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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
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SOLUTIA INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
- --------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS. YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE
ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT
CLASS JUNE 30, 2002
----- --------------
COMMON STOCK, $0.01 PAR VALUE 104,803,534 SHARES
- ----------------------------- ------------------
====================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLUTIA INC.
STATEMENT OF CONSOLIDATED INCOME (LOSS)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ---------------------
2002 2001 2002 2001
----- ----- ------ ------
NET SALES.......................................... $ 736 $ 737 $1,390 $1,484
Cost of goods sold................................. 599 609 1,131 1,228
----- ----- ------ ------
GROSS PROFIT....................................... 137 128 259 256
Marketing expenses................................. 46 45 89 91
Administrative expenses............................ 35 38 71 74
Technological expenses............................. 16 15 31 32
Amortization expense............................... 1 8 2 16
----- ----- ------ ------
OPERATING INCOME................................... 39 22 66 43
Equity earnings from affiliates--net of tax........ 4 8 12 12
Interest expense................................... (19) (22) (44) (44)
Other income--net.................................. 2 6 9 37
----- ----- ------ ------
INCOME BEFORE INCOME TAXES......................... 26 14 43 48
Income taxes....................................... 3 1 6 13
----- ----- ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................. 23 13 37 35
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................................ -- -- (167) --
----- ----- ------ ------
NET INCOME (LOSS).................................. $ 23 $ 13 $ (130) $ 35
===== ===== ====== ======
BASIC EARNINGS (LOSS) PER SHARE:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................. $0.22 $0.13 $ 0.35 $ 0.34
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................................ -- -- (1.59) --
----- ----- ------ ------
BASIC EARNINGS (LOSS) PER SHARE.................... $0.22 $0.13 $(1.24) $ 0.34
===== ===== ====== ======
DILUTED EARNINGS (LOSS) PER SHARE:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................. $0.22 $0.12 $ 0.35 $ 0.33
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................................ $ -- $ -- $(1.59) $ --
----- ----- ------ ------
DILUTED EARNINGS (LOSS) PER SHARE.................. $0.22 $0.12 $(1.24) $ 0.33
===== ===== ====== ======
Weighted average equivalent shares (in millions):
Basic.......................................... 104.8 103.7 104.7 103.6
Effect of dilutive securities:
Common share equivalents--common shares
issuable upon exercise of outstanding
stock options............................ 0.3 1.3 0.4 1.3
----- ----- ------ ------
Diluted........................................ 105.1 105.0 105.1 104.9
===== ===== ====== ======
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ---------------------
2002 2001 2002 2001
----- ----- ------ ------
NET INCOME (LOSS).................................. $ 23 $ 13 $ (130) $ 35
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments................... 87 (24) 82 (60)
Unrealized investment gain (loss), net of tax...... (1) -- -- --
Net unrealized loss on derivative instruments,
net of tax....................................... -- (2) -- (2)
Net realized (gain) loss on derivative instruments,
net of tax....................................... -- -- 1 (2)
----- ----- ------ ------
COMPREHENSIVE INCOME (LOSS)........................ $ 109 $ (13) $ (47) $ (29)
===== ===== ====== ======
See accompanying Notes to Consolidated Financial Statements.
1
SOLUTIA INC.
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 13 $ 23
Trade receivables, net of allowance of $18 in 2002 and
$22 in 2001............................................... 439 352
Miscellaneous receivables................................... 115 105
Prepaid expenses............................................ 10 15
Deferred income tax benefit................................. 121 123
Inventories................................................. 327 303
------ ------
TOTAL CURRENT ASSETS........................................ 1,025 921
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................ 62 58
Buildings................................................... 437 425
Machinery and equipment..................................... 3,056 3,006
Construction in progress.................................... 51 51
------ ------
Total property, plant and equipment......................... 3,606 3,540
Less accumulated depreciation............................... 2,469 2,397
------ ------
NET PROPERTY, PLANT AND EQUIPMENT........................... 1,137 1,143
INVESTMENTS IN AFFILIATES................................... 221 313
GOODWILL, net............................................... 324 386
IDENTIFIED INTANGIBLE ASSETS, net........................... 74 194
LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 236 254
OTHER ASSETS................................................ 183 197
------ ------
TOTAL ASSETS................................................ $3,200 $3,408
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................ $ 272 $ 233
Wages and benefits.......................................... 51 56
Postretirement liabilities.................................. 93 82
Miscellaneous accruals...................................... 343 362
Short-term debt............................................. 576 683
------ ------
TOTAL CURRENT LIABILITIES................................... 1,335 1,416
LONG-TERM DEBT.............................................. 646 627
POSTRETIREMENT LIABILITIES.................................. 937 947
OTHER LIABILITIES........................................... 440 531
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value
$0.01)
Issued: 118,400,635 shares in 2002 and 2001............... 1 1
Net deficiency of assets at spinoff....................... (113) (113)
Treasury stock, at cost (13,597,101 shares in 2002 and
13,921,604 shares in 2001).............................. (250) (257)
Unearned ESOP shares........................................ -- (1)
Accumulated other comprehensive loss........................ (62) (144)
Reinvested earnings......................................... 266 401
------ ------
SHAREHOLDERS' DEFICIT....................................... (158) (113)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $3,200 $3,408
====== ======
See accompanying Notes to Consolidated Financial Statements.
2
SOLUTIA INC.
STATEMENT OF CONSOLIDATED CASH FLOW
(DOLLARS IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
------------------
2002 2001
----- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss)........................................... $(130) $ 35
Adjustments to reconcile to Cash From Operations:
Cumulative effect of change in accounting principle..... 167 --
Depreciation and amortization........................... 76 90
Amortization of deferred credits........................ (7) (7)
Net pretax gains from asset disposals................... (6) (31)
Changes in assets and liabilities:
Income and deferred taxes........................... 61 (7)
Trade receivables................................... (87) (25)
Inventories......................................... (24) 1
Accounts payable.................................... 41 (45)
Other assets and liabilities........................ (42) (93)
----- ----
CASH FROM OPERATIONS........................................ 49 (82)
----- ----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (31) (43)
Acquisition and investment payments, net of cash acquired... (17) (18)
Property disposals and investment proceeds.................. 100 32
----- ----
CASH FROM INVESTING ACTIVITIES.............................. 52 (29)
----- ----
FINANCING ACTIVITIES:
Net change in short-term debt obligations................... (109) 103
Common stock issued under employee stock plans.............. 2 8
Other financing activities.................................. (4) (2)
----- ----
CASH FROM FINANCING ACTIVITIES.............................. (111) 109
----- ----
DECREASE IN CASH AND CASH EQUIVALENTS....................... (10) (2)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 23 19
----- ----
END OF PERIOD............................................... $ 13 $ 17
===== ====
See accompanying Notes to Consolidated Financial Statements.
3
SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BASIS OF PRESENTATION
Solutia Inc. and its subsidiaries make and sell a variety of
high-performance chemical-based materials. Solutia is a world
leader in performance films for laminated safety glass and
after-market applications; resins and additives for high-value
coatings; process development and scale-up services for
pharmaceutical fine chemicals; specialties such as water treatment
chemicals, heat transfer fluids and aviation hydraulic fluid and an
integrated family of nylon products including high-performance
polymers and fibers.
These financial statements should be read in conjunction with
the audited financial statements and notes to consolidated financial
statements included in Solutia's 2001 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on March 7, 2002.
A summary of our critical accounting policies is presented on
page 13 of our most recent Form 10-K. There have been no material
changes in the accounting policies followed by Solutia during fiscal
year 2002 except for those changes described in Note 6.
The accompanying unaudited consolidated financial statements
reflect all adjustments that, in the opinion of management, are
necessary to present fairly the financial position, results of
operations, comprehensive income (loss), and cash flows for the
interim periods reported. Such adjustments are of a normal,
recurring nature. The results of operations for the three-month
and six-month periods ended June 30, 2002, are not necessarily
indicative of the results to be expected for the full year.
Certain reclassifications to prior year's financial information
have been made to conform to the 2002 presentation.
2. ACQUISITIONS
On May 31, 2002, Solutia acquired Axio Research Corporation
(Axio) for approximately $5 million, which was financed with cash
from operations. Axio is a contract research organization providing
clinical trial design and data management to a wide range of clients
including pharmaceutical, biotechnology and medical device companies
as well as academic and government research groups. Axio will
complement the Pharmaceutical service offering within the Specialty
Products segment. The allocation of the purchase price to assets and
liabilities acquired resulted in current assets of $1 million,
non-current assets of $1 million, goodwill of $4 million and current
liabilities of $1 million. Axio's results of operations were
included in Solutia's results of operations from the acquisition
date and were not material to Solutia's consolidated results of
operations for the six month period ended June 30, 2002.
3. RESTRUCTURING RESERVES
As part of the integration of Vianova Resins with Solutia's
resins businesses, Solutia identified excess production capacity
for certain Solutia resins products that will allow for the
consolidation of production facilities. As a result, Solutia decided
to exit its operations at the Port Plastics site in Addyston, Ohio.
An $8 million ($5 million aftertax) charge to cost of goods sold was
recorded in the second quarter of 2000 to carry out the exit plan.
The charge included $2 million to write down plant assets to their
fair value of approximately $1 million, $2 million of dismantling
costs and $4 million of estimated costs for which Solutia is
contractually obligated under an operating agreement. Fair value was
determined by discounting future cash flows using an appropriate
discount rate based on the Company's cost of capital. Under the
operating agreement, Solutia was required to provide 24 months
notice of intent to exit and to pay contractually obligated costs
for an additional 18 months thereafter to a third-party operator.
Solutia provided notice of intent to exit on June 30, 2000, and
exited the site in June of 2002. The contractually obligated costs
represent direct manufacturing, overhead, utilities and severance.
The financial impact will not be material to Solutia as production
will be shifted to other production facilities.
4
The following table summarizes the 2000 restructuring charge and
amounts utilized to carry out those plans:
SHUTDOWN OF ASSET WRITE- OTHER
FACILITIES DOWNS COSTS TOTAL
----------- ------------ ----- -----
Balance at January 1, 2000.................... $-- $-- $-- $--
Charges taken............................. 2 2 4 8
Amounts utilized.......................... -- (2) -- (2)
---- ---- ---- ----
Balance at December 31, 2000.................. 2 -- 4 6
Amounts utilized.......................... -- -- -- --
---- ---- ---- ----
Balance at December 31, 2001.................. 2 -- 4 6
Amounts utilized.......................... -- -- -- --
---- ---- ---- ----
Balance at March 31, 2002..................... 2 -- 4 6
Amounts utilized.......................... -- -- -- --
---- ---- ---- ----
BALANCE AT JUNE 30, 2002...................... $ 2 $-- $ 4 $ 6
==== ==== ==== ====
4. INVENTORY VALUATION
The components of inventories as of June 30, 2002, and
December 31, 2001, were as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Finished goods................................. $ 225 $ 209
Goods in process............................... 110 107
Raw materials and supplies..................... 103 100
----- -----
Inventories, at FIFO cost...................... 438 416
Excess of FIFO over LIFO cost.................. (111) (113)
----- -----
TOTAL.......................................... $ 327 $ 303
===== =====
5. CONTINGENCIES
Because of the size and nature of its business, Solutia is a
party to numerous legal proceedings. Most of these proceedings have
arisen in the ordinary course of business and involve claims for
money damages. In addition, at the time of the spinoff, Solutia
assumed from the former Monsanto Company (now known as Pharmacia
Corporation), under a distribution agreement, liabilities related to
specified legal proceedings. As a result, although Pharmacia remains
a defendant, Solutia is required to manage the litigation and
indemnify Pharmacia for costs, expenses and judgments arising from
the litigation. Such matters arise out of the normal course of
business and relate to product liability; government regulation,
including environmental issues; employee relations and other issues.
Certain of the lawsuits and claims seek damages in significant
amounts. Although the results of litigation cannot be predicted with
certainty, management's belief is that the final outcome of such
litigation, except as noted below, will not have a material adverse
effect on Solutia's consolidated financial position, liquidity or
profitability in any one year.
Solutia's Annual Report on Form 10-K for the year ended
December 31, 2001, describes four consolidated cases, sometimes referred
to as Abernathy v. Monsanto or Bowie v. Monsanto, which have been in
trial in Circuit Court for Etowah County, Alabama. The trial court
departed from its announced schedule and did not submit the issue of
compensatory damages for the 17 Phase I trial plaintiffs to the jury
for determination. If damages are awarded against Solutia in these
cases, it would appeal on all available grounds. Solutia believes
that it has meritorious grounds for appeal; however, there can be no
guarantee any such appeal would be successful. Also, in order to
appeal any lower court judgment, Solutia would be required to post a
surety bond. Such a bond is often required to be collateralized.
Pharmacia is our co-defendant in the Abernathy or Bowie cases.
Pharmacia has agreed to obtain a surety bond if it is able to do so
on commercially reasonable terms if needed and if Solutia does not
obtain the bond. If Pharmacia obtains an appeal bond without
providing collateral, any decisions regarding management or
settlement
5
of this litigation would be jointly controlled by Solutia,
Pharmacia, and Monsanto (the new company which Pharmacia has
announced plans to spin off on August 13, 2002) with each company
having an equal vote. If such a bond is required to be secured by
collateral, Solutia would have the right to provide the collateral
and control any settlement decisions regarding these cases. If
Solutia does not provide the required collateral, then Monsanto
would have the option to provide the collateral and would then
control any settlement decisions regarding these cases. If Monsanto
does not provide the required collateral, then Pharmacia would
provide the necessary collateral and would assume control of any
settlement decisions in these cases.
Management does not believe that the ultimate resolution of the
matters related to Anniston, Alabama will have a material adverse
impact on its consolidated financial position or liquidity. However,
it is possible that a resolution of these cases may have a material
adverse impact on Solutia's net income in a given year, although it
is impossible at this time to estimate the range or amount of any
such liability.
In connection with the agreement described above relating to
obtaining a surety bond in the Abernathy v. Monsanto litigation, if
one is necessary, Solutia has agreed to an amendment, dated as of
July 1, 2002, to the distribution agreement with Pharmacia. The
amendment provides that Solutia accepts the substitution of Monsanto
in place of Pharmacia as the entity that will, generally, in the
first instance, perform many of the obligations of Pharmacia under
the distribution agreement. Pharmacia, however, has agreed to remain
primarily liable under the distribution agreement for the
performance of those obligations. The amendment to the distribution
agreement also provides that Solutia will indemnify Monsanto with
respect to the liabilities assumed by Solutia under the distribution
agreement.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, Solutia adopted Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS No. 142, Solutia
discontinued the amortization of goodwill and identifiable
intangible assets that have indefinite useful lives. Intangible
assets that have finite useful lives will continue to be amortized
over their useful lives. Goodwill will be assessed annually for
impairment. This statement also required certain intangible assets
that did not meet the criteria for recognition apart from goodwill,
to be subsumed into goodwill. During the quarter ended March 31,
2002, Solutia subsumed into goodwill $74 million of intangible
assets net of related deferred tax liabilities representing
assembled workforce and noncontractual customer relationships that
did not meet the separability criteria under SFAS No. 141,
"Business Combinations."
Net income (loss) and earnings (loss) per share for the three
and six months ended June 30, 2002 and 2001, adjusted to exclude the
non-amortization provisions of SFAS No. 142, net of tax, are as
follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss):
Income before cumulative effect of change in accounting
principle............................................ $ 23 $ 13 $ 37 $ 35
Goodwill amortization.................................. -- 5 -- 10
Subsumed intangible assets amortization................ -- 2 -- 3
Equity method goodwill amortization.................... -- 1 -- 1
Trademark amortization................................. -- -- -- 1
Cumulative effect of change in accounting principle.... -- -- (167) --
----- ----- ------ -----
ADJUSTED NET INCOME (LOSS).................................. $ 23 $ 21 $ (130) $ 50
===== ===== ====== =====
6
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic earnings (loss) per share:
Income before cumulative effect of change in accounting
principle............................................. $0.22 $0.13 $ 0.35 $0.34
Goodwill amortization................................... -- 0.05 -- 0.10
Subsumed intangible assets amortization................. -- 0.02 -- 0.03
Equity method goodwill amortization..................... -- 0.01 -- 0.01
Trademark amortization.................................. -- -- -- 0.01
Cumulative effect of change in accounting principle..... -- -- (1.59) --
----- ----- ------ -----
ADJUSTED BASIC EARNINGS (LOSS) PER SHARE.................... $0.22 $0.21 $(1.24) $0.49
===== ===== ====== =====
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ------------------
2002 2001 2002 2001
----- ----- ------ -----
Diluted earnings (loss) per share:
Income before cumulative effect of change in accounting
principle............................................. $0.22 $0.12 $ 0.35 $0.33
Goodwill amortization................................... -- 0.05 -- 0.10
Subsumed intangible assets amortization................. -- 0.02 -- 0.03
Equity method goodwill amortization..................... -- 0.01 -- 0.01
Trademark amortization.................................. -- -- -- 0.01
Cumulative effect of change in accounting principle..... -- -- (1.59) --
----- ----- ------ -----
ADJUSTED DILUTED EARNINGS (LOSS) PER SHARE.................. $0.22 $0.20 $(1.24) $0.48
===== ===== ====== =====
Identified intangible assets are as follows:
GROSS JUNE 30, 2002 NET
CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE
-------- ------------- --------
Amortized intangible assets:
Contractual customer relationships............... $26 $ (4) $22
Patents.......................................... 7 (2) 5
Employment agreements............................ 5 (1) 4
Other............................................ 6 (4) 2
--- ---- ---
TOTAL AMORTIZED INTANGIBLE ASSETS..................... $44 $(11) $33
--- ---- ---
Unamortized intangible assets:
Trademarks........................................ $47 $ (6) $41
--- ---- ---
TOTAL UNAMORTIZED INTANGIBLE ASSETS................... $47 $ (6) $41
--- ---- ---
TOTAL IDENTIFIED INTANGIBLE ASSETS.................... $91 $(17) $74
=== ==== ===
7
GROSS DECEMBER 31, 2001 NET
CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE
-------- ----------------- --------
Intangible assets:
Customer relationships............................ $149 $(14) $135
Trademarks........................................ 45 (6) 39
Assembled workforce............................... 10 (2) 8
Patents........................................... 7 (2) 5
Employment agreements............................. 5 -- 5
Other............................................. 6 (4) 2
---- ---- ----
TOTAL INTANGIBLE ASSETS............................... $222 $(28) $194
==== ==== ====
The Company's second quarter acquisition of Axio (see Note 2),
resulted in goodwill of approximately $4 million. Intangible asset
amortization expense was $1 million for the quarter ended June 30,
2002, and $2 million for the six months ended June 30, 2002. As a
result of adoption of SFAS No. 142, there have been no changes to
amortizable lives or methods, except for trademarks, which have
indefinite lives as defined under the new standard. Trademarks are
associated with products and tradenames of the Company and are
expected to provide benefits beyond the foreseeable future.
Amortization expense for the net carrying amount of intangible
assets is estimated to be $4 million in 2002, $4 million in 2003, $4
million in 2004, $4 million in 2005 and $4 million in 2006.
Goodwill as allocated by reportable segment is as follows:
PERFORMANCE SPECIALTY INTEGRATED
FILMS PRODUCTS NYLON TOTAL
----------- --------- ---------- -----
Gross goodwill, December 31, 2001................ $ 84 $ 347 $-- $ 431
Accumulated amortization......................... (11) (34) (45)
---- ----- ---- -----
Net goodwill, December 31, 2001.................. $ 73 $ 313 $-- $ 386
Intangible assets and related accounts subsumed:
Noncontractual customer relationships........ -- 114 -- 114
Assembled workforce.......................... -- 8 -- 8
Deferred tax liabilities..................... -- (48) -- (48)
Goodwill acquired................................ -- 4 -- 4
Impairment loss.................................. -- (167) -- (167)
Translation...................................... -- 27 -- 27
---- ----- ---- -----
Goodwill, June 30, 2002.......................... $ 73 $ 251 $-- $ 324
==== ===== ==== =====
Fair value measurements of the reporting units were estimated
by a third-party specialist utilizing both an income and market
multiple approach. Based on this analysis, Solutia recorded an
impairment loss of $167 million during the first quarter of 2002 for
the Resins and Additives business in the Specialty Products segment
due to declining estimates of future results given current economic
and market conditions. This goodwill is non-deductible for tax
purposes. The impairment charge is reflected as the cumulative
effect of change in accounting principle in the accompanying
statement of consolidated income (loss).
7. INVESTMENTS IN AFFILIATES
During the first quarter of 2002, Solutia sold its 50 percent
interest in the Advanced Elastomer Systems joint venture to
ExxonMobil Chemical Company, a division of Exxon Mobil Corporation
and Exxon Chemical Asset Management Partnership, a subsidiary of
Exxon Mobil Corporation for approximately $102 million. The sale
resulted in a gain of $5 million ($3 million aftertax).
8
8. SEGMENT DATA
Solutia's management is organized around four strategic business
platforms: Performance Films, Resins and Additives, Specialties and
Integrated Nylon. Resins and Additives and Specialties have been
aggregated into the Specialty Products reportable segment because of
their similar economic characteristics, as well as their similar
products and services, production processes, types of customers and
methods of distribution. Solutia's reportable segments and their
major products are as follows:
PERFORMANCE FILMS SPECIALTY PRODUCTS INTEGRATED NYLON
----------------- ------------------ ----------------
SAFLEX(R) plastic interlayer Resins and additives, Nylon intermediate "building
including ALFTALAT(R) block" chemicals
KEEPSAFE(R), SAFLEX polyester resins,
INSIDE(R) (in Europe only) RESIMENE(R) and MAPRENAL(R) Merchant polymer and nylon
and KEEPSAFE MAXIMUM(R) crosslinkers, SYNTHACRYL(R) extrusion polymers,
glass for residential acrylic resins and GELVA(R) including VYDYNE(R) and
security and hurricane pressure-sensitive adhesives ASCEND(R)
protection windows
LLUMAR(R), VISTA(R) and Industrial products, including Carpet fibers, including the
GILA(R) professional and THERMINOL(R) heat transfer WEAR-DATED(R) and
after-market window films fluids, DEQUEST(R) water ULTRON VIP(R) brands
treatment chemicals,
VANCEVA(TM) design, enhanced SKYDROL(R) hydraulic fluids Industrial nylon fibers
security and sound and SKYKLEEN(R) cleaning
attenuation films fluids for aviation and
chlorobenzenes
Conductive and anti-reflective Pharmaceutical services, ACRILAN(R) acrylic fibers for
coated films and deep-dyed including process research, apparel, upholstery fabrics,
films process development craft yarns and other
services, scale-up applications
capabilities and small scale
manufacturing for the
pharmaceutical industry
Accounting policies of the segments are the same as those used
in the preparation of Solutia's consolidated financial statements.
Solutia evaluates the performance of its operating segments based on
segment earnings before interest expense and income taxes (EBIT),
which includes marketing, administrative, technological, and
amortization expenses and other non-recurring charges such as
restructuring and asset impairment charges that can be directly
attributable to the operating segment. Certain expenses and other
items that are managed outside of the segments are excluded. These
unallocated items consist primarily of corporate expenses, equity
earnings from affiliates, interest expense, other income--net
and expense items, and certain non-recurring items such as gains and
losses on asset dispositions and restructuring charges that are not
directly attributable to the operating segment. Solutia accounts for
intersegment sales at agreed upon transfer prices. Intersegment
sales are eliminated in consolidation. Segment assets consist
primarily of customer receivables, raw materials and finished goods
inventories, fixed assets, goodwill and identified intangible assets
directly associated with the production processes of the segment
(direct fixed assets). Segment depreciation and amortization are
based upon direct tangible and intangible assets. Unallocated assets
consist primarily of deferred taxes, certain investments in equity
affiliates and indirect fixed assets.
9
Segment data for the three and six months ended June 30, 2002,
and 2001, were as follows:
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films................ $ 155 $-- $ 21 $ 159 $-- $ 20
Specialty Products............... 242 1 21 234 -- 14
Integrated Nylon................. 340 -- 12 344 -- 9
------ ---- ---- ------ ---- ----
SEGMENT TOTALS..................... 737 1 54 737 -- 43
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations............... (1) (1) -- --
Corporate expenses............... (15) (16)
Equity earnings from
affiliates..................... 3 7
Interest expense................. (19) (22)
Other income--net................ 3 2
CONSOLIDATED TOTALS:
------ ---- ------ ----
NET SALES........................ $ 736 $-- $ 737 $--
====== ==== ---- ====== ==== ----
INCOME BEFORE INCOME TAXES....... $ 26 $ 14
==== ====
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films................ $ 297 $-- $ 40 $ 310 $-- $ 36
Specialty Products (a)........... 458 1 41 485 -- 63
Integrated Nylon................. 636 -- 19 689 -- 4
------ ---- ---- ------ ---- ----
SEGMENT TOTALS..................... 1,391 1 100 1,484 -- 103
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations............... (1) (1) -- --
Corporate expenses............... (32) (26)
Equity earnings from
affiliates..................... 11 12
Interest expense................. (44) (44)
Other income--net (b)............ 8 3
CONSOLIDATED TOTALS:
------ ---- ------ ----
NET SALES........................ $1,390 $-- $1,484 $--
====== ==== ---- ====== ==== ----
INCOME BEFORE INCOME TAXES....... $ 43 $ 48
==== ====
(a) Specialty Products profit for the six months ended June 30, 2001, includes a gain from an insurance
settlement associated with the explosion and fire that destroyed the Vianova printing inks and phenolics
production facility in Wiesbaden, Germany ($28 million pretax, $17 million aftertax).
(b) Other income--net for the six months ended June 30, 2002, includes a gain from the sale of Solutia's
50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a
division of Exxon Mobil Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of Exxon
Mobil Corporation ($5 million pretax, $3 million aftertax).
9. SUBSEQUENT EVENTS
Amended Credit Facility
On July 25, 2002, Solutia and its bank syndicate amended
Solutia's revolving credit facility. The amendment extends the
maturity of the facility until August 2004. It also reduces the
facility from $800 million to $600 million and separates the
facility into a $300 million term loan and a $300 million revolving
credit facility. The term loan has scheduled payment obligations as
follows: $25 million at December 31, 2002; $50 million at
December 31, 2003; $25 million at June 30, 2004; and the remainder
at maturity.
10
Borrowings under the amended credit facility bear interest at a
floating rate based on LIBOR, plus an applicable margin. The margin
for LIBOR loans is 5.75 percent and will increase by 50 basis points
in July 2003 and an additional 50 basis points in January 2004. A
premium in the amount of 2 percent of the principal repaid on the
term loan will apply until July 25, 2003, and a premium of 1 percent
will apply to such principal payments thereafter. The amended credit
facility is available for working capital and other general
corporate purposes.
Senior Secured Notes
On July 9, 2002, SOI Funding Corp. ("SOI Funding"), a special
purpose entity, offered 223,000 units (the "Units"), comprising
$223 million aggregate principal amount of its 11.25 percent Senior
Secured Notes (the "Notes") due 2009 and warrants to purchase a
total of 5,533,522 shares of Solutia's common stock.
The Units were offered and sold only to "Qualified Institutional
Buyers" as defined under Rule 144A under the Securities Act of 1933
(the "Act"), and outside the United States in accordance with
Regulation S under the Act. Cash proceeds from the sale of the Units
net of estimated fees were approximately $193 million. These net
offering proceeds were placed in escrow pending Solutia's amendment
of its credit facilities, as described under "Amended Credit
Facility" above, and assumption of SOI Funding's obligations under
the Notes. Both of these events occurred on July 25, 2002, at which
time the net offering proceeds were released to Solutia. Solutia
deposited approximately $155 million of the proceeds with the
trustee for the $150 million of 6.5 percent notes due October 15,
2002 to pay the principal and interest at maturity. The remaining
proceeds were used to pay fees, expenses and other costs related to
the amended credit facility, cash collateralize certain outstanding
letters of credit and repay a portion of borrowings under Solutia's
amended credit facility.
Each warrant entitles the holder to purchase 24.814 shares of
Solutia's common stock at an exercise price of $7.59 per share,
subject to adjustment under certain circumstances. Solutia recorded
the warrants at their estimated fair value of approximately
$19 million on the date of issuance based on the application of
the Black-Scholes option pricing model which incorporates current
stock price, expected dividend yield, expected stock price
volatility, expected interest rates and the expected holding period
of the warrants. The warrants will be exercisable at any time after
their separation from the Notes and before their expiration on
July 15, 2009.
Solutia's obligations and the obligations of its subsidiary
borrowers under the amended credit facility and the senior secured
notes are guaranteed by Solutia Inc., CPFilms Inc., Monchem
International Inc., Monchem, Inc., Solutia Systems, Inc. and each of
Solutia's subsequently acquired or organized domestic subsidiaries,
subject to certain exceptions. The notes and the guarantees are
secured by either first or second priority liens on all of the
domestic collateral securing Solutia's bank obligations.
10. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
CPFilms, Inc., Monchem, Inc., Monchem International, Inc., and
Solutia Systems, Inc., wholly-owned subsidiaries of the Company (the
"Guarantors"), are guarantors of the amended credit facility and the
Notes issued in a private placement offering (see Note 9). The
Guarantors will fully and unconditionally guarantee the Notes on a
joint and several basis. The following consolidating condensed
financial statements present, in separate columns, financial
information for: Solutia Inc. on a parent only basis carrying its
investment in subsidiaries under the equity method; Guarantors on a
combined, or where appropriate, consolidated basis, carrying
investments in subsidiaries who do not guarantee the debt (the
"Non-Guarantors") under the equity method; Non-Guarantors on a
combined, or where appropriate, consolidated basis; eliminating
adjustments; and consolidated totals as of June 30, 2002 and
December 31, 2001, and for the three and six months ended June 30,
2002 and 2001. The eliminating adjustments primarily reflect
intercompany transactions, such as interest income and expense,
accounts receivable and payable, advances, short and long-term debt,
royalties and profit in inventory eliminations. The Company has not
presented separate financial statements and other disclosures
concerning the Guarantors as management has determined that such
information is not material to potential investors.
11
SOLUTIA INC.
CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.................... $491 $ 47 $328 $(130) $736
Cost of goods sold........... 442 20 271 (134) 599
---- ---- ---- ----- ----
GROSS PROFIT................. 49 27 57 4 137
Marketing expenses........... 29 5 12 -- 46
Administrative expenses...... 21 2 13 (1) 35
Technological expenses....... 13 -- 3 -- 16
Amortization expense......... -- -- 1 -- 1
---- ---- ---- ----- ----
OPERATING INCOME (LOSS)...... (14) 20 28 5 39
Equity earnings from
affiliates--net of tax..... 65 10 -- (71) 4
Interest expense............. (35) (1) (29) 46 (19)
Other income--net............ 2 30 21 (51) 2
---- ---- ---- ----- ----
INCOME BEFORE INCOME TAXES... 18 59 20 (71) 26
Income taxes (benefit)....... (5) -- 8 -- 3
---- ---- ---- ----- ----
NET INCOME................... $ 23 $ 59 $ 12 $ (71) $ 23
==== ==== ==== ===== ====
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME................... $ 23 $ 59 $ 12 $ (71) $ 23
OTHER COMPREHENSIVE INCOME:
Currency translation
adjustments................ 87 88 13 (101) 87
Unrealized investment gains,
net of tax................. (1) -- -- -- (1)
---- ---- ---- ----- ----
COMPREHENSIVE INCOME......... $109 $147 $ 25 $(172) $109
==== ==== ==== ===== ====
12
SOLUTIA INC.
CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.................... $497 $ 44 $324 $(128) $737
Cost of goods sold........... 452 19 270 (132) 609
---- ---- ---- ----- ----
GROSS PROFIT................. 45 25 54 4 128
Marketing expenses........... 34 4 7 -- 45
Administrative expenses...... 27 2 9 -- 38
Technological expenses....... 13 1 1 -- 15
Amortization expense......... (6) 2 12 -- 8
---- ---- ---- ----- ----
OPERATING INCOME (LOSS)...... (23) 16 25 4 22
Equity earnings from
affiliates--net of tax..... 56 11 -- (59) 8
Interest expense............. (37) (2) (34) 51 (22)
Other income--net............ 8 21 32 (55) 6
---- ---- ---- ----- ----
INCOME BEFORE INCOME TAXES... 4 46 23 (59) 14
Income taxes (benefit)....... (9) -- 10 -- 1
---- ---- ---- ----- ----
NET INCOME................... $ 13 $ 46 $ 13 $ (59) $ 13
==== ==== ==== ===== ====
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME................... $ 13 $ 46 $ 13 $ (59) $ 13
OTHER COMPREHENSIVE INCOME
(LOSS):
Currency translation
adjustments................ (24) (24) (6) 30 (24)
Net unrealized loss on
derivative instruments,
net of tax................. (2) -- -- -- (2)
---- ---- ---- ----- ----
COMPREHENSIVE INCOME (LOSS).. $(13) $ 22 $ 7 $ (29) $(13)
==== ==== ==== ===== ====
13
SOLUTIA INC.
CONSOLIDATING STATEMENT OF LOSS
SIX MONTHS ENDED JUNE 30, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.................... $ 927 $ 83 $ 634 $(254) $1,390
Cost of goods sold........... 831 37 522 (259) 1,131
----- ----- ----- ----- ------
GROSS PROFIT................. 96 46 112 5 259
Marketing expenses........... 57 9 23 -- 89
Administrative expenses...... 44 4 25 (2) 71
Technological expenses....... 25 1 5 -- 31
Amortization expense......... -- -- 2 -- 2
----- ----- ----- ----- ------
OPERATING INCOME (LOSS)...... (30) 32 57 7 66
Equity earnings (loss) from
affiliates--net of tax..... (45) (139) -- 196 12
Interest expense............. (75) (3) (57) 91 (44)
Other income--net............ 14 52 44 (101) 9
----- ----- ----- ----- ------
INCOME (LOSS) BEFORE INCOME
TAXES...................... (136) (58) 44 193 43
Income taxes (benefit)....... (7) -- 14 (1) 6
----- ----- ----- ----- ------
Income (Loss) Before
Cumulative Effect of Change
in Accounting Principle.... (129) (58) 30 194 37
Cumulative Effect of Change
in Accounting Principle.... (1) -- (166) -- (167)
----- ----- ----- ----- ------
NET LOSS..................... $(130) $ (58) $(136) $ 194 $ (130)
===== ===== ===== ===== ======
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
SIX MONTHS ENDED JUNE 30, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET LOSS..................... $(130) $ (58) $(136) $ 194 $ (130)
OTHER COMPREHENSIVE INCOME
(LOSS):
Currency translation
adjustments................ 82 81 13 (94) 82
Unrealized investment gains,
net of tax................. -- -- -- -- --
Net realized loss on
derivative instruments,
net of tax................. 1 -- -- -- 1
----- ----- ----- ----- ------
COMPREHENSIVE INCOME (LOSS).. $ (47) $ 23 $(123) $ 100 $ (47)
===== ===== ===== ===== ======
14
SOLUTIA INC.
CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.................... $1,006 $ 80 $658 $(260) $1,484
Cost of goods sold........... 918 34 544 (268) 1,228
------ ---- ---- ----- ------
GROSS PROFIT................. 88 46 114 8 256
Marketing expenses........... 73 9 9 -- 91
Administrative expenses...... 46 4 24 -- 74
Technological expenses....... 27 1 4 -- 32
Amortization expense......... (6) 3 19 -- 16
------ ---- ---- ----- ------
OPERATING INCOME (LOSS)...... (52) 29 58 8 43
Equity earnings from
affiliates--net of tax..... 156 47 -- (191) 12
Interest expense............. (74) (4) (69) 103 (44)
Other income
(expense)--net............. (10) 67 91 (111) 37
------ ---- ---- ----- ------
INCOME BEFORE INCOME TAXES... 20 139 80 (191) 48
Income taxes (benefit)....... (15) -- 28 -- 13
------ ---- ---- ----- ------
NET INCOME................... $ 35 $139 $ 52 $(191) $ 35
====== ==== ==== ===== ======
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME................... $ 35 $139 $ 52 $(191) $ 35
OTHER COMPREHENSIVE INCOME
(LOSS):
Currency translation
adjustments................ (60) (62) (17) 79 (60)
Net unrealized loss on
derivative instruments,
net of tax................. (2) -- -- -- (2)
Net realized (gain) loss on
derivative instruments,
net of tax................. (2) -- -- -- (2)
------ ---- ---- ----- ------
COMPREHENSIVE INCOME (LOSS).. $ (29) $ 77 $ 35 $(112) $ (29)
====== ==== ==== ===== ======
15
SOLUTIA INC.
CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 2 $ 1 $ 10 $ -- $ 13
Trade receivables, net...................... 15 202 222 -- 439
Intercompany receivables.................... (34) 532 146 (644) --
Miscellaneous receivables................... 83 -- 32 -- 115
Prepaid expenses............................ 4 1 5 -- 10
Deferred income tax benefit................. 94 -- 20 7 121
Inventories................................. 159 23 166 (21) 327
------ ------ ------ ------- ------
TOTAL CURRENT ASSETS.................... 323 759 601 (658) 1,025
PROPERTY, PLANT AND EQUIPMENT:
Land........................................ 17 -- 45 -- 62
Buildings................................... 272 23 142 -- 437
Machinery and equipment..................... 2,514 64 478 -- 3,056
Construction in progress.................... 25 10 16 -- 51
------ ------ ------ ------- ------
Total property, plant and equipment......... 2,828 97 681 -- 3,606
Less accumulated depreciation............... 2,095 17 357 -- 2,469
------ ------ ------ ------- ------
NET PROPERTY, PLANT AND EQUIPMENT........... 733 80 324 -- 1,137
INVESTMENTS IN AFFILIATES................... 3,073 77 29 (2,958) 221
GOODWILL.................................... -- 72 252 -- 324
IDENTIFIED INTANGIBLE ASSETS, NET........... 3 26 45 -- 74
LONG-TERM DEFERRED INCOME TAX BENEFIT....... 219 -- 17 -- 236
INTERCOMPANY ADVANCES....................... 128 2,085 1,445 (3,658) --
OTHER ASSETS................................ 150 -- 33 -- 183
------ ------ ------ ------- ------
TOTAL ASSETS............................ $4,629 $3,099 $2,746 $(7,274) $3,200
====== ====== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 178 $ 12 $ 82 $ -- $ 272
Intercompany payables....................... 364 134 146 (644) --
Wages and benefits.......................... 25 -- 26 -- 51
Postretirement liabilities.................. 92 -- 1 -- 93
Miscellaneous accruals...................... 180 12 151 -- 343
Short-term debt............................. 525 -- 51 -- 576
Intercompany short-term debt................ 285 27 347 (659) --
------ ------ ------ ------- ------
TOTAL CURRENT LIABILITIES................... 1,649 185 804 (1,303) 1,335
LONG-TERM DEBT.............................. 448 -- 198 -- 646
INTERCOMPANY LONG-TERM DEBT................. 1,500 34 1,465 (2,999) --
POSTRETIREMENT LIABILITIES.................. 907 -- 30 -- 937
OTHER LIABILITIES........................... 283 4 153 -- 440
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock................................ 1 -- -- -- 1
Net (deficiency) excess of assets at
spinoff and subsidiary capital........ (113) 2,876 96 (2,972) (113)
Treasury stock.......................... (250) -- -- -- (250)
Accumulated other comprehensive loss........ (62) -- -- -- (62)
Reinvested earnings......................... 266 -- -- -- 266
------ ------ ------ ------- ------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (158) 2,876 96 (2,972) (158)
------ ------ ------ ------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................. $4,629 $3,099 $2,746 $(7,274) $3,200
====== ====== ====== ======= ======
16
SOLUTIA INC.
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 3 $ 1 $ 19 $ -- $ 23
Trade receivables, net...................... (5) 178 179 -- 352
Intercompany receivables.................... 2,899 3,354 133 (6,386) --
Miscellaneous receivables................... 77 -- 28 -- 105
Prepaid expenses............................ 12 -- 3 -- 15
Deferred income tax benefit................. 95 -- 21 7 123
Inventories................................. 160 23 138 (18) 303
------ ------ ------ -------- ------
TOTAL CURRENT ASSETS.................... 3,241 3,556 521 (6,397) 921
PROPERTY, PLANT AND EQUIPMENT:
Land........................................ 18 -- 40 -- 58
Buildings................................... 274 22 129 -- 425
Machinery and equipment..................... 2,527 51 428 -- 3,006
Construction in progress.................... 18 20 13 -- 51
------ ------ ------ -------- ------
Total property, plant and equipment......... 2,837 93 610 -- 3,540
Less accumulated depreciation............... 2,070 14 313 -- 2,397
------ ------ ------ -------- ------
NET PROPERTY, PLANT AND EQUIPMENT........... 767 79 297 -- 1,143
INVESTMENTS IN AFFILIATES................... 3,139 206 26 (3,058) 313
GOODWILL, NET............................... 2 72 312 -- 386
IDENTIFIED INTANGIBLE ASSETS, NET........... 3 26 165 -- 194
LONG-TERM DEFERRED INCOME TAX BENEFIT....... 242 -- 12 -- 254
INTERCOMPANY ADVANCES....................... 128 2,010 1,812 (3,950) --
OTHER ASSETS................................ 166 -- 31 -- 197
------ ------ ------ -------- ------
TOTAL ASSETS............................ $7,688 $5,949 $3,176 $(13,405) $3,408
====== ====== ====== ======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 160 $ 8 $ 65 $ -- $ 233
Intercompany payables....................... 3,271 2,995 120 (6,386) --
Wages and benefits.......................... 26 -- 30 -- 56
Postretirement liabilities.................. 81 -- 1 -- 82
Miscellaneous accruals...................... 210 11 141 -- 362
Short-term debt............................. 683 -- -- -- 683
Intercompany short-term debt................ 189 31 112 (332) --
------ ------ ------ -------- ------
TOTAL CURRENT LIABILITIES................... 4,620 3,045 469 (6,718) 1,416
LONG-TERM DEBT.............................. 448 -- 179 -- 627
INTERCOMPANY LONG-TERM DEBT................. 1,494 45 2,080 (3,619) --
POSTRETIREMENT LIABILITIES.................. 921 -- 26 -- 947
OTHER LIABILITIES........................... 318 6 207 -- 531
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock................................ 1 -- -- -- 1
Net (deficiency) excess of assets at
spinoff and subsidiary capital........ (113) 2,853 215 (3,068) (113)
Treasury stock.......................... (257) -- -- -- (257)
Unearned ESOP shares........................ (1) -- -- -- (1)
Accumulated other comprehensive loss........ (144) -- -- -- (144)
Reinvested earnings......................... 401 -- -- -- 401
------ ------ ------ -------- ------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (113) 2,853 215 (3,068) (113)
------ ------ ------ -------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................. $7,688 $5,949 $3,176 $(13,405) $3,408
====== ====== ====== ======== ======
17
SOLUTIA INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH FROM OPERATIONS.................... $(39) $ 63 $ 25 $-- $ 49
---- ---- ---- ---- -----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases............................. (15) (4) (12) -- (31)
Acquisition and investment payments, net
of cash acquired...................... (17) -- -- -- (17)
Property disposals and investment
proceeds.............................. 101 -- (1) -- 100
---- ---- ---- ---- -----
CASH FROM INVESTING ACTIVITIES.......... 69 (4) (13) -- 52
---- ---- ---- ---- -----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................... (157) -- 48 -- (109)
Common stock issued under employee stock
plans................................. 2 -- -- -- 2
Other financing activities.............. (4) -- -- -- (4)
Changes in investments and advances from
(to) affiliates....................... 128 (59) (69) -- --
---- ---- ---- ---- -----
CASH FROM FINANCING ACTIVITIES.......... (31) (59) (21) -- (111)
---- ---- ---- ---- -----
DECREASE IN CASH AND CASH EQUIVALENTS... (1) -- (9) -- (10)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................... 3 1 19 -- 23
---- ---- ---- ---- -----
END OF PERIOD........................... $ 2 $ 1 $ 10 $-- $ 13
==== ==== ==== ==== =====
18
SOLUTIA INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH FROM OPERATIONS.................... $(130) $ 78 $(29) $ (1) $(82)
----- ---- ---- ---- ----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases............................. (16) (6) (21) -- (43)
Acquisition and investment payments, net
of cash acquired...................... (18) -- -- -- (18)
Property disposals and investment
proceeds.............................. (5) -- 37 -- 32
----- ---- ---- ---- ----
CASH FROM INVESTING ACTIVITIES.......... (39) (6) 16 -- (29)
----- ---- ---- ---- ----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................... 106 -- (3) -- 103
Common stock issued under employee stock
plans................................. 8 -- -- -- 8
Other financing activities.............. (2) -- -- -- (2)
Changes in investments and advances from
(to) affiliates....................... 50 (72) 21 1 --
----- ---- ---- ---- ----
CASH FROM FINANCING ACTIVITIES.......... 162 (72) 18 1 109
----- ---- ---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (7) -- 5 -- (2)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................... 11 -- 8 -- 19
----- ---- ---- ---- ----
END OF PERIOD........................... $ 4 $-- $ 13 $-- $ 17
===== ==== ==== ==== ====
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking
statements include all statements regarding expected future
financial position, results of operations, profitability, cash flows
and liquidity. Important factors that could cause actual results to
differ materially from the expectations reflected in the
forward-looking statements herein include, among others, general
economic, business and market conditions, customer acceptance of new
products, raw material and energy pricing, currency fluctuations,
interest rate fluctuations, increased competitive and/or customer
pressure, ability to divest existing businesses, exposure to product
liability and other litigation and cost of environmental
remediation, changes in accounting principles generally accepted in
the United States of America and ability to implement cost reduction
initiatives in a timely manner.
CRITICAL ACCOUNTING POLICIES
A summary of our critical accounting policies is presented on
page 13 of our 2001 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 7, 2002.
RESULTS OF OPERATIONS--THREE MONTHS ENDED JUNE 30, 2002, COMPARED
WITH THE THREE MONTHS ENDED JUNE 30, 2001
Net sales for the second quarter of 2002 were essentially even
with the second quarter of 2001. Higher volumes and favorable
currency exchange rate fluctuations were offset by lower average
selling prices.
Performance Films
Net sales in the Performance Films segment for the second
quarter of 2002 decreased by 3 percent from the same period of the
prior year. Net sales decreased primarily because of lower average
selling prices than those of the year-ago quarter due to competitive
pricing pressures, partially offset by higher sales volumes and
favorable currency exchange rate fluctuations. Higher CPFilms'
window film sales were partially offset by decreased demand for
SAFLEX(R) plastic interlayer products. Sales volumes for SAFLEX(R)
plastic interlayer products were down primarily due to significantly
lower sales to a large customer, partially offset by increased
volumes in the Asia Pacific markets. Sales volumes will be
negatively impacted by lower sales to this customer for the
remainder of 2002. Also, to a lesser extent, net sales were
positively affected by favorable currency exchange rate fluctuations
primarily due to the strengthening euro and Japanese yen in relation
to the U.S. dollar.
Segment profit for the three-month period ended June 30, 2002,
increased 5 percent over the three-month period ended June 30, 2001,
primarily due to lower raw material costs, lower personnel expense
associated with restructuring activities carried out during 2001,
lower amortization expense due to the adoption of SFAS No. 142 and
higher equity earnings. The impact of significantly lower sales
volumes to the large Saflex customer on segment profitability is
expected to be mostly offset by higher sales of SAFLEX(R) plastic
interlayer products to other glass laminators, improved product mix
and cost reductions.
Specialty Products
Net sales in the Specialty Products segment increased 3 percent
for the second quarter 2002 over the comparable quarter of the prior
year. The increase in net sales was primarily caused by higher sales
volume in Resins and Additives because of increased demand by
European customers. Also, to a lesser extent, businesses in this
segment were favorably impacted by currency exchange rate
fluctuations due to the strengthening euro in relation to the
U.S. dollar. Partially offsetting the sales volumes increases and
favorable currency exchange rate fluctuations were lower average
selling prices primarily because of pricing pressures.
Segment profit for the Specialty Products segment increased
50 percent for the quarter ended June 30, 2002, over the year-ago
quarter. Profit increased primarily from the effects of higher
net sales, lower amortization expense due to the adoption of
SFAS No. 142, lower raw material costs, lower personnel expense
associated with restructuring activities carried out during 2001
and favorable manufacturing variances associated with higher
capacity utilization rates.
20
Integrated Nylon
Net sales for the second quarter of 2002 in the Integrated Nylon
segment decreased 1 percent from the second quarter of 2001. The
change in sales occurred primarily because of declines in average
selling prices in most businesses due to competitive pricing
pressures. These declines more than offset price increases
experienced in carpet fiber. Sales volumes were up slightly from the
comparable prior-year period. Sales volume increases in carpet
fiber, intermediate chemicals and nylon plastics and polymers were
mostly offset by volume declines in nylon industrial products.
Segment profit for the Integrated Nylon segment was $12 million
for the quarter ended June 30, 2002, up 33 percent from the second
quarter of 2001. The increase in segment profitability resulted
primarily from lower personnel expense associated with restructuring
activities carried out during 2001, lower raw material and energy
prices and favorable manufacturing variances associated with higher
capacity utilization rates. Segment profitability was negatively
affected by approximately $6 million due to the temporary shutdown
of the Chocolate Bayou Intermediates facility during the second
quarter of 2002 because of a power outage.
Operating Income
Operating income for the second quarter of 2002 increased to
$39 million from $22 million in the second quarter of 2001. Excluding
the effects of amortization expense from operating results in the
second quarter of 2001 associated with the adoption of SFAS No. 142
(see Note 6), operating income in the second quarter of 2002
increased $10 million from the prior year. The increase in operating
income was primarily driven by the lower raw material and energy
costs, higher volumes and lower personnel costs resulting from
restructuring activities carried out during 2001, partially offset
by impact of lower selling prices and the aforementioned
manufacturing outage.
Equity Earnings from Affiliates--net of tax
Equity earnings from affiliates was $4 million in the second
quarter of 2002 compared to $8 million in the comparable quarter
in 2001. Excluding the loss of income from the sale of Solutia's
50 percent interest in the Advanced Elastomer Systems joint venture
which occurred in the first quarter of 2002, equity earnings were
essentially unchanged from prior year.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2002, COMPARED WITH
THE SIX MONTHS ENDED JUNE 30, 2001
Net sales for the six-month period ended June 30, 2002,
decreased by 6 percent as compared with the six-month period ended
June 30, 2001. Sales decreases reflect lower average selling prices,
and to a lesser extent, lower volumes.
Performance Films
Performance Films' net sales for the first six months of 2002
decreased 4 percent in comparison to the first six months of 2001.
Net sales decreased primarily because of lower average selling
prices than those of the year-ago period due to competitive pricing
pressures, partially offset by higher sales volumes. Higher CPFilms'
window film sales were partially offset by decreased demand for
SAFLEX(R) plastic interlayer products due to significantly lower
sales to a large customer and lower specialty films sales into the
electronic display market. Sales volumes will be negatively impacted
by lower sales to this customer for the remainder of 2002.
Performance Films' segment profit for the first half of 2002
increased 11 percent from the first half of 2001 because of lower
raw material costs, lower marketing, administrative and
technological spending, lower personnel expense associated with
restructuring activities carried out during 2001 and lower
amortization expense due to the adoption of SFAS No. 142. The impact
of significantly lower sales volumes to the large Saflex customer on
segment profitability is expected to be mostly offset by higher
sales of SAFLEX(R) plastic interlayer products to other glass
laminators, improved product mix and cost reductions.
21
Specialty Products
Net sales in the Specialty Products segment decreased 6 percent
for the six months ended June 30, 2002, over the comparable period
of the prior year. The decrease in net sales was primarily caused by
lower average selling prices than those of the year-ago period
because of pricing pressures. Also, to a lesser extent, net sales
were negatively impacted by lower volumes in the Resins and
Additives business and lower sales of chlorobenzenes. Partially
offsetting the decreases in average selling prices and sales volumes
were modest volume increases in Pharmaceutical Services.
Segment profit for the six-month period ended June 30, 2002,
decreased 35 percent as compared to the six-month period ended
June 30, 2001. Excluding a gain of $28 million ($17 million aftertax)
recorded in the first quarter of 2001 from an insurance settlement,
segment profit increased 17 percent primarily due to lower
amortization expense due to the adoption of SFAS No. 142, lower
raw material costs and lower personnel expense associated with
restructuring activities carried out during 2001.
Integrated Nylon
The Integrated Nylon segment's net sales for the six months
ended June 30, 2002, decreased 8 percent as compared with the six
months ended June 30, 2001 primarily due to declines in average
selling prices in all businesses in this segment. Sales volumes were
also down slightly from the comparable prior-year period. The
effects of a weak U.S. economy continue to unfavorably impact
average selling prices and volumes in comparison with 2001. Price
decreases in all businesses were due to competitive pricing
pressures. In addition, price decreases in intermediate chemicals
also resulted from contracts with formula pricing tied to raw
material costs. Carpet fiber sales experienced an unfavorable
product mix, while achieving overall increases in volume.
Integrated Nylon's segment profit for the first half of 2002 was
$19 million, up $15 million from the $4 million experienced for the
first half of 2001. The increase resulted primarily from lower raw
material and energy prices, lower marketing, administrative, and
technological spending, lower personnel expense associated with
restructuring activities carried out during 2001and favorable
manufacturing variances associated with higher capacity utilization
rates. Segment profitability was negatively affected by
approximately $6 million due to the temporary shutdown of the
Chocolate Bayou Intermediates facility during the second quarter
of 2002 because of a power outage.
Operating Income
Operating income for the first six months of 2002 increased
to $66 million from $43 million in the first six months of 2001.
Excluding the effects of amortization expense from operating results
for the six months ended June 30, 2001, associated with the adoption
of SFAS No. 142 (see Note 6), operating income for the six months
ended June 30, 2002, increased $9 million from the prior year. The
increase in operating income was primarily driven by the lower raw
material and energy costs, lower personnel costs resulting from
restructuring activities carried out during 2001 and lower
marketing, administrative and technological expenses, partially
offset by a year-over-year increase in corporate expenses of
approximately $5 million due to protracted litigation in Anniston,
Alabama.
Equity Earnings from Affiliates--net of tax
Equity earnings from affiliates was $12 million in the first
half of 2002, even with the comparable period of 2001. Excluding the
loss of income from the sale of Solutia's 50 percent interest in the
Advanced Elastomer Systems joint venture during the first quarter of
2002, equity earnings increased by $4 million. The increase is
primarily due to higher earnings from the Astaris joint venture.
Other Income--Net
Other income--net for the six months ended June 30, 2002, was
$9 million compared to $37 million for the same period in 2001.
The six months ended June 30, 2002, includes a $5 million ($3 million
aftertax) gain from the sale of Solutia's 50 percent interest in the
Advanced Elastomer Systems joint venture. The six months ended
June 30, 2001, includes a $28 million gain ($17 million aftertax) from
an insurance settlement. Excluding these gains from both periods, other
income for the six months ended June 30, 2002, was $4 million
compared to $9 million for the same period in 2001, which was due
in part to a small gain from certain asset sales in 2001.
22
Cumulative Effect of Change in Accounting Principle
Effective January 1, 2002, Solutia adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." In accordance with
SFAS No. 142, Solutia discontinued the amortization of goodwill and
identifiable intangible assets that have indefinite useful lives.
Intangible assets that have finite useful lives will continue to be
amortized over their useful lives. Goodwill will be assessed
annually for impairment. This statement also required certain
intangible assets that did not meet the criteria for recognition
apart from goodwill, to be subsumed into goodwill. During the
quarter ended March 31, 2002, Solutia subsumed into goodwill
$74 million of intangible assets net of related deferred tax
liabilities representing assembled workforce and noncontractual
customer relationships that did not meet the separability criteria
under SFAS No. 141, "Business Combinations."
Fair value measurements of the reporting units were estimated
by a third-party specialist utilizing both an income and market
multiple approach. Based on this analysis, Solutia recorded an
impairment loss of $167 million for the Resins and Additives
business in the Specialty Products segment due to declining
estimates of future results given current economic and market
conditions. This goodwill is non-deductible for tax purposes. The
impairment charge is reflected as the cumulative effect of change in
accounting principle in the accompanying statement of consolidated
income (loss).
FINANCIAL CONDITION AND LIQUIDITY
Cash generated from operations was $49 million for the six
months ended June 30, 2002, compared to cash used in operations of
$82 million for the six months ended June 30, 2001. The improvement
was primarily attributable to an income tax refund received during
the first quarter of 2002, a $21 million dividend received during
the second quarter of 2002 from the Flexsys joint venture, stronger
operating earnings and lower severance payments. In March of 2002,
the "Job Creation and Worker Assistance Act" was enacted which
allowed for, among other things, a five-year carryback of net
operating losses. As a result of this new law, Solutia received a
$30 million income tax refund from the United States taxing
authorities, in addition to its $30 million anticipated income tax
refund during the first quarter of 2002.
Solutia's working capital at June 30, 2002 increased to negative
$310 million from negative $495 million at December 31, 2001. The
increase in the working capital position primarily resulted from a
reduction of short-term debt and an increase in accounts receivable,
partially offset by an increase in accounts payable.
LIQUIDITY
On June 30, 2002, Solutia's debt obligations totaled
$1,222 million, including borrowings under the existing $800 million
credit facility with a syndicate of commercial banks, notes and
debentures. The weighted average interest rate on Solutia's total debt
outstanding at June 30, 2002, was approximately 5.7 percent.
At June 30, 2002, debt maturing within one year consisted
primarily of borrowings of $425 million from the $800 million
facility due in August of 2002 and $150 million of 6.5 percent notes
due in October of 2002.
AMENDED CREDIT FACILITY
On July 25, 2002, Solutia and its bank syndicate amended
Solutia's revolving credit facility. The amendment extends the
maturity of the facility until August 2004. It also reduces the
facility from $800 million to $600 million and separates the
facility into a $300 million term loan and a $300 million revolving
credit facility. The term loan has scheduled payment obligations
as follows: $25 million at December 31, 2002; $50 million at
December 31, 2003; $25 million at June 30, 2004; and the remainder
at maturity. The amended credit facility requires the Company to cash
collateralize certain outstanding letters of credit. Fees, expenses
and other costs associated with the amended credit facility and cash
collateralization of letters of credit totaled approximately
$50 million. The amended credit facility is available for working
capital and other general corporate purposes.
Guarantees
Solutia's obligations and the obligations of its subsidiary
borrowers under the amended credit facility are guaranteed by
Solutia Inc., CPFilms Inc., Monchem International Inc., Monchem,
Inc., Solutia Systems, Inc. (the "subsidiary guarantors") and each
of Solutia's subsequently acquired or organized domestic
subsidiaries, subject to certain exceptions.
23
Collateral
Borrowings under the amended credit facility as well as the
beneficiaries of the Astaris support agreement, the lessee under the
co-generation facility at Pensacola, Florida and holders of certain
designated letters of credit are secured by (1) liens on all of
Solutia Inc.'s inventory and receivables and those of the subsidiary
guarantors, (2) pledges of 100 percent of the stock of Monchem, Inc.
and Solutia Systems, Inc. and 65 percent of the voting stock and
100 percent of all other stock of Monchem International, Inc.,
(3) liens on intercompany debt of and held by Monchem, Inc., Monchem
International, Inc. and Solutia Systems, Inc., (4) pledges of
65 percent of the voting stock (and 100 percent of all other stock)
of Solutia Europe, S.A./N.V. and Solutia U. K. Holdings Limited,
(5) a lien on certain principal properties, (6) a lien on certain
intellectual property; and (7) liens on property, plant and
equipment, inventory, receivables and certain intellectual property
of four European subsidiaries. The aggregate amount of Solutia's
obligations entitled to the benefit of the lien on such principal
properties is limited to 15 percent of its net tangible assets, as
determined at the date that the lien was granted.
In addition, borrowings under the amended credit facility are
secured by liens shared equally and ratably with the holders of
Solutia's outstanding publicly traded notes and senior secured notes
described below. These include a lien on (1) certain other principal
properties, (2) 100 percent of the stock of CPFilms Inc., and
(3) pledges of intercompany debt of CPFilms Inc; and a second
priority lien shared equally and ratably on the principal properties
on which the banks have a first priority lien. The amended credit
facility also contains customary representations and warranties and
affirmative and negative covenants.
Interest
Borrowings under the amended credit facility bear interest at a
floating rate based on LIBOR, plus an applicable margin. The margin
for LIBOR loans is 5.75 percent and will increase by 50 basis points
in July 2003 and an additional 50 basis points in January 2004. A
premium in the amount of 2 percent of the principal repaid on the
term loan will apply until July 25, 2003, and a premium of 1 percent
will apply to such principal payments thereafter.
Covenants
The amended credit facility requires Solutia to meet certain
financial tests, including, but not limited to, maximum leverage and
minimum interest coverage ratios. In addition, the amended credit
facility contains certain covenants which, among other things, limit
the incurrence of additional debt, aggregate capital expenditures,
guarantees, liens, investments, asset sales, dividends, restricted
payments, acquisitions, mergers and consolidations, change of
business, transactions with affiliates, prepayments of debt,
repurchases of stock and redemptions of certain other indebtedness
and other matters customarily restricted in such agreements.
SENIOR SECURED NOTES
On July 9, 2002, Solutia completed a private placement of
223,000 units consisting of $223 million of senior secured 7 year
notes and warrants to purchase 5,533,522 shares of common stock at
an exercise price of $7.59 per share. The 7 year notes were issued
by SOI Funding Corp., a special purpose entity, and the offering
resulted in cash proceeds, net of estimated fees, of $193 million
which were placed in escrow pending amendment of Solutia's credit
facility, as described under "Amended Credit Facility" above and
assumption of SOI Funding Corp.'s obligations under the notes. Both
of these events occurred on July 25, 2002, at which time the net
offering proceeds were released from escrow. Solutia deposited
approximately $155 million of the proceeds with the trustee for the
$150 million of 6.5 percent notes due October 15, 2002 to pay the
principal and interest at maturity. The remaining proceeds were used
to pay fees, expenses and other costs related to the amended credit
facility, cash collateralize certain outstanding letters of credit
and repay a portion of borrowings under Solutia's amended credit
facility.
Guarantees
All of the subsidiaries that guarantee the obligations under
Solutia's amended credit facility will fully and unconditionally
guarantee the notes on a senior joint and several basis. Certain of
Solutia's future domestic subsidiaries will be required to execute
similar guarantees. The subsidiary guarantees will each rank in
right of payment equal to each subsidiary guarantor's existing and
future senior debt.
24
Collateral
The notes and guarantees will be secured by a first priority
lien (shared with (A) holders of our bank obligations, (B) the
beneficiaries of the Astaris support agreement, (C) the lessee under
the co-generation facility at Pensacola, Florida and (D) holders of
certain designated letters of credit) on the following assets:
(1) certain principal properties, (2) pledges of 100 percent of the
stock of CPFilms Inc., and (3) intercompany debt of CPFilms Inc.;
and a second priority lien on the following assets: (1) 65 percent
of the voting stock (100 percent of all other stock) of Monchem
International, Inc. and 100 percent of the stock of the remaining
subsidiary guarantors, Monchem, Inc. and Solutia Systems, Inc.,
(2) intercompany debt of and held by the subsidiary guarantors (other
than CPFilms Inc.), (3) substantially all of Solutia's and the
subsidiary guarantors' accounts receivable and inventory and certain
intellectual property, (4) 65 percent of the voting stock (and
100 percent of all other stock) of two foreign subsidiaries, and
(5) certain other production facilities.
Interest expense, giving effect to the new facilities, is
expected to be approximately $107 million for 2002. Assuming a
constant debt level and current LIBOR rates, interest expense is
expected to be approximately $125 million for 2003. Included in the
2003 estimate for interest expense is approximately $25 million of
amortization of debt discount, warrants and issuance costs primarily
for the amended credit facility and the senior secured notes.
OTHER
During the first quarter of 2002, Solutia sold its 50 percent
interest in the Advanced Elastomer Systems joint venture to
ExxonMobil Chemical Company, a division of Exxon Mobil Corporation
and Exxon Chemical Asset Management Partnership, a subsidiary of
Exxon Mobil Corporation for approximately $102 million. The sale
resulted in a gain of $5 million ($3 million aftertax).
In 1993, a co-generation facility was constructed at the
Pensacola, Florida manufacturing site to provide the plant with
electricity and steam. Solutia financed the construction by placing
the co-generation facility in a trust that was funded by a syndicate
of commercial banks. Solutia makes monthly operating lease payments
and the lease term is co-terminous with the amended credit facility.
In connection with the completion of the external financing
agreement for Astaris which expires in September of 2005, Solutia
contractually agreed to provide Astaris with funding in the event
the joint venture fails to meet certain financial benchmarks. During
the second quarter of 2002, Solutia contributed $12 million to the
joint venture under this agreement. Solutia anticipates that an
additional contribution of approximately $15 million will be
required in the second half of 2002. Solutia believes that this
obligation is not likely to have a significant impact on its
consolidated financial position, liquidity or profitability.
On June 18, 2002, Standard and Poor's downgraded Solutia's
senior unsecured rating from BB+ to BB- and the secured bank loan
from BB+ to BB. On June 13, 2002, Moody's downgraded Solutia's
senior unsecured rating from Ba1 to Ba2 and the secured bank loan
from Baa3 to Ba1. On May 10, 2002, Standard and Poor's downgraded
Solutia's senior unsecured and secured bank loan rating from BBB- to
BB+.
Solutia believes that its cash flow from operations and
available borrowing capacity under the amended credit facility
provide sufficient resources to finance its operations and planned
capital needs for the next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." The
statement addresses accounting and reporting requirements for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement obligations. SFAS No. 143
is effective for fiscal years beginning after June 15, 2002. Solutia
is evaluating SFAS No. 143 to determine the effects, if any, on its
consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FACTORS
There have been no material changes in market risk exposures
during the first six months of 2002 that affect the disclosures
presented in the information appearing under "Derivative Financial
Instruments" on pages 26 and 27 of Solutia's Annual Report on
Form 10-K for the year ended December 31, 2001.
25
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 9, 2002, SOI Funding Corp. offered 223,000 units (the
"Units"), comprising $223 million aggregate principal amount of its
11.25 percent Senior Secured Notes (the "Notes") due 2009 and
warrants to purchase a total of 5,533,522 shares of Solutia's common
stock. Each warrant entitles the holder to purchase 24.814 shares of
Solutia's common stock at an exercise price of $7.59 per share,
subject to adjustment under certain circumstances. The warrants will
be exercisable at any time after their separation from the Notes and
before their expiration on July 15, 2009.
The Units were offered and sold only to "Qualified Institutional
Buyers" as defined under Rule 144A under the Securities Act of 1933
(the "Act"), and outside the United States in accordance with
Regulation S under the Act. The Units were sold for an aggregate
offering price of $200,682,160, with an aggregate discount to the
initial purchasers of $5,575,000, resulting in net offering proceeds
of $195,107,160. These net offering proceeds were placed in escrow
pending Solutia's assumption of SOI Funding's obligations under the
Notes.
On July 25, 2002, Solutia assumed SOI Funding's obligations
under the Notes, and the net offering proceeds were released to
Solutia. Solutia used these proceeds (1) to make an irrevocable
deposit with the trustee for Solutia's $150 million of outstanding
6.5 percent notes due October 15, 2002 to pay the principal and
interest at their maturity date, (2) to pay fees, expenses and other
costs associated with the amended credit facility, (3) to cash
collateralize certain outstanding letters of credit, and (4) to
repay a portion of borrowings under the amended credit facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Solutia's annual meeting of stockholders on April 24, 2002,
three matters were submitted to a vote of stockholders.
1. The stockholders elected the following directors for a
three-year term that will expire at the annual meeting of
stockholders in 2005 (or until their respective successors
are elected and qualified, or until their earlier death,
resignation or removal). Votes were cast as follows:
VOTES
VOTES "WITHHOLD
NAME "FOR" AUTHORITY"
---- ----- ----------
Paul H. Hatfield................................. 93,595,487 3,008,228
J. Patrick Mulcahy............................... 92,961,380 3,642,335
Sally G. Narodick................................ 93,389,995 3,213,720
The following directors are continuing terms expiring at
the annual meeting of stockholders in 2003: Paul Donovan,
Robert H. Jenkins and Frank A. Metz, Jr. The following
directors are continuing terms expiring at the annual meeting
of stockholders in 2004: John C. Hunter III, William D. Ruckelshaus
and John B. Slaughter.
2. The Solutia Inc. 2002-2006 Long-Term Incentive Plan was
approved by the stockholders. A total of 87,660,027 votes
were cast in favor of the plan, 8,262,667 votes were cast
against it, and 681,021 votes were counted as abstentions.
3. The appointment by the Board of Directors of Deloitte &
Touche LLP as principal independent auditors for the year
2002 was ratified by the stockholders. A total of 92,430,215
votes were cast in favor of ratification, 3,773,980 votes
were cast against it, and 399,520 votes were counted as
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit Index at page 28 of this report.
(b) Reports on Form 8-K during the quarter ended June 30, 2002:
On June 19, 2002, Solutia filed a Form 8-K, under Item 9,
"Regulation FD Disclosure," describing the structure and
certain terms of a proposed private placement of $250 million
of senior secured notes.
On June 18, 2002, Solutia filed a Form 8-K, containing a press
release which announced that Solutia was pursuing a
$250 million private placement of senior secured notes.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SOLUTIA INC.
-----------------------------------
(Registrant)
/s/ JAMES M. SULLIVAN
-----------------------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: August 1, 2002
27
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 Amendment to Distribution Agreement, dated as of July 1,
2002, by and among Pharmacia Corporation, Solutia Inc., and
Monsanto Company
4 Warrant Agreement between Solutia Inc. and HSBC Bank USA as
Warrant Agent, dated as of July 9, 2002
10(a) Solutia Inc. 2002-2006 Long-Term Incentive Plan
(incorporated by reference to Appendix A of the Solutia Inc.
Notice of Annual Meeting and Proxy Statement dated
March 14, 2002)
10(b) Protocol Agreement, dated as of July 1, 2002, by and among
Pharmacia Corporation, Solutia Inc., and Monsanto Company
10(c) Second Amended and Restated Credit Agreement, dated as of
July 25, 2002, between Solutia Inc., as Borrower, the
initial lenders named therein, Bank of America, N.A., as
Syndication Agent and Citibank, N.A., as Administrative Agent
11 Omitted--Inapplicable; see "Statement of Consolidated Income
(Loss)" on page 1
99(a) Computation of the Ratio of Earnings to Fixed Charges
99(b) Business Risk Factors as set forth in Offering Memorandum,
dated July 2, 2002
28