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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
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SOLUTIA INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
- --------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED
FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). 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 MARCH 31, 2003
----- --------------
COMMON STOCK, $0.01 PAR VALUE 104,699,333 SHARES
----------------------------- ------------------
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLUTIA INC.
STATEMENT OF CONSOLIDATED LOSS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
------ ------
NET SALES................................................... $ 596 $ 520
Cost of goods sold.......................................... 527 433
------ ------
GROSS PROFIT................................................ 69 87
Marketing expenses.......................................... 39 35
Administrative expenses..................................... 30 32
Technological expenses...................................... 12 11
Amortization expense........................................ 1 1
------ ------
OPERATING INCOME (LOSS)..................................... (13) 8
Equity earnings (loss) from affiliates--net of tax.......... (2) 8
Interest expense............................................ (23) (19)
Other income--net........................................... 7 7
------ ------
INCOME (LOSS) BEFORE INCOME TAXES........................... (31) 4
Income taxes (benefit)...................................... (14) --
------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. (17) 4
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX...... (2) 10
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... -- (167)
------ ------
NET LOSS.................................................... $ (19) $ (153)
====== ======
BASIC EARNINGS (LOSS) PER SHARE:
Income (Loss) from Continuing Operations Before Discontinued
Operations and Cumulative Effect of Change in Accounting
Principle................................................. $(0.16) $ 0.04
Net Loss per Share.......................................... $(0.18) $(1.46)
DILUTED EARNINGS (LOSS) PER SHARE:
Income (Loss) from Continuing Operations Before Discontinued
Operations and Cumulative Effect of Change in Accounting
Principle................................................. $(0.16) $ 0.04
Net Loss per Share.......................................... $(0.18) $(1.46)
WEIGHTED AVERAGE EQUIVALENT SHARES (IN MILLIONS):
Basic................................................... 104.7 104.7
Effect of dilutive securities:
Common share equivalents--common shares issuable
upon exercise of outstanding stock options........ -- 0.4
----- -----
Diluted................................................. 104.7 105.1
===== =====
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
------ ------
NET LOSS (19) (153)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments............................ 37 (5)
Unrealized investment gain, net of tax...................... -- 1
Net realized loss on derivative instruments, net of tax..... -- 1
------ ------
COMPREHENSIVE INCOME (LOSS)................................. $ 18 $ (156)
====== ======
See accompanying Notes to Consolidated Financial Statements.
1
SOLUTIA INC.
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 17 $ 17
Trade receivables, net of allowance of $17 in 2003 and $16
in 2002................................................... 311 270
Miscellaneous receivables................................... 97 97
Prepaid expenses............................................ 15 17
Deferred income tax benefit................................. 131 108
Inventories................................................. 270 262
Assets of Discontinued Operations........................... -- 636
------ ------
TOTAL CURRENT ASSETS........................................ 841 1,407
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................ 19 19
Buildings................................................... 376 375
Machinery and equipment..................................... 2,975 2,946
Construction in progress.................................... 26 26
------ ------
Total property, plant and equipment......................... 3,396 3,366
Less accumulated depreciation............................... 2,452 2,436
------ ------
NET PROPERTY, PLANT AND EQUIPMENT........................... 944 930
INVESTMENTS IN AFFILIATES................................... 234 232
GOODWILL.................................................... 146 144
IDENTIFIED INTANGIBLE ASSETS, NET........................... 66 66
LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 229 290
OTHER ASSETS................................................ 301 273
------ ------
TOTAL ASSETS................................................ $2,761 $3,342
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................ $ 241 $ 234
Wages and benefits.......................................... 26 42
Postretirement liabilities.................................. 106 93
Miscellaneous accruals...................................... 246 314
Short-term debt............................................. 6 358
Liabilities of Discontinued Operations...................... -- 165
------ ------
TOTAL CURRENT LIABILITIES................................... 625 1,206
LONG-TERM DEBT.............................................. 850 839
POSTRETIREMENT LIABILITIES.................................. 1,157 1,164
OTHER LIABILITIES........................................... 361 382
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value
$0.01)
Issued: 118,400,635 shares in 2003 and 2002............... 1 1
Additional contributed capital............................ 19 19
Treasury stock, at cost (13,701,302 shares in 2003 and
13,659,351 shares in 2002, respectively)................ (251) (251)
Net deficiency of assets at spinoff......................... (113) (113)
Accumulated other comprehensive loss........................ (109) (146)
Reinvested earnings......................................... 221 241
------ ------
TOTAL SHAREHOLDERS' DEFICIT................................. (232) (249)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $2,761 $3,342
====== ======
See accompanying Notes to Consolidated Financial Statements.
2
SOLUTIA INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss.................................................... $ (19) $(153)
Adjustments to reconcile to Cash From Operations:
Cumulative effect of change in accounting principle..... -- 167
Depreciation and amortization........................... 34 34
(Income) loss from discontinued operations, net of
tax................................................... 2 (10)
Amortization of deferred credits........................ (3) (3)
Amortization of deferred debt issuance costs and debt
discount.............................................. 4 3
Restructuring expenses and other special items.......... 12 --
Net pretax gains from asset disposals................... -- (5)
Changes in assets and liabilities:
Income and deferred taxes........................... (15) 63
Trade receivables................................... (41) (28)
Inventories......................................... (8) (9)
Accounts payable.................................... 7 (1)
Other assets and liabilities........................ (8) (72)
----- -----
CASH USED IN OPERATIONS--CONTINUING OPERATIONS.............. (35) (14)
CASH PROVIDED BY (USED IN) OPERATIONS--DISCONTINUED
OPERATIONS................................................ (11) 5
----- -----
CASH USED IN OPERATIONS..................................... (46) (9)
----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (40) (11)
Property disposals and investment proceeds.................. -- 98
----- -----
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES--CONTINUING
OPERATIONS................................................ (40) 87
CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES--DISCONTINUED OPERATIONS....................... 482 (2)
----- -----
CASH PROVIDED BY INVESTING ACTIVITIES....................... 442 85
----- -----
FINANCING ACTIVITIES:
Net change in short-term debt obligations................... (352) (81)
Common stock issued under employee stock plans.............. -- 1
Other financing activities.................................. (39) --
----- -----
CASH USED IN FINANCING ACTIVITIES--CONTINUING OPERATIONS.... (391) (80)
CASH USED IN FINANCING ACTIVITIES--DISCONTINUED
OPERATIONS................................................ (5) --
----- -----
CASH USED IN FINANCING ACTIVITIES........................... (396) (80)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ -- (4)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 17 23
----- -----
END OF PERIOD............................................... $ 17 $ 19
===== =====
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; 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 2002 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on March 6, 2003.
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
period ended March 31, 2003, 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 2003 presentation.
2. DISCONTINUED OPERATIONS
On December 2, 2002, Solutia signed a definitive agreement to sell its
resins, additives and adhesives businesses to UCB S.A. for $500 million in
cash, plus an upfront payment of $10 million for a period of exclusivity. On
January 31, 2003, the sale was completed resulting in a pretax gain of
$24 million. Total proceeds, including the $10 million exclusivity fee received
in 2002, net of transaction costs were $494 million. The assets and
liabilities of the discontinued operations have been classified as current
in the Statement of Consolidated Financial Position at December 31, 2002. In
addition, proceeds from this divestiture were used to pay down $405 million
of borrowings under the amended credit facility in accordance with bank
agreements. As a result, all borrowings under this facility have been
classified as short-term at December 31, 2002. The Company retained certain
tax liabilities of approximately $40 million related to the divested
businesses and has excluded them from the liabilities identified below. The
carrying amounts of assets and liabilities from discontinued operations at
December 31, 2002, consisted of the following:
DECEMBER 31,
2002
------------
ASSETS:
Receivables and prepaids.................................... $100
Inventories................................................. 68
Other current assets........................................ 36
----
Total Current Assets.................................... 204
----
Property, plant and equipment, net.......................... 199
Intangible assets........................................... 205
Other long-term assets...................................... 28
----
Total Assets............................................ $636
====
LIABILITIES:
Accounts payable............................................ $ 42
Miscellaneous accruals...................................... 51
----
Total Current Liabilities............................... 93
----
Postretirement liabilities.................................. 21
Non-current deferred tax liability.......................... 33
Other long-term liabilities................................. 18
----
Total Liabilities....................................... $165
====
4
The operating results of the resins, additives and adhesives
businesses have been reported separately as discontinued operations
in the Consolidated Financial Statements for periods presented. The
operating results for the quarter ended March 31, 2002, exclude
certain corporate expenses of $1 million which had previously been
allocated to the resins, additives and adhesives businesses. In
addition, interest expense of $24 million in 2003 and $6 million in
2002 associated with debt that was repaid with the sales proceeds
was allocated to discontinued operations. The operating results for
2003 include results of operations for the month of January of 2003.
Net sales and income from discontinued operations are as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
---- ----
Net sales............................................ $53 $134
Income before income tax expense (including gain on
disposal of $24)................................... 7 14
Income tax expense................................... (9) (4)
--- ----
Income (loss) from discontinued operations........... $(2) $ 10
=== ====
3. EARNINGS (LOSS) PER SHARE
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
------ ------
Income (Loss) from Continuing Operations Before Discontinued
Operations and Cumulative Effect of Change in Accounting
Principle................................................. (17) 4
Income (Loss) from Discontinued Operations, net of taxes.... (2) 10
Cumulative Effect of Change in Accounting Principle......... -- (167)
------ ------
Net Loss.................................................... $ (19) $ (153)
====== ======
Basic Earnings (Loss) per Share:
Income (Loss) from Continuing Operations Before Discontinued
Operations and Cumulative Effect of Change in Accounting
Principle................................................. $(0.16) $ 0.04
Income (Loss) from Discontinued Operations, net of taxes.... (0.02) 0.09
Cumulative Effect of Change in Accounting Principle......... -- (1.59)
------ ------
Basic Loss per Share........................................ $(0.18) $(1.46)
====== ======
Diluted Earnings (Loss) per Share:
Income (Loss) from Continuing Operations Before Discontinued
Operations and Cumulative Effect of Change in Accounting
Principle................................................. $(0.16) $ 0.04
Income (Loss) from Discontinued Operations, net of taxes.... (0.02) 0.09
Cumulative Effect of Change in Accounting Principle......... -- (1.59)
------ ------
Diluted Loss per Share...................................... $(0.18) $(1.46)
====== ======
Weighted average equivalent shares (in millions):
Basic................................................... 104.7 104.7
Effect of dilutive securities:
Common share equivalents--common shares issuable
upon exercise of outstanding stock options and
warrants.......................................... -- 0.4
------ ------
Diluted................................................. 104.7 105.1
====== ======
4. STOCK OPTION PLANS
Effective January 1, 2003, Solutia adopted SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and
Disclosure," which allowed Solutia to continue following the
guidance of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," for measurement and
recognition of stock-based transactions with employees. Accordingly,
no compensation cost has been recognized for Solutia's option plans
in the Statement of Consolidated Loss, as all options granted under
the plans had an exercise price equal to the market value of the
Company's stock on the date of the grant. Had the determination of
5
compensation cost for these plans been based on the fair value at
the grant dates for awards under these plans, Solutia's net loss
would have been increased to the pro forma amounts indicated below:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
------ ------
NET LOSS:
As reported................................... $ (19) $ (153)
Deduct: Total stock-based employee
compensation expense determined using the
Black-Scholes option-pricing model for all
awards, net of tax.......................... (2) (2)
------ ------
Pro forma..................................... $ (21) $ (155)
====== ======
LOSS PER SHARE:
Basic--as reported............................ $(0.18) $(1.46)
Basic--pro forma.............................. $(0.20) $(1.48)
Diluted--as reported.......................... $(0.18) $(1.46)
Diluted--pro forma............................ $(0.20) $(1.47)
Compensation expense resulting from the fair value method may
not be representative of compensation expense to be incurred on a
pro forma basis in future years. The fair value of each option grant
is estimated on the date of grant by use of the Black-Scholes
option-pricing model.
5. RESTRUCTURING RESERVES
During the first quarter of 2003, Solutia recorded restructuring
charges of $6 million to cost of goods sold and $5 million to
marketing, administrative and technological expenses for costs
associated with workforce reductions. The restructuring was part of
an enterprise-wide cost reduction initiative associated with the
sale of the resins, additives and adhesives businesses and other
cost reduction initiatives. As a result of these actions, Solutia
reduced its workforce by approximately 170 positions. Cash outlays
associated with the restructuring actions were funded from
divestiture proceeds and operations. Approximately 90 percent of the
workforce reductions affected North American business and
manufacturing operations, and approximately 10 percent affected
European, Asian and Latin American operations. Management positions
represented approximately 40 percent of the workforce reductions.
EMPLOYMENT
REDUCTIONS TOTAL
---------- -----
Balance at January 1, 2003......................... $-- $--
Charges taken................................. 11 11
Amounts utilized.............................. (7) (7)
---- ----
BALANCE AT MARCH 31, 2003.......................... $ 4 $ 4
==== ====
During 2000, Solutia decided to exit its resins facility at the
Port Plastics site in Addyston, Ohio. An $8 million charge to cost
of goods sold was recorded to carry out the exit plan. The charge
included $2 million to write down plant assets to their fair value,
$2 million of dismantling costs and $4 million of direct
manufacturing, overhead, utilities and severance costs for which
Solutia was contractually obligated under an operating agreement.
Solutia was required to provide 24 months notice of intent to exit
and was required 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. Solutia retained the reserve pursuant to the
sales agreement for the resins, additives and adhesives divestiture.
6
The following table summarizes the restructuring charge, amounts
utilized to carry out those plans and amount remaining at March 31,
2003:
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.......................... (2) -- -- (2)
---- ---- ---- ----
Balance at December 31, 2002.................. -- -- 4 4
Amounts utilized.......................... -- -- -- --
---- ---- ---- ----
BALANCE AT MARCH 31, 2003..................... $-- $-- $ 4 $ 4
==== ==== ==== ====
6. INVENTORY VALUATION
The components of inventories as of March 31, 2003, and December
31, 2002, were as follows:
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Finished goods................................ $ 194 $ 179
Goods in process.............................. 102 101
Raw materials and supplies.................... 93 83
----- -----
Inventories, at FIFO cost..................... 389 363
Excess of FIFO over LIFO cost................. (119) (101)
----- -----
TOTAL......................................... $ 270 $ 262
===== =====
7. 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 we became an independent
company, we assumed liabilities related to specified legal
proceedings from the former Monsanto Company (now known as Pharmacia
Corporation, a wholly owned subsidiary of Pfizer Inc.), under an
agreement known as the Distribution Agreement. As a result, although
Monsanto remains the named defendant, the Company is required to
manage the litigation and indemnify Pharmacia for costs, expenses
and judgments arising from the litigation. While the results of
litigation cannot be predicted with certainty, the Company does not
believe, based on currently available facts, that the ultimate
resolution of any of these preceding matters will have a material
adverse effect on our consolidated financial position or liquidity
in any one year. However, resolution in those cases involving the
alleged discharge of polychlorinated biphenyls ("PCBs") from the
Anniston, Alabama plant site and the Penndot case, may have a
material adverse effect on net income in a given year, although it
is impossible at this time to estimate the range or amount of any
such liability. In addition, there cannot be any assurance that any
final judgment against the Company in the Anniston, Alabama cases,
if upheld on appeal, will not have a material adverse effect on
consolidated financial position and liquidity.
Solutia has contractually agreed to provide the Astaris joint
venture with funding in the event the joint venture fails to meet
certain benchmarks. Solutia anticipates required contributions of
approximately $50 million for 2003.
Solutia is defending a number of lawsuits pending in state
and federal court relating to the alleged release of PCBs and
other materials from our Anniston, Alabama plant site.
(1) Abernathy v. Monsanto: This matter involves four
consolidated cases brought on behalf of approximately
3,500 plaintiffs and is currently pending in Circuit Court for
Etowah County, Alabama. Trial in this
7
action recommenced on March 17, 2003, with arguments to
the jury regarding compensatory damages for plaintiffs
making property damage and exposure claims. As of
April 8, 2003 the jury had returned compensatory damages
verdicts for the original 17 trial plaintiffs. We asked
the trial court to sever these claims and certify them
for appeal to the Alabama Supreme Court. The trial court
denied our request. As of April 22, 2003, the jury had
returned compensatory damage verdicts totaling
approximately $11.8 million to 51 plaintiffs who have
made property damage and exposure claims, but no final
appealable judgment has been entered with respect to
these verdicts. No claims of personal injury have been
tried or presented to the jury. Trial of this action
continues.
(2) Tolbert v. Monsanto: There are currently approximately
15,300 plaintiffs in this action brought in U.S. District
Court for the Northern District of Alabama. The parties had
selected eight plaintiffs from two "disease categories" for
a phase I trial. On February 25, 2003, the court allowed
plaintiffs to dismiss with prejudice the claims of two phase
I plaintiffs selected by Solutia and indicated that
plaintiffs should withdraw two of their phase I selections.
The court has set a phase I trial date of October 14, 2003.
(3) Payton v. Monsanto: This action was brought in Circuit Court
for Shelby County, Alabama on behalf of a purported class of
owners, lessees and licensees of property around Lay Lake.
On March 19, 2003, the trial court entered an order
certifying a plaintiff class. We intend to appeal this
order, and our notice of appeal is due to be filed by
April 30, 2003.
8. 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. 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 $1 million of intangible assets net of related deferred tax
liabilities representing assembled workforce that did not meet the
separability criteria under SFAS No. 141, "Business Combinations."
Identified intangible assets are as follows:
GROSS MARCH 31, 2003 NET
CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE
-------- -------------- --------
Amortized intangible assets:
Contractual customer relationships............... $23 $ (6) $17
Employment agreements............................ 5 (3) 2
Other............................................ 8 (5) 3
Translation...................................... 7 -- 7
--- ---- ---
TOTAL AMORTIZED INTANGIBLE ASSETS..................... $43 $(14) $29
--- ---- ---
Unamortized intangible assets:
Trademarks........................................ $39 $ (4) $35
Translation....................................... 2 -- 2
--- ---- ---
TOTAL UNAMORTIZED INTANGIBLE ASSETS................... $41 $ (4) $37
--- ---- ---
TOTAL IDENTIFIED INTANGIBLE ASSETS.................... $84 $(18) $66
=== ==== ===
8
GROSS DECEMBER 31, 2002 NET
CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE
-------- ----------------- --------
Amortized intangible assets:
Contractual customer relationships................ $23 $ (5) $18
Employment agreements............................. 5 (3) 2
Other............................................. 8 (5) 3
Translation....................................... 6 -- 6
--- ---- ---
TOTAL AMORTIZED INTANGIBLE ASSETS..................... $42 $(13) $29
--- ---- ---
Unamortized intangible assets:
Trademarks........................................ $39 $ (4) $35
Translation....................................... 2 -- 2
--- ---- ---
TOTAL UNAMORTIZED INTANGIBLE ASSETS................... $41 $ (4) $37
--- ---- ---
TOTAL IDENTIFIED INTANGIBLE ASSETS.................... $83 $(17) $66
=== ==== ===
There were no acquisitions of intangible assets and there have
been no changes to amortizable lives or methods during the first
quarter of 2003. Intangible asset amortization expense was
$1 million for the first quarter of 2003. Amortization expense for the
net carrying amount of intangible assets is estimated to be
$3 million in 2003, $3 million in 2004, $3 million in 2005, $3 million
in 2006 and $3 million in 2007.
Goodwill as allocated by reportable segment is as follows:
PERFORMANCE PRODUCTS
AND SERVICES TOTAL
-------------------- -----
Goodwill, December 31, 2002................ $144 $144
Translation................................ 2 2
---- ----
Goodwill, March 31, 2003................... $146 $146
==== ====
9. SEGMENT DATA
Solutia's management is organized around two strategic business
platforms: Performance Products and Services and Integrated Nylon.
Solutia's reportable segments and their major products are as
follows:
PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON
--------------------------------- ----------------
SAFLEX(R) plastic interlayer Nylon intermediate "building block" chemicals
Polyvinyl butyral for KEEPSAFE(R), SAFLEX Merchant polymer and nylon extrusion
INSIDE(R) (in Europe only) and KEEPSAFE polymers, including VYDYNE(R) and ASCEND(R)
MAXIMUM(R) laminated window glass
LLUMAR(R), VISTA(R) and GILA(R) professional Carpet fibers, including the WEAR-DATED(R) and
and retail window films ULTRON(R) brands
VANCEVA(TM) films Industrial nylon fibers
Conductive and anti-reflective coated films and ACRILAN(R) acrylic fibers for apparel, upholstery
deep-dyed films fabrics, craft yarns and other applications
Industrial products, including THERMINOL(R)
heat transfer fluids, DEQUEST(R) water
treatment chemicals, SKYDROL(R) aviation
hydraulic fluids, SKYKLEEN(R) aviation
solvents, and chlorobenzenes
Services for process research and
development, scale-up manufacturing and small
volume licensed production 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
9
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 (loss) 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.
Segment data for the three months ended March 31, 2003, and 2002
are as follows:
2003 2002
----------------- ------------------
NET NET
SALES PROFIT SALES PROFIT
----- ------ ----- ------
SEGMENT:
Performance Products and Services....................... $243 $ 17 $224 $ 21
Integrated Nylon........................................ 353 (11) 296 7
---- ---- ---- ----
SEGMENT TOTALS.............................................. 596 6 520 28
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses........................................ (15) (17)
Equity earnings (loss) from affiliates, net of tax........ (3) 8
Interest expense.......................................... (23) (19)
Other income--net......................................... 4 4
CONSOLIDATED TOTALS:
---- ----
NET SALES................................................. $596 $520
==== ---- ==== ----
INCOME (LOSS) BEFORE INCOME TAXES......................... $(31) $ 4
==== ====
10. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
CPFilms, Inc., Monchem International, Inc., Monchem, Inc., and
Solutia Systems, Inc., wholly-owned subsidiaries of the Company (the
"Guarantors"), are guarantors of the amended credit facility and the
senior secured notes (the "Notes"). The Guarantors 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
March 31, 2003 and December 31, 2002, and for the periods ended
March 31, 2003 and 2002. 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 such information is not
material and would substantially duplicate disclosures included
elsewhere in this report.
10
SOLUTIA INC.
CONSOLIDATING STATEMENT OF LOSS
THREE MONTHS ENDED MARCH 31, 2003
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES......................... $464 $ 33 $ 181 $(82) $596
Cost of goods sold................ 444 14 156 (87) 527
---- ----- ----- ---- ----
GROSS PROFIT...................... 20 19 25 5 69
Marketing expenses................ 27 5 7 -- 39
Administrative expenses........... 21 2 7 -- 30
Technological expenses............ 11 1 0 -- 12
Amortization expense.............. -- -- 1 -- 1
---- ----- ----- ---- ----
OPERATING INCOME (LOSS)........... (39) 11 10 5 (13)
Equity earnings (loss) from
affiliates--net of tax.......... 54 22 1 (79) (2)
Interest expense.................. (36) (3) (19) 35 (23)
Other income--net................. 3 23 16 (35) 7
---- ----- ----- ---- ----
INCOME (LOSS) BEFORE INCOME
TAXES........................... (18) 53 8 (74) (31)
Income benefit.................... (1) (1) (14) 2 (14)
---- ----- ----- ---- ----
INCOME (LOSS) FROM CONTINUING
OPERATIONS...................... (17) 54 22 (76) (17)
Loss from Discontinued Operations,
net of taxes.................... (2) (103) (103) 206 (2)
---- ----- ----- ---- ----
NET LOSS.......................... $(19) $ (49) $ (81) $130 $(19)
==== ===== ===== ==== ====
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2003
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET LOSS.......................... $(19) $ (49) $ (81) $130 $(19)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation
adjustments..................... 37 38 35 (73) 37
---- ----- ----- ---- ----
COMPREHENSIVE INCOME (LOSS)....... $ 18 $ (11) $ (46) $ 57 $ 18
==== ===== ===== ==== ====
11
SOLUTIA INC.
CONSOLIDATING STATEMENT OF LOSS
THREE MONTHS ENDED MARCH 31, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES......................... $ 404 $ 36 $ 156 $(76) $ 520
Cost of goods sold................ 365 17 128 (77) 433
----- ----- ----- ---- -----
GROSS PROFIT...................... 39 19 28 1 87
Marketing expenses................ 26 5 4 -- 35
Administrative expenses........... 24 2 6 -- 32
Technological expenses............ 10 -- 1 -- 11
Amortization expense.............. -- -- 1 -- 1
----- ----- ----- ---- -----
OPERATING INCOME (LOSS)........... (21) 12 16 1 8
Equity earnings (loss) from
affiliates--net of tax.......... (124) (158) -- 290 8
Interest expense.................. (34) (2) (29) 46 (19)
Other income--net................. 16 20 22 (51) 7
----- ----- ----- ---- -----
INCOME (LOSS) BEFORE INCOME
TAXES........................... (163) (128) 9 286 4
Income taxes (benefit)............ (1) -- 2 (1) --
----- ----- ----- ---- -----
INCOME (LOSS) FROM CONTINUING
OPERATIONS...................... (162) (128) 7 287 4
Income from Discontinued
Operations, net of taxes........ 10 11 11 (22) 10
Cumulative Effect of Change in
Accounting Principle, net of
tax............................. (1) -- (166) -- (167)
----- ----- ----- ---- -----
NET LOSS.......................... $(153) $(117) $(148) $265 $(153)
===== ===== ===== ==== =====
CONSOLIDATING STATEMENT OF COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET LOSS.......................... $(153) $(117) $(148) $265 $(153)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation
adjustments..................... (5) (7) -- 7 (5)
Unrealized investment gain, net of
tax............................. 1 -- -- -- 1
Net realized loss on derivative
instruments, net of tax......... 1 -- -- -- 1
----- ----- ----- ---- -----
COMPREHENSIVE LOSS................ $(156) $(124) $(148) $272 $(156)
===== ===== ===== ==== =====
12
SOLUTIA INC.
CONSOLIDATING BALANCE SHEET
MARCH 31, 2003
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 7 $ -- $ 10 $ -- $ 17
Trade receivables, net...................... 15 170 126 -- 311
Intercompany receivables.................... 27 592 112 (731) --
Miscellaneous receivables................... 71 (9) 35 -- 97
Prepaid expenses............................ 12 -- 3 -- 15
Deferred income tax benefit................. 104 -- 22 5 131
Inventories................................. 164 26 95 (15) 270
Current Assets--Discontinued Operations..... -- -- -- -- --
------ ------ ------ ------- ------
TOTAL CURRENT ASSETS.................... 400 779 403 (741) 841
PROPERTY, PLANT AND EQUIPMENT:
Land........................................ 17 -- 2 -- 19
Buildings................................... 265 25 86 -- 376
Machinery and equipment..................... 2,496 71 408 -- 2,975
Construction in progress.................... 16 1 9 -- 26
------ ------ ------ ------- ------
Total property, plant and equipment......... 2,794 97 505 -- 3,396
Less accumulated depreciation............... 2,083 20 349 -- 2,452
------ ------ ------ ------- ------
NET PROPERTY, PLANT AND EQUIPMENT........... 711 77 156 -- 944
INVESTMENTS IN AFFILIATES................... 2,565 (14) 32 (2,349) 234
GOODWILL.................................... -- 72 74 -- 146
IDENTIFIED INTANGIBLE ASSETS, NET........... 3 26 37 -- 66
LONG-TERM DEFERRED INCOME TAX BENEFIT....... 217 -- 12 -- 229
INTERCOMPANY ADVANCES....................... 128 1,661 725 (2,514) --
OTHER ASSETS................................ 273 1 27 -- 301
LONG-TERM ASSETS--DISCONTINUED OPERATIONS... -- -- -- -- --
------ ------ ------ ------- ------
TOTAL ASSETS............................ $4,297 $2,602 $1,466 $(5,604) $2,761
====== ====== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 191 $ 14 $ 37 $ (1) $ 241
Intercompany payables....................... 501 158 72 (731) --
Wages and benefits.......................... 15 -- 11 -- 26
Postretirement liabilities.................. 105 -- 1 -- 106
Miscellaneous accruals...................... 134 11 101 -- 246
Short-term debt............................. 5 -- 1 -- 6
Intercompany short-term debt................ 37 55 246 (338) --
Current Liabilities--Discontinued
Operations................................ -- -- -- -- --
------ ------ ------ ------- ------
TOTAL CURRENT LIABILITIES................... 988 238 469 (1,070) 625
LONG-TERM DEBT.............................. 632 -- 218 -- 850
INTERCOMPANY LONG-TERM DEBT................. 1,501 -- 675 (2,176) --
POSTRETIREMENT LIABILITIES.................. 1,129 -- 28 -- 1,157
OTHER LIABILITIES........................... 279 -- 83 (1) 361
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock................................ 1 -- -- -- 1
Additional contributed capital.......... 19 -- -- -- 19
Treasury stock.......................... (251) -- -- -- (251)
Net (deficiency) excess of assets at
spinoff and subsidiary capital........ (113) 2,364 (7) (2,357) (113)
Accumulated other comprehensive loss........ (109) -- -- -- (109)
Reinvested earnings......................... 221 -- -- -- 221
------ ------ ------ ------- ------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (232) 2,364 (7) (2,357) (232)
------ ------ ------ ------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................. $4,297 $2,602 $1,466 $(5,604) $2,761
====== ====== ====== ======= ======
13
SOLUTIA INC.
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ -- $ -- $ 17 $ -- $ 17
Trade receivables, net...................... 12 146 112 -- 270
Intercompany receivables.................... 28 567 357 (952) --
Miscellaneous receivables................... 69 -- 28 -- 97
Prepaid expenses............................ 14 1 2 -- 17
Deferred income tax benefit................. 82 -- 19 7 108
Inventories................................. 167 23 92 (20) 262
Current Assets--Discontinued Operations..... 85 10 541 -- 636
------ ------ ------ ------- ------
TOTAL CURRENT ASSETS.................... 457 747 1,168 (965) 1,407
PROPERTY, PLANT AND EQUIPMENT:
Land........................................ 17 -- 2 -- 19
Buildings................................... 266 25 84 -- 375
Machinery and equipment..................... 2,482 71 393 -- 2,946
Construction in progress.................... 15 1 10 -- 26
------ ------ ------ ------- ------
Total property, plant and equipment......... 2,780 97 489 -- 3,366
Less accumulated depreciation............... 2,082 19 335 -- 2,436
------ ------ ------ ------- ------
NET PROPERTY, PLANT AND EQUIPMENT........... 698 78 154 -- 930
INVESTMENTS IN AFFILIATES................... 2,990 33 30 (2,821) 232
GOODWILL.................................... -- 72 72 -- 144
IDENTIFIED INTANGIBLE ASSETS, NET........... 3 26 37 -- 66
LONG-TERM DEFERRED INCOME TAX BENEFIT....... 278 -- 12 -- 290
INTERCOMPANY ADVANCES....................... 128 2,126 1,461 (3,715) --
OTHER ASSETS................................ 241 1 31 -- 273
------ ------ ------ ------- ------
TOTAL ASSETS............................ $4,795 $3,083 $2,965 $(7,501) $3,342
====== ====== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 191 $ 8 $ 35 $ -- $ 234
Intercompany payables....................... 463 152 337 (952) --
Wages and benefits.......................... 20 -- 22 -- 42
Postretirement liabilities.................. 92 -- 1 -- 93
Miscellaneous accruals...................... 179 10 125 -- 314
Short-term debt............................. 233 -- 125 -- 358
Intercompany short-term debt................ 201 23 268 (492) --
Current Liabilities--Discontinued
Operations................................ 33 -- 132 -- 165
------ ------ ------ ------- ------
TOTAL CURRENT LIABILITIES................... 1,412 193 1,045 (1,444) 1,206
LONG-TERM DEBT.............................. 630 -- 209 -- 839
INTERCOMPANY LONG-TERM DEBT................. 1,586 98 1,539 (3,223) --
POSTRETIREMENT LIABILITIES.................. 1,137 -- 27 -- 1,164
OTHER LIABILITIES........................... 279 -- 104 (1) 382
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock................................ 1 -- -- -- 1
Additional contributed capital.......... 19 -- -- -- 19
Treasury stock.......................... (251) -- -- -- (251)
Net (deficiency) excess of assets at
spinoff and subsidiary capital........ (113) 2,792 41 (2,833) (113)
Accumulated other comprehensive loss........ (146) -- -- -- (146)
Reinvested earnings......................... 241 -- -- -- 241
------ ------ ------ ------- ------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (249) 2,792 41 (2,833) (249)
------ ------ ------ ------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................. $4,795 $3,083 $2,965 $(7,501) $3,342
====== ====== ====== ======= ======
14
SOLUTIA INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS... $ (62) $ 20 $ (4) $-- $ (46)
----- ---- ----- ---- -----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases............................. (37) -- (3) -- (40)
Property disposals and investment
proceeds.............................. 172 -- 310 -- 482
----- ---- ----- ---- -----
CASH PROVIDED BY INVESTING ACTIVITIES... 135 -- 307 -- 442
----- ---- ----- ---- -----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................... (227) -- (125) -- (352)
Other financing activities.............. (44) -- -- -- (44)
Changes in investments and advances from
(to) affiliates....................... 205 (20) (185) -- --
----- ---- ----- ---- -----
CASH USED IN FINANCING ACTIVITIES....... (66) (20) (310) -- (396)
----- ---- ----- ---- -----
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.......................... 7 -- (7) -- --
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................... -- -- 17 -- 17
----- ---- ----- ---- -----
END OF PERIOD........................... $ 7 $-- $ 10 $-- $ 17
===== ==== ===== ==== =====
SOLUTIA INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS... $ (30) $ 29 $ (8) $-- $ (9)
----- ---- ---- ---- ----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases............................. (7) (1) (5) -- (13)
Property disposals and investment
proceeds.............................. 98 -- -- -- 98
----- ---- ---- ---- ----
CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES............................ 91 (1) (5) -- 85
----- ---- ---- ---- ----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................... (133) -- 52 -- (81)
Common stock issued under employee stock
plans................................. 1 -- -- -- 1
Changes in investments and advances from
(to) affiliates....................... 69 (28) (41) -- --
----- ---- ---- ---- ----
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................ (63) (28) 11 -- (80)
----- ---- ---- ---- ----
DECREASE IN CASH AND CASH EQUIVALENTS... (2) -- (2) -- (4)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................... 3 1 19 -- 23
----- ---- ---- ---- ----
END OF PERIOD........................... $ 1 $ 1 $ 17 $-- $ 19
===== ==== ==== ==== ====
15
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 or shortages, currency
fluctuations, increased competitive and/or customer pressure, gain
or loss of significant customers, 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, ability to
implement cost reduction initiatives in a timely manner,
geopolitical instability, and changes in pension assumptions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A summary of our critical accounting policies and estimates is
presented on page 14 of our 2002 Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 6, 2003.
RESULTS OF OPERATIONS--FIRST QUARTER 2003 COMPARED WITH FIRST
QUARTER 2002
Net sales for the first quarter of 2003 were $596 million
compared with net sales of $520 million for the first quarter of
2002. The net sales increase reflected higher average selling prices
of approximately 9 percent, improved sales volumes of approximately
3 percent and favorable currency exchange rate fluctuations of
approximately 3 percent.
Performance Products and Services
Performance Products and Services net sales for the first
quarter of 2003 were $243 million compared with $224 million for the
first quarter of 2002. The sales increase resulted from favorable
currency exchange rate fluctuations of approximately 6 percent as
well as net increases of approximately 1 percent in both average
selling prices and volumes. Net sales were positively affected by
the strengthening euro in relation to the U.S. dollar. Moderate
increases of average selling prices experienced in Chlorobenzenes
and moderate increases of volumes experienced in THERMINOL(R) heat
transfer fluids and DEQUEST(R) water treatment chemicals, more than
offset slight decreases in average selling prices experienced in
SAFLEX(R) plastic interlayer products and slight decreases in
volumes experienced in CPFilms window film and precision coated
products.
Segment profit was $17 million for the first quarter of 2003
versus $21 million for the prior year quarter. Segment profit
decreased $4 million or 19 percent primarily due to severance
charges associated with workforce reductions, unfavorable
manufacturing variances and increased raw material costs, partially
offset by higher net sales, lower marketing, administrative and
technological expenses and lower incentive expenses.
Integrated Nylon
Integrated Nylon segment had net sales of $353 million for the
first quarter of 2003 compared with $296 million for the same period
of the prior year. The sales increase resulted from higher average
selling prices of approximately 14 percent and sales volume
improvements of approximately 5 percent. Price increases occurred
principally in the intermediate chemicals segment as they benefited
from formula-based sales contracts tied to raw material costs. In
addition, modest price increases were recorded in select fiber
products but did not include recently announced increases in carpet
fibers which were implemented April 1, 2003. Sales volumes were up
in most segments and include benefits of reintegrated marketing
responsibilities for the nylon molding resins business previously
performed under a marketing alliance with Dow Plastics, a business
unit of Dow Chemical.
The Integrated Nylon segment experienced a loss of $11 million
in the first quarter of 2003 compared to a profit of $7 million in
the prior year quarter. Segment profit declined because of higher
raw material and energy costs of approximately $60 million and
severance charges associated with workforce reductions, partially
offset by higher net sales as well as favorable manufacturing
operations. Raw material and energy costs were higher
16
because of uncertain geopolitical factors and the declaration of
force majeure for supply of propylene, a key raw material. The sharp rise in
raw material and energy costs had a significant impact on the
profitability of carpet fiber, intermediates and nylon plastics and
polymers.
Corporate Expenses
Corporate expenses were $15 million for the first quarter of
2003 compared to $17 million in the first quarter of 2002. The
decline primarily resulted from lower litigation expenses partially
offset by severance charges associated with workforce reductions.
Operating Income
THREE MONTHS
ENDED MARCH 31,
---------------------
(DOLLARS IN MILLIONS) 2003 2002
------ ------
Performance Products and Services Segment Profit....... $ 17 $ 21
Integrated Nylon Segment Profit/(Loss)................. (11) 7
Less: Corporate Expenses.......................... (15) (17)
Less: Equity Earnings from Affiliates included in
Segment Profit/(Loss)........................... (1) --
Less: Other Income items included in Segment
Profit/(Loss)................................... (3) (3)
---- ----
Operating Income/(Loss)................................. $(13) $ 8
==== ====
Solutia had an operating loss of $13 million in the first
quarter of 2003 compared with operating income of $8 million in the
first quarter of 2002. The decrease in operating income was
primarily driven by higher raw material and energy costs and higher
severance costs associated with workforce reductions, partially
offset by improvements in average selling prices, sales volumes and
favorable currency exchange rate fluctuations.
Equity Earnings (Loss) from Affiliates
THREE MONTHS
ENDED MARCH 31,
---------------------
(DOLLARS IN MILLIONS) 2003 2002
------ ------
Equity Earnings/(Loss) from Affiliates................ $(2) $ 8
=== ====
Equity Earnings from Affiliates included in Reportable
Segment Profit...................................... $ 1 $--
=== ====
Solutia records the equity earnings (loss) from affiliates net
of income taxes. Equity loss from affiliates of $2 million for the
three months ended March 31, 2003, compared to equity earnings from
affiliates of $8 million for the comparable quarter of 2002. Equity
earnings from affiliates in 2003 were negatively affected by
restructuring charges related to asset impairments at the Flexsys
joint venture and severance charges at both the Flexsys and Astaris
joint ventures. In addition, Astaris' earnings decreased as a result
of lower sales volumes, lower selling prices and lower revenue from
an electricity sales contract. During the first quarter of 2002,
Solutia sold its 50 percent interest in Advanced Elastomer Systems
joint venture. Equity earnings from affiliates for the three months
ended March 31, 2002, included $2 million of earnings from the
Advanced Elastomer Systems joint venture.
Other Income--Net
THREE MONTHS
ENDED MARCH 31,
---------------------
(DOLLARS IN MILLIONS) 2003 2002
------ ------
Other Income--Net...................................... $7 $7
== ==
Other Income--Net included in Reportable Segment
Profit............................................... $3 $3
== ==
17
Other income--net for the three months ended March 31, 2003 and
2002, was $7 million. During the first quarter of 2003, Solutia
realized a benefit of $4 million related to the recovery of certain
receivables, established prior to 1997, which had previously been
written off. During the first quarter 2002, Solutia sold its
50 percent interest in the Advanced Elastomer Systems joint venture
resulting in a gain of $5 million.
Income Tax Benefit
Solutia's income tax benefit was $14 million for the first
quarter of 2003 compared to $0 million for the first quarter of
2002. The significant increase in income tax benefit is due to the
decrease in income on a year over year basis. The effective tax rate
increased because of the utilization of deferred tax liabilities for
the income taxes on distributed foreign earnings.
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.
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 $1 million of intangible assets net
of related deferred tax liabilities representing assembled workforce
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 during the first quarter of 2002 for
the resins and additives business (which is presented as
discontinued operations) due to declining estimates of future
results given current economic and market conditions. The goodwill
impairment charge is non-deductible for tax purposes and is
reflected as the cumulative effect of change in accounting principle
in the accompanying statement of consolidated loss.
Restructuring Activities
During the first quarter of 2003, Solutia recorded restructuring
charges of $6 million to cost of goods sold and $5 million to
marketing, administrative and technological expenses for costs
associated with workforce reductions. The restructuring was part of
an enterprise-wide cost reduction initiative associated with the
sale of the resins, additives and adhesives businesses and other
cost reduction initiatives. As a result of these actions, Solutia
reduced its workforce by approximately 170 positions. Cash outlays
associated with the restructuring actions were funded from
divestiture proceeds and operations. Approximately 90 percent of the
workforce reductions affected North American business and
manufacturing operations, and approximately 10 percent affected
European, Asian and Latin American operations. Management positions
represented approximately 40 percent of the workforce reductions.
Solutia anticipates additional severance charges of approximately
$9 million for the remainder of 2003.
18
Summary of Events Affecting Comparability
Charges and gains recorded in three months ended March 31, 2003
and 2002, and other events affecting comparability have been
summarized in the tables below (dollars in millions).
2003
-----------------------------------------------------------------
PERFORMANCE
PRODUCTS INTEGRATED CORPORATE/
INCREASE/(DECREASE) AND SERVICES NYLON OTHER CONSOLIDATED
- ---------------------------------------- ------------ ---------- ---------- ------------
IMPACT ON:
Cost of goods sold...................... $ 3 $ 3 $ $ 6 (a)
--- --- ----
Total cost of goods sold................ 3 3 -- 6
Marketing............................... 1 1 (a)
Administrative.......................... 1 2 3 (a)
Technological........................... 1 1 (a)
--- --- --- ----
OPERATING INCOME (LOSS) IMPACT...... (6) (3) (2) (11)
Equity earnings (loss) from affiliates,
net of tax............................ (5) (5) (b)
Other income (expense).................. 4 4 (c)
--- --- --- ----
PRETAX INCOME STATEMENT IMPACT...... $(6) $(3) $(3) (12)
=== === ===
Income tax benefit impact............... (3)
----
AFTERTAX INCOME STATEMENT IMPACT.... $ (9)
====
2003 EVENTS
-----------
(a) Restructuring charges for workforce reductions of approximately 170 people across all world areas and
functions of the Company ($11 million).
(b) The Flexsys and Astaris joint ventures, in which the Company has a fifty percent joint interest, incurred
restructuring charges during the quarter related to asset impairments and severance charges ($5 million).
(c) The Company recovered certain receivables, established prior to 1997, which had previously been written off
($4 million).
2002
-----------------------------------------------------------------
PERFORMANCE
PRODUCTS INTEGRATED CORPORATE/
INCREASE/(DECREASE) AND SERVICES NYLON OTHER CONSOLIDATED
- ---------------------------------------- ------------ ---------- ---------- ------------
IMPACT ON:
Cost of goods sold...................... $ $ $ $--
Total cost of goods sold................ -- -- -- --
Marketing, administrative, technological
and amortization expenses.............
--- --- --- ---
OPERATING INCOME (LOSS) IMPACT...... -- -- -- --
Equity earnings (loss) from affiliates,
net of tax............................
Other income (expense).................. 5 5 (d)
--- --- --- ---
PRETAX INCOME STATEMENT IMPACT...... $-- $-- $ 5 5
=== === ===
Income taxes impact..................... 2
---
AFTERTAX INCOME STATEMENT IMPACT.... $ 3
===
2002 EVENTS
-----------
(d) Gain resulting from the sale of the Company's fifty percent interest in the Advanced Elastomer Systems joint
venture ($5 million).
19
FINANCIAL CONDITION AND LIQUIDITY
On December 2, 2002, Solutia signed a definitive agreement to
sell its resins, additives and adhesives businesses to UCB S.A. for
$500 million in cash, plus an upfront payment of $10 million for a
period of exclusivity. On January 31, 2003, the sale was completed.
Proceeds from the divestiture were used to pay down all of the
borrowings under the amended credit facility, provide $39 million
cash collateral for certain outstanding letters of credit and
purchase the co-generation facility at Pensacola, Florida for
$32 million in accordance with bank agreements. The Company retained
certain tax liabilities related to the divested businesses and
expects to pay approximately $29 million in 2003 related to these
liabilities.
Divestiture proceeds provided the primary source of funds to
finance operating needs and capital expenditures during the first
quarter of 2003. Cash used in continuing operations was $35 million
during the first quarter of 2003, up $21 million from $14 million
from the comparable period of 2002. The increase was primarily
attributable to a $60 million income tax refund received during the
first quarter of 2002, partially offset by improvements in working
capital.
Capital spending increased $29 million to $40 million in the
first quarter of 2003, compared to $11 million in the first quarter
of 2002. The increase resulted from the purchase of the
co-generation facility in Pensacola, Florida, for approximately
$32 million. The remaining expenditures were used to fund maintenance
and cost reduction projects.
During the first quarter of 2003, proceeds from the sale of the
resins, additives and adhesives businesses were included in cash
provided by discontinued operations. Proceeds generated in the first
quarter of 2002 included the sale of the Company's 50 percent
interest in the Advanced Elastomer Systems joint venture to
ExxonMobil Chemical Company, a subsidiary of Exxon Mobil Corporation
for approximately $102 million.
Total debt decreased by $341 million to $856 million at
March 31, 2003, compared to $1,197 million at the end of 2002 and
consisted of borrowings under the amended credit facility, notes,
indenture and debentures. The decrease was driven by the use of
divestiture proceeds to pay down debt.
Solutia's working capital from continuing operations increased
by $486 million to $216 million at March 31, 2003, compared to
negative $270 million at December 31, 2002. The increase in the
working capital position primarily resulted from lower short-term
debt.
Solutia had a shareholders' deficit of $232 million at
March 31, 2003 compared to $249 million at December 31, 2002. The
$17 million improvement was principally caused by favorable currency
translation adjustments, principally related to the increase in
value of the euro, partially offset by lower 2003 earnings.
The Company's primary sources of liquidity have been and will
continue to be cash from operations, divestiture proceeds,
borrowings from its revolving credit facility and other external
financing sources. At March 31, 2003, after consideration of
$117 million of letters of credit outstanding under the credit
facility, the Company had capacity to borrow up to $178 million.
The weighted average interest rate on Solutia's total debt
outstanding at March 31, 2003, was approximately 7.8 percent
compared to 5.7 percent at March 31, 2002. Interest expense was
$23 million in the first quarter of 2003 compared to $19 million in the
comparable quarter of 2002. The increase resulted from amortization
of deferred debt issuance costs incurred during the second half of
2002 for the refinancing of the credit facility and higher interest
rates associated with the credit facility and the senior secured
notes.
Solutia believes that it has sufficient liquidity to finance its
needs for the next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." This Interpretation
provides guidance related to identifying variable interest entities
and determining whether such entities should be consolidated. This
Interpretation also provides guidance related to the initial and
subsequent measurement of assets, liabilities, and noncontrolling
interests of newly consolidated variable interest entities and
requires disclosures for both the primary beneficiary of a variable
interest entity and other beneficiaries of the entity. In addition,
this Interpretation requires certain disclosures if it is reasonably
possible that a company will
20
consolidate or disclose information about a variable interest entity
when it initially applies the guidance in this Interpretation. This
Interpretation must be applied immediately to (a) variable interest
entities created, or (b) interests in variable interest entities
obtained, after January 31, 2003. For those variable interest
entities created, or interests in variable interest entities
obtained, on or before January 31, 2003, the guidance in this
Interpretation must be applied in the first fiscal year or interim
period beginning after June 15, 2003. Solutia is evaluating this
Interpretation to determine the impact on its consolidated financial
statements. However, the Company currently expects to consolidate
the assets and liabilities associated with the leasing of the
Company's corporate headquarters of approximately $40 million to
$50 million in the third quarter of 2003. Solutia has not determined the
value, if any, to be assigned to the residual value guaranty
associated with this leasing arrangement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FACTORS
There have been no material changes in market risk exposures
during the first three months of 2003 that affect the disclosures
presented in the information appearing under "Derivative Financial
Instruments" on pages 31 and 32 of Solutia's Annual Report on
Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, Solutia carried
out an evaluation, under the supervision and with the participation
of Solutia's management, including its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of Solutia's disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that Solutia's disclosure controls and
procedures are effective in timely alerting them to material
information relating to Solutia and its consolidated subsidiaries
that is required to be included in Solutia's periodic SEC filings.
Additionally, there were no significant changes in the internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Solutia's Annual Report on Form 10-K for the year ended December 31,
2002 ("2002 Form 10-K"), described a number of lawsuits pending
in state and federal court relating to the alleged release of
polychlorinated biphenyls ("PCBs") and other materials from our
Anniston, Alabama plant site.
(1) Abernathy v. Monsanto: This matter involves four
consolidated cases brought on behalf of approximately
3,500 plaintiffs and is currently pending in Circuit Court for
Etowah County, Alabama. Trial in this action recommenced on
March 17, 2003, with arguments to the jury regarding
compensatory damages for plaintiffs making property damage
and exposure claims. As of April 8, 2003 the jury had
returned compensatory damages verdicts for the original
17 trial plaintiffs. We asked the trial court to sever these
claims and certify them for appeal to the Alabama Supreme
Court. The trial court denied our request. As of April 22,
2003, the jury had returned compensatory damage verdicts
totaling approximately $11.8 million to 51 plaintiffs who
have made property damage and exposure claims, but no final
appealable judgment has been entered with respect to these
verdicts. No claims of personal injury have been tried or
presented to the jury. Trial of this action continues.
(2) Tolbert v. Monsanto: There are currently approximately
15,300 plaintiffs in this action brought in U.S. District
Court for the Northern District of Alabama. The parties had
selected eight plaintiffs from two "disease categories" for
a phase I trial. On February 25, 2003, the court allowed
plaintiffs to dismiss with prejudice the claims of two phase
I plaintiffs selected by Solutia and indicated that
plaintiffs should withdraw two of their phase I selections.
The court has set a phase I trial date of October 14, 2003.
(3) Payton v. Monsanto: This action was brought in Circuit Court
for Shelby County, Alabama on behalf of a purported class of
owners, lessees and licensees of property around Lay Lake.
On March 19, 2003, the trial court entered an order
certifying a plaintiff class. We intend to appeal this
order, and our notice of appeal is due to be filed by
April 30, 2003.
Solutia's 2002 Form 10-K also described a number of cases in
which plaintiffs allege injury from exposure to PCBs which occurred
in the course of their employment or as a result of incidents
involving equipment which used PCBs as a dielectric, hydraulic or
heat transfer fluid.
(1) Crystal Springs, Mississippi Litigation: This matter
involves five cases, four brought in Circuit Court for the
First Judicial District of Hinds County, Mississippi, and
one in Circuit Court for Copiah County Mississippi, on
behalf of a total of 170 individual plaintiffs who claim
that exposure to PCBs at Kuhlman Electric Company's plant in
Crystal Springs caused them unspecified injuries. The
defendants had removed these cases to federal court. On
March 14, 2003, the U.S. District Court for the Southern
District of Mississippi remanded these cases to state court.
(2) Other Pending PCB Case: Our former parent, Monsanto Company
(now known as Pharmacia Corporation, a wholly owned
subsidiary of Pfizer Inc.), was named as one of a number of
defendants in a wrongful death action, Johnson et al. v.
Ashland Inc. et al., filed in the Circuit Court of Hinds
County, Mississippi on March 27, 2003, on behalf of the
family of a deceased worker at a shipbuilding facility in
Pascagoula, Mississippi. Plaintiffs seek compensatory and
punitive damages in unspecified amounts. Solutia is
vigorously defending this matter and believes that there are
meritorious defenses, including lack of proximate cause and
lack of negligence or other improper conduct on the part of
our former parent company or Solutia.
Solutia's 2002 Form 10-K described a Partial Consent Decree
lodged with the United States District Court for the Northern
District of Alabama in an action captioned United States of America
v. Pharmacia Corporation and Solutia Inc. The District Court
conducted hearings on January 21, 2003 and February 25, 2003,
regarding objections to entry of the Partial Consent Decree made by
plaintiffs in the Abernathy case. The objectors as well as Solutia
and the United States have made filings subsequent to the hearing.
The parties await a decision by the court on approval of the Partial
Consent Decree.
22
Solutia's 2002 Form 10-K described a case pending in the
Commonwealth Court of Pennsylvania seeking damages allegedly
resulting from PCBs found in the Transportation and Safety Building
in Harrisburg, Pennsylvania. The Commonwealth Court has certified
the record on appeal to the Pennsylvania Supreme Court, and the
Supreme Court has issued a briefing schedule to the parties. Solutia
filed its record designations on April 21, 2003, and will file its
brief on appeal by April 30, 2003.
Solutia's 2002 Form 10-K described a legal proceeding arising
from the alleged violations of the Wyoming Environmental Quality
Act, the Wyoming Air Quality Standards & Regulations and a permit
issued by the Wyoming Department of Environmental Quality for a coal
coking facility in Rock Springs, Wyoming. The parties have now
agreed to settle this matter and have filed a Stipulation and Order
of Judgment with the United States District Court for the District
of Wyoming. [We are awaiting approval of the settlement by the
District Court.]
Solutia's 2002 Form 10-K described (a) an investigation by
authorities in the United States, Europe and Canada of past
commercial practices in the rubber chemicals industry and (b) a
number of purported class actions filed against producers of rubber
chemicals including Flexsys, our 50/50 joint venture with Akzo Nobel
N.V., each seeking actual and treble damages under state law on
behalf of all retail purchasers of tires in the relevant state since
1994. On April 8, 2003, a purported class action, Rubber Engineering
and Development Company v. Akzo Nobel, N.V., et al, was filed in
United States District Court for the Northern District of California
against a number of companies including Solutia and Flexsys. The
plaintiff alleges price fixing and seeks treble damages and
injunctive relief under U.S. antitrust laws on behalf of all
individuals and entities that purchased rubber chemicals in the
United States from the defendants, their predecessors, or their
controlled subsidiaries from January 1, 1995 until October 10, 2002.
On April 9, 2003, a second purported class action, Standard Rubber
Products, Inc. v. Akzo Nobel N.V., et al, was filed in the same
court. The second action names the same defendants, makes
substantially the same allegations and seeks substantially the same
relief as the first action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit Index at page 27 of this report.
(b) Reports on Form 8-K filed during the quarter ended March 31, 2003:
On February 18, 2003, Solutia filed a Form 8-K announcing the
sale of its resins, additives and adhesives businesses.
On February 26, 2003, Solutia filed a Form 8-K containing
three press releases; the first to announce the Alabama
Supreme Court's decision on a motion of recusal in Abernathy
vs. Monsanto, the second to announce the February 27
teleconference to review the decision, and the third to
announce board action regarding the election of directors
and officers and nominations of directors for re-election.
23
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/ J. M. SULLIVAN
------------------------------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: April 28, 2003
24
I, John C. Hunter III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Solutia
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Date: April 28, 2003
/s/ JOHN C. HUNTER III
-------------------------------------
John C. Hunter III
Chairman, President and
Chief Executive Officer
25
I, Robert A. Clausen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Solutia
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Date: April 28, 2003
/s/ ROBERT A. CLAUSEN
-------------------------------------------
Robert A. Clausen
Vice Chairman, Chief Financial Officer and
Chief Administrative Officer
26
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10 Change of Control Agreement between Solutia Inc. and
Jeffry N. Quinn dated as of February 26, 2003
11 See "Statement of Consolidated Loss" on page 1.
99 Computation of the Ratio of Earnings to Fixed Charges
27