drexel Burnham Lambert Group, Inc. (In re
Drexel Burnham Lambert Group, Inc.), 134 B.R. 499, 505 (Bankr. S.D.N.Y. 1991).
Solutia is seeking acceptances of the terms of the Amended Plan from
Persons entitled to vote to accept or reject the Amended Plan in advance of
approval of the Monsanto Settlement and the Retiree Settlement pursuant to
Bankruptcy Rule 9019. The Settlement Approval Hearing is scheduled to begin on
September 5, 2007.
142
Solutia anticipates that the Equity Committee and Ad Hoc Notes
Committee will oppose the Monsanto Settlement. Solutia does not anticipate any
objection to the Retiree Settlement.
There is a risk that the Monsanto Settlement and/or the Retiree
Settlement is not approved or is modified. In such an event, the Solicitation
of votes may be ineffective and Solutia may be required to either resolicit
votes or formulate a new plan of reorganization.
Solutia believes that the Settlement Approval Hearing generally could
have three possible outcomes: (a) the Monsanto Settlement and Retiree
Settlement will be approved; (b) the Monsanto Settlement and Retirement
Settlement will be denied; (c) the Monsanto Settlement and Retiree Settlement
will be modified as a result of further negotiations between the parties
supporting and opposing Monsanto Settlement.
o If the Monsanto Settlement and Retiree Settlement are
approved, Solutia will seek to confirm the Amended Plan
based on votes received through the solicitation process.
o If the Monsanto Settlement and Retiree Settlement are
denied, Solutia will need to reformulate and renegotiate the
terms of a new plan. This process could be protracted, due
to the possibility of extended complex litigation and
negotiation, and would likely delay Solutions emergence form
the Chapter 11 Cases for the foreseeable future.
o If the Monsanto Settlement and Retiree Settlement are
modified, and such modification materially and adversely
affect parties who previously voted in favor of the Amended
Plan, Solutia may need to resolicit votes from such parties.
However, if the modifications to the Amended Plan are not material or
adverse, no resolicitation will be necessary. "Material" in the resolicitation
context refers to a modification which makes a party who previously voted to
accept the plan "apt to reconsider his vote." See In re American Solar King
Corp., 90 B.R. at 824; see also In re Eastern Sys, 118 B.R. 223.
Solutia's ability to move forward with confirmation of the Amended
Plan once the voting solicitation period has ended will be directly affected
by the outcome of the Settlement Approval Hearing.
THE MONSANTO SETTLEMENT AND THE RETIREE SETTLEMENT ARE CRITICAL TO THE AMENDED
PLAN
Moreover, without the reallocation of the Legacy Liabilities, as
provided for under the Monsanto Settlement and the Retiree Settlement, it is
unclear whether Solutia will be able to reorganize its businesses and what, if
any, distributions holders of claims against or Common Stock and Options and
Warrants to Purchase Common Stock in Solutia ultimately would receive with
respect to their claims or equity interests. Without the Monsanto Settlement
and the Retiree Settlement, 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
143
Amended Plan, which eliminates legacy tort liability exposure, reduces
environmental obligations, and significantly reduces Solutia's exposure with
regard to retiree obligations.
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. If the requisite
acceptances of the Plan are received, Solutia intends to seek confirmation of
the Amended Plan by the Bankruptcy Court. If the requisite acceptances are not
received, Solutia may nevertheless seek confirmation of a modified Plan
notwithstanding the dissent of certain Classes of Claims. The Bankruptcy Court
may confirm a modified Plan pursuant to the "cramdown" provisions of the
Bankruptcy Code, which allow the Bankruptcy Court to confirm a plan that has
been rejected by an impaired class of claims if it determines that the plan
satisfies section 1129(b) of the Bankruptcy Code. See Section XII.C hereof. In
order to confirm a plan against a dissenting class, the Bankruptcy Court also
must find that at least one impaired class has accepted the plan, with such
acceptance being determined without including the acceptance of any "insider"
in such class.
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 Common Stock and Options
and Warrants to Purchase Common Stock 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
144
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.
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 Equity Committee has stated that the equity value of Reorganized
Solutia is higher than the equity value the Debtors are proposing. The Equity
Committee has stated that it will challenge the Debtors' estimated enterprise
value at the Confirmation Hearing.
145
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.
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.
146
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.
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.
147
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.
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
148
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.
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.
149
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.
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;
150
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.
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.
151
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 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 and its
subsidiaries have 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
152
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 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 and its
subsidiaries are parties 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.
153
THE APPLICABILITY OF NUMEROUS ENVIRONMENTAL LAWS TO SOLUTIA'S MANUFACTURING
FACILITIES COULD CAUSE SOLUTIA TO INCUR MATERIAL COSTS AND LIABILITIES
Solutia and its subsidiaries are subject to extensive federal, state,
local and foreign environmental, safety and health laws and regulations
concerning, among other things, emissions to the air, discharges to land and
water and the generation, handling, treatment and disposal of hazardous waste
and other materials. Under certain environmental laws, 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 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
154
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 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
155
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 and its subsidiaries generate 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 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 and its subsidiaries own 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
156
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 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.
FLEXSYS' INABILITY TO ENFORCE ITS INTELLECTUAL PROPERTY RIGHTS COULD IMPACT
THE COMPANY'S FINANCIAL PERFORMANCE
The inability of Flexsys America to protect and enforce its
intellectual property rights to manufacture any or all of 4-ADPA, 6PPD and
IPPD in various jurisdictions, or an ultimate determination that such
intellectual property rights are invalid in one or more jurisdictions, or the
failure to successfully prosecute patents in one or more jurisdictions would
have a material adverse effect on Flexsys America's business and financial
performance, which, in turn, would have a material adverse effect on Solutia's
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
157
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.
LEGACY LIABILITIES MAY EXCEED REORGANIZED SOLUTIA'S CAPACITY TO PAY SUCH
OBLIGATIONS FOLLOWING EMERGENCE
The Ad Hoc Notes Committee believes that there may be feasibility
issues with the Amended Plan given (a) the possibility that Legacy Liabilities
could exceed Reorganized Solutia's capacity to pay such obligations following
the Debtors' emergence form bankruptcy or (b) the effect of Monsanto's
possible failure to perform its obligations with respect to Legacy Liabilities
following the Debtors' emergence from bankruptcy. As evidenced by the Monsanto
Settlement and the Retiree Settlement, the Creditors' Committee, Solutia,
Monsanto, Pharmacia, the Retirees' Committee and the Ad Hoc Trade Committee
disagree with the Ad Hock Note Committee's assessment.
The Ad Hoc Notes Committee believes that if Wilmington Trust prevails
in the appeal of the Final Judgment (assuming that the Final Judgment is not
affirmed or the appeal is not otherwise dismissed), the Amended Plan may not
be feasible. Solutia believes that if Wilmington Trust prevails, depending on
the ultimate determination on the value of the underlying collateral securing
the Noteholders' claims, a plan of reorganization may still be confirmed.
158
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
159
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
160
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
161
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.(71)
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>
- -------------------
(71) 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.
162
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
163
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
164
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 STAY
-------------------------------------
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,
165
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; provided, even further still, however,
-------- ------------------
that the terms of this release shall not apply to claims for breaches of
fiduciary duty, as such term is defined under ERISA, with respect to the SIP
Plan against current and former directors, officers and employees of the
Debtors.
166
4. EXCULPATION AND LIMITATION OF LIABILITY
---------------------------------------
Except as provided in the Plan or the Confirmation Order, none of the
Debtors, Monsanto, Pharmacia, the Creditors' Committee nor the current or
former individual members thereof, except for the Prepetition Indenture
Trustee, the Retirees' Committee nor the current individual members thereof,
the Ad Hoc Trade Committee nor the current individual members thereof, nor any
of their respective present members, representatives, officers, directors,
shareholders, employees, advisors, attorneys, Affiliates or agents acting in
such capacity, except for advisors to the Prepetition Indenture Trustee, shall
have or incur any liability to, or be subject to any right of action by, any
Holder of a Claim, including, but not limited to, a Legacy Claim, or an Equity
Interest, or any other party in interest, or any of their respective agents,
direct or indirect shareholders, employees, representatives, financial
advisors, attorneys or Affiliates, or any of their respective successors or
assigns, for any act or omission in connection with, relating to, or arising
out of, the Chapter 11 Cases, the pursuit of confirmation of the Plan, the
consummation of the Plan, or the administration of the Plan or the property to
be distributed under the Plan, except for their willful misconduct, criminal
conduct, misuse of confidential information that causes damages, fraud, ultra
vires acts or gross negligence, and in all respects shall be entitled to rely
reasonably upon the advice of counsel with respect to their duties and
responsibilities under the Plan; provided, however, that nothing in this
-------- -------
paragraph shall affect the rights, defenses, obligations or claims arising
between Monsanto and Pharmacia. Notwithstanding any other provision herein,
any and all claims for breaches of fiduciary duty, as such term is defined
under ERISA, with respect to the SIP Plan shall be limited to available
proceeds of insurance policies covering such claims, if any.
5. ASSUMPTION OF THE ACE INSURANCE PROGRAM AND THE TREATMENT OF
------------------------------------------------------------
THE ACE COMPANIES' CLAIMS
-------------------------
Pursuant to the ACE Insurance Program, the ACE Companies have
provided and continue to provide, inter alia, insurance coverage to one or
more of the Debtors, their respective affiliates and/or predecessors
including, but not limited to, Monsanto, for specified periods, for general
liability, workers' compensation, automobile liability and pollution
liability, and the Debtors are required to, inter alia, pay and reimburse the
ACE Companies for deductible and other obligations, all subject to the terms
and conditions of and as more particularly described in the ACE Insurance
Program. The Debtors' obligations under the ACE Insurance Program are secured
by, inter alia, letters of credit, paid loss deposit funds and retention
reimbursement funds.
The ACE Insurance Program is necessary and essential to the Debtors'
and Reorganized Debtors' businesses, and assumption is in the best interests
of the Debtors and Reorganized Debtors. The Debtors and the ACE Companies have
negotiated the ACE Settlement Agreement which will be filed with the
Bankruptcy Court and which will be subject to approval of the Bankruptcy Court
pursuant to Bankruptcy Rule 9019.
The ACE Settlement Agreement shall contain each of the following
material terms:
Notwithstanding anything to the contrary in the Plan or the
Confirmation Order:
167
On the Effective Date, the Debtors and the Reorganized Debtors shall
assume the ACE Insurance Program. The ACE Insurance Program will survive and
remain unaffected by the Amended Plan or Confirmation Order.
Upon entry of an Order of the Bankruptcy Court approving the ACE
Settlement Agreement, the ACE Companies shall have relief from the automatic
stay to apply the funds which the ACE Companies hold in the amount of $813,800
to the balance of $1,238,119.31 which is due and owing by the Debtors under
the OCIP Agreement.
Within 15 days of the Effective Date, the Reorganized Debtors shall:
(i) pay to the ACE Companies a cure claim with respect to the assumption of
the OCIP Agreement in the amount of $424,319.31 (the "OCIP Cure Claim"), (ii)
pay to ESIS a cure claim with respect to the assumption of the ESIS Agreements
in the amount of $8.25, as of June 30, 2007 (the "ESIS Cure Claim"), (iii)
cure all other defaults (together with the OCIP Cure Claim and the ESIS Cure
Claim, the "ACE Cure Claim") under the ACE Insurance Program, (iv) compensate
the ACE Companies for any actual pecuniary loss resulting from such defaults,
and (v) provide adequate assurance of future performance under the ACE
Insurance Program.
If (i) the Effective Date occurs prior to April 1, 2008, (ii) the ACE
Cure Claim has been paid in full, and (iii) a Final Order approving the ACE
Settlement Agreement has been entered (the "conditions"), then ACE will permit
a reduction of $3,500,000 in the outstanding amount of letters of credit
securing the ACE Insurance Program. If the conditions have not been satisfied
in full (time being of the essence), then ACE will adjust the amount of
collateral in the ordinary course under the ACE Insurance Program without any
commitment by ACE to reduce such amount.
The Reorganized Debtors shall be liable for all of the Debtors'
obligations under the ACE Insurance Program including, without limitation, the
duty to continue to provide collateral and security as required by the ACE
Insurance Program.
The ACE Insurance Program shall not be amended, modified, waived or
impaired in any respect by the Relationship Agreement or otherwise without the
prior written agreement of the ACE Companies.
The claims of the ACE Companies arising under the ACE Insurance
Program shall not be discharged, shall be Allowed Administrative Expense
Claims, and shall be payable by the Debtors (or after the Effective Date, the
Reorganized Debtors) in the ordinary course of their businesses pursuant to
the terms and conditions of the ACE Insurance Program (except that the ACE
Cure Claim shall be paid in full on or before the Effective Date). The ACE
Companies shall not be required to file or serve a request for payment of any
Administrative Expense Claim and shall not be subject to the Administrative
Expense Claim Bar Date.
The Plan or the confirmation of the Plan shall not: (i) preclude or
limit the rights of the ACE Companies to contest and/or litigate with any
person or entity, including the Debtors and/or the Reorganized Debtors, the
existence, primacy and/or scope of available coverage under any alleged
applicable policy; (ii) permit the holder of an Insured Claim to recover the
same amounts from the insurers and any other person or entity, including the
Debtors or the Reorganized
168
Debtors; (iii) alter the ACE Companies' rights and obligations under the ACE
Insurance Program or modify the coverage provided thereunder; (iv) alter the
rights and obligations of the Debtors (or on or after the Effective Date, the
Reorganized Debtors) under the ACE Insurance Program, including any duty of
the Debtors (or on or after the Effective Date, the Reorganized Debtors) to
defend, at their own expense, against claims asserted under the Policies; or
(v) discharge, release or relieve the Debtors (or on or after the Effective
Date, the Reorganized Debtors) from any debt or other liability under the ACE
Insurance Program.
The ACE Companies shall withdraw any and all proofs of claim which
they filed against the Debtors following the occurrence of: (i) entry of a
Final Order approving the ACE Settlement Agreement; (ii) entry of a Final
Order approving the Plan containing terms regarding ACE Settlement Agreement
acceptable to the ACE Companies; (iii) the Effective Date; and (iv) payment in
full by the Debtors of the ACE Cure Claim.
To the extent of any inconsistency between the ACE Settlement
Agreement and the Plan, the Disclosure Statement, the Confirmation Order or
any other document, agreement or order, the terms of the ACE Settlement
Agreement will control.
The ACE Companies shall reserve their right to object to the Plan or
otherwise participate in the Debtors' bankruptcy case.
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, the Warrants 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, the Warrants 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 Warrants and the Rights will be issued in
accordance with section 1145(a)(1), the Debtors believe that New Common Stock
issuable upon the exercise of the Warrants and Rights to persons who are not
underwriters within section 1145 of the Bankruptcy Code also will be exempt
from registration
169
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 the Warrants and 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.
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
170
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 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.
171
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
WARRANTS OR THE RIGHTS. THE DEBTORS RECOMMEND THAT POTENTIAL RECIPIENTS OF THE
NEW COMMON STOCK, THE WARRANTS OR THE RIGHTS CONSULT THEIR OWN COUNSEL
CONCERNING WHETHER THEY MAY FREELY TRADE THE WARRANTS OR THE RIGHTS 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
172
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 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
173
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 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
174
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 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.
175
(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.
(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
176
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.
(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).
177
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.
178
(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, each Holder of common stock in Solutia Inc.
may receive their Pro Rata share of Warrants to the extent that Classes 11,
12, 13, 14, 15 and 20 vote to accept the Amended Plan, and all existing Equity
Interest in Solutia will be cancelled pursuant to the Plan. The exchange of
common stock in Solutia Inc. for Warrants should be treated as part of the
same reorganization under Section 351 or Section 368(a) of the IRC as is
described above under the heading "Treatment of a Holder of an Allowed
Noteholder Claim or a General Unsecured Claim:". In general, if an exchange
qualifies as a reorganization a recipient of securities will recognize gain,
but not loss in an amount equal to the excess of the principal amount of
securities received of the principal amount of securities surrendered. For
purposes of the reorganization provisions of the IRC, common stock in Solutia
Inc. should be treated as "Securities" with a principal amount of zero.
Therefore, a Holder of an Equity Interest in Solutia should not recognize gain
on its receipt of the Warrants because the principal amount of securities
received does not exceed the principal amount of securities surrendered. A
Holder of common stock in Solutia Inc. also cannot recognize any loss of the
exchange.
(h) Consequences to Holders of Retiree Claims
In accordance with the terms of the Retiree Settlement Agreement,
Solutia shall contribute 2.62 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.
179
B. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO THE
---------------------------------------------------------------
DEBTOR
------
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 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
180
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.
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
181
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 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
182
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 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.
183
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
184