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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 001-13255
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SOLUTIA INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
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$.01 PAR VALUE COMMON STOCK
PREFERRED STOCK PURCHASE RIGHTS
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 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.
[X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT
TO ITEM 405 OF REGULATION S-K (SECTION 229.405 OF THIS CHAPTER) IS NOT
CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S
KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY
REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM
10-K. [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED
FILER (AS DEFINED IN RULE 12b-2 OF THE ACT). [X] YES [ ] NO
STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON
EQUITY HELD BY NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT
WHICH THE COMMON EQUITY WAS LAST SOLD, OR THE AVERAGE BID AND ASKED
PRICE OF SUCH COMMON EQUITY, AS OF THE LAST BUSINESS DAY OF THE
REGISTRANT'S MOST RECENTLY COMPLETED SECOND FISCAL QUARTER.
APPROXIMATELY $226.89 MILLION ON JUNE 30, 2003.
NOTE.--IF A DETERMINATION AS TO WHETHER A PARTICULAR PERSON OR
ENTITY IS AN AFFILIATE CANNOT BE MADE WITHOUT INVOLVING UNREASONABLE
EFFORT AND EXPENSE, THE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD
BY NON-AFFILIATES MAY BE CALCULATED ON THE BASIS OF ASSUMPTIONS
REASONABLE UNDER THE CIRCUMSTANCES, PROVIDED THAT THE ASSUMPTIONS ARE
SET FORTH IN THIS FORM.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE
REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
104,607,467 SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AS OF
THE CLOSE OF BUSINESS ON FEBRUARY 27, 2004.
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Solutia makes statements in this Annual Report on Form 10-K that are
considered forward-looking statements under the federal securities laws.
The Company considers all statements regarding anticipated or future
matters, including the following, to be forward-looking statements:
* future effects from Solutia's filing for Chapter 11 protection
which occurred on December 17, 2003;
* Solutia's expected future financial position, liquidity, results
of operations, profitability and cash flows;
* dividends;
* financing plans;
* competitive position;
* business strategy;
* budgets;
* projected cost reductions;
* results of litigation;
* plans and objectives of management for future operations;
* contractual obligations;
* off-balance sheet arrangements;
* growth opportunities for existing products and services;
* price increases;
* benefits from new technology; and
* effect of changes in accounting due to recently issued accounting
standards.
These statements are not guarantees of Solutia's future performance.
They represent Solutia's estimates and assumptions only on the date it
made them. There are risks, uncertainties and other important factors
that could cause Solutia's actual performance or achievements to be
materially different from those it may project. These risks,
uncertainties and factors include:
* Solutia's ability to develop, confirm and consummate a Chapter 11
plan of reorganization;
* Solutia's ability to reduce the overall leveraged position of the
Company;
* the potential adverse impact of Solutia's Chapter 11 filing on its
operations, management and employees, and the risks associated
with operating businesses under Chapter 11 protection;
* Solutia's ability to comply with the terms of its debtor-in-
possession (DIP) financing facility;
* customer response to Solutia's Chapter 11 filing;
* general economic, business and market conditions;
* currency fluctuations;
* interest rate fluctuations;
* price increases or shortages of raw materials and energy;
* disruption of operations;
* exposure to product liability and other litigation and cost of
environmental remediation;
* lower prices for Solutia's products or a decline in Solutia's market
share due to competition or price pressure by customers;
* ability to implement cost reduction initiatives in a timely manner;
* ability to divest existing businesses;
* efficacy of new technology and facilities;
* limited access to capital resources;
* changes in U.S. and foreign laws and regulations;
* geopolitical instability; and
* changes in pension assumptions.
1
PART I
ITEM 1. BUSINESS.
OVERVIEW
Solutia and its subsidiaries make and sell a variety of
high-performance chemical-based materials, which are used in a broad
range of consumer and industrial applications. Solutia is reporting its
business under two segments: Performance Products and Services and
Integrated Nylon.
Solutia's Performance Products and Services segment comprises its
Performance Films product line and Specialties. Specialties consists of
Industrial Products and Pharmaceutical Services.
* Solutia's Performance Films product line includes plastic
interlayer for laminated safety glass and custom-coated films for
after-market automotive and architectural applications. The
Company markets its plastic interlayer under the SAFLEX(R) brand
and VANCEVA(TM) brand for use in automobile windshields; side,
rear and roof windows of vehicles; and for architectural
applications. Solutia also brands plastic interlayer under the
KEEPSAFE(R) and KEEPSAFE MAXIMUM(R) marks for architectural
applications. In addition, Solutia produces custom-coated window
films, branded as LLUMAR(R) and VISTA(R), for professional after-
market automotive and architectural applications and as GILA(R)
for the do-it-yourself retail market.
* Solutia's Industrial Products product line includes specialty
chemicals such as DEQUEST(R) water treatment chemicals,
THERMINOL(R) heat transfer fluids and SKYDROL(R) aviation
hydraulic fluids.
* Solutia's Pharmaceutical Services include an array of integrated
pharmaceutical development services ranging from process research
to manufacturing, clinical trial services and advisory services,
for leading pharmaceutical companies.
Solutia's Integrated Nylon segment comprises an integrated family of
nylon products.
* Solutia's chemical intermediates are used as feedstock for fiber
and resins production and are sold on the merchant market.
* Solutia's VYDYNE(R) and ASCEND(R) nylon polymers are sold to the
engineered thermoplastic and apparel markets.
* Solutia's fibers are sold under the WEAR-DATED(R) brand for use in
carpet and upholstery for customers, the ULTRON(R) brand for
commercial carpet and the ACRILAN(R) brand for knit apparel.
Solutia was incorporated in Delaware in April 1997 to hold most of
the chemical businesses of the former Monsanto Company, now known as
Pharmacia Corporation, a wholly owned subsidiary of Pfizer Inc.
("Pharmacia"). On September 1, 1997, Pharmacia spun off Solutia by
distributing Solutia's shares as a dividend to its stockholders. Solutia
became an independent publicly held company as a result of the spinoff.
CHAPTER 11 PROCEEDINGS
On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern
District of New York. The cases were consolidated for the purpose of
joint administration and were assigned case number 03-17949 (PCB).
Solutia's subsidiaries outside the United States were not included in
the Chapter 11 filing.
The filing was made to restructure the Company's balance sheet by
reducing indebtedness to appropriate levels, to streamline operations
and reduce costs to allow the Company to emerge from Chapter 11 as a
viable going concern, and to obtain relief from the negative financial
impact of legacy liabilities. These factors, combined with the weakened
state of the chemical manufacturing sector, general economic conditions,
and continuing high, volatile energy and crude oil costs have been an
obstacle to Solutia's financial stability and success. While Solutia
believes it will be able to significantly reduce the legacy liabilities
through the bankruptcy process, there can be no certainty that it will
be successful in doing so.
Under Chapter 11, Solutia is operating its businesses as
debtor-in-possession (DIP) under court protection from creditors and
claimants. Since the filing, all orders sufficient to enable Solutia to
conduct normal business activities, including the approval of Solutia's
DIP financing, have been entered by the bankruptcy court. While Solutia
is subject to Chapter 11, all transactions not in the ordinary course of
business will require the prior approval of the bankruptcy court.
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a final $525 million DIP credit facility.
This DIP facility consists of (i) a $50 million multiple draw term loan;
(ii) a $300 million single draw term loan, which was drawn in full on
the effective date of the facility; and (iii) a $175 million
borrowing-based revolving credit facility, which includes a $150 million
letter of
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credit subfacility. For additional information regarding the DIP
financing, see Management's Discussion and Analysis in Item 7 below and
Note 21 to the accompanying consolidated financial statements on page 78
below.
As a consequence of the Chapter 11 filing, pending litigation
against Solutia is generally stayed, and no party may take any action to
collect its pre-petition claims except pursuant to order of the
bankruptcy court.
In order to exit Chapter 11 successfully, Solutia must propose and
obtain confirmation by the bankruptcy court of a plan of reorganization
that satisfies the requirements of the Bankruptcy Code. Although the
Company expects to file a plan of reorganization that provides for
Solutia's emergence from bankruptcy as a going concern, there can be no
assurance that a plan of reorganization will be confirmed by the
bankruptcy court or that any such plan will be implemented successfully.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options
and warrants to purchase its common stock, and that it is unlikely that
holders of Solutia's common stock, including options and warrants to
purchase Solutia's common stock, will receive any consideration for that
stock or those options and warrants in such a plan of reorganization.
Solutia is unable to estimate what recovery such a plan of
reorganization will provide to holders of Solutia's outstanding debt
securities. While Solutia filed for Chapter 11 in part to gain relief
from the legacy liabilities it was required to assume when it was spun
off from Pharmacia, the extent to which such relief will be achieved is
uncertain at this time. It is also possible that pursuant to a plan of
reorganization Solutia will agree to retain a portion of the legacy
liabilities.
RECENT DEVELOPMENTS
Prior to Solutia's Chapter 11 filing, Solutia reached an agreement
with the requisite holders of the Euro Notes ("Euronotes"), issued by
Solutia Europe S.A./N.V. ("SESA") and guaranteed by Solutia Inc., to
restructure these Euronotes which among other changes eliminated certain
cross-default provisions. On January 30, 2004, SESA successfully
completed the restructuring. The restructuring allows SESA to continue
normal operations while Solutia Inc. and its domestic subsidiaries
reorganize under Chapter 11 bankruptcy protection. For information on
the Euronote restructuring, see Management's Discussion and Analysis in
Item 7 below and Note 21 to the accompanying consolidated financial
statements on page 78 below.
SEGMENTS; PRINCIPAL PRODUCTS
Solutia's reportable segments are:
* Performance Products and Services; and
* Integrated Nylon.
The tabular and narrative information contained in Note 23 to the
accompanying consolidated financial statements appearing on pages 81 and
82 is incorporated by reference into this section.
3
PERFORMANCE PRODUCTS AND SERVICES SEGMENT
Major End-Use
Major End-Use Products & Major Raw
Markets Major Products Applications Major Competitors Materials Major Plants
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CONSTRUCTION AND Polyvinyl butyral Products to increase DuPont; Sekisui; HT Butyraldehyde; Ghent, Belgium;
HOME FURNISHINGS for KEEPSAFE(R) and the safety, Troplast ethanol; polyvinyl Springfield, MA;
KEEPSAFE MAXIMUM(R) security, sound alcohol; vinyl Trenton, MI
laminated window attenuation, energy acetate monomer
glass; VANCEVA(TM) efficiency and
films; LLUMAR(R) and ultraviolet
VISTA(R) protection of
professional window architectural glass
films and GILA(R) for residential and
retail window films commercial
structures;
after-market films
for solar control,
security and safety Bekaert; Polyester film Martinsville, VA
Madico/Lintec; 3M
ASTROTURF(R) and Entrance matting Elecster; Fichet; Polyethylene St. Louis, MO;
CLEAN MACHINE(R) HBN-Teknik Ghent, Belgium
door mats
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VEHICLES SAFLEX(R) plastic Products to increase DuPont; Sekisui Butyraldehyde; Ghent, Belgium;
interlayer for the safety, ethanol; polyvinyl Springfield, MA;
windshields and for security, sound alcohol; vinyl Trenton, MI
side, roof and rear attenuation and acetate monomer
windows of vehicles; ultraviolet
VANCEVA(TM) plastic protection of
interlayer and automotive glass and
films; LLUMAR(R), give vehicles a
FORMULAONE custom appearance
PERFORMANCE Bekaert; Polyester film Martinsville, VA
AUTOMOTIVE FILMS(R) Madico/Lintec; 3M
and GILA(R) retail
window films
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INDUSTRIAL Metallized films; Window films; tapes; 3M; Toray; Polyester film; Martinsville, VA
APPLICATIONS sputtered films; automotive badging; Mitsubishi; ATI; glycol; n-methyl-
AND ELECTRONICS release liners and optical and colored Garware; Intellicoat 2-pyrrolidone; crude
deep-dyed films filters; shades; and dispersed dyes;
reprographics; aluminum wires and
packaging boats; uvinol
Performance films; Computer Bekaert; Southwall; Polyester film; Martinsville, VA;
conductive and touch-screens; OCLI Indium tin; precious Canogo Park, CA;
anti-reflective electroluminescent metals Runcorn, U.K.
coated films displays for
hand-held
electronics and
watches; cathode ray
tube and LCD
monitors
Chlorobenzenes Herbicides PPG Benzene; chlorine Sauget, IL
DEQUEST(R) water Water treatment; oil Rhodia; Bayer Phosphorus Newport, Wales
treatment chemicals field chemicals trichloride (U.K.)
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CAPITAL EQUIPMENT THERMINOL(R) heat Heat transfer fluids Dow Chemical Co.; Benzene; phenol Alvin, TX;
transfer fluids Nippon Steel Anniston, AL;
Chemical Co. Newport,
Wales (U.K.)
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AVIATION/ SKYDROL(R) aviation Hydraulic fluids for ExxonMobile Phosphorus St. Louis, MO
TRANSPORTATION hydraulic fluids; commercial aircraft; oxychloride;
SKYKLEEN(R) aviation environmentally methanol
solvents friendly solvents
for aviation
maintenance
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PHARMACEUTICALS Services for process New pharmaceuticals Rhodia ChiRex; Aarau and Bubendorf,
research and Albany Molecular Switzerland
development, Research; Pharma-
scale-up Eco; Evotec
manufacturing and
small-volume
licensed production
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4
INTEGRATED NYLON SEGMENT
Major End-Use
Major End-Use Products & Major Raw
Markets Major Products Applications Major Competitors Materials Major Plants
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CONSTRUCTION AND Nylon carpet staple; WEAR-DATED(R) Invista; Honeywell; Acrylonitrile; Pensacola, FL;
HOME FURNISHINGS nylon bulk residential and BASF ammonia; Greenwood, SC;
continuous filament; ULTRON(R) commercial cyclohexane; Decatur and
ACRILAN(R) acrylic carpet; propylene Foley, AL
fiber; ASCEND(R) WEAR-DATED(R)
nylon polymer upholstery fabrics;
blankets; non-woven
reinforcement and
linings
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PERSONAL PRODUCTS ACRILAN(R) acrylic Sweaters; knit Acordis; Invista; Acrylonitrile; Pensacola, FL;
fiber; ASCEND(R) apparel; half-hose; BASF; Rhodia ammonia; Decatur, AL;
nylon polymer active wear; craft cyclohexane; Greenwood, SC
yarns; hand-knit propylene
yarns; apparel;
dental floss;
intimate apparel
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VEHICLES Nylon filament; Tires; brakes; Acordis; DuPont; Acrylonitrile; Pensacola, FL;
VYDYNE(R) nylon convertible tops; Rhodia; Asahi ammonia; Decatur, AL;
molding resins; automotive interior, Chemical; Invista; cyclohexane; Greenwood, SC
ASCEND(R) nylon exterior and BASF propylene
polymer; ACRILAN(R) under-the-hood
acrylic fiber molded parts
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INDUSTRIAL ACRILAN(R) acrylic Conveyer belts; Acordis; DUSA; Shen Acrylonitrile; Pensacola, FL;
APPLICATIONS fiber; ASCEND(R) awnings and outdoor Ma ammonia; Decatur, AL;
nylon polymer; furniture; nylon cyclohexane; Greenwood, SC
industrial nylon film cooking bags; propylene
fiber specialized food
packaging
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INTERMEDIATE Nylon salt; adipic Nylon and acrylic DuPont; Rhodia; Natural gas; Decatur, AL;
CHEMICALS acid; fiber; nylon and ABS BASF; Asahi Chemical propylene; Alvin, TX;
hexamethylenediamine; plastics; synthetic cyclohexane Greenwood, SC;
acrylonitrile resins; synthetic Pensacola, FL
lubricants; paper
chemicals;
plasticizers
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5
PRINCIPAL EQUITY AFFILIATES
Solutia participates in several joint ventures in which it shares
management control with other companies. Solutia's equity earnings
(loss) from affiliates, net of tax, were $(83) million in 2003,
$13 million in 2002, and $(13) million in 2001. Principal joint ventures
include Flexsys, L.P. and Astaris LLC.
Flexsys, headquartered in Belgium, is a leading supplier of process
chemicals to the rubber industry. Its product line includes a number of
performance-enhancing products, including branded accelerators
(SANTOCURE(R), THIOFIDE(R) and THIOTAX(R)), pre-vulcanization inhibitors
(SANTOGARD(R)PVI), antidegradants (SANTOFLEX (R)) and antioxidants
(FLECTOL(R)) and insoluble sulphur (CRYSTEX(R)). Flexsys is a 50/50
joint venture with Akzo Nobel N.V.
Astaris, headquartered in the United States, sells phosphorus,
phosphoric acid and phosphate salts. Its product line includes a number
of branded products such as LEVN-LITE(R) and PAN-O-LITE(R) phosphate,
which are sold into the bakery markets. The business also services the
pharmaceutical, meat and poultry and industrial marketplaces. Astaris is
a 50/50 joint venture with FMC Corporation. On October 14, 2003, Solutia
filed suit in Circuit Court in St. Louis County, Missouri, against FMC
over the failure of purified phosphoric acid technology provided by FMC
to Astaris. On February 20, 2004, Solutia voluntarily dismissed the
state court action and filed an adversary proceeding against FMC in the
U.S. Bankruptcy Court for the Southern District of New York.
For additional information about Flexsys and Astaris, see
"Management's Discussion and Analysis" in Item 7 below and Note 10 to the
accompanying consolidated financial statements on page 60 below.
SALE OF PRODUCTS
Solutia sells its products directly to end users in various
industries, principally by using its own sales force, and, to a lesser
extent, by using distributors.
On May 1, 2002, Solutia and Dow Plastics, a business unit of The Dow
Chemical Company, formally terminated the marketing alliance under which
Dow had marketed Solutia's VYDYNE(R) nylon 6,6 molding resins for
injection molding applications worldwide, and Solutia resumed sole
responsibility for the business.
Solutia's marketing and distribution practices do not result in
unusual working capital requirements on a consolidated basis. The
Company maintains inventories of finished goods, goods in process and
raw materials to meet customer requirements and Solutia's scheduled
production. In general, Solutia does not manufacture its products
against a backlog of firm orders; it schedules production to meet the
level of incoming orders and the projections of future demand. Solutia
does not have material contracts with the government of the United
States or any state, local or foreign government. The Company is not
generally dependent on one or a group of customers, and no single
customer or customer group accounts for 10 percent or more of Solutia's
net sales. However, sales to the carpet mill industry and the European
automobile glass industry each represent a significant portion of
Solutia's net sales.
Solutia's second and third quarters are typically stronger than its
first and fourth quarters because sales of carpet and window films are
stronger in the spring and fall.
COMPETITION
The global markets in which Solutia's chemical businesses operate
are highly competitive. Solutia expects competition from other
manufacturers of the same products and from manufacturers of different
products designed for the same uses as ours to continue in both U.S. and
ex-U.S. markets. Depending on the product involved, Solutia encounters
various types of competition, including price, delivery, service,
performance, product innovation, product recognition and quality.
Overall, the Company regards its principal product groups as competitive
with many other products of other producers and believe that Solutia is
an important producer of many of these product groups. For additional
information regarding competition in specific markets, see the charts
under "Segments; Principal Products" above.
RAW MATERIALS AND ENERGY RESOURCES
Solutia buys large amounts of commodity raw materials, including
propylene, cyclohexane, benzene and natural gas. The Company typically
buys major requirements for key raw materials pursuant to medium-term
contracts. Solutia is not dependent on any one supplier for a material
amount of its raw materials or energy requirements, but it obtains
certain important raw materials from a few major suppliers. In general,
in those cases where Solutia has limited sources of raw materials, it
has developed contingency plans to minimize the effect of any
interruption or reduction in supply. For information about specific raw
materials, see the charts under "Segments; Principal Products" above.
While temporary shortages of raw materials and energy may
occasionally occur, these items are generally sufficiently available to
cover Solutia's current and projected requirements. However, their
continuing availability and price may be affected by unscheduled plant
6
interruptions and domestic and world market conditions, political
conditions and governmental regulatory actions. Due to the significant
quantity of these raw materials and energy sources utilized by Solutia,
a minor shift in the underlying prices for these items can result in a
significant impact on Solutia's consolidated financial position and
results of operations.
PATENTS AND TRADEMARKS
Solutia owns a large number of patents that relate to a wide variety
of products and processes and have pending a substantial number of
patent applications. In addition, Solutia is licensed under a small
number of patents owned by others. The Company owns a considerable
number of established trademarks in many countries under which the
Company markets its products. These patents and trademarks in the
aggregate are of material importance to Solutia's operations and to
Solutia's Performance Products and Services and Integrated Nylon
segments. Patents and trademarks owned by Solutia Inc. and its domestic
subsidiary CPFilms Inc. have been pledged as part of the collateral for
the DIP financing. The holders of Solutia's 11.25 percent Senior Secured
Notes due 2009 have a junior security interest in these patents and
trademarks. Patents and trademarks of SESA, as well as trademarks owned
by AMCIS AG and Carbogen AG, have been pledged to the holders of SESA's
Euronotes in connection with the restructuring of that debt.
RESEARCH AND DEVELOPMENT
Research and development constitute an important part of Solutia's
activities. Solutia's expenses for research and development amounted to
approximately $46 million in 2003, $39 million in 2002 and $43 million
in 2001, or about 2 percent of sales on average. The Company focuses its
expenditures for research and development on process improvements and
selected product development.
Solutia's research and development programs in the Performance
Products and Services segment result in new products and processes with
improved manufacturing efficiency, enhanced product performance, or
greater environmental friendliness. New products include protective
films for window shades and automotive paint, improved interlayers for
hurricane and sound protection, and specialty films for plasma
television screens. During the year the Company introduced processes for
manufacturing safety glass that save time and use simpler equipment.
Solutia's Integrated Nylon segment continues to focus on internal
process improvements to mitigate increasing raw material prices and to
commercialize new products to address customer needs and improve product
mix. This year the Company expects to commercialize technology that it
has developed to impart permanent stain protection to carpets.
ENVIRONMENTAL MATTERS
The narrative information appearing under "Environmental Matters"
beginning on page 26 below is incorporated here by reference.
EMPLOYEE RELATIONS
On December 31, 2003, Solutia had approximately 6,300 employees
worldwide. In general, satisfactory relations have prevailed between
Solutia's employees and Solutia. Solutia uses self-directed work teams,
incentive programs and other initiatives to keep employees actively
involved in the success of the business. Approximately 16 percent of
Solutia's workforce is currently represented by various labor unions.
INTERNATIONAL OPERATIONS
Solutia and its subsidiaries are engaged in manufacturing, sales and
research and development in areas outside the United States.
Approximately 40 percent of Solutia's consolidated sales from continuing
operations in 2003 were made into markets outside the United States,
including Europe, Canada, Latin America and Asia. Solutia's Performance
Products and Services segment is particularly dependent on its
international operations. Approximately 60 percent of the 2003 sales of
the Performance Products and Services segment were made into markets
outside the United States.
Operations outside the United States are potentially subject to a
number of risks and limitations that are not present in domestic
operations, including trade restrictions, investment regulations,
governmental instability and other potentially detrimental governmental
practices or policies affecting companies doing business abroad.
Operations outside the United States are also subject to
fluctuations in currency values. The functional currency of each of
Solutia's non-United States operations is the local currency. Exchange
rates between these currencies and U.S. dollars have fluctuated
significantly in recent years and may continue to do so. In addition,
Solutia generates revenue from export sales and operations conducted
outside the United States that may be denominated in currencies other
than the relevant functional currency.
7
INTERNET ACCESS TO INFORMATION
Solutia's Internet address is www.solutia.com. The Company makes
available free of charge through Solutia's Internet website its annual
report on Form 10-K, its quarterly reports on Form 10-Q, current reports
on Form 8-K, and any amendments to these reports as soon as reasonably
practicable after they are electronically filed with, or furnished to,
the Securities and Exchange Commission. Forms 3, 4 and 5 filed by
Solutia's directors and executive officers with respect to Solutia's
equity securities are also accessible from Solutia's website. All of
these materials may be accessed from the "Investors" section of
Solutia's website.
ITEM 2. PROPERTIES.
Solutia's general offices are located in a leased facility in
St. Louis County, Missouri on land owned by the Company (see Note 12 to the
accompanying consolidated financial statements). Solutia's principal
European offices are located in Louvain-la-Neuve, Belgium, on land
leased from the University of Louvain. Information about Solutia's major
manufacturing locations worldwide and segments that used these locations
on February 1, 2004, appears under "Segments; Principal Products" in
Item 1 of this report and is incorporated here by reference.
Solutia's principal plants are suitable and adequate for their use.
Utilization of these facilities varies with seasonal, economic and other
business conditions, but none of Solutia's principal plants is
substantially idle. Solutia's facilities generally have sufficient
capacity for existing needs and expected near-term growth.
Solutia owns most of its principal plants. However, at Antwerp,
Belgium and Sao Jose dos Campos, Brazil, both of which are sites
belonging to Monsanto Company, the Company owns certain buildings and
production equipment and leases the underlying land. In addition,
Solutia leases buildings for its Pharmaceuticals Services Division,
including the production site in Aarau. In Bubendorf, Switzerland, it
owns one production building but not the land on which it stands.
Monsanto and Solutia have operating agreements with respect to each
of the two Monsanto facilities listed above and Solutia's Chocolate
Bayou facility in Alvin, Texas. Under these operating agreements,
Solutia is the guest and Monsanto is the operator, except at the
Chocolate Bayou facility at which Monsanto is the guest and Solutia is
the operator. The initial term of each of the operating agreements has
15 years remaining. After the initial term, the operating agreements
continue indefinitely unless either party terminates on at least
24 months' prior written notice. Each of the operating agreements also
provides that, under certain circumstances, either the operator or the
guest may terminate the operating agreement before the expiration of its
initial term. Solutia operates several facilities for other third
parties, principally within the Alvin (Chocolate Bayou), Texas; Sauget,
Illinois; Pensacola, Florida; Trenton, Michigan; Newport, Wales (U.K.),
St. Louis (Queeny), Missouri; and Springfield, Massachusetts sites under
long-term lease and operating agreements.
Mortgages on Solutia's plants at the following locations constitute
a portion of the collateral securing Solutia's DIP financing facility:
Decatur, Alabama; Springfield, Massachusetts; Trenton, Michigan;
Greenwood, South Carolina; Alvin (Chocolate Bayou), Texas; Pensacola,
Florida; and Martinsville, Virginia. The holders of Solutia's
11.25 percent Senior Secured Notes due 2009 hold second mortgages on each of
these plants. Holders of SESA's Senior Secured Notes hold mortgages on
Solutia's facilities in Ghent, Belgium and Louvain-la-Neuve, Belgium, as
well as Solutia's building at Antwerp, Belgium. In addition, there is a
mechanics' lien filed by Fluor Daniel, a division of Fluor Enterprises,
Inc., against Solutia's Chocolate Bayou facility, currently securing an
obligation in the amount of approximately $7 million, which obligation
consists of the remaining payments Solutia agreed to make to Fluor
Daniel over a three-year period in settlement of litigation arising out
of the construction of an acrylonitrile facility at the Chocolate Bayou
plant. As a result of the Chapter 11 filing, Solutia has received
notices of mechanics' liens from a number of contractors seeking payment
of pre-petition claims. While contractors are permitted to perfect their
liens after the commencement of the Chapter 11 case by filing written
notice, the automatic stay under Section 362 of the Bankruptcy Code
prevents their taking any further action to enforce a lien against
Solutia's property, and the Company does not expect the filing of these
liens to have any adverse effect on the operation of Solutia's plants.
ITEM 3. LEGAL PROCEEDINGS.
Because of the size and nature of Solutia's business, Solutia is a
party to numerous legal proceedings. Most of these proceedings have
arisen in the ordinary course of business and involve claims for money
damages. In addition, at the time of Solutia's spin-off from Pharmacia,
Solutia assumed the defense of specified legal proceedings and agreed to
indemnify Pharmacia in connection with those proceedings. Solutia has
determined that these defense and indemnification obligations to
Pharmacia are pre-petition obligations under the U.S. Bankruptcy Code
that Solutia is prohibited from performing, except pursuant to a
confirmed plan of reorganization. As a result, Solutia has ceased
performance of these obligations. Solutia's cessation of performance may
give rise to a pre-petition unsecured claim against Solutia which
Pharmacia may assert in Solutia's Chapter 11 case.
In Solutia's Chapter 11 proceedings, Solutia is engaged in various
litigation matters with Pharmacia and the U.S. Environmental Protection
Agency (EPA). These litigation matters relate to the impact of Solutia's
Chapter 11 proceedings on the obligations Solutia
8
assumed at the time of its spin-off and Solutia's obligations under
environmental laws. These litigation matters could affect the size of
creditor claims to be asserted in Solutia's Chapter 11 case by the EPA,
Pharmacia and Monsanto, as well as the extent, if any, to which Solutia
will be required to continue to perform environmental obligations and
legacy liabilities under Solutia's plan of reorganization. For additional
information regarding Solutia's Chapter 11 Proceedings, see the
"Chapter 11 Proceedings" section in Item I above.
The following paragraphs describe several proceedings to which
Solutia is a party or for which it has defended and indemnified
Pharmacia in the past.
ANNISTON, ALABAMA CASES
(1) Abernathy v. Monsanto and Tolbert v. Monsanto: Abernathy
involved four consolidated cases, the first of which was served
on April 1, 1996, that were originally filed in Circuit Court
for Calhoun County, Alabama (and were later transferred to
Etowah County, Alabama) on behalf of 3,516 plaintiffs who own or
rent homes, own or operate businesses, attend churches, or have
otherwise resided in or visited neighborhoods near the Anniston
plant. Plaintiffs sought compensatory and punitive damages and
injunctive relief requiring the Company to remove alleged
contamination. The individual plaintiffs claimed to have
suffered permanent adverse health effects and to fear future
disease. They asserted the need for medical monitoring,
diminution in the value of their properties in the case of
residential and commercial property owners and commercial losses
in the case of business owners. The Tolbert case, which was
served on June 4, 2001, was filed in the U.S. District Court for
the Northern District of Alabama. It ultimately included the
claims of approximately 18,233 plaintiffs. Plaintiffs claimed
that they were exposed to PCBs and suffer from unspecified
physical injuries and emotional distress as a result. Plaintiffs
sought compensatory and punitive damages and requested medical
testing, monitoring and treatment, injunctive relief and, in the
case of property owners, property damage.
In August 2003, the parties in both Abernathy and Tolbert
entered into a Global Settlement Agreement to resolve these and
several related cases. The Global Settlement Agreement has been
approved by both the Abernathy and the Tolbert trial courts. The
Global Settlement Agreement provides for cash payments of
$600 million, as well as a broad array of community health
initiatives for low-income residents of Anniston and Calhoun
County. In connection with the Global Settlement Agreement,
Solutia entered into a separate agreement with Pharmacia and
Monsanto pursuant to which Solutia agreed to pay $50 million of
the $600 million cash settlement, payable in ten equal annual
installments, without interest, beginning in August 2004.
Approximately $160 million of the settlement is expected to be
provided through the parties' commercial insurance. Monsanto
agreed to pay the remaining $390 million. Solutia arranged for
Pfizer Inc., the parent of Pharmacia, to provide the community
health initiatives described above. In addition, Solutia issued
Monsanto warrants to purchase up to 10 million shares of Solutia
common stock at an exercise price of $1.10 per common share.
Solutia is a named defendant in the Abernathy and Tolbert cases.
As a result, Solutia filed a Suggestion of Bankruptcy in both
cases. On January 22, 2004, the court entered an order in the
Tolbert case dismissing Solutia, without prejudice. With respect
to the Abernathy case, the court had previously entered an order
on August 6, 2003, finding that in the event Solutia became a
debtor in a case under Chapter 11 of the U.S. Bankruptcy Code,
Solutia would be immediately severed and dismissed, without
prejudice, from the Abernathy case without further action from
the court. Solutia has determined that the Bankruptcy Code
prohibits it from paying Solutia's portion of the settlement
obligation, except pursuant to a confirmed plan of
reorganization.
(2) Anniston Partial Consent Decree: The U.S. District Court for the
Northern District of Alabama approved the revised Partial
Consent Decree on August 4, 2003 that had been lodged with the
court in an action captioned United States of America v.
Pharmacia Corporation (p/k/a Monsanto Company) and Solutia. This
Partial Consent Decree provides for Pharmacia and Solutia to
sample certain residential properties and remove soils found on
those properties if PCBs are at a level of 1 part per million
(ppm) or above, to conduct a Remedial Investigation and
Feasibility Study to provide information for the selection by
the EPA of a cleanup remedy for the Anniston PCB site, and to
pay EPA's past response costs and future oversight costs related
to this work. The decree also provided for the creation of an
educational trust fund of approximately $3 million to be funded
over a 12-year period to provide supplemental educational
services for school children in west Anniston. A dispute
currently exists between the EPA and Solutia regarding the scope
and application of the automatic stay arising as a result of
Solutia's Chapter 11 filing to the remaining obligations under
the Partial Consent Decree.
(3) Owens v. Monsanto: On October 27, 2003, a motion was filed in
U.S. District Court for the Northern District of Alabama,
contending that the global settlement in Tolbert and Abernathy
also requires the payment of additional funds to plaintiffs in
Owens v. Monsanto, another Anniston-related PCB case settled by
Solutia in April 2001. On January 8, 2004, the District Court
granted plaintiffs' motion, ruling that the Owens plaintiffs
were entitled to receive a total of approximately $1 million as
a result of the Global Settlement Agreement. Plaintiffs' motion
for reconsideration was denied on January 24, 2004, and
plaintiffs have filed a timely appeal to the U.S. Court of
Appeals for the Eleventh Circuit. Solutia is not a named
defendant in this litigation and therefore has taken no action
to stay the litigation in connection with Solutia's Chapter 11
proceedings. Solutia assumed the defense of this litigation at
the time of its spin-off from Pharmacia. The Company has
determined that its obligation to defend and indemnify Pharmacia
with regard to this litigation is a pre-petition obligation that
Solutia is prohibited from performing, except pursuant to a
confirmed plan of reorganization. Solutia has ceased defending
Pharmacia with respect to this litigation.
9
(4) Payton v. Monsanto: This case was brought in Circuit Court in
Shelby County, Alabama on July 15, 1997, on behalf of a
purported class of all owners, lessees and licensees of
properties located on Lay Lake, which is downstream from Lake
Logan Martin on the Coosa River. Plaintiffs seek compensatory
and punitive damages in an unspecified amount for an alleged
increased risk of physical injury and illness, emotional
distress caused by fear of future injury or illness, medical
monitoring and diminishment in the value of their properties and
their riparian rights. The parties have reached a tentative
agreement to settle this case for a cash payment of $5 million
and an equitable component that has yet to be determined.
Solutia is not a named defendant in this litigation and
therefore has taken no action to stay the litigation in
connection with its Chapter 11 proceedings. Solutia assumed the
defense of this litigation at the time of its spin-off from
Pharmacia. The Company has determined that Solutia's obligation
to defend and indemnify Pharmacia with regard to this litigation
is a pre-petition obligation that Solutia is prohibited from
performing, except pursuant to a confirmed plan of
reorganization. Solutia has ceased defending Pharmacia with
respect to this litigation.
(5) Other Anniston Cases: Claims made by five plaintiffs in two
cases pending in Circuit Court for Jefferson County, by seven
plaintiffs in one case pending in Circuit Court for Calhoun
County, Alabama and by one plaintiff in one case pending in U.S.
District Court for the Northern District of Alabama have been
resolved and are subject to the Global Settlement Agreement of
the Abernathy and Tolbert cases described above. In addition,
claims of property damages made by one plaintiff in one case
pending in Circuit Court for Calhoun County have been settled
for a nominal sum. Approximately ten cases remain pending in
various Circuit Courts in the state of Alabama. Solutia is a
named defendant in those ten proceedings. As a result, Solutia
has filed a Suggestion of Bankruptcy in each case staying the
litigation against it. The Company believes that any direct
claims against it relating to these actions constitute
pre-petition unsecured claims that will be discharged as part of
Solutia's Chapter 11 case. Solutia has also defended Pharmacia
with respect to this litigation. Solutia has determined that its
obligation to defend and indemnify Pharmacia with regard to this
litigation is a pre-petition obligation that Solutia is
prohibited from performing, except pursuant to a confirmed plan
of reorganization. Solutia has ceased defending Pharmacia with
respect to this litigation.
PENNDOT CASE
Pharmacia is one of several defendants added on February 7, 1997, to
a case then pending in the Commonwealth Court of Pennsylvania. This
action was originally filed against United States Mineral Products
Company in 1990 by the Commonwealth of Pennsylvania, seeking damages
caused by the presence of asbestos fireproofing in the Transportation
and Safety Building ("T & S Building") in Harrisburg, Pennsylvania. In
June 1994 a fire broke out in the T & S Building. Testing following the
fire revealed the presence of low levels of PCBs at various locations in
the building. The Commonwealth claims that PCBs used in fluorescent
light ballasts, in adhesives in fiberglass ductboard that was part of
the heating and ventilation system and in caulking used on the exterior
of the building contaminated the building and necessitated its
demolition. The Commonwealth seeks recovery of costs it allegedly
incurred in testing, monitoring, cleanup, demolition and temporary
relocation of Commonwealth employees caused by the alleged
contamination. In addition, the Commonwealth seeks the cost of
constructing a new building on the site of the T & S Building. On August
23, 2000, the jury returned a verdict of $90 million against Pharmacia.
The verdict was reduced to $45 million by the trial court because the
manufacturer of the fiberglass ductboard reached a settlement with the
Commonwealth during trial. On behalf of Pharmacia, Solutia filed
extensive post-trial motions, seeking judgment notwithstanding the
jury's verdict or a new trial. The trial court denied these motions in
orders filed on October 16, 2002. On November 15, 2002, Solutia filed an
appeal as of right to the Supreme Court of Pennsylvania. On November 17,
2003, the Supreme Court of Pennsylvania remanded the case to the trial
court for an opinion solely on the issue of juror misconduct. In response
to Solutia's application, the Supreme Court of Pennsylvania ordered the
trial court to file its opinion on that issue by March 15, 2004. Oral
argument before the Supreme Court of Pennsylvania on this matter is
scheduled for May 11, 2004. Solutia is not a named defendant in this
litigation and therefore has taken no action to stay the litigation in
connection with its Chapter 11 proceedings. Solutia assumed the defense of
this litigation at the time of its spin-off from Pharmacia. The Company
has determined that Solutia's obligation to defend and indemnify Pharmacia
with regard to this litigation is a pre-petition obligation that Solutia
is prohibited from performing, except pursuant to a confirmed plan of
reorganization. Solutia has ceased defending Pharmacia with respect to
this litigation. Solutia does, however, continue to provide a $20 million
letter of credit to secure a portion of Pharmacia's obligations with
respect to the appeal bond.
OTHER PCB LITIGATION
Excluding the Anniston, Alabama cases and the PENNDOT case discussed
above, since 1971, Pharmacia has been named as a defendant in
approximately 482 cases in which plaintiffs have made claims of personal
injuries or property damage resulting from alleged exposure to PCBs. Of
these cases, 467 have been resolved, including the claims of
approximately 15,000 plaintiffs at a cost to Pharmacia and the Company
of approximately $32 million. These cases have usually involved
product-based claims in which plaintiffs have alleged that exposure to
PCBs occurred in the course of their employment or as a result of an
incident involving equipment which used PCBs as a dielectric, hydraulic
or heat transfer fluid. In a few of these cases, plaintiffs have sought
to recover the cost of cleaning up PCB's that they disposed of
improperly. In each of the remaining cases in which Solutia is a named
defendant, the Company has filed a Suggestion of Bankruptcy staying the
litigation against it. Solutia believes that any direct claims against
it relating to these actions constitute pre-petition
10
unsecured claims that will be discharged as part of its Chapter 11 case.
Solutia has also defended Pharmacia with respect to this litigation.
Solutia has determined that its obligation to defend and indemnify
Pharmacia with regard to this litigation is a pre-petition obligation
that Solutia is prohibited from performing, except pursuant to a
confirmed plan of reorganization. Solutia has ceased defending Pharmacia
with respect to this litigation.
PREMISES BASED ASBESTOS LITIGATION
Like a great number of other companies that used high temperature
manufacturing processes, Pharmacia historically used asbestos insulating
materials in piping and other equipment at its chemicals plants. As a
result, Pharmacia and Solutia have been named as defendants along with
numerous other premises owners in actions brought by employees of
contractors who claim that they were exposed to asbestos at Solutia's
facilities and at the facilities of these other owners. Currently, there
are approximately 520 asbestos actions involving an estimated 3,500 to
4,500 plaintiffs brought against Pharmacia and/or Solutia. Solutia does
not have any product-based asbestos litigation. In all of the cases in
which Solutia is a named defendant, Solutia has filed a Suggestion of
Bankruptcy staying the litigation against it. Solutia believes that any
direct claims against it relating to these actions constitute
pre-petition unsecured claims that will be discharged as part of its
Chapter 11 case. Solutia has also defended Pharmacia with respect to
this litigation. Solutia has determined that its obligation to defend
and indemnify Pharmacia with regard to this litigation is a pre-petition
obligation that Solutia is prohibited from performing, except pursuant
to a confirmed plan of reorganization. Solutia has ceased defending
Pharmacia with respect to this litigation.
FLEXSYS RELATED LITIGATION
Antitrust authorities in the United States, Europe and Canada are
investigating past commercial practices in the rubber chemicals
industry. Flexsys, Solutia's 50/50 joint venture with Akzo Nobel N.V.,
is a subject of such an investigation and has been fully cooperating
with the authorities and in the ongoing investigation will continue to
do so. In addition, a number of purported class actions have been filed
against Flexsys and other producers of rubber chemicals.
State court actions by retail tire purchasers. Although not named as
---------------------------------------------
a defendant in any of the cases, Solutia is aware of 20 purported class
actions that have been filed against Flexsys and other producers of
rubber chemicals in various state courts in the United States. In each
of these cases, plaintiffs seek actual and treble damages under state
law on behalf of all retail purchasers of tires in that state since as
early as 1994. Ten of these cases have been dismissed as to Flexsys, and
in some cases as to other defendants, either by the plaintiff or by the
trial court on procedural grounds. One of these dismissals remains on
appeal by the plaintiffs. Thus, eleven cases remain pending, either on
appeal of court ordered dismissals or at the trial court level in
preliminary motion phases.
Federal court actions by purchasers of rubber chemicals. Seven
-------------------------------------------------------
purported class actions have been filed in the U.S. District Court for
the Northern District of California on behalf of all individuals and
entities that had purchased rubber chemicals in the United States during
the period January 1, 1995 until October 10, 2002, against Solutia,
Flexsys and a number of other companies producing rubber chemicals.
These actions allege price-fixing and seek treble damages and injunctive
relief under U.S. antitrust laws on behalf of all the plaintiffs. One
action was dismissed by the plaintiffs. The remaining six actions have
been consolidated into a single action called In Re Rubber Chemicals
Antitrust Litigation in the U.S. District Court for the Northern
District of California. Solutia has filed a Suggestion of Bankruptcy in
this consolidated action staying the litigation against it. On
January 14, 2004, an eighth case, Monmouth Rubber and Plastics Corp v. Akzo
Nobel, N.V. et al., alleging essentially identical claims and seeking
the same relief as the consolidated complaint was filed in the same
court. Solutia anticipates that this case will also be consolidated with
the prior cases and will also be stayed as to Solutia.
Federal court actions alleging violations of federal securities
---------------------------------------------------------------
laws. Five purported shareholder class actions have been filed in the
- ----
U.S. District Court for the Northern District of California against
Solutia, its chief executive officer, and its chief financial officer.
The complaints allege that from December 16, 1998 to October 10, 2002,
Solutia's accounting practices regarding incorporation of Flexsys'
results into Solutia's financial reports violated federal securities
laws by misleading investors as to Solutia's actual results and causing
inflated prices to be paid by purchasers of Solutia's publicly traded
securities during the period. The plaintiffs seek damages and any
equitable relief that the court deems proper. One of the suits, Gulley
v. Solutia et al., also includes Solutia's former chief executive
officer as a defendant and states that the purported period is August 7,
1998 to October 10, 2002. These cases have been consolidated into one
action, In re Solutia Inc. Securities Litigation. The consolidated
action has been automatically stayed with respect to Solutia by virtue
of Section 362(a) of the Bankruptcy Code. It has not been stayed with
respect to the individual defendants.
Shareholder Derivative Suits. Two purported shareholder derivative
----------------------------
suits were filed in the Missouri Circuit Court for the Twenty-First
Judicial Circuit of St. Louis County against certain of Solutia's
current and past directors, chief executive officers, chief financial
officer and former vice chairman. Solutia is included as a nominal
defendant. The plaintiffs seek damages on behalf of Solutia for the
individual defendants' alleged breaches of fiduciary duty, abuse of
control, gross mismanagement, waste of corporate assets and unjust
enrichment, arising out of Flexsys' alleged participation in the
price-fixing of rubber chemicals and Solutia's incorporation of Flexsys'
purportedly inflated financial results arising from the alleged
price-fixing into Solutia's financial statements. These two shareholder
derivative suits have
11
been consolidated into a single action, In re Solutia Inc. Derivative
Litigation. On December 29, 2003, the court entered an Order in the
consolidated action staying the litigation with respect to all
defendants, including Solutia.
For information about certain environmental proceedings involving
Solutia, see "Environmental Matters" on page 26.
RISK MANAGEMENT
Solutia has evaluated risk retention and insurance levels for
product liability, property damage and other potential areas of risk.
Solutia will continue to devote significant effort to maintaining and
improving safety and internal control programs, which reduce its
exposure to certain risks. Solutia actively participates in the safety
and health Voluntary Protection Program (VPP) administered by the
Occupational Safety and Health Administration (OSHA) for most sites in
the United States, and implemented by Solutia for sites outside the
United States. Currently, nine of Solutia's U.S. sites hold the OSHA VPP
"Star" designation, a rating signifying full compliance. Two other sites
in the United States located where the OSHA Star program was unavailable
have received either their state equivalent to the OSHA designation or
the Solutia Star, an internal equivalent to the OSHA designation. Three
of Solutia's ex-U.S. sites, two in Europe and one in Canada, have also
achieved the Solutia "Star" designation.
Solutia's management determines the amount of insurance coverage to
buy from unaffiliated companies and the appropriate amount of risk to
retain and/or co-insure based on the cost and availability of insurance
and the likelihood of a loss. Management believes that the levels of
risk that Solutia has retained are consistent with those of other
companies in the chemical industry. Solutia shares certain of these
policies with Pharmacia. There can be no assurance that Solutia will not
incur losses beyond the limits, or outside the coverage, of its
insurance. For additional information, see "Self-Insurance" on page 26.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Solutia did not submit any matters to its security holders during
the fourth quarter of 2003.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
On December 17, 2003, following Solutia's Chapter 11 filing, the
New York Stock Exchange (NYSE) halted trading in Solutia's common stock
and announced that it would apply to the U.S. Securities and Exchange
Commission (SEC) to remove the common stock from listing on the
Exchange. The SEC granted the application, and Solutia's common stock
was delisted, on February 27, 2004. Solutia's common stock is currently
being quoted under the ticker symbol SOLUQ on the Pink Sheets Electronic
Quotation Service maintained by The Pink Sheets LLC and on the Over the
Counter Bulletin Board.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options
and warrants to purchase its common stock, and that it is unlikely that
holders of Solutia's common stock, including options and warrants to
purchase Solutia's common stock, will receive any consideration for that
stock or those options and warrants in such a plan of reorganization.
Solutia is unable to estimate what recovery such a plan of
reorganization will provide to holders of Solutia's outstanding debt
securities.
The following table shows the high and low sales prices for Solutia's
common stock for each quarter during 2003 and 2002 as reported on the
NYSE or the Pink Sheets Quotation Service, as applicable. On December 17,
2003, the NYSE halted trading in Solutia's common stock, and the stock
commenced trading on the Pink Sheets Quotation Service. Solutia's common
stock did not commence trading on the Over the Counter Bulletin Board
until February 2004.
2003 High Low
- --------------------------------- ------ -----
First Quarter.................... $ 4.73 $1.61
Second Quarter................... 2.80 1.20
Third Quarter.................... 4.89 .91
Fourth Quarter................... 4.43 .23
2002 High Low
- --------------------------------- ------ -----
First Quarter.................... $13.20 $6.12
Second Quarter................... 8.92 7.10
Third Quarter.................... 7.10 4.51
Fourth Quarter................... 5.95 2.81
On February 27, 2004, Solutia had 30,858 registered shareholders.
The declaration and payment of dividends is made at the discretion
of Solutia's Board of Directors. There was no annual dividend paid in
2003 whereas a $0.04 per share annual dividend was paid in 2002. The
Company is currently prohibited by both the Bankruptcy Code and the DIP
financing facility from paying dividends to shareholders.
13
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL SUMMARY
(Dollars and shares in millions, except per share amounts)
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
OPERATING RESULTS FROM CONTINUING OPERATIONS:
NET SALES................................................ $ 2,430 $ 2,299 $ 2,322 $ 2,676 $ 2,776
GROSS PROFIT............................................. 60 363 310 348 620
As percent of net sales.............................. 2% 16% 13% 13% 22%
MARKETING, ADMINISTRATIVE, AND TECHNOLOGICAL EXPENSES.... 351 322 334 352 328
As percent of net sales.............................. 14% 14% 14% 13% 12%
OPERATING INCOME (LOSS)(1)............................... (372) 38 (36) (15) 289
As percent of net sales.............................. (15)% 2% (2)% (1)% 10%
INCOME (LOSS) BEFORE TAXES(2)............................ (565) (19) (124) 30 298
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE(2),(3)......................... (980) (8) (81) 36 203
As percent of net sales.............................. (40)% -- (3)% 1% 7%
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE...... (5) (167) -- -- --
SHARE DATA FROM CONTINUING OPERATIONS:
BASIC EARNINGS (LOSS) PER SHARE FROM CONTINUING
OPERATIONS(3).......................................... $ (9.37) $ (0.08) $ (0.78) $ 0.34 $ 1.83
DILUTED EARNINGS (LOSS) PER SHARE FROM CONTINUING
OPERATIONS............................................. (9.37) (0.08) (0.78) 0.34 1.77
DIVIDENDS PER SHARE...................................... 0.00 0.04 0.04 0.04 0.04
TOTAL ASSETS--CONTINUING OPERATIONS...................... 2,446 2,706 2,667 2,755 2,902
LONG-TERM DEBT(4)........................................ 919 839 626 783 801
COMMON STOCK PRICE:
HIGH................................................. 4.89 13.20 15.07 17.19 26.31
LOW.................................................. 0.23 2.81 11.25 10.38 13.50
CLOSE................................................ 0.37 3.63 14.02 12.00 15.44
PRICE/EARNINGS RATIO ON YEAR-END STOCK PRICE............. -- (45) (18) 35 9
NUMBER OF REGISTERED SHAREHOLDERS........................ 31,183 32,878 34,668 36,703 39,171
YEAR-END SHARES OUTSTANDING.............................. 104.6 104.7 104.5 102.9 109.5
SHARES REPURCHASED....................................... .2 -- -- 7.7 3.8
AVERAGE DAILY TRADING VOLUME (IN THOUSANDS).............. 1,456 649 358 518 458
OTHER DATA FROM CONTINUING OPERATIONS:
INTEREST EXPENSE......................................... $ 120 $ 84 $ 70 $ 55 $ 39
INCOME TAX EXPENSE (BENEFIT)(5).......................... 415 (11) (43) (6) 95
DEPRECIATION AND AMORTIZATION............................ 137 134 143 152 147
CAPITAL EXPENDITURES..................................... 78 59 83 211 255
EMPLOYEES (YEAR-END)..................................... 6,300 7,300 7,100 8,100 8,500
- --------
(1) Operating income (loss) includes restructuring charges and other items of $333 million in 2003, $22 million
in 2002, $78 million in 2001, $158 million in 2000, and $61 million in 1999.
(2) Income (loss) from continuing operations includes amortization expense which, under the provisions of SFAS
No. 142, Goodwill and Other Intangible Assets, adopted on January 1, 2002, is no longer recognized of
$12 million or $0.12 per share net of tax, and $10 million or $0.09 per share net of tax, in 2001 and 2000,
respectively.
(3) Income (loss) from continuing operations before cumulative effect of change in accounting principle includes
restructuring charges and other items of $890 million, or $8.51 per share in 2003, $15 million, or $0.14 per
share in 2002, $96 million, or $0.92 per share in 2001, $81 million, or $0.75 per share in 2000, and
$38 million, or $0.33 per share in 1999.
(4) Long-term debt as of December 31, 2003 includes $625 million of debt classified as subject to compromise in
accordance with SOP 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, as a
result of the Company's Chapter 11 bankruptcy filing in 2003.
(5) Income tax expense (benefit) includes an increase in valuation allowances of $547 million in 2003,
$11 million in 2001 and $7 million in 2000.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Financial Condition and Liquidity under Item 7
for more information.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and accompanying notes
thereto included in Item 8 of this Form 10-K.
OVERVIEW
Solutia's reportable segments and their major products and services
are as follows:
PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON
- ------------------------------------------------------------ ------------------------------------------------------------
SAFLEX(R) plastic interlayer Nylon intermediate "building block" chemicals
Polyvinyl butyral for KEEPSAFE(R) and KEEPSAFE MAXIMUM(R) Merchant polymer and nylon extrusion polymers, including
laminated window glass VYDYNE(R) and ASCEND(R)
LLUMAR(R), VISTA(R) and GILA(R) professional and retail Carpet fibers, including the WEAR-DATED(R) and ULTRON(R)
window films brands
VANCEVA(TM) plastic interlayer and films Industrial nylon fibers
Conductive and anti-reflective coated films and deep-dyed ACRILAN(R) acrylic fibers for apparel, upholstery fabrics,
films craft yarns and other applications
Industrial products, including THERMINOL(R) heat transfer
fluids, DEQUEST(R) water treatment chemicals, SKYDROL(R)
aviation hydraulic fluids, and chlorobenzenes
Services for process research and development, scale-up
manufacturing and small volume licensed production for the
pharmaceutical industry
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 income and expense items that can be directly
attributable to the segment. Certain expenses and other items that are
managed outside of the segments are excluded. These unallocated items
consist primarily of corporate expenses, certain equity earnings from
affiliates, interest expense, other income and expense items,
reorganization items, gains and losses from asset dispositions and
restructuring charges that are not directly attributable to the
operating segment. See Note 23 to the consolidated financial statements
for further information.
Summary Results of Operations
The discussions below and accompanying consolidated financial
statements have been prepared in accordance with Statement of Position
90-7 (SOP 90-7), Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code, and on a going concern basis, which assumes the
continuity of operations and reflects the realization of assets and
satisfaction of liabilities in the ordinary course of business. However,
as a result of the Chapter 11 proceedings, such realization of assets
and liquidation of liabilities are subject to a significant number of
uncertainties.
Net sales and operating income (loss) of the Company are as follows
for the years ended December 31:
2003 2002 2001
(dollars in millions) ------ ------ ------
Net Sales................................................... $2,430 $2,299 $2,322
====== ====== ======
Operating Income (Loss):
Performance Products and Services Segment Profit
(Loss)................................................ $ (39) $ 78 $ 77
Integrated Nylon Segment Profit (Loss).................. (59) 24 6
Less: Corporate Expenses............................ (268) (61) (121)
Less: Equity (Earnings) Loss from Affiliates and
Other (Income) Expense items included in Segment
Profit (Loss)..................................... (6) (3) 2
------ ------ ------
Operating Income (Loss)..................................... $ (372) $ 38 $ (36)
====== ====== ======
Charges included in Operating Income (Loss)................. $ (333) $ (22) $ (78)
====== ====== ======
Solutia's net sales for 2003 were $2,430 million compared with net
sales of $2,299 million in 2002. This approximate 6 percent increase in
net sales reflects higher average selling prices of approximately
3 percent and favorable currency exchange rate fluctuations of
approximately 3 percent. Sales volumes in 2003 were relatively
comparable to 2002 levels. Net sales of $2,299 million in 2002 decreased
1 percent from 2001 net sales of $2,322 million. The net sales decrease
reflected lower average selling prices of approximately 2 percent,
partially offset by favorable currency exchange rate fluctuations of
1 percent. Sales volumes were essentially flat year over year. The lower
average selling prices in 2002 were driven by unfavorable global
economic conditions experienced during 2002.
15
Operating loss was $372 million in 2003, compared to operating
income of $38 million in 2002. As indicated in the preceding table,
operating results for each year were affected by various charges, which
are described in greater detail in the Results of Operations section
below. The 2003 results were also impacted by higher raw material and
energy costs, increased pension expense, higher environmental
remediation expense, higher marketing, administrative and technological
expenses and increased professional advisory fees, offset in part by
higher net sales and benefits realized from operational cost reduction
activities. The 2002 results were impacted by lower raw material and
energy costs and lower personnel costs resulting from restructuring
activities carried out during 2001, partially offset by manufacturing
outages at the Chocolate Bayou Intermediates facility.
Chapter 11 Proceedings
On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern
District of New York. The cases were consolidated for the purpose of
joint administration and were assigned case number 03-17949 (PCB).
Solutia's subsidiaries outside the United States were not included in
the Chapter 11 filing.
The filing was made to restructure the Company's balance sheet by
reducing indebtedness to appropriate levels, to streamline operations
and reduce costs to allow the Company to emerge from Chapter 11 as a
viable going concern, and to obtain relief from the negative financial
impact of legacy liabilities. These factors, combined with the weakened
state of the chemical manufacturing sector, general economic conditions
and continuing high, volatile energy and crude oil costs have been an
obstacle to Solutia's financial stability and success. While Solutia
believes it will be able to significantly reduce the legacy liabilities
through the bankruptcy process, there can be no certainty that it will
be successful in doing so.
Under Chapter 11, Solutia is operating its businesses as
debtor-in-possession (DIP) under court protection from creditors and
claimants. Since the filing, all orders sufficient to enable the Company
to conduct normal business activities, including the approval of
Solutia's DIP financing, have been entered by the bankruptcy court.
While Solutia is subject to Chapter 11, all transactions outside the
ordinary course of business will require the prior approval of the
bankruptcy court.
As a consequence of the Chapter 11 filing, pending litigation
against Solutia is generally stayed, and no party may take any action to
collect its pre-petition claims except pursuant to order of the
bankruptcy court.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options
and warrants to purchase its common stock, and that it is unlikely that
holders of Solutia's common stock, including options and warrants to
purchase Solutia's common stock, will receive any consideration for that
stock or those options and warrants in such a plan of reorganization.
Solutia is unable to estimate what recovery such a plan of
reorganization will provide to holders of Solutia's outstanding debt
securities. While Solutia filed for Chapter 11 in part to gain relief
from the legacy liabilities it was required to assume when it was spun
off from Pharmacia, the extent to which such relief will be achieved is
uncertain at this time. It is also possible that pursuant to a plan of
reorganization Solutia will agree to retain a portion of the legacy
liabilities.
Final DIP Financing
-------------------
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a final $525 million DIP credit facility.
This DIP facility consists of (i) a $50 million multiple draw term loan
component; (ii) a $300 million single draw term loan component, which was
drawn in full on the effective date of the facility; and (iii) a $175
million borrowing-based revolving credit component, which includes a $150
million letter of credit subfacility. See page 31 in the "Financial
Condition and Liquidity" section in Item 7 below for additional
information.
Euronote Modification
---------------------
Prior to Solutia's Chapter 11 filing, Solutia reached an agreement
with the requisite holders of the Euronotes, issued by SESA and
guaranteed by Solutia Inc., to restructure the Euronotes which among
other changes eliminated certain cross-default provisions. On January 30,
2004, SESA successfully completed the restructuring. The restructuring
allows SESA to continue normal operations while Solutia Inc. and its
domestic subsidiaries reorganize under Chapter 11 bankruptcy protection.
See page 32 "Financial Condition and Liquidity" section in Item 7 below
for additional information.
Going Concern
-------------
In order to exit Chapter 11 successfully, Solutia must propose and
obtain confirmation by the bankruptcy court of a plan of reorganization
that satisfies the requirements of the Bankruptcy Code. Although the
Company expects to file a plan of reorganization that provides for
Solutia's emergence from bankruptcy as a going concern, there can be no
assurance that a plan of reorganization will be confirmed by the
bankruptcy court or that any such plan will be implemented successfully.
16
Financial Information
---------------------
Summarized financial information concerning Solutia and subsidiaries
in reorganization and subsidiaries not in reorganization as of and for
the year-ended December 31, 2003 is presented as follows:
Solutia and Solutia and
Subsidiaries in Subsidiaries not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- ------------------- ------------ ------------
Net sales................................. $ 1,992 $ 769 $(331) $ 2,430
Operating loss............................ (345) (48) 21 (372)
Net loss.................................. (987) (62) 62 (987)
Total assets.............................. 2,114 782 (450) 2,446
Liabilities not subject to compromise..... 1,018 646 (314) 1,350
Liabilities subject to compromise......... 2,221 -- -- 2,221
Total shareholders' equity (deficit)...... (1,125) 136 (136) (1,125)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial
statements and related footnotes. In preparing these consolidated
financial statements, the Company has made its best estimates of certain
amounts included in these consolidated financial statements. However,
application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ materially from these estimates.
Management has discussed the development, selection and disclosure of
these critical accounting policies and estimates with the Audit and
Finance Committee of Solutia's Board of Directors.
The Company believes that the estimates, assumptions and judgments
involved in the accounting policies described below have the greatest
potential impact on the consolidated financial statements and require
assumptions that can be highly uncertain at the time the estimate is
made. The Company considers the following items to be its critical
accounting policies:
* Environmental Remediation
* Self-Insurance
* Income Taxes
* Impairment of Long-Lived Assets
* Impairment of Goodwill and Indefinite-Lived Intangible Assets
* Pension and Other Postretirement Benefits
The Company also has other significant accounting policies. The
Company believes that, compared to the critical accounting policies
listed above, the other policies either do not generally require
estimates and judgments that are as difficult or as subjective, or are
less likely to have a material impact on the reported results of
operations for a given period.
Environmental Remediation
With respect to environmental remediation obligations, the Company's
policy is to accrue costs for remediation of contaminated sites in the
accounting period in which the obligation becomes probable and the cost
is reasonably estimable. Cost estimates for remediation are developed by
assessing, among other items, (i) the extent of the Company's
contribution to the environmental matter; (ii) the number and financial
viability of other potentially responsible parties; (iii) the scope of
the anticipated remediation and monitoring plan; (iv) settlement offers
received from governmental or private parties; and (v) the Company's
past experience with similar matters. The Company's estimates of the
environmental remediation reserve requirements typically fall within a
range. If the Company believes no best estimate exists within a range of
possible outcomes, in accordance with accounting guidance, the minimum
loss is accrued. Environmental liabilities are not discounted, and they
have not been reduced for any claims for recoveries from third parties.
These estimates are critical because the Company must forecast
environmental remediation activity into the future which is highly
uncertain and requires a large degree of judgment. Therefore, the
environmental reserves may materially differ from the actual liabilities
if the Company's estimates prove to be inaccurate, which could
materially affect earnings in a given period. Uncertainties related to
recorded environmental liabilities include changing governmental policy
and regulations, judicial proceedings, the number and financial
viability of other potentially responsible parties, the method and
extent of remediation, and future changes in technology. Because of
these uncertainties, the range of possible outcomes for existing
environmental remediation reserves could exceed the amounts recorded by
17
approximately $30 million and could be below the amounts recorded by
approximately $10 million. These valuations of future environmental
costs do not contemplate the uncertainties inherent in the Company's
bankruptcy proceedings, as the potential impact of the Chapter 11
proceedings upon future environmental costs cannot be reasonably
determined at this time. Due to these uncertainties, certain of the
environmental liabilities have been classified as subject to compromise
in the Statement of Consolidated Financial Position as of December 31,
2003. The estimate for environmental liabilities is a critical
accounting estimate for both reportable segments.
Self-Insurance
Solutia maintains self-insurance reserves to cover its estimated
future legal costs, settlements and judgments related to workers'
compensation, product, general, automobile and operations liability
claims that are less than policy deductible amounts or not covered by
insurance. Self-insured losses are accrued based upon estimates of the
aggregate liability for claims incurred using certain actuarial
assumptions followed in the insurance industry, the Company's historical
experience and certain case-specific reserves as required, including
estimated legal costs. The maximum extent of the self-insurance provided
by the Company and related insurance recoveries are dependent upon a
number of factors including the facts and circumstances of individual
cases and the terms and conditions of the commercial policies. Solutia
has purchased commercial insurance in order to reduce its exposure to
workers' compensation, product, general, automobile and property
liability claims. Policies for periods prior to the spin-off are shared
with Pharmacia. This insurance has varying policy limits and
deductibles. When recovery from an insurance policy is considered
probable, a receivable is recorded. Self insurance reserve estimates are
critical because changes to the actuarial assumptions used in the
development of these reserves can materially affect earnings in a given
period and the Company must forecast loss activity into the distant
future which is highly uncertain and requires a large degree of
judgment.
Actuarial reserve indications are projections of the remaining
future payments for workers' compensation, product, general, automobile
and operations liability claims for which Solutia is legally
responsible. These projections are made in the context of an uncertain
future where variations between estimated and actual amounts are
attributable to many factors, including changes in operations, changes
in judicial environments, shifts in the types or timing of the reporting
of claims, changes in the frequency or severity of losses and random
chance. The actuarial estimates of the reserve requirements fall within
a range. The actuary's best estimate of the liability is near the middle
of the actuary's range; accordingly, the Company has recorded the
liability at this level. Solutia estimates that the high end of the
range of possible outcomes exceeds the amounts recorded by approximately
$15 million and the low end of the range of possible outcomes is
approximately $15 million below the recorded amount. These valuations of
future self-insurance costs do not contemplate the uncertainties
inherent in the Company's bankruptcy proceedings, as the potential
impact of the Chapter 11 proceedings upon future self-insurance costs
cannot be reasonably determined at this time. Due to these
uncertainties, all of the self insurance liabilities have been
classified as subject to compromise in the Statement of Consolidated
Financial Position as of December 31, 2003. The estimate for
self-insurance reserves is a critical accounting estimate for both
reportable segments.
Income Taxes
Solutia accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities at
enacted rates. The Company bases its estimate of deferred tax assets and
liabilities on current tax laws and rates and, in certain cases,
business plans and other expectations about future outcomes. Solutia
records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While Solutia has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance,
in the event Solutia were to determine that it would be able to realize
its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in
the period such determination was made. Likewise, should Solutia
determine that it would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was
made. The consolidated financial statements include increases in
valuation allowances as a result of uncertainty created by the Company's
Chapter 11 process.
The Company's accounting for deferred tax consequences represents
management's best estimate of future events that can be appropriately
reflected in the accounting estimates. Changes in existing regulatory
tax laws, rates and future business results may affect the amount of
deferred tax liabilities or the valuation of deferred tax assets over
time.
Impairment of Long-Lived Assets
Impairment tests of long-lived assets, including finite-lived
intangible assets, are made when conditions indicate the carrying value
may not be recoverable. The carrying value of a long-lived asset is
considered impaired when the total projected undiscounted cash flows
from such asset are separately identifiable and are less than its
carrying value. The Company's estimate of the cash flows is based on
information available at that time including these and other factors:
sales forecasts, customer trends, operating rates, raw material and
energy prices and other global economic indicators and factors. If an
impairment is indicated, the asset value is written down to its fair
value based upon
18
market prices or, if not available, upon discounted cash value, at an
appropriate discount rate determined by the Company to be commensurate
with the risk inherent in the business model. These estimates are
critical because changes to the Company's assumptions used in the
development of the impairment analyses can materially affect earnings in
a given period and the Company must forecast cash flows into the future
which is highly uncertain and requires a significant degree of judgment.
The consolidated financial statements do not reflect any adjustments for
the impairment of long-lived assets that may result as part of the
approval and implementation of a plan of reorganization to be submitted
as part of the Chapter 11 process. The estimate for impairment of
long-lived assets is a critical accounting estimate for both reportable
segments.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are reviewed for
impairment annually under the provisions of Statement of Financial
Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets.
Although as required by SFAS No. 142, impairment analyses are performed
more frequently, if changes in circumstances indicate the carrying value
may not be recoverable during the intervening period between annual
impairment tests. The Company performs the review for impairment at the
reporting unit level. The impairment assessment is completed by
determining the fair values of the reporting units using income and
market multiple approaches and comparing those fair values to the
carrying values of the reporting units. If the fair value of a reporting
unit is less than its carrying value, the Company then allocates the fair
value of the reporting unit to all the assets and liabilities of that
reporting unit. The excess of the fair value of the reporting unit over
the amounts assigned to its assets and liabilities is the implied fair
value of the goodwill. If the carrying value of the reporting unit's
goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized for this differential. This valuation process involves
assumptions based upon management's best estimates and judgments that
approximate the market conditions experienced at the time the impairment
assessment is made. These assumptions include but are not limited to
earnings and cash flow projections, discount rate and peer company
comparability. Actual results may differ from these estimates due to the
inherent uncertainty involved in such estimates. The consolidated
financial statements do not reflect any adjustments for the impairment of
goodwill and indefinite-lived intangible assets that may result as part
of the approval and implementation of a plan of reorganization to be
submitted as part of the Chapter 11 process. The estimate for impairment
of goodwill and indefinite-lived intangible assets is a critical
accounting estimate for the Performance Products and Services reportable
segment. The Integrated Nylon reportable segment does not have goodwill
or indefinite-lived intangible assets.
Pension and Other Postretirement Benefits
Under the provisions of SFAS No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pension, measurement of the obligations under the
defined benefit pension plans and the other postemployement benefit
(OPEB) plans are subject to several significant estimates. These
estimates include the rate of return on plan assets, the rate at which
the future obligations are discounted to value the liability, rate of
compensation increase for employees and health care cost trend rates.
Additionally, the cost of providing benefits depends on demographic
assumptions including retirements, mortality, turnover and plan
participation. Solutia typically uses actuaries to assist it in
preparing these calculations and determining these assumptions. The
Company's annual measurement date is December 31 for both the pension
and OPEB plans.
Historically, the Company has based its discount rate on a review of
long-term bonds that receive one of the two highest ratings given by a
recognized rating agency. The Company estimates its assumed long-term
rate of return on assets based on its historical rate of return
experienced by the plan assets, adjusted for assumed asset allocation
and forecasted capital market returns. The Company estimates the assumed
trend rate for healthcare costs and the ultimate trend rate for
healthcare costs based on projected increases in medical costs.
If actual results differ from these assumptions, the cost of
providing these benefits could materially increase or decrease. Refer to
the "Employee Benefits" discussion on page 27 within Management's
Discussion and Analysis below for the quantification of the sensitivity
of hypothetical changes to these aforementioned critical assumptions
underlying the valuation of pension and other postretirement benefits.
In addition, these valuations of future pension and other postretirement
costs do not contemplate the uncertainties inherent in the Company's
bankruptcy proceedings, as the potential impact of the Chapter 11
proceedings upon future spending for these items cannot be reasonably
determined at this time. Due to these uncertainties, all postretirement
liabilities related to Solutia entities filing for Chapter 11 have been
classified as subject to compromise in the Statement of Consolidated
Financial Position as of December 31, 2003.
RESULTS OF OPERATIONS
PERFORMANCE PRODUCTS AND SERVICES
2003 2002 2001
(dollars in millions) ------ ---- ----
Net Sales................................................... $1,038 $974 $990
====== ==== ====
Segment Profit (Loss)....................................... $ (39) $ 78 $ 77
====== ==== ====
Charges included in Segment Profit (Loss)............... $ (143) $ -- $ (3)
====== ==== ====
19
Net sales for Performance Products and Services were $1,038 million
in 2003 compared with $974 million in 2002. This approximate 6 percent
increase in 2003 net sales compared to 2002 resulted from higher sales
volumes of approximately 2 percent and favorable currency exchange rate
fluctuations of approximately 6 percent partially offset by lower
average selling prices of approximately 2 percent. Sales volumes
benefited from increases in SAFLEX(R) plastic interlayer products sales
in the Asia Pacific and European markets, more than offsetting the
significantly lower sales to a large SAFLEX(R) customer in the prior
year. Net sales were positively affected by the strengthening euro and
Australian dollar in relation to the U.S. dollar. Lower average selling
prices in 2003 in comparison to 2002 reflected competitive pricing
pressures in SAFLEX(R) plastic interlayer products offset in part by
improved selling prices in chlorobenzenes.
Net sales for Performance Products and Services were $974 million in
2002 compared with $990 million in 2001. The decrease in 2002 net sales
relative to 2001 resulted from lower average selling prices of
approximately 3 percent partially offset by favorable currency exchange
rate fluctuations of approximately 2 percent. Lower average selling
prices in 2002 versus 2001 reflected competitive pricing pressures in
SAFLEX(R) plastic interlayer products and chlorobenzenes. Net sales were
positively affected by the strengthening euro and Australian dollar in
relation to the U.S. dollar. Sales volumes were essentially flat year
over year as increased SAFLEX(R) plastic interlayer products sales
volumes in the Asia Pacific markets were offset by significantly lower
sales to a large Saflex customer during 2002. Additionally, higher sales
volumes of CPFilms window film and precision coated products and
DEQUEST(R) water treatment chemicals were offset by lower sales volumes
of chlorobenzenes.
The Performance Products and Services segment experienced a loss of
$39 million in 2003 compared with a profit of $78 million in 2002. The
segment loss for 2003 included $47 million of restructuring charges for
workforce reductions, write-down of assets, and contract termination
costs. Also included in the 2003 segment results is an asset impairment
charge within the Pharmaceutical Services business line related to fixed
assets of approximately $18 million. In addition, a charge of
$78 million is included to write down goodwill and certain indefinite-lived
and finite-lived intangible assets within the Pharmaceutical Services
business line. These charges within the Pharmaceutical Services business
line were precipitated by the declining estimates of forecasted results
given current economic and market conditions within the pharmaceutical
services business environment. See Notes 7 and 8 to the accompanying
consolidated financial statements for further discussion of these
impairment charges. Also included in the 2003 results compared to 2002
were benefits realized from operational cost reduction activities,
higher net sales and lower marketing, administrative and technological
spending, partially offset by higher raw material costs.
Segment profit was $78 million in 2002 versus $77 million in 2001.
Segment profit for 2001 included a fourth quarter charge of $3 million
associated with the termination of the employment of a former owner of
Pharmaceutical Services. Also included in the 2002 results compared to
2001 were lower net sales partially offset by lower raw material costs,
lower amortization expense due to adoption of SFAS No. 142, the negative
impact of the chlorobenzenes business due to the combination of lower
sales volumes and sales prices, and lower personnel expense associated
with restructuring activities carried out during 2001. The impact of
significantly lower sales volumes to a large Saflex customer on segment
profitability in 2002 was mostly offset by higher sales of SAFLEX(R)
plastic interlayer products to other glass laminators, improved product
mix and cost reductions.
INTEGRATED NYLON
2003 2002 2001
(dollars in millions) ------ ------ ------
Net Sales................................................... $1,392 $1,325 $1,332
====== ====== ======
Segment Profit (Loss)....................................... $ (59) $ 24 $ 6
====== ====== ======
Charges included in Segment Profit (Loss)............... $ (5) $ (5) $ (12)
====== ====== ======
Solutia's Integrated Nylon segment had net sales of $1,392 million
in 2003 compared with $1,325 million in 2002. This 5 percent increase in
2003 net sales resulted primarily from higher average selling prices of
approximately 5 percent partially offset by sales volume declines of
less than 1 percent. Price increases occurred primarily in intermediate
chemicals, as it benefited from formula-based sales contracts tied to
raw material costs and higher pricing in the merchant acrylonitrile
market. In addition, price benefits were experienced to a lesser extent
in the remaining Integrated Nylon businesses. Acrylic fiber sales
volumes declined due to weak U.S. demand in the textiles segment. Carpet
fibers volumes increased, although there was an unfavorable change in
mix, as demand for lower margin commodity products increased compared to
the prior year. Nylon plastics and polymers experienced increased
volumes, benefiting from reintegrated marketing responsibilities for the
nylon molding resins business that were previously performed under a
marketing alliance with Dow Plastics, a business unit of The Dow
Chemical Company.
Solutia's Integrated Nylon segment had net sales of $1,325 million
in 2002 compared with $1,332 million in 2001. The 1 percent decrease in
2002 net sales primarily resulted from a decline in average selling
prices in almost all businesses in this segment of approximately
2 percent, partially offset by sales volume improvements of less than
1 percent. The effects of a weak U.S. economy unfavorably impacted
20
average selling prices in 2002. Increased sales volumes in nylon,
plastics and polymers and intermediate chemicals were mostly offset by
decreased volumes in nylon industrial products and carpet fiber. Sales
volumes in nylon, plastics and polymers improved following Solutia's
successful reintegration of the marketing responsibilities for the nylon
molding resins business previously performed under a marketing alliance
with Dow Plastics. In addition, the fibers businesses experienced
unfavorable product mix.
The Integrated Nylon segment experienced a loss of $59 million in
2003 compared to a profit of $24 million in 2002. The $5 million in
charges included in the 2003 segment results were due to workforce
reductions, whereas the $5 million charge included in 2002 segment
results was due to the resolution of a construction dispute with the
contractor of the Company's acrylonitrile plant in Alvin, Texas.
Overall, segment profit decreased $83 million in comparing 2003 to 2002.
This decline primarily resulted from higher raw material and energy
costs of approximately $150 million which offset the effects of higher
net sales and modestly lower manufacturing costs in the segment on a
year over year basis. Raw material and energy costs were higher due to
uncertain geopolitical factors and the declaration of force majeure for
supply of propylene, a key raw material. Manufacturing operations were
modestly favorable as a result of benefits resulting from cost
containment activities completed in 2003, partially offset by slightly
lower capacity utilization in Solutia's facilities for Intermediates and
Acrilan(R) acrylic fibers.
The Integrated Nylon segment's profit was $24 million in 2002
compared to $6 million in 2001. Included within the 2001 results were
$12 million of charges to write down certain notes and accounts
receivables primarily from insolvent textile fiber customers. Lower raw
material and energy prices offset the effects of lower net sales in the
segment on a year over year basis. In addition, lower personnel expense
associated with restructuring activities carried out during 2001
significantly contributed to the increase in segment profit, partially
offset by unscheduled outages at the Chocolate Bayou Intermediates
facility during the second and third quarters of 2002.
CORPORATE EXPENSES
2003 2002 2001
(dollars in millions) ----- ---- -----
Corporate Expenses.......................................... $ 268 $ 61 $ 121
===== ==== =====
Charges included in Corporate Expenses.................. $(185) $(17) $ (66)
===== ==== =====
Corporate expenses were $268 million in 2003 compared to $61 million
in 2002. However, as indicated in the above table, corporate expenses
for each year were affected by various charges. During 2003, Solutia
recorded a $99 million charge related to the Company's share of the
Anniston litigation settlement and to increase certain other litigation
accruals, a $35 million charge for a non-cash pension settlement loss
due to the significant amount of lump sum distributions from the pension
plan during 2003, $27 million in charges for environmental remediation
and funding of an educational trust related to the partial consent
decree in Anniston, Alabama, a $20 million charge to increase
environmental reserves related to exiting the Nitro, WV facility, and
$4 million in severance charges for workforce reductions. During 2002,
Solutia recorded a $17 million charge for a non-cash pension settlement
loss due to the significant amount of lump sum distributions from the
pension plan during 2002. Also included in the 2003 results compared to
2002 were increased pension expense in accordance with SFAS No. 87,
higher environmental remediation expense, and increased professional
advisory fees.
Corporate expenses were $61 million in 2002 compared to $121 million
in 2001. However, as indicated in the above table, corporate expenses
for each year were affected by various charges. During the fourth
quarter 2001, Solutia reached agreements with various state and federal
agencies having enforcement authority on the nature, timing and extent
of certain environmental remediation obligations. As a result, the 2001
corporate expenses included a charge of $34 million to increase
environmental reserves. Actual costs to terminate certain European and
North American management employees and certain employee benefit costs
for involuntary terminations in 2001 were higher than the original
estimates. As a result, Solutia recorded an additional restructuring
charge of $9 million to cover these higher costs. In addition, Solutia
modified its estimates of the aggregate liability for uninsured product
liability claims based upon certain actuarial assumptions and historical
experience. As a result, the Company recorded a charge of $20 million to
increase self-insurance reserves in 2001. Solutia also recorded a loss
contingency during 2001 of $3 million in corporate expenses due to
certain unoccupied leased office space. Also included in the 2002
results compared to 2001 were lower personnel expense associated with
restructuring activities carried out during 2001, partially offset by
higher litigation expenses primarily due to the litigation in Anniston,
Alabama.
IMPAIRMENT OF INTANGIBLE ASSETS
During the fourth quarter 2003, the Company recorded an impairment
charge of $78 million within the Pharmaceutical Services reporting unit
for the write down of goodwill, certain indefinite-lived intangible
assets and certain finite-lived intangible assets. In accordance with
SFAS No. 142, the impairment charge for goodwill and indefinite-lived
intangible assets of $64 million was based upon fair value estimates of
the reporting unit by third party specialists using income and market
approaches. The $14 million impairment charge for certain finite-lived
intangible assets was determined through the impairment test performed
in accordance with SFAS No. 144, as more fully described in Note 7 to
the accompanying consolidated financial statements. These impairment
charges are both recorded in the Impairment
21
of Intangible Assets line within the Statement of Consolidated
Operations and are included within the results of operations of the
Performance Products and Services operating segment.
EQUITY EARNINGS (LOSS) FROM AFFILIATES
2003 2002 2001
(dollars in millions and net of tax) ---- ---- ----
Flexsys L.P. Equity Earnings (Loss)......................... $(12) $11 $ 12
Astaris LLC Equity Earnings (Loss).......................... (72) 1 (36)
Advanced Elastomer Systems L.P. Equity Earnings............. -- 2 11
Other Equity Earnings (Loss) from Affiliates included in
Reportable Segment Profit (Loss).......................... 1 (1) --
---- --- ----
Equity Earnings (Loss) from Affiliates...................... $(83) $13 $(13)
==== === ====
Charges included in Equity Earnings (Loss) from
Affiliates............................................ $(89) $(4) $(41)
==== === ====
Solutia records the equity earnings (loss) from affiliates net of
income taxes. Equity losses from affiliates were $83 million in 2003
compared with equity earnings of $13 million in 2002. Equity earnings
(loss) from affiliates were affected by various items in each year.
During 2003, equity loss from affiliates was negatively affected by
$89 million in charges resulting from (i) the Astaris joint venture for
selective production asset and product rationalizations, including the
Conda, Idaho, purified phosphoric acid facility, which performed
significantly below expectations since its start-up in 2001;
(ii) restructuring charges related to production asset rationalization and
certain plant closures at the Flexsys joint venture; (iii) severance
charges at both the Flexsys and Astaris joint ventures; and (iv) in the
fourth quarter 2003, the Flexsys joint venture recorded a charge related
to litigation expenses. During 2002, the Flexsys joint venture recorded
charges to write-down certain production assets to fair market value.
Solutia's share of these charges was $4 million. Also included in the
2003 results compared to 2002 were lower earnings from Astaris and
Flexsys. Astaris' earnings decreased as a result of lower volumes, lower
selling prices and absence of revenue from electricity sales in 2003.
Flexsys' earnings were negatively impacted by lower average selling
prices, higher raw material costs and unfavorable currency exchange
rates. In addition, equity earnings from affiliates in 2002 included
$2 million of earnings from Solutia's 50 percent share of the Advanced
Elastomer Systems (AES) joint venture, which was sold to ExxonMobil
Chemical Company, a division of ExxonMobil Corporation and Exxon
Chemical Asset Management Partnership, a subsidiary of ExxonMobil
Corporation, during the first quarter of 2002.
Equity earnings from affiliates were $13 million for 2002 compared
to an equity loss from affiliates of $13 million in 2001. Equity
earnings (loss) from affiliates were affected by various items in each
year. In addition to the previously discussed 2002 charges, during 2001,
the Astaris joint venture recorded charges associated with the closure
of its elemental phosphorus production facility in Pocatello, Idaho.
Solutia's share of these charges was approximately $37 million. Also in
2001, Flexsys recorded charges associated with the closure of its 4NDPA
facility in Newport, Wales (U.K.). Solutia's share of these charges was
approximately $4 million. Also included in the 2002 results compared to
2001 was the loss of income from the sale of Solutia's 50 percent
interest in the AES joint venture and lower earnings from Flexsys. Lower
earnings from Flexsys in 2002 resulted from restructuring activities,
lower sales volumes and lower average selling prices. Astaris' 2002
earnings, while essentially flat with 2001, benefited from the sale of
electricity under a multi-year electricity sales contract, offset by
lower sales volumes, lower average selling prices and higher
manufacturing cost variances.
INTEREST EXPENSE
2003 2002 2001
(dollars in millions) ---- ---- ----
Interest Expense............................................ $120 $84 $70
==== === ===
Charges included in Interest Expense........................ $(14) $-- $--
==== === ===
The $36 million increase in interest expense in 2003 from 2002
resulted principally from the write-off of unamortized debt issuance
costs of $14 million related to the credit facility retired in 2003, the
full year effect of amortization of deferred debt issuance costs
incurred during the second half of 2002 and higher interest rates
associated with the credit facility and the senior secured notes
compared to 2002. The $14 million increase from 2001 to 2002 primarily
resulted from the amortization of deferred debt issuance costs incurred
during the second half of 2002 and higher interest rates associated with
the credit facility and the senior secured notes compared to 2001.
22
OTHER INCOME (EXPENSE), NET
2003 2002 2001
(dollars in millions) ---- ---- ----
Other Income (Expense), net................................. $11 $14 $(5)
=== === ===
Other Income (Expense), net included in Reportable
Segment Profit (Loss).................................. $ 5 $ 4 $(2)
=== === ===
Net Gains (Charges) included in Other Income (Expense),
net.................................................... $ 4 $ 5 $(8)
=== === ===
Other income, net in 2003 was $11 million compared to other income,
net in 2002 of $14 million. However, each year was affected by various
gains. During 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 2002, Solutia sold its
50 percent interest in the AES joint venture resulting in a gain of
$5 million. Also impacting the 2003 results compared to 2002 was reduced
royalty income in 2003.
Other income, net in 2002 was $14 million compared to other expense,
net in 2001 of $5 million. However, each year was affected by various
gains and charges. During 2002, Solutia sold its 50 percent interest in
the AES joint venture resulting in a gain of $5 million. During 2001,
Solutia recorded charges of $5 million to write down an e-commerce
investment to its fair value based upon indicators that the loss in its
value was permanent and $3 million in the Integrated Nylon segment to
write off certain non-performing assets. Also impacting the 2002 results
compared to 2001 were currency gains experienced during 2002.
INCOME TAX EXPENSE (BENEFIT)
2003 2002 2001
(dollars in millions) ---- ---- ----
Income Tax Expense (Benefit)................................ $415 $(11) $(43)
==== ==== ====
Increase in Valuation Allowances included in Income Tax
Expense (Benefit)..................................... $547 $ -- $ 11
==== ==== ====
Solutia's effective income tax expense (benefit) rates were
74 percent in 2003 compared to (58) percent in 2002. However, 2003 was
affected by an increase in valuation allowances of $580 million, of
which $547 million was recorded in Income Tax Expense (Benefit) in the
Statement of Consolidated Operations and $33 million was recorded in
Other Comprehensive Loss in the Statement of Consolidated Comprehensive
Loss. The additional valuation allowances were provided principally for
the U.S. deferred tax assets as a result of the Company's Chapter 11
filing (as more fully described in Note 13 to the accompanying
consolidated financial statements).
Solutia's effective income tax benefit rates were 58 percent in 2002
compared to 35 percent in 2001. Items increasing Solutia's overall
effective tax benefit rate in 2002 compared to 2001 include a greater
percentage of after-tax equity earnings from affiliates and effective
tax planning strategies impacting pre-tax operating income.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This Interpretation
provides guidance related to identifying variable interest entities
(VIEs) and determining whether such entities should be consolidated. The
Interpretation must be applied immediately to VIEs created, or interests
in VIEs obtained, after January 31, 2003. For those VIEs created, or
interests in VIEs obtained, on or before January 31, 2003, the guidance
in the Interpretation must be applied in the first fiscal year or
interim period beginning after December 15, 2003. The Company early
adopted the provisions of the Interpretation for VIEs obtained on or
before January 31, 2003, during the third quarter 2003. There have been
no VIEs created, or interests in VIEs obtained, after January 31, 2003.
The Company has one operating lease related to its corporate
headquarters in St. Louis, Missouri, entered into in 1999, that
qualifies as a VIE under this Interpretation. Based on the current terms
of the lease agreement and the residual value guarantee the Company
provides to the lessor, the Company concluded it is the primary
beneficiary of the VIE. The residual value guarantee is $35 million as
of December 31, 2003. As a result, the Company consolidated the
property, plant and equipment of $37 million and long-term debt of
$43 million held by this VIE, and recorded minority interest of
$1 million and a resulting after-tax charge of $5 million, reported as a
cumulative effect of a change in accounting principle, net of tax.
Effective January 1, 2002, Solutia adopted SFAS No. 142, Goodwill
and Other Intangible Assets, and accordingly discontinued the
amortization of goodwill and identifiable intangible assets that have
indefinite useful lives. Fair value measurements of the reporting units
were estimated by a third-party specialist utilizing both income and
market multiple approaches. Based on this analysis, Solutia recorded an
impairment loss of $167 million during 2002 for the resins, additives
and adhesives businesses (which is presented as discontinued operations)
due to declining estimates of future results given current economic and
market conditions. The goodwill impairment charge was
23
non-deductible for tax purposes and is reflected as the cumulative
effect of change in accounting principle in the Statement of
Consolidated Operations.
SUMMARY OF EVENTS AFFECTING COMPARABILITY
Charges and gains recorded in 2003, 2002 and 2001 and other events
affecting comparability have been summarized in the tables below
(dollars in millions).
2003
---------------------------------------------------------------
Performance
Products
and Integrated Corporate/ Consoli-
Increase/(Decrease) Services Nylon Other dated
------------------- ----------- ---------- ---------- -----------
IMPACT ON:
Cost of goods sold........................................ $ 37 $ 5 $ -- $ 42 (a)
18 18 (b)
27 27 (c)
26 26 (d)
99 99 (e)
20 20 (f)
----- --- ----- -----
Total cost of goods sold.................................. 55 5 172 232
Marketing................................................. 2 2 (a)
2 2 (d)
Administrative............................................ 2 4 6 (a)
4 4 (d)
Technological............................................. 6 6 (a)
3 3 (d)
Impairment of intangible assets........................... 78 78 (g)
----- --- ----- -----
OPERATING LOSS IMPACT..................................... (143) (5) (185) (333)
Equity loss from affiliates, net of tax................... (89) (89) (h)
Interest expense.......................................... (14) (14) (i)
Other income, net......................................... 4 4 (j)
----- --- ----- -----
PRE-TAX INCOME STATEMENT IMPACT........................... $(143) $(5) $(284) (432)
===== === =====
Income tax expense........................................ 458 (k)
-----
AFTER-TAX INCOME STATEMENT IMPACT......................... $(890)
=====
- ---------
2003 CHARGES, GAINS AND OTHER EVENTS
(a) Restructuring charges for workforce reductions of approximately 530 positions across all world areas and
functions of the Company, write-down of assets, and contract termination costs ($56 million pre-tax and
after-tax--see note (k) below).
(b) Asset impairment of fixed assets in the Pharmaceutical Services business line in accordance with SFAS
No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets ($18 million pre-tax, $16 million
after-tax).
(c) Charge for environmental remediation and funding for an educational trust related to the partial consent
decree in Anniston, Alabama ($27 million pre-tax and after-tax see note (k) below).
(d) Pension settlement loss as required by SFAS No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits ($35 million pre-tax and after-tax--see note (k)
below).
(e) Charge related to the Company's share of the Anniston litigation settlement and to increase certain other
litigation accruals ($99 million pre-tax and after-tax--see note (k) below).
(f) Increase to environmental reserve related to exiting the Nitro, WV facility ($20 million pre-tax and
after-tax--see note (k) below).
(g) Writedown of non-deductible goodwill and other indefinite-lived intangible assets in accordance with SFAS No.
142 ($64 million pre-tax) and of finite-lived intangible assets in accordance with SFAS No. 144 ($14 million
pre-tax); both charges within the Pharmaceutical Services business line.
(h) Restructuring and litigation charges incurred at the Flexsys and Astaris joint ventures related to asset
impairments, severance charges, and litigation expenses ($89 million after-tax).
(i) Writeoff of unamortized debt issuance cost related to the credit facility refinanced during 2003 ($14 million
pre-tax and after-tax--see note (k) below).
(j) Recovery of certain receivables, established prior to 1997, which had previously been written off ($4 million
pre-tax and after-tax--see note (k) below).
(k) With the exception of items (b) and (g) above that relate to ex-U.S. operations, the above items are
considered to have the same pre-tax and after-tax impact as the tax benefit or expense realized from the
losses or gains, respectively, are offset by the increase in valuation allowance for U.S. deferred tax assets
resulting from uncertainty as to their recovery as a result of the Chapter 11 filing.
24
2002
---------------------------------------------------------------
Performance
Products Integrated Corporate/ Consoli-
Increase/(Decrease) and Services Nylon Other dated
------------------- ------------ ---------- ---------- ----------
IMPACT ON:
Cost of goods sold........................................ $ $ 5 $ $ 5 (l)
12 12 (m)
---- --- ----- ----
Total cost of goods sold.................................. -- 5 12 17
Marketing, administrative, technological and amortization
expenses................................................ 5 5 (m)
---- --- ----- ----
OPERATING INCOME IMPACT................................... -- (5) (17) (22)
Equity earnings from affiliates, net of tax............... (4) (4) (n)
Other income, net......................................... 5 5 (o)
---- --- ----- ----
PRE-TAX INCOME STATEMENT IMPACT........................... $ -- $(5) $ (16) (21)
==== === =====
Income tax benefit........................................ (6)
----
AFTER-TAX INCOME STATEMENT IMPACT......................... $(15)
====
- ---------
2002 CHARGES, GAINS AND OTHER EVENTS
(l) Charges related to the resolution of a construction dispute with the contractor of the acrylonitrile plant in
Alvin (Chocolate Bayou), Texas ($5 million pre-tax, $3 million after-tax, or $0.03 per share).
(m) As required by SFAS No. 88, the Company recorded a non-cash pension settlement loss because of the
significant amount of lump sum distributions from the pension plan during 2002 ($17 million pre-tax,
$11 million after-tax, or $0.11 per share).
(n) Charges for the Flexsys joint venture related to the write-down of production assets to fair market
($4 million after-tax, or $0.04 per share).
(o) Gain resulting from the sale of the Company's 50 percent interest in the AES joint venture ($5 million,
$3 million after-tax, or $0.03 per share).
2001
---------------------------------------------------------------
Performance
Products
and Integrated Corporate/ Consoli-
Increase/(Decrease) Services Nylon Other dated
------------------- ----------- ---------- ---------- -----------
IMPACT ON:
Cost of goods sold........................................ $ 2 $ $ $ 2 (p)
54 54 (r)
9 9 (s)
--- ---- ----- -----
Total cost of goods sold.................................. 2 -- 63 65
Marketing, administrative, technological and amortization
expenses................................................ 1 1 (p)
9 9 (q)
3 3 (t)
--- ---- ----- -----
OPERATING LOSS IMPACT..................................... (3) (9) (66) (78)
Equity loss from affiliates, net of tax................... (37) (37) (u)
(4) (4) (v)
Other income, net......................................... (3) (3) (q)
(5) (5) (w)
--- ---- ----- -----
PRE-TAX INCOME STATEMENT IMPACT........................... $(3) $(12) $(112) (127)
=== ==== =====
Income tax benefit........................................ (31)
-----
AFTER-TAX INCOME STATEMENT IMPACT......................... $ (96)
=====
- ---------
2001 CHARGES AND OTHER EVENTS
(p) Charges related to the termination of a former Carbogen owner ($3 million pre-tax, $2 million after-tax, or
$0.02 per share).
(q) Charges to write down certain notes, primarily from textile fiber customers, and to write down certain
non-performing assets ($12 million pre-tax, $8 million after-tax, or $0.07 per share).
(r) Charges to increase environmental and self-insurance reserves ($54 million pre-tax, $34 million after-tax, or
$0.33 per share).
(s) Additional severance charges recorded to cover cost overruns associated with the 2001 restructuring program
($9 million pre-tax, $6 million after-tax, or $0.06 per share).
(t) A loss contingency due to certain unoccupied leased office space ($3 million pre-tax, $2 million after-tax,
or $0.02 per share).
(u) Charges for the closure of Astaris' elemental phosphorus production facility in Pocatello, Idaho ($37 million
after-tax, or $0.35 per share).
(v) Charges for the closure of Flexsys' 4NDPA manufacturing facility in the Newport, Wales (U.K.) ($4 million
after-tax, or $0.04 per share).
(w) A charge to write down the value of an e-commerce investment based upon indicators that the loss in its value
was permanent ($5 million pre-tax, $3 million after-tax, or $0.03 per share).
25
ENVIRONMENTAL MATTERS
Solutia continues its strong commitment to comply with laws and
government regulations concerning environmental, safety and health
matters in the United States and other countries. U.S. environmental
legislation that has a particular impact on the Company includes the
Toxic Substances Control Act; the Resource Conservation and Recovery
Act; the Clean Air Act; the Clean Water Act; the Safe Drinking Water
Act; and the Comprehensive Environmental Response, Compensation and
Liability Act (commonly known as Superfund). The Company is also subject
to the Occupational Safety and Health Act and regulations of the
Occupational Safety and Health Administration ("OSHA") concerning
employee safety and health matters. The EPA, OSHA and other federal
agencies have the authority to promulgate regulations that have an
impact on the Company's operations. In addition to these federal
activities, various states have been delegated certain authority under
several of these federal statutes and have adopted environmental, safety
and health laws and regulations. State or federal agencies having lead
enforcement authority may seek fines and penalties for violation of
these laws and regulations.
Solutia is dedicated to long-term environmental protection and
compliance programs that reduce and monitor emissions of hazardous
materials into the environment as well as to the remediation of
identified existing environmental concerns. Solutia is among the leaders
in Responsible Care, the chemical industry's performance-enhancement
program.
Expenditures in 2003 were approximately $7 million for environmental
capital projects and approximately $96 million for the management of
environmental programs. Included in environmental program management is
the operation and maintenance of current operating facilities for
environmental control, which is expensed in the period incurred, and
$33 million for remediation activity, which was charged against recorded
environmental liabilities. Recoveries from third parties were $4 million
in 2003 and $5 million in 2002, with no recoveries in 2001.
Environmental compliance and remediation costs incurred by the
Company fall into two broad categories: (a) obligations related to
properties currently owned or operated by Solutia and (b) obligations
related to properties that are not owned by Solutia, including non-
owned properties adjacent to current operating sites. For the owned and
operated sites, Solutia had an accrued liability of $81 million as of
December 31, 2003 for solid and hazardous waste remediation, which
represents the Company's best estimate of the underlying obligation. In
addition, this balance also includes post-closure costs at certain of
Solutia's operating locations. This liability is not classified as
subject to compromise in the Statement of Financial Position because,
irrespective of the bankruptcy proceedings, the Company will be required
to comply with environmental requirements in the conduct of its
business, regardless of when the underlying environmental contamination
occurred. However, the Company ultimately expects to seek recovery
against other potentially responsible parties at certain of these
locations. Solutia spent $19 million in 2003 for remediation of these
properties. In 2004, the Company anticipates spending approximately
$17 million related to these properties currently owned or operated by
Solutia.
The Company had an accrued liability of $85 million as of
December 31, 2003 for properties not owned or operated by Solutia. Included
within this liability classification is the $24 million charge taken in
the second quarter related to the partial consent decree approved by the
U.S. District Court for the Northern District of Alabama with respect to
properties adjacent to the Anniston, Alabama operating site. This decree
requires an expedited residential cleanup of identified properties to
achieve the EPA's cleanup standard, and performance of a Remedial
Investigation and Feasibility Study (RI/FS). The RI/FS to be performed
under the partial consent decree will outline the work that will lead to
a comprehensive approach to the cleanup of polychlorinated biphenyls
(PCBs) in waterways and commercial properties in the Anniston area. This
liability is classified as subject to compromise in the Statement of
Financial Position as the Company currently believes it constitutes a
pre-petition claim that will be discharged in the bankruptcy process.
The EPA is currently contesting this view. During 2003, $14 million was
expended for remediation of properties not owned by the Company.
Given the inherent uncertainties associated with the bankruptcy
process, and the prominence which these liabilities have in the legal
proceedings, the Company cannot forecast its level of spending or
expense in 2004, or any anticipated recoveries in 2004 as it relates to
past or current remediation activities for obligations related to
properties that are not owned by Solutia, including non-owned properties
adjacent to current operating sites. However, the Company can predict
future spending and expense for obligations related to properties
currently owned or operated by Solutia and accordingly, these spending
amounts are included in the contractual obligations table in the
Commitments section of Management's Discussion and Analysis below.
Furthermore, in addition to the bankruptcy court proceedings, the
Company's environmental liabilities are also subject to changing
governmental policy and regulations, discovery of unknown conditions,
judicial proceedings, method and extent of remediation, existence of
other potentially responsible parties and future changes in technology.
The Company believes that known and unknown environmental matters, when
ultimately resolved, which may be over an extended period of time, could
have a material effect on the consolidated financial position, liquidity
and results of operations of the Company.
SELF-INSURANCE
As discussed in Item 3 to this report, 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 Solutia's spin-off from Pharmacia, Solutia assumed the
defense of specified legal proceedings and agreed to indemnify Pharmacia in
26
connection with those proceedings. Solutia has determined that these
defense and indemnification obligations to Pharmacia are pre-petition
obligations under the U.S. Bankruptcy Code that Solutia is prohibited
from performing, except pursuant to a confirmed plan of reorganization.
As a result, Solutia has ceased performance of these obligations.
Solutia's cessation of performance may give rise to a pre-petition
unsecured claim against Solutia which Pharmacia may assert in Solutia's
Chapter 11 case.
Since the spin-off, Solutia has been responsible for bearing the
costs associated with various toxic tort lawsuits related to PCBs,
premises-based asbestos and other chemical exposures from the conduct of
the historic chemical business of Pharmacia. At the time of the
Chapter 11 filing, Solutia was defending approximately 520 asbestos actions
(involving an estimated 3,500 to 4,500 plaintiffs) brought against
Pharmacia. In addition, notwithstanding the recent settlement of cases
relating to the Anniston plant site, Solutia was defending approximately
30 cases involving alleged exposure from PCB's manufactured by Pharmacia
prior to the spin-off. Solutia was also defending approximately
100 general and product liability claims brought against Pharmacia.
Solutia had an accrued liability of $156 million as of December 31,
2003 and $102 million as of December 31, 2002 for self-insurance
liabilities. Self-insurance expense was $82 million in 2003, $25 million
in 2002, and $40 million in 2001. The increase in self-insurance expense
in 2003 compared with 2002 was principally a result of an increase in
the existing reserve levels up to the discounted settlement amount in
the Anniston PCB litigation settlement, additional legal expenses and an
increase to account for the change in insurance recovery assumptions
resulting from the exhaustion of certain insurance policies. Cash
payments for these matters were $50 million in 2003, $47 million in
2002, and $34 million in 2001, whereas recoveries from insurance
carriers were $8 million in 2003, $16 million in 2002, and $10 million
in 2001.
Claims for legal matters arising prior to the Company's Chapter 11
filing will be addressed in the bankruptcy proceedings. As a result of
the Chapter 11 petition, an automatic stay has been imposed against the
commencement or continuation of legal proceedings against the Company
outside of the bankruptcy court process. Consequently, the Company's
accrued liability for self-insurance has been classified entirely as
subject to compromise in the Statement of Consolidated Financial
Position as of December 31, 2003. In general, all claims against the
Company that seek a recovery of assets of the Company's estate will be
addressed in the Chapter 11 process and paid only pursuant to the terms
of a confirmed plan of reorganization. Accordingly, the Company cannot
forecast the level of future self-insurance spending and anticipated
levels of recoveries based upon the inherent uncertainty underlying the
bankruptcy proceedings.
EMPLOYEE BENEFITS
Employee benefits include noncontributory defined benefit pension
plans and other postemployment programs that provide certain health care
and life insurance benefits (OPEB). The Company also has stock option
plans covering officers and employees and a non-employee director
compensation plan for non-employee members of Solutia's Board of
Directors.
Under the provisions of SFAS No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pension, measurement of the obligations under the
defined benefit pension plans and the OPEB plans are subject to a number
of assumptions. These include the rate of return on pension plan assets,
health care cost trend rates and the rate at which the future
obligations are discounted to value the liability at December 31st of
each year presented in the Statement of Consolidated Financial Position.
The amounts reflected in the consolidated financial statements and
accompanying notes do not reflect the impact of any changes to the
benefit plans that might be contemplated as a result of the bankruptcy
filing. Due to the inherent uncertainty involved with the Chapter 11
proceedings, the recorded amounts related to the Company's domestic
pension plans, as well as other domestic postretirement plans, have been
classified as subject to compromise in the Statement of Consolidated
Financial Position as of December 31, 2003.
Pension expense in accordance with SFAS No. 87 was $42 million in
2003, $23 million in 2002, and $19 million in 2001 and expense for OPEB
was $55 million in 2003, $57 million in 2002, and $58 million in 2001.
During 2003, Solutia recorded a $35 million pre-tax pension settlement
loss, as required by SFAS No. 88, Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits. The settlement loss resulted from the significant amount of
lump sum distributions from Solutia's domestic pension plans during
2003, primarily relating to workforce reductions. In 2002, Solutia
recorded a pre-tax pension settlement charge of $17 million also
resulting from a significant amount of lump sum distributions
experienced during that year.
The expected long-term rate of return on pension plan assets
assumption was 9.0 percent in 2003 and is anticipated to be 9.0 percent
in 2004. The expected long-term rate of return on pension plan assets
assumption is based on the target asset allocation policy and the
expected future rates of return on these assets. See Note 16 to the
accompanying consolidated financial statements for the Company's
historical and target allocation of plan assets for the pension plans.
A hypothetical 25 basis point change in the assumed long-term rate of
return would result in an increase of approximately $2 million to
pension expense.
The discount rate used to remeasure the pension and other
postretirement benefits obligations was 6.25 percent in 2003 and
6.75 percent in 2002. A hypothetical 25 basis point change in the
discount rate results in a change of approximately $22 million in the
pension projected benefit obligation and approximately a $1 million
change in pension expense. A hypothetical 25 basis point change in the
27
discount rate results in a change of approximately $12 million in the
accumulated benefit obligation for the OPEB plans and less than
approximately $1 million change to OPEB expense.
The Company estimated the five-year assumed trend rate for
healthcare costs to be 9 percent and the ultimate trend rate for
healthcare costs to be 5 percent in 2003. The rate is assumed to
decrease to 5 percent by 2008 and remain at that level thereafter.
A 1 percent change in the assumed health care cost trend rate would have
changed postretirement benefit obligation by $2 million as of
December 31, 2003 and would have had a less than $1 million change to OPEB
expense. Solutia's costs for postretirement medical benefits are capped
for many current retirees and for active employees; therefore, the
impact of this hypothetical change in the assumed health care cost trend
rate is limited.
As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company has elected to account for stock options under
APB Opinion No. 25, Accounting for Stock Issued to Employees, based on
their intrinsic value at the date of grant. Because options are granted
at market value, there is no intrinsic value and resultant compensation
expense. If the Company had accounted for options based on the method
proscribed by SFAS No. 123, pro-forma loss would have been increased by
approximately $5 million in 2003, $7 million in 2002, and $8 million in
2001. This valuation methodology provides an estimate of fair value that
encapsulates a number of management estimates, including estimated
option life and future volatility. Changes in these assumptions could
significantly impact the estimated fair value of the options. In
addition, Solutia believes that its plan of reorganization will result
in cancellation of its existing shares of common stock, as well as
options and warrants to purchase its common stock, and that it is
unlikely that holders of options to purchase Solutia's common stock will
receive any consideration for those options in such a plan of
reorganization.
Pension Plan Funded Status
The majority of Solutia's employees are covered under
noncontributory defined benefit pension plans. The pension plans are
funded in accordance with Solutia's long-range projections of the plan's
financial conditions. These projections take into account benefits
earned and expected to be earned, anticipated returns on pension plan
assets and income tax and other regulations. The amount of pension plan
underfunding in the pension plans decreased to $516 million as of
December 31, 2003 from $587 million as of December 31, 2002.
Solutia is actively managing funding of its pension plans in order
to meet the requirements of the IRS and the Pension Benefits Guarantee
Corporation (a U.S. federal agency). No contributions were made during
2003 to the qualified pension plan. In 2002, Solutia made discretionary
contributions of $17 million to the qualified pension plan to reduce the
probability of larger contribution requirements in the future and to
utilize available tax benefits. In addition, the Company contributed
$7 million in 2003 and 2002, respectively, to fund its other benefit plans.
According to current IRS funding rules, Solutia does not expect to be
required to make pension contributions in 2004. However, the Company may
elect to make voluntary contributions to the Pension trust in 2004 in
order to minimize future required contributions.
DERIVATIVE FINANCIAL INSTRUMENTS
Solutia's business operations give rise to market risk exposures
that result from changes in currency exchange rates, interest rates and
certain commodity prices. To manage the volatility relating to these
exposures, Solutia enters into various hedging transactions that enable
it to alleviate the adverse effects of financial market risk. Solutia's
hedging transactions are carried out under policies and procedures
approved by the Audit and Finance Committee of the Board of Directors,
which do not permit the purchase or holding of any derivative financial
instruments for trading purposes. Notes 2 and 9 to the accompanying
consolidated financial statements include further discussion of the
Company's accounting policies for financial instruments.
Foreign Currency Exchange Rate Risk
Solutia manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. Solutia uses foreign currency hedging
instruments to manage the volatility associated with foreign currency
purchases of materials and other assets and liabilities created in the
normal course of business. Solutia primarily uses forward exchange
contracts and purchased options to hedge these risks with maturities of
less than 18 months. Solutia also enters into certain foreign currency
derivative instruments primarily to protect against exposure related to
intercompany financing transactions. Corporate policy prescribes the
range of allowable hedging activity and what hedging instruments the
Company is permitted to use. Because the counterparties to these
contracts are major international financing institutions, credit risk
arising from these contracts is not significant, and Solutia does not
anticipate any counterparty losses.
At December 31, 2003, Solutia had currency forward contracts to
purchase and sell $186 million of currencies, principally the euro and
United Kingdom Pound-Sterling, with average maturities of six months.
Based on the Company's overall currency rate exposure at December 31,
2003, including derivative and other foreign currency sensitive
instruments, a 10 percent adverse change in quoted foreign currency
rates of these instruments would result in an immaterial change in fair
value of these instruments. This is consistent with the overall foreign
currency exchange rate exposure at December 31, 2002.
28
Interest Rate Risk
Interest rate risk is primarily related to changes in the fair value
of fixed-rate long-term debt and short-term, floating rate debt. Solutia
believes its current debt structure appropriately protects the Company
from changes in interest rates and does not actively use any contracts
to manage interest rate risk. A 1 percent increase in the Prime lending
rate would have increased interest expense by approximately $4 million
during 2003, assuming the debt composition at December 31, 2003 was
consistent throughout the year. The variable component of total debt
outstanding at December 31, 2003 was comprised entirely of debt
classified as not subject to compromise. This is consistent with the
overall interest rate exposure at December 31, 2002. There were no
interest rate risk hedging instruments outstanding as of December 31,
2003.
Commodity Price Risk
Certain raw materials and energy sources used by Solutia are subject
to price volatility caused by weather, crude oil prices, supply
conditions, political and economic variables and other unpredictable
factors. Historically, Solutia routinely used forward and option
contracts to manage a portion of the volatility related to anticipated
energy purchases. However, there were no commodity forward or option
contracts outstanding as of December 31, 2003.
RESTRUCTURING ACTIVITIES
During 2003, the Company recorded restructuring and severance
charges of $56 million. The restructuring charges resulted from the
Company's continued strategic evaluation of its businesses, and the
resulting decisions to shut down certain operations due to various
market and economic conditions. Included in these restructuring charges
was $22 million of severance charges associated with ongoing workforce
reductions precipitated by the sale of the resins, additives and
adhesives businesses and other ongoing cost reduction initiatives;
$17 million of asset write-downs; $14 million related to non-cancellable
operating leases, because the Company is no longer fully utilizing the
properties underlying these leases; and $3 million in contract
termination costs. As a result of the aforementioned severance actions,
Solutia reduced its workforce by approximately 530 positions. Cash
outlays associated with the restructuring actions were funded from
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 30 percent of
the workforce reductions.
During 2001, Solutia reduced its workforce by approximately
700 positions and eliminated more than 750 contractor positions. While
savings from the restructuring program are difficult to estimate, given
the nature of the activities, the corollary benefits achieved and the
timing of the actions taken, the best estimate of the savings realized
during 2001 from Solutia's restructuring actions was approximately
$60 million in continuing operations. These savings were primarily
reflected in cost of goods sold. Solutia received approximately
$94 million in cumulative savings in continuing operations during 2002
as compared with 2000, primarily reflected in cost of goods sold, from
reduced employee and contractor expenses. Cash outlays associated with
the restructuring actions were funded from 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 and sales offices.
Management positions represented approximately one-third of the
workforce reductions. During 2001, Solutia determined that the original
provision taken for its 2001 restructuring program was insufficient to
cover its total costs. Actual costs to terminate certain European and
North American management employees and certain employee benefit costs
for involuntary terminations were higher than the original estimates. As
a result, Solutia recorded additional restructuring charges of
$9 million to cost of goods sold to cover these higher costs. The
restructuring actions contemplated by this reserve were completed by the
end of 2001. Certain severance payments owed to individuals terminated
late in the fourth quarter of 2001 were included in accrued liabilities
at December 31, 2001, and were paid during the first quarter of 2002.
FINANCIAL CONDITION AND LIQUIDITY
As discussed above, the Company is operating as a
debtor-in-possession under Chapter 11 of the Bankruptcy Code. As a
result of the uncertainty surrounding the Company's current
circumstances, it is difficult to predict the Company's actual liquidity
needs and sources at this time. However, based upon current and
anticipated levels of operations, during the continuation of the
bankruptcy proceedings, the Company believes that its liquidity and
capital resources will be sufficient to maintain its normal operations
at current levels. The Company's access to additional financing while in
the Chapter 11 bankruptcy process will likely be very limited.
Financial Analysis
Divestiture proceeds and borrowings from the Company's revolving
credit facilities and the interim DIP facility provided the primary
source of funds to finance operating needs and capital expenditures
during 2003. Cash used in continuing operations was $25 million in 2003
compared to cash provided by continuing operations of $127 million in
2002. The decrease was primarily attributable to lower earnings, vendor
term compression, a $60 million income-tax refund received during the
first quarter 2002, partially offset by a $25 million advance
29
payment received from Monsanto during the third quarter 2003. In 2002,
cash generated from continuing operations increased $101 million from
$26 million in 2001. The improvement was primarily attributable to
higher income tax refunds, lower working capital, stronger operating
earnings and lower severance payments.
Capital spending was $78 million in 2003, compared to $59 million in
2002. The increase resulted primarily from the purchase of the co-
generation facility in Pensacola, Florida, for approximately
$32 million, which was required as a result of the sale of the resins,
additives and adhesives businesses. The remaining expenditures were used
to fund various minor capital improvements, as well as certain cost
reduction projects. Spending decreased $24 million in 2002 compared to
$83 million in 2001. These expenditures were used to fund various cost
reduction, maintenance and revenue growth expansion projects. In 2004,
the Company expects capital spending will be approximately $60 million.
Approximately $14 million of estimated capital requirements were
committed at December 31, 2003.
The Company continued to divest certain non-strategic businesses in
order to focus resources on core businesses. The proceeds from these and
other asset sales generated $479 million in 2003, $109 million in 2002,
and $9 million in 2001. During 2003, net proceeds included the sale of
the resins, additives and adhesives businesses of $474 million, which
were included in cash provided by discontinued operations. Proceeds
generated in 2002 included the sale of the Company's 50 percent interest
in the AES 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.
Net cash used for acquisitions completed during 2002 totaled
approximately $5 million for the purchase of Axio Research Corporation,
a contract research organization providing clinical trial design and
data management. There were no acquisitions in 2003 or 2001.
Solutia used approximately $63 million in 2003, $30 million in 2002
and $31 million in 2001 for investment payments to keep the Astaris
joint venture in compliance with its financial covenants. On October 8,
2003, Solutia and Astaris amended its external financing agreement to
release the Astaris lenders' security interests in certain Solutia
assets in exchange for Solutia's posting of a $67 million letter of
credit, representing fifty percent of the Astaris lenders' outstanding
commitments to Astaris as of October 8, 2003. The agreement was also
amended to provide for a dollar-for-dollar reduction of the Astaris
lenders' commitments with future payments made by Solutia and FMC under
their existing support agreements to Astaris. This additional amendment
provides a $67 million limitation for each of Solutia and FMC on future
funding in the event the joint venture continues to fail to meet certain
financial benchmarks. Solutia's $67 million letter of credit will also
reduce dollar-for-dollar as future payments are made by Solutia under
its existing support agreement. The remaining commitment to Astaris as
of December 31, 2003 is $51 million. This amount is recorded as a
liability in the Statement of Consolidated Financial Position in
accordance with FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.
FMC and Solutia also agreed conceptually to allow Astaris to defer
up to $30 million each of obligations to FMC and Solutia arising under
existing operating agreements over the next 24-36 months to provide
liquidity assistance to Astaris as it implements its recently announced
business restructuring. Astaris, FMC and Solutia are currently
negotiating definitive agreements to allow for the deferral of these
obligations, including repayment terms and conditions.
Total debt of $1,280 million, including $625 million subject to
compromise and $655 million not subject to compromise, increased by
$83 million at December 31, 2003, compared to $1,197 million at
December 31, 2002. This increase in total debt from 2002 was principally a
result of the consolidation of $43 million of long-term debt in 2003 resulting
from the adoption of FASB Interpretation No. 46 (see Note 12 to the
accompanying consolidated financial statements), and $43 million
increase in the outstanding Euronotes in 2003 due to the weakening of
the U.S. dollar relative to the euro. The use of divestiture proceeds to
pay down outstanding credit facility borrowings of approximately
$358 million in 2003 was essentially offset by $361 million of additional
credit facility borrowings during 2003.
Solutia's working capital from continuing operations increased by
$331 million to $61 million at December 31, 2003, compared to negative
$270 million at December 31, 2002. This increase in working capital
resulted principally from the classification of approximately
$340 million of liabilities as subject to compromise, as of December 31,
2003, that would have been otherwise classified as current liabilities
if the Company had not filed for Chapter 11 protection. See Note 3 to
the accompanying consolidated financial statements for discussion of
liabilities subject to compromise. Working capital was negative
$279 million including both the liabilities not subject to compromise and the
above noted liabilities subject to compromise that would have been
current as of December 31, 2003. This is relatively consistent with the
December 31, 2002 amount of negative $270 million.
Solutia had a shareholders' deficit of $1,125 million at December 31,
2003 compared to a deficit of $249 million at December 31, 2002.
Shareholders' deficit increased principally due to 2003 losses of
$987 million, partially offset by favorable currency translation adjustments,
principally related to the increase in value of the euro in relation to
the U.S. dollar, and the warrants valued at $37 million that Solutia
issued in 2003 to Monsanto relating to the Anniston litigation
settlement.
The weighted average interest rate on Solutia's total debt
outstanding at December 31, 2003, was approximately 8.9 percent compared
to 7.8 percent at December 31, 2002. Excluding debt subject to
compromise, the weighted average interest rate on total debt was
9.3 percent
30
at December 31, 2003. While operating as a debtor-in-possession during
the Chapter 11 proceedings, the Company has ceased paying interest on
all unsecured pre-petition indebtedness.
As a result of the Chapter 11 filing, the Company was in default on
all its debt agreements as of December 31, 2003, with the exception of
the interim DIP financing arrangement described below. In addition,
subsequent to the Company's bankruptcy filing, Moody's Investors Ratings
Services withdrew all ratings for the Company and its related debt
securities. Standard & Poor's lowered its ratings on the Company and
related U.S. dollar denominated debt securities to a D rating and raised
its rating from CCC- to CCC+ on the Euronotes issued by SESA.
At December 31, 2003, all of the Company's liquidity was in the form
of cash in the amount of $159 million, of which $34 million was cash of
Solutia's subsidiaries that are not parties to the Chapter 11
proceedings. As of the funding date of the final DIP facility (described
below) on January 21, 2004, total liquidity was approximately
$250 million, including approximately $115 million of availability under the
credit facility and approximately $135 million of cash on-hand.
Prior and Current Credit Facilities
October 2003 Credit Facility
----------------------------
On October 8, 2003, Solutia entered into a new $350 million credit
facility. The proceeds of the loans made under the facility were used to
retire the Company's pre-existing bank debt and for general working
capital purposes, including fees and expenses related to the credit
facility. The amount of outstanding borrowings under the credit facility
as of December 31, 2003 was approximately $286 million. The facility was
paid in full and cancelled as part of the final DIP facility entered
into by the Company on January 16, 2004, as more fully described below.
The October 2003 credit facility consisted of (i) a $150 million
revolving credit component available for borrowing or for the issuance
of letters of credit and (ii) a $200 million term loan. The revolving
credit component only became available when the term loan was fully
drawn. Availability under the revolving credit component was subject to
a working capital borrowing base formula and limited to a maximum of
$150 million. A component of the term loan was scheduled to amortize at
the rate of $833,333 per month starting in April 2004. The credit
facility was subject to various mandatory commitment reductions and
prepayments in connection with asset sales, equity issuances, receipt of
extraordinary proceeds and certain other events.
Certain of the Company's substantial manufacturing facilities which
formerly secured, among other things, Solutia's bank debt, its keepwell
obligations with respect to the Astaris credit agreement, and
obligations of Solutia relative to various public debentures were not
included as collateral for the October 2003 credit facility. The release
of the liens upon these properties resulted in three series of Solutia
debt instruments reverting from secured debt to unsecured debt: its
6.72%, 2037 debentures which, but for the protection afforded by the
Chapter 11 proceedings, are puttable in October 2004 ($150 million
outstanding); its guaranty of its subsidiary SESA's 6.25%, Feb. 2005
Euronotes ((euro) 200 million outstanding); and its 7.375%, October 2027
debentures ($300 million outstanding). These debt instruments were
unsecured when issued but, as a result of "equal and ratable" clauses in
their indentures, became secured in 2002, in accordance with their
governing documents, when liens on certain property, plant and equipment
securing debt in an amount greater than 15 percent of Solutia's
consolidated net tangible assets were granted to Solutia's bank group
and to the Astaris lenders. Upon completion of the October 2003 credit
facility, the above debt instruments, which aggregated approximately
$680 million, reverted to unsecured status.
Interim DIP Financing
---------------------
On December 19, 2003, the U.S. Bankruptcy Court entered an interim
order authorizing Solutia to borrow up to $85 million of DIP financing
for the period between the entry of the interim order and the entry of a
final order authorizing a full DIP facility. Accordingly, on December
19, 2003, Solutia entered into an interim financing facility providing
for $515 million of total DIP financing, of which $85 million was
immediately available under the interim Bankruptcy Court order, with an
additional $430 million of DIP financing to be available upon entry of a
final Bankruptcy Court order approving the total $515 million. In
aggregate, the interim DIP facility approved on December 19, 2003
consisted of (i) a $50 million term loan component; (ii) a $315 million
term loan component; and (iii) a $150 million borrowing-based revolving
credit component, which included a $150 million letter of credit
subfacility. As of December 31, 2003, $75 million was outstanding under
the interim DIP facility, which amount was subsequently paid in full
through the final DIP facility entered into as of January 16, 2004, as
more fully described below.
Final DIP Financing
-------------------
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a final $525 million DIP credit facility.
This DIP facility consists of (i) a $50 million multiple draw term loan
component ("Term Loan A"); (ii) a $300 million single draw term loan
component ("Term Loan B"); and (iii) a $175 million borrowing-based
revolving credit component, which includes a $150 million letter of
credit subfacility. Proceeds from the final DIP facility were used to
retire the Company's existing pre-petition $350 million credit facility, to
31
repay the $75 million provided by the interim DIP facility and to
provide approximately $100 million of new liquidity, net of fees and
expenses.
The final DIP facility has a maturity date which is the earliest of
(i) December 19, 2005; (ii) the earlier of the effective date and the
date of the substantial consummation (as defined in Section 1101(2) of
the Bankruptcy Code), in each case, of a plan of reorganization in the
Chapter 11 cases confirmed by an order of the Bankruptcy Court; and
(iii) such earlier date on which all loans under the final DIP facility
shall become due and payable in accordance with the terms of the final
DIP facility or other loan documents. Additionally, the final DIP
facility is subject to various mandatory commitment reductions and
prepayments in connection with asset sales, equity issuances, receipt of
extraordinary proceeds and certain other events. In particular, the
final DIP facility significantly limits the Company's ability to use
divesture proceeds for any purpose other than the permanent reduction of
the final DIP facility.
Collateral
The Bankruptcy Court's final order, issued on January 16, 2004,
authorized the Company to incur post-petition secured indebtedness, and
ordered the repayment of the $350 million pre-petition facility and the
$75 million interim DIP facility with the proceeds of the final DIP
facility. In addition, the final order granted all the perfected first
priority and senior liens, originally granted to the $350 million pre-
petition facility and $75 million interim DIP facility, to the lenders
under the final DIP facility in conjunction with its post-petition
senior secured status. In particular, the final DIP facility is secured
by a lien on substantially all of the Company's domestic assets,
including (i) accounts receivable and inventory; (ii) certain
intellectual property; (iii) pledges of stock of certain domestic
subsidiaries; (iv) pledges of 65 percent of the outstanding stock of
certain foreign subsidiaries; (v) liens on intercompany notes receivable
held by parties to the loan; and (vi) liens on property, plant and
equipment located at St. Louis, Missouri; Columbia, Tennessee; Foley,
Alabama; Martinsville, Virginia; Springfield, Massachusetts; Trenton,
Michigan; Alvin, Texas; Pensacola, Florida; Decatur, Alabama; and
Greenwood, South Carolina.
Interest
Borrowings under the revolving credit component bear interest at a
rate per annum equal to the prime rate or LIBOR plus 2.25 percent at the
election of the borrower. Borrowings under the term loan bear interest
at a rate per annum equal to the greater of (i) the prime rate plus
4.0 percent or (ii) 8.0 percent.
Guarantees
The obligations of Solutia Inc. and Solutia Business Enterprises,
Inc., as borrowers under the final DIP facility, are guaranteed by
Solutia's other domestic subsidiaries which own substantially all of the
Company's domestic assets. These subsidiaries are Axio Research
Corporation, Beamer Road Management Company, CPFilms Inc., Monchem,
Inc., Monchem International, Inc., Solutia Greater China, Inc., Solutia
Inter-America, Inc., Solutia International Holding, LLC, Solutia
Investments, LLC, Solutia Management Company, Inc., Solutia Overseas,
Inc., Solutia Systems, Inc., and Solutia Taiwan, Inc. The obligations
must also be guaranteed by each of Solutia's subsequently acquired or
organized domestic subsidiaries, subject to certain exceptions. In
addition, Solutia Inc. and Solutia Business Enterprises, Inc. are
jointly and severally liable with respect to their obligations under the
final DIP facility, thus in effect each guaranteeing the other's debt.
Covenants and Other Restrictions
The final DIP facility requires the Company to meet certain
financial covenants, including but not limited to, minimum earnings
before interest, taxes, depreciation and amortization (EBITDA) targets,
on a consolidated basis and for one of its operating units. In addition,
the credit facility contains certain covenants which, among other
things, limits the incurrence of additional debt, aggregate capital
expenditures, additional operating leases, issuance of capital stock,
issuance of guarantees, liens, investments, asset sales, dividends,
certain payments, acquisitions, mergers, consolidations and
dissolutions, 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.
The final DIP facility contains customary and other events of
default, including, among others, payment defaults, breaches of
representations and warranties, covenant defaults, cross-defaults to the
Company's Euronotes, failure of guaranties or security documentation to
be effective, judgment defaults, ERISA defaults, Solutia Inc. change of
control, conversion of the case from a Chapter 11 to a Chapter 7
bankruptcy and a material adverse effect default.
Euronote Modification
---------------------
On January 30, 2004, the Company's wholly-owned subsidiary, SESA,
restructured its 6.25% Euronotes, due in 2005. The Euronotes are issued
by SESA and aggregate (euro) 200 million in principal amount. The
restructuring allows SESA to continue normal operations while Solutia
Inc. and its domestic subsidiaries reorganize under Chapter 11
bankruptcy protection.
32
The restructuring was implemented in a multi-step process. The first
step was completed on December 16, 2003 at a meeting of Euronote holders
at which the required percentage of Euronote holders adopted resolutions
agreeing to forebear through January 30, 2004 the acceleration and
default of the Euronotes in the event of a Chapter 11 filing by Solutia
Inc. In consideration for that agreement, SESA made an additional
interest payment to the Euronote holders of approximately $2 million.
The second step of the restructuring was completed on January 30, 2004
at a meeting of Euronote holders at which the required percentage of
Euronote holders adopted resolutions approving definitive documentation
set forth in the terms and conditions of the restructuring and approving
other related actions. The Euronotes were amended in the following
manner:
1. Certain cross default provisions in the Euronotes that would have
resulted in default and acceleration upon the filing of a Chapter
11 proceeding by Solutia Inc. were eliminated. Solutia Inc.'s
guarantee of the Euronotes was also eliminated.
2. The maturity of the Euronotes was extended to December 15, 2008,
from the original maturity date of February 15, 2005.
3. Interest on the Euronotes was fixed at the rate of 10 percent per
annum, payable semi-annually in arrears.
4. SESA agreed to grant to the holders of the Euronotes security
interests in substantially all of the assets of SESA and certain
of its subsidiaries (excluding Flexsys Holding BV) and to cause
these subsidiaries to be added as guarantors of the Euronotes, all
to the extent permitted under applicable law and as further
provided in the underlying documentation implementing the
restructuring.
5. Certain redemption provisions were added that allow partial
redemption of the Euronotes as a result of permitted asset sales
and full redemption in certain circumstances. Full redemption is
barred for 18 months; thereafter, full redemption is allowed at
105 percent of principal for the next twelve months, 103 percent
of principal for the twelve months thereafter, 101 percent of
principal for the twelve months after that and at par thereafter.
6. Covenants were added that have the effect of limiting the ability
of SESA and its subsidiaries to transfer assets or cash out of
those entities until the Euronotes are paid.
7. SESA agreed to certain financial reporting requirements and to
indemnify Euronote holders against certain liabilities.
SESA and the holders of the Euronotes also entered into an Agreement
of Understanding that sets forth, among other items, the post-closing
process for implementing the guarantees, security and pledges associated
with the restructuring.
The Company has analyzed the modifications of the Euronotes in
accordance with the provisions of Emerging Issues Task Force (EITF)
No. 02-04, Determining Whether a Debtor's Modification or Exchange of Debt
Instruments is within the Scope of FASB Statement No. 15, and EITF
No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt
Instruments, and recorded a charge of approximately $15 million during
January 2004 to record the Euronotes as modified at their fair value on
January 30, 2004.
Off-Balance Sheet Arrangements
See Note 20 to the accompanying consolidated financial statements
for a summary of off-balance sheet arrangements.
Contingencies
Litigation
----------
Because of the size and nature of Solutia's business, Solutia is a
party to numerous legal proceedings. Most of these proceedings have
arisen in the ordinary course of business and involve claims for money
damages. In addition, at the time of Solutia's spin-off from Pharmacia,
Solutia assumed the defense of specified legal proceedings and agreed to
indemnify Pharmacia in connection with those proceedings. Solutia has
determined that these defense and indemnification obligations to
Pharmacia are pre-petition obligations under the U.S. Bankruptcy Code
that Solutia is prohibited from performing, except pursuant to a
confirmed plan of reorganization. As a result, Solutia has ceased
performing these obligations. Solutia's cessation of performance may
give rise to a pre-petition unsecured claim against Solutia which
Pharmacia may assert in Solutia's Chapter 11 case.
Following is a summary of legal proceedings that management believes
it is reasonably possible could result in an outcome that is material to
the consolidated financial statements.
33
Anniston, Alabama Litigation
(1) Abernathy v. Monsanto and Tolbert v. Monsanto: Abernathy
involved four consolidated cases, the first of which was served
on April 1, 1996, that were originally filed in Circuit Court
for Calhoun County, Alabama (and were later transferred to
Etowah County, Alabama) on behalf of 3,516 plaintiffs who own or
rent homes, own or operate businesses, attend churches, or have
otherwise resided in or visited neighborhoods near the Anniston
plant. Plaintiffs sought compensatory and punitive damages and
injunctive relief requiring the Company to remove alleged
contamination. The individual plaintiffs claimed to have
suffered permanent adverse health effects and to fear future
disease. They asserted the need for medical monitoring,
diminution in the value of their properties in the case of
residential and commercial property owners and commercial losses
in the case of business owners. The Tolbert case, which was
served on June 4, 2001, was filed in the U.S. District Court for
the Northern District of Alabama. It ultimately included the
claims of approximately 18,233 plaintiffs. Plaintiffs claimed
that they were exposed to PCBs and suffer from unspecified
physical injuries and emotional distress as a result. Plaintiffs
sought compensatory and punitive damages and requested medical
testing, monitoring and treatment, injunctive relief and, in the
case of property owners, property damage.
In August 2003, the parties in both Abernathy and Tolbert
entered into a Global Settlement Agreement to resolve these and
several related cases. The Global Settlement Agreement has been
approved by both the Abernathy and the Tolbert trial courts. The
Global Settlement Agreement provides for cash payments of
$600 million, as well as a broad array of community health
initiatives for low-income residents of Anniston and Calhoun
County. In connection with the Global Settlement Agreement,
Solutia entered into a separate agreement with Pharmacia and
Monsanto pursuant to which Solutia agreed to pay $50 million of
the $600 million cash settlement, payable in ten equal annual
installments, without interest, beginning in August 2004.
Approximately $160 million of the settlement is expected to be
provided through the parties' commercial insurance. Monsanto
agreed to pay the remaining $390 million. Solutia arranged for
Pfizer Inc., the parent of Pharmacia, to provide the community
health initiatives described above. In addition, Solutia issued
Monsanto warrants to purchase up to 10 million shares of Solutia
common stock at an exercise price of $1.10 per common share (see
Note 19 to the accompanying consolidated financial statements).
Solutia is a named defendant in the Abernathy and Tolbert cases.
As a result, Solutia filed a Suggestion of Bankruptcy in both
cases. On January 22, 2004, the court entered an order in the
Tolbert case dismissing Solutia, without prejudice. With respect
to the Abernathy case, the court had previously entered an order
on August 6, 2003, finding that in the event Solutia became a
debtor in a case under Chapter 11 of the U.S. Bankruptcy Code,
Solutia would be immediately severed and dismissed, without
prejudice, from the Abernathy case without further action from
the court. Solutia has determined that the Bankruptcy Code
prohibits it from paying Solutia's portion of the settlement
obligation, except pursuant to a confirmed plan of
reorganization.
(2) Anniston Partial Consent Decree: The U.S. District Court for the
Northern District of Alabama approved the revised Partial
Consent Decree on August 4, 2003 that had been lodged with the
court in an action captioned United States of America v.
Pharmacia Corporation (f/k/a Monsanto Company) and Solutia. This
Partial Consent Decree provides for Pharmacia and Solutia to
sample certain residential properties and remove soils found on
those properties if PCBs are at a level of 1 part per million
(ppm) or above, to conduct a Remedial Investigation and
Feasibility Study to provide information for the selection by
the EPA of a cleanup remedy for the Anniston PCB site, and to
pay EPA's past response costs and future oversight costs related
to this work. The decree also provided for the creation of an
educational trust fund of approximately $3 million to be funded
over a 12-year period to provide supplemental educational
services for school children in west Anniston. A dispute
currently exists between the EPA and Solutia regarding the scope
and application of the automatic stay arising as a result of
Solutia's Chapter 11 filing to the remaining obligations under
the Partial Consent Decree.
(3) Owens v. Monsanto: On October 27, 2003, a motion was filed in
U.S. District Court for the Northern District of Alabama,
contending that the Global Settlement Agreement in Tolbert and
Abernathy also requires the payment of additional funds to
plaintiffs in Owens v. Monsanto, another Anniston-related PCB
case settled by Solutia in April 2001. On January 8, 2004, the
District Court granted plaintiffs' motion, ruling that the Owens
plaintiffs were entitled to receive a total of approximately
$1 million as a result of the Global Settlement Agreement.
Plaintiffs' motion for reconsideration was denied on January 24,
2004, and plaintiffs have filed a timely appeal to the U.S.
Court of Appeals for the Eleventh Circuit. Solutia is not a
named defendant in this litigation and therefore has taken no
action to stay the litigation in connection with its Chapter 11
proceedings. Solutia assumed the defense of this litigation at
the time of its spin-off from Pharmacia. Solutia has determined
that its obligation to defend and indemnify Pharmacia with
regard to this litigation is a pre-petition obligation that
Solutia is prohibited from performing, except pursuant to a
confirmed plan of reorganization. Solutia has ceased defending
Pharmacia with respect to this litigation.
(4) Payton v. Monsanto: This case was brought in Circuit Court in
Shelby County, Alabama on July 15, 1997, on behalf of a
purported class of all owners, lessees and licensees of
properties located on Lay Lake, which is downstream from Lake
Logan Martin on the Coosa River. Plaintiffs seek compensatory
and punitive damages in an unspecified amount for an alleged
increased risk of physical injury and illness, emotional
distress caused by fear of future injury or illness, medical
monitoring and diminishment in the value of their properties and
their riparian rights. The parties have reached a tentative
agreement to settle this case for a cash payment of
34
$5 million and an equitable component that has yet to be determined.
Solutia is not a named defendant in this litigation and
therefore has taken no action to stay the litigation in
connection with its Chapter 11 proceedings. Solutia assumed the
defense of this litigation at the time of its spin-off from
Pharmacia. Solutia has determined that its obligation to defend
and indemnify Pharmacia with regard to this litigation is a
pre-petition obligation that Solutia is prohibited from
performing, except pursuant to a confirmed plan of
reorganization. Solutia has ceased defending Pharmacia with
respect to this litigation.
(5) Other Anniston Cases: Claims made by five plaintiffs in two
cases pending in Circuit Court for Jefferson County, by seven
plaintiffs in one case pending in Circuit Court for Calhoun
County, Alabama and by one plaintiff in one case pending in U.S.
District Court for the Northern District of Alabama have been
resolved and are subject to the Global Settlement Agreement of
the Abernathy and Tolbert cases described above. In addition,
claims of property damages made by one plaintiff in one case
pending in Circuit Court for Calhoun County have been settled
for a nominal sum. Approximately ten cases remain pending in
various Circuit Courts in the state of Alabama. Solutia is a
named defendant in those ten proceedings. As a result, Solutia
has filed a Suggestion of Bankruptcy in each case staying the
litigation against it. Solutia believes that any direct claims
against it relating to these actions constitute pre-petition
unsecured claims that will be discharged as part of its Chapter
11 case. Solutia has also defended Pharmacia with respect to
this litigation. Solutia has determined that its obligation to
defend and indemnify Pharmacia with regard to this litigation is
a pre-petition obligation that Solutia is prohibited from
performing, except pursuant to a confirmed plan of
reorganization. Solutia has ceased defending Pharmacia with
respect to this litigation.
PENNDOT Case
Pharmacia is one of several defendants added on February 7, 1997, to
a case then pending in the Commonwealth Court of Pennsylvania. This
action was originally filed against United States Mineral Products
Company in 1990 by the Commonwealth of Pennsylvania, seeking damages
caused by the presence of asbestos fireproofing in the Transportation
and Safety Building ("T & S Building") in Harrisburg, Pennsylvania. In
June 1994 a fire broke out in the T & S Building. Testing following the
fire revealed the presence of low levels of PCBs at various locations in
the building. The Commonwealth claims that PCBs used in fluorescent
light ballasts, in adhesives in fiberglass ductboard that was part of
the heating and ventilation system and in caulking used on the exterior
of the building contaminated the building and necessitated its
demolition. The Commonwealth seeks recovery of costs it allegedly
incurred in testing, monitoring, cleanup, demolition and temporary
relocation of Commonwealth employees caused by the alleged
contamination. In addition, the Commonwealth seeks the cost of
constructing a new building on the site of the T & S Building. On
August 23, 2000, the jury returned a verdict of $90 million against Pharmacia.
The verdict was reduced to $45 million by the trial court because the
manufacturer of the fiberglass ductboard reached a settlement with the
Commonwealth during trial. On behalf of Pharmacia, Solutia filed
extensive post-trial motions, seeking judgment notwithstanding the
jury's verdict or a new trial. The trial court denied these motions in
orders filed on October 16, 2002. On November 15, 2002, Solutia filed an
appeal as of right to the Supreme Court of Pennsylvania. On November 17,
2003, the Supreme Court of Pennsylvania remanded the case to the trial
court for an opinion solely on the issue of juror misconduct. In response
to Solutia's application, the Supreme Court of Pennsylvania ordered the
trial court to file its opinion on that issue by March 15, 2004. Oral
argument before the Supreme Court of Pennsylvania on this matter is
scheduled for May 11, 2004. Solutia is not a named defendant in this
litigation and therefore has taken no action to stay the litigation in
connection with its Chapter 11 proceedings. Solutia assumed the defense
of this litigation at the time of its spin-off from Pharmacia. Solutia
has determined that its obligation to defend and indemnify Pharmacia with
regard to this litigation is a pre-petition obligation that Solutia is
prohibited from performing, except pursuant to a confirmed plan of
reorganization. Solutia has ceased defending Pharmacia with respect to
this litigation. Solutia does, however, continue to provide a $20 million
letter of credit to secure a portion of Pharmacia's obligations with
respect to the appeal bond.
Premises Based Asbestos Litigation
Like a great number of other companies that used high temperature
manufacturing processes, Pharmacia historically used asbestos insulating
materials in piping and other equipment at its chemicals plants. As a
result, Pharmacia and Solutia have been named as defendants along with
numerous other premises owners in actions brought by employees of
contractors who claim that they were exposed to asbestos at Solutia's
facilities and at the facilities of these other owners. Currently, there
are approximately 520 asbestos actions involving an estimated 3,500 to
4,500 plaintiffs brought against Pharmacia and/or Solutia. Solutia does
not have any product-based asbestos litigation. In all of the cases in
which Solutia is a named defendant, it has filed a Suggestion of
Bankruptcy staying the litigation against it. Solutia believes that any
direct claims against it relating to these actions constitute
pre-petition unsecured claims that will be discharged as part of its
Chapter 11 case. Solutia has also defended Pharmacia with respect to
this litigation. Solutia has determined that its obligation to defend
and indemnify Pharmacia with regard to this litigation is a pre-petition
obligation that Solutia is prohibited from performing, except pursuant
to a confirmed plan of reorganization. Solutia has ceased defending
Pharmacia with respect to this litigation.
Flexsys Related Litigation
Antitrust authorities in the United States, Europe and Canada are
investigating past commercial practices in the rubber chemicals
industry. Flexsys, Solutia's 50/50 joint venture with Akzo Nobel N.V.,
is a subject of such an investigation and has been fully cooperating
35
with the authorities and in the ongoing investigation will continue to
do so. In addition, a number of purported class actions have been filed
against Flexsys and other producers of rubber chemicals.
Environmental Liabilities
-------------------------
Environmental compliance and remediation costs incurred by the
Company fall into two broad categories: (a) obligations related to
properties currently owned or operated by Solutia and (b) obligations
related to properties that are not owned by Solutia, including non-
owned properties adjacent to current operating sites. For the owned and
operated sites, Solutia had an accrued liability of $81 million as of
December 31, 2003 for solid and hazardous waste remediation, which
represents the Company's best estimate of the underlying obligation. In
addition, this balance also includes post-closure costs at certain of
the Company's operating locations. This liability is not classified as
subject to compromise in the Statement of Financial Position because,
irrespective of the bankruptcy proceedings, the Company will be required
to comply with environmental requirements in the conduct of its
business, regardless of when the underlying environmental contamination
occurred. However, the Company ultimately expects to seek recovery
against other potentially responsible parties at certain of these
locations.
The Company had an accrued liability of $85 million as of December 31,
2003 for properties not owned or operated by Solutia. Included
within this liability classification is the $24 million charge taken in
the second quarter related to the partial consent decree approved by the
U.S. District Court for the Northern District of Alabama with respect to
properties adjacent to the Anniston, Alabama operating site. This decree
requires an expedited residential cleanup of identified properties to
achieve the EPA's cleanup standard, and performance of a Remedial
Investigation and Feasibility Study (RI/FS). The RI/FS to be performed
under the partial consent decree will outline the work that will lead to
a comprehensive approach to the cleanup of PCBs in waterways and
commercial properties in the Anniston area. This liability is classified
as subject to compromise in the Statement of Financial Position as the
Company currently believes it constitutes a pre-petition claim that will
be discharged in the bankruptcy process. The EPA is currently contesting
this view.
In addition to the bankruptcy proceedings, the Company's
environmental liabilities are also subject to changing governmental
policy and regulations, discovery of unknown conditions, judicial
proceedings, method and extent of remediation, existence of other
potentially responsible parties and future changes in technology. The
Company believes that the known and unknown environmental matters, when
ultimately resolved, which may be over an extended period of time, could
have a material effect on the consolidated financial position, liquidity
and profitability of the Company.
UCB S.A. Dispute
----------------
On December 2, 2002, Solutia signed a definitive stock and asset
purchase agreement (SAPA) 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 pre-tax gain of $24 million. During
2003 a number of disputes arose between the parties as to amounts due
under various provisions of the SAPA which were unresolved as of the
Chapter 11 filing date. The Company had approximately $30 million
recorded for this liability at December 31, 2003. As a result of the
Company's Chapter 11 filing, these liabilities are subject to compromise
and will be addressed in conjunction with the ongoing bankruptcy
proceedings.
Impact of Chapter 11 Proceedings
--------------------------------
During the reorganization process, substantially all pending
litigation against the Company and its subsidiaries that filed for
reorganization under Chapter 11 (Debtors) is stayed, as well as the
majority of all other pre-petition claims. Exceptions would generally
include pre-petition claims approved by the court, as well as fully
secured claims. Such claims may be subject to future adjustments.
Adjustments may result from actions of the Bankruptcy Court,
negotiations, rejection of executory contracts, the determination as to
the value of any collateral securing claims, proofs of claims, or other
events. Additional pre-filing claims not currently reflected in the
consolidated financial statements may be identified through the proof of
claim reconciliation process and may arise in connection with actions
taken by the Debtors in the cases. The amount of pre-filing claims
ultimately allowed by the Court in respect to contingent claims may be
materially different from the amounts reflected in the consolidated
financial statements. Generally, claims against Debtors arising from
actions or omissions prior to its filing date will be compromised in
connection with the plan of reorganization. The ultimate resolution of
all of these claims may be settled through negotiation as compared to
court proceedings, with the result being the Company retaining certain
obligations currently classified as Liabilities Subject to Compromise in
the Statement of Consolidated Financial Position.
Commitments
Solutia has entered into agreements with certain customers to supply
a guaranteed quantity of certain products annually at prices specified
in the agreements. In return, the customers have advanced funds to
Solutia to cover the costs of expanding capacity to provide the
guaranteed supply. Solutia has recorded the advances as deferred credits
and amortizes the amounts to income as the customers purchase the
products. The unamortized deferred credits were approximately
$168 million at December 31, 2003, and approximately $161 million at
December 31, 2002.
36
Solutia's obligations and the obligations of its subsidiary
borrowers under the credit facility entered into on October 8, 2003 were
guaranteed by CPFilms Inc., Monchem International, Inc., Monchem, Inc.,
Solutia Systems, Inc., Solutia Business Enterprises, and Solutia
Investments, LLC (the "Subsidiary Guarantors") and each of Solutia's
subsequently acquired or organized domestic subsidiaries, subject to
certain exceptions. In addition, Solutia Inc. guaranteed the payment of
amounts due from subsidiary borrowers under the credit facility. All of
the subsidiaries that guaranteed the obligations under Solutia's credit
facility fully and unconditionally guaranteed the senior secured notes
on a joint and several basis.
The following table summarizes Solutia's contractual obligations and
commercial commitments that are not subject to compromise as of
December 31, 2003. Payments associated with liabilities subject to compromise
have been excluded from the table below, as the Company cannot forecast
its future level of spending given the inherent uncertainties associated
with the ongoing Chapter 11 bankruptcy process. See Note 3 to the
accompanying consolidated financial statements for further disclosure
concerning liabilities subject to compromise.
Obligations Due by Period (Dollars in Millions)
------------------------------------------------------- 2009 and
Contractual Obligations Total 2004 2005 2006 2007-2008 thereafter
----------------------- ------ ---- ---- ---- --------- ----------
Credit Facility(a)............................... $ 361 $361 $-- $-- $ -- $ --
Long-Term Debt................................... 294 -- -- -- 294 --
Operating Leases................................. 75 16 14 10 14 21
Unconditional Purchase Obligations............... 75 9 7 6 11 42
Standby Letters of Credit(b)..................... 181 181 -- -- -- --
Environmental Remediation........................ 81 17 16 15 17 16
Other Commercial Commitments(c).................. 168 58 7 7 14 82
------ ---- --- --- ---- ----
TOTAL CONTRACTUAL CASH OBLIGATIONS............... $1,235 $642 $44 $38 $350 $161
====== ==== === === ==== ====
- -------
(a) The $361 million credit facility was paid in full during January 2004 with proceeds from the final DIP
facility. The Company expects this final DIP facility to be paid in full during 2005.
(b) Standby letters of credit of $130 million contractually expiring in 2004 are anticipated to be renewed or
extended through a $150 million subfacility for letters of credit in the final DIP facility completed in
January 2004, or by extensions with existing standby letters of credit providers with cash collateral. The
remaining $51 million relates to a standby letter of credit used to satisfy the obligations of the Company
for contributions to the Astaris joint venture. Although, the standby letter of credit does not expire until
2005, it is expected that contributions to the joint venture resulting reductions in the standby letter of
credit will be satisfied in 2004.
(c) Other commercial commitments represent agreements with customers to supply a guaranteed quantity of certain
products annually at prices specified in the agreements.
Under the Chapter 11 bankruptcy proceedings, the Company may assume
or reject executory contracts. Therefore, the commitments shown above
may not reflect actual cash outlays in the future periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 to the accompanying consolidated financial statements for
a summary of recently issued accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information appearing under "Derivative Financial Instruments"
on page 28 is incorporated here by reference.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FINANCIAL SECTION--TABLE OF CONTENTS
Page
Number
------
Management Report........................................... 39
Reports of Independent Auditors............................. 40-41
Statement of Consolidated Operations........................ 42
Statement of Consolidated Comprehensive Loss................ 42
Statement of Consolidated Financial Position................ 43
Statement of Consolidated Cash Flows........................ 44
Statement of Consolidated Shareholders' Deficit............. 45
Notes to Consolidated Financial Statements.................. 46
38
MANAGEMENT REPORT
Management is responsible for the integrity, objectivity and
preparation of Solutia Inc.'s consolidated financial statements and all
of the related information appearing in this Annual Report on Form 10-K.
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America, and reflect the effects of certain estimates that are based
upon currently available information and management's judgments.
Management maintains a system of internal controls over financial
reporting designed to provide reasonable assurance that Solutia's assets
are safeguarded against material loss from unauthorized use or
disposition and that authorized transactions are properly recorded to
permit the preparation of accurate financial information. Cost/benefit
judgments are an important consideration in this regard. The
effectiveness of internal controls is maintained by careful personnel
selection and thorough training, division of responsibilities,
establishment and communication of policies and ongoing internal review
programs and audits.
Solutia's consolidated financial statements as of and for the each
of the three years in the period ended December 31, 2003 have been
audited by Deloitte & Touche LLP, independent auditors. Their audits
were conducted in accordance with auditing standards generally accepted
in the United States of America, and included a review of financial
controls, tests of accounting records, and other procedures as they
considered necessary in the circumstances.
The Audit and Finance committee of the Board of Directors, which is
composed of outside directors, meets regularly with management, internal
auditors and independent auditors to review accounting, financial
reporting, and auditing and internal control matters. The Audit and
Finance committee has direct and private access to the internal and
external auditors.
Management believes that Solutia's system of internal controls over
financial reporting as of and for the period ended December 31, 2003,
was effective and adequate to accomplish the objectives described above.
/s/ John C. Hunter III /s/ Robert A. Clausen
John C. Hunter III Robert A. Clausen
Chairman, President and Vice Chairman, Chief Financial
Chief Executive Officer Officer and Chief Administrative
Officer
March 15, 2004
39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Solutia Inc.:
We have audited the accompanying statements of consolidated
financial position of Solutia Inc. and subsidiaries (Debtor-in-
Possession) (the Company) as of December 31, 2003 and 2002, and the
related statements of consolidated operations, comprehensive loss, cash
flows and shareholders' deficit. Our audits also included the financial
statement schedule in the Index at Item 15. These financial statements
and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on
our audits. We did not audit the financial statements of Astaris LLC
("Astaris"), the Company's investment in which is accounted for by use
of the equity method. The Company's share of Astaris' net deficiency of
$23 million at December 31, 2003 and of $115 million in that company's
loss for the year ended December 31, 2003 are included in the
accompanying financial statements. The financial statements of Astaris
were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for such
company for the year ended December 31, 2003, is based solely on the
report of such other auditors.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2003
and 2002, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of
America. [Open for any modifications as may be required as a result of
KPMG's opinion]
As discussed in Note 1 to the consolidated financial statements, the
Company has filed for reorganization under Chapter 11 of the United
States Bankruptcy Code. The accompanying financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such financial statements do not purport to
show (a) as to assets, their realizable value on a liquidation basis or
their availability to satisfy liabilities; (b) as to pre-petition
liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to shareholder
accounts, the effect of any changes that may be made in the
capitalization of the Company; or (d) as to operations, the effect of
any changes that may be made in its business.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 1, the Company's recurring losses from operations and shareholders'
deficiency raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also
discussed in Note 1. The financial statements do not include adjustments
that might result from the outcome of this uncertainty.
As discussed in the notes to the consolidated financial statements,
the Company adopted Financial Accounting Standards Board Interpretation
No. 46 "Consolidation of Variable Interest Entities," Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" and SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" effective July 1, 2003, January 1,
2002 and January 1, 2001, respectively.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
St. Louis, Missouri
March 15, 2004
40
INDEPENDENT AUDITORS' REPORT
The Board of Managers
Astaris LLC:
We have audited the consolidated balance sheets of Astaris LLC (a
Delaware limited liability company) and subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of operations,
changes in members' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. The
consolidated financial statements of Astaris LLC and subsidiaries as of
December 31, 2001 and for the year then ended were audited by other
auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated
January 18, 2002.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Astaris LLC and subsidiaries as of December 31,
2003 and 2002, and the results of their operations and their cash flows
for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
St. Louis, Missouri
January 30, 2004
41
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED OPERATIONS
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
--------------------------------
2003 2002 2001
------ ------ ------
NET SALES................................................... $2,430 $2,299 $2,322
Cost of goods sold.......................................... 2,370 1,936 2,012
------ ------ ------
GROSS PROFIT................................................ 60 363 310
Marketing expenses.......................................... 156 147 142
Administrative expenses..................................... 142 128 142
Technological expenses...................................... 53 47 50
Amortization expense........................................ 3 3 12
Impairment of intangible assets............................. 78 -- --
------ ------ ------
OPERATING INCOME (LOSS)..................................... (372) 38 (36)
Equity earnings (loss) from affiliates, net of tax.......... (83) 13 (13)
Interest expense (excluding unrecorded contractual interest
expense of $1 in 2003).................................... (120) (84) (70)
Other income (expense), net................................. 11 14 (5)
Reorganization items, net................................... (1) -- --
------ ------ ------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT).................... (565) (19) (124)
Income tax expense (benefit)................................ 415 (11) (43)
------ ------ ------
LOSS FROM CONTINUING OPERATIONS BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. (980) (8) (81)
Income (Loss) from Discontinued Operations, net of tax...... (2) 24 22
Cumulative Effect of Change in Accounting Principle, net of
tax....................................................... (5) (167) --
------ ------ ------
NET LOSS.................................................... $ (987) $ (151) $ (59)
====== ====== ======
BASIC AND DILUTED LOSS PER SHARE:
Loss from Continuing Operations Before Discontinued
Operations and Cumulative Effect of Change in Accounting
Principle................................................. $(9.37) $(0.08) $(0.78)
Net Loss.................................................... $(9.44) $(1.44) $(0.57)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING....... 104.6 104.7 103.9
STATEMENT OF CONSOLIDATED COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
Year Ended December 31,
----------------------------
2003 2002 2001
----- ----- ----
NET LOSS.......................................................... $(987) $(151) $(59)
OTHER COMPREHENSIVE LOSS:
Currency translation adjustments.................................. 55 119 (37)
Cumulative effect of accounting change, net of tax of $(1)........ -- -- 2
Net realized loss on derivative instruments, net of tax of $(1)... -- 1 --
Net unrealized loss on derivative instruments, net of tax of $2... -- -- (3)
Minimum pension liability adjustments, net of tax of $(70)
in 2003, $72 in 2002, and $(2) in 2001.......................... 19 (122) 2
----- ----- ----
COMPREHENSIVE LOSS................................................ $(913) $(153) $(95)
===== ===== ====
See accompanying Notes to Consolidated Financial Statements.
42
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
As of December 31,
--------------------
2003 2002
------- ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 159 $ 17
Trade receivables, net of allowances of $14 in 2003 and
$16 in 2002............................................... 281 270
Miscellaneous receivables................................... 84 97
Inventories................................................. 240 262
Prepaid expenses............................................ 31 17
Deferred income tax benefit................................. 9 108
Assets of Discontinued Operations........................... -- 636
------- ------
TOTAL CURRENT ASSETS........................................ 804 1,407
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $2,597 in 2003 and $2,436 in 2002......... 909 930
INVESTMENTS IN AFFILIATES................................... 206 232
GOODWILL, net............................................... 97 144
IDENTIFIED INTANGIBLE ASSETS, net........................... 43 66
LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 15 290
OTHER ASSETS................................................ 372 273
------- ------
TOTAL ASSETS................................................ $ 2,446 $3,342
======= ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................ $ 78 $ 234
Accrued liabilities......................................... 303 356
Postretirement liabilities.................................. 1 93
Short-term debt............................................. 361 358
Liabilities of Discontinued Operations...................... -- 165
------- ------
TOTAL CURRENT LIABILITIES................................... 743 1,206
LONG-TERM DEBT.............................................. 294 839
POSTRETIREMENT LIABILITIES.................................. 31 1,164
OTHER LIABILITIES........................................... 282 382
------- ------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE................. 1,350 3,591
LIABILITIES SUBJECT TO COMPROMISE........................... 2,221 --
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.......................... 56 19
Treasury stock, at cost (13,838,717 and 13,659,351
shares in 2003 and 2002, respectively)................. (251) (251)
Net deficiency of assets at spin-off........................ (113) (113)
Accumulated other comprehensive loss........................ (72) (146)
(Accumulated deficit) reinvested earnings................... (746) 241
------- ------
TOTAL SHAREHOLDERS' DEFICIT................................. (1,125) (249)
------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $ 2,446 $3,342
======= ======
See accompanying Notes to Consolidated Financial Statements.
43
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED CASH FLOWS
(DOLLARS IN MILLIONS)
Year Ended December 31,
-----------------------------
2003 2002 2001
----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss.................................................... $(987) $(151) $ (59)
Adjustments to reconcile to Cash From Operations:
Cumulative effect of change in accounting principle..... 5 167 --
Depreciation and amortization........................... 137 134 143
Loss (Income) from discontinued operations, net of
tax.................................................... 2 (24) (22)
Amortization of deferred credits........................ (17) (14) (14)
Settlement of Anniston litigation and other litigation
matters................................................ 99 -- --
Impairment of intangible assets......................... 78 -- --
Restructuring expenses and other charges................ 255 21 127
Reorganization items, net............................... 1 -- --
Other, net.............................................. 15 7 --
Changes in assets and liabilities:
Income and deferred taxes........................... 401 54 (57)
Trade receivables................................... (11) (6) 37
Inventories......................................... 22 (20) 52
Accounts payable.................................... (30) 41 (105)
Liabilities subject to compromise................... 2 -- --
Other assets and liabilities........................ 3 (82) (76)
----- ----- -----
CASH PROVIDED BY (USED IN) OPERATIONS--CONTINUING
OPERATIONS................................................ (25) 127 26
CASH PROVIDED BY (USED IN) OPERATIONS--DISCONTINUED
OPERATIONS................................................ (11) 44 18
----- ----- -----
CASH PROVIDED BY (USED IN) OPERATIONS....................... (36) 171 44
----- ----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (78) (59) (83)
Acquisition and investment payments, net of cash acquired... (63) (37) (33)
Property disposals and investment proceeds, net............. 5 109 9
----- ----- -----
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES--CONTINUING
OPERATIONS................................................ (136) 13 (107)
CASH PROVIDED BY INVESTING ACTIVITIES--DISCONTINUED
OPERATIONS................................................ 474 -- 21
----- ----- -----
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............. 338 13 (86)
----- ----- -----
FINANCING ACTIVITIES:
Net change in short-term debt obligations................... 3 (327) 41
Net change in cash collateralized letters of credit......... (121) (11) --
Proceeds from issuance of long-term debt obligations........ -- 182 --
Issuance of stock warrants.................................. -- 19 --
Deferred debt issuance costs................................ (31) (29) (4)
Dividend payments........................................... -- (4) (4)
Common stock issued under employee stock plans.............. -- 2 13
Other, net.................................................. (6) (2) --
----- ----- -----
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES--CONTINUING
OPERATIONS................................................ (155) (170) 46
CASH USED IN FINANCING ACTIVITIES--DISCONTINUED
OPERATIONS................................................ (5) (20) --
----- ----- -----
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............. (160) (190) 46
----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 142 (6) 4
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 17 23 19
----- ----- -----
END OF YEAR................................................. $ 159 $ 17 $ 23
===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
The following analysis contains consolidated activity including both
continuing operations and discontinued operations. The effect of
exchange rate changes on cash and cash equivalents was not material.
Cash payments for interest (net of amounts capitalized) were
$99 million in 2003, $84 million in 2002 and $90 million in 2001. Cash
payments for income taxes were $16 million in 2003, $31 million in 2002
and $24 million in 2001. Cash payments for the management of
environmental programs which were charged against recorded environmental
liabilities were $33 million in 2003, $26 million in 2002 and
$40 million in 2001.
44
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED SHAREHOLDERS' DEFICIT
(DOLLARS IN MILLIONS)
Year Ended December 31,
-------------------------------
2003 2002 2001
------- ----- -----
COMMON STOCK:
BALANCE, JANUARY 1.......................................... $ 1 $ 1 $ 1
------- ----- -----
BALANCE, DECEMBER 31........................................ $ 1 $ 1 $ 1
------- ----- -----
ADDITIONAL CONTRIBUTED CAPITAL:
BALANCE, JANUARY 1.......................................... $ 19 $ -- $ --
Issuance of 10,000,000 and 5,533,522 warrants in 2003
and 2002, respectively................................. 37 19 --
------- ----- -----
BALANCE, DECEMBER 31........................................ $ 56 $ 19 $ --
------- ----- -----
NET DEFICIENCY OF ASSETS AT SPIN-OFF:
BALANCE, JANUARY 1.......................................... $ (113) $(113) $(113)
------- ----- -----
BALANCE, DECEMBER 31........................................ $ (113) $(113) $(113)
------- ----- -----
TREASURY STOCK:
BALANCE, JANUARY 1.......................................... $ (251) $(257) $(296)
Net shares (purchased) issued under employee stock
plans - ((179,366 shares) in 2003, 262,253 shares
in 2002, and 1,562,590 shares in 2001)................. -- 6 39
------- ----- -----
BALANCE, DECEMBER 31........................................ $ (251) $(251) $(257)
------- ----- -----
UNEARNED ESOP SHARES:
BALANCE, JANUARY 1.......................................... $ -- $ (1) $ (9)
Amortization of ESOP balance............................ -- 1 8
------- ----- -----
BALANCE, DECEMBER 31........................................ $ -- $ -- $ (1)
------- ----- -----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
ACCUMULATED CURRENCY ADJUSTMENT:
BALANCE, JANUARY 1.................................. $ (19) $(138) $(101)
Currency translation adjustments.................... 55 119 (37)
------- ----- -----
BALANCE, DECEMBER 31................................ 36 (19) (138)
------- ----- -----
MINIMUM PENSION LIABILITY:
BALANCE, JANUARY 1.................................. (127) (5) (7)
Minimum pension liability adjustments............... 19 (122) 2
------- ----- -----
BALANCE, DECEMBER 31................................ (108) (127) (5)
------- ----- -----
DERIVATIVE INSTRUMENTS:
BALANCE, JANUARY 1.................................. -- (1) --
Cumulative effect of accounting change.............. -- -- 2
Net losses on derivative instruments................ -- 1 (3)
------- ----- -----
BALANCE, DECEMBER 31................................ -- -- (1)
------- ----- -----
BALANCE, DECEMBER 31........................................ $ (72) $(146) $(144)
------- ----- -----
(ACCUMULATED DEFICIT) REINVESTED EARNINGS:
BALANCE, JANUARY 1.......................................... $ 241 $ 401 $ 491
Net loss................................................ (987) (151) (59)
Employee stock plans.................................... -- (5) (27)
Dividends............................................... -- (4) (4)
------- ----- -----
BALANCE, DECEMBER 31........................................ $ (746) $ 241 $ 401
------- ----- -----
TOTAL SHAREHOLDERS' DEFICIT................................. $(1,125) $(249) $(113)
======= ===== =====
See accompanying Notes to Consolidated Financial Statements.
45
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS
Nature of Operations
Solutia Inc. and its subsidiaries (referred to herein as "Solutia"
or the "Company") 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.
Prior to September 1, 1997, Solutia was a wholly-owned subsidiary of
the former Monsanto Company (now known as Pharmacia Corporation, a
wholly-owned subsidiary of Pfizer, Inc.). On September 1, 1997,
Pharmacia distributed all of the outstanding shares of common stock of
the Company as a dividend to Pharmacia stockholders (the spin-off). As a
result of the spin-off, on September 1, 1997, Solutia became an
independent publicly-held company listed on the New York Stock Exchange
and its operations ceased to be owned by Pharmacia. A net deficiency of
assets of $113 resulted from the spin-off.
Proceedings Under Chapter 11 of the U.S. Bankruptcy Code
On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern
District of New York. The cases were consolidated for the purpose of
joint administration and were assigned case number 03-17949 (PCB).
Solutia's subsidiaries outside the United States were not included in
the Chapter 11 filing.
The filing was made to restructure the Company's balance sheet by
reducing indebtedness to appropriate levels, to streamline operations
and reduce costs to allow the Company to emerge from Chapter 11 as a
viable going concern, and to obtain relief from the negative financial
impact of legacy liabilities. These factors, combined with the weakened
state of the chemical manufacturing sector, general economic conditions
and continuing high, volatile energy and crude oil costs have been an
obstacle to Solutia's financial stability and success. While Solutia
believes it will be able to significantly reduce the legacy liabilities
through the bankruptcy process, there can be no certainty that it will
be successful in doing so.
Under Chapter 11, Solutia is operating its businesses as
debtor-in-possession (DIP) under court protection from creditors and
claimants. Since the filing, all orders sufficient to enable the Company
to conduct normal business activities, including the approval of the
Company's DIP financing, have been entered by the bankruptcy court.
While Solutia is subject to Chapter 11, all transactions outside the
ordinary course of business will require the prior approval of the
bankruptcy court.
As a consequence of the Chapter 11 filing, pending litigation
against Solutia is generally stayed, and no party may take any action to
collect pre-petition claims except pursuant to order of the bankruptcy
court.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options
and warrants to purchase its common stock and that it is unlikely that
holders of Solutia's common stock, including options and warrants to
purchase Solutia's common stock, will receive any consideration for that
stock or those options and warrants in such a plan of reorganization.
The Company is unable to estimate what recovery such a plan of
reorganization will provide to holders of Solutia's outstanding debt
securities. While Solutia filed for Chapter 11 in part to gain relief
from the legacy liabilities it was required to assume when it was spun
off from Pharmacia, the extent to which such relief will be achieved is
uncertain at this time. It is also possible that pursuant to a plan of
reorganization Solutia will agree to retain a portion of the legacy
liabilities.
Final DIP Financing
-------------------
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a final $525 DIP credit facility. This DIP
facility consists of (i) a $50 multiple draw term loan component; (ii) a
$300 single draw term loan component; and (iii) a $175 borrowing-based
revolving credit component, which includes a $150 letter of credit
subfacility. Proceeds from the DIP financing facility were used to
retire the Company's existing pre-petition $350 credit facility, repay
the $75 provided by the interim DIP facility and provide approximately
$100 of new liquidity for general operating purposes.
46
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Euronote Modification
---------------------
Prior to Solutia's Chapter 11 filing, Solutia reached an agreement
with the requisite holders of the Euronotes, issued by SESA and
guaranteed by Solutia Inc., to restructure the Euronotes which among
other changes eliminated certain cross-default provisions. On
January 30, 2004, SESA successfully completed the restructuring. The
restructuring allows SESA to continue normal operations while Solutia
Inc. and its domestic subsidiaries reorganize under Chapter 11
bankruptcy protection.
Going Concern
-------------
The Company is currently operating under Chapter 11 of the U.S.
Bankruptcy code and continuation of the Company as a going concern is
contingent upon, among other things, the Company's ability (i) to comply
with the terms and conditions of its DIP financing; (ii) to obtain
confirmation of a plan of reorganization under the Bankruptcy Code;
(iii) to return to profitability; (iv) to generate sufficient cash flow
from operations; and (v) to obtain financing sources to meet the
Company's future obligations. These matters create uncertainty about the
Company's ability to continue as a going concern. The consolidated
financial statements do not reflect any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might result from the
outcome of these uncertainties. Additionally, a plan of reorganization
could materially change amounts reported in the consolidated financial
statements, which do not give effect to all adjustments of the carrying
value of assets and liabilities that are necessary as a consequence of
reorganization under Chapter 11.
Condensed Consolidating Financial Statements
--------------------------------------------
Condensed consolidating financial statements for Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as
of and for the year-ended December 31, 2003 are presented below. These
condensed consolidating financial statements include investments in
subsidiaries carried under the equity method.
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2003
Solutia and Solutia and
Subsidiaries in Subsidiaries not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- ------------------- ------------ ------------
ASSETS
Current assets............................ $ 557 $323 $ (76) $ 804
Property, plant and equipment, net........ 771 138 -- 909
Investment in subsidiaries and
affiliates.............................. 344 236 (374) 206
Intangible assets, net.................... 102 38 -- 140
Other assets.............................. 340 47 -- 387
------- ---- ----- -------
TOTAL ASSETS.......................... $ 2,114 $782 $(450) $ 2,446
======= ==== ===== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities....................... $ 716 $341 $(314) $ 743
Liabilities subject to compromise......... 2,221 -- -- 2,221
Long-term debt............................ 43 251 -- 294
Other liabilities......................... 259 54 -- 313
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,125) 136 (136) (1,125)
------- ---- ----- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)............................... $ 2,114 $782 $(450) $ 2,446
======= ==== ===== =======
47
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR-ENDED DECEMBER 31, 2003
Solutia and Solutia and
Subsidiaries in Subsidiaries not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- ------------------- ------------ ------------
Net sales................................. $1,992 $ 769 $(331) $2,430
Cost of goods sold........................ 2,045 675 (350) 2,370
------ ----- ----- ------
Gross profit.............................. (53) 94 19 60
Marketing, administrative and
technological expenses.................. 288 65 (2) 351
Amortization expense...................... 1 2 -- 3
Impairment of intangible assets........... 3 75 -- 78
------ ----- ----- ------
Operating income (loss)................... (345) (48) 21 (372)
Equity earnings from affiliates, net of
tax..................................... (142) (2) 61 (83)
Interest expense.......................... 102 18 -- 120
Other income (expense), net............... 36 (10) (16) 10
------ ----- ----- ------
Loss before income tax expense
(benefit)............................... (553) (78) 66 (565)
Income tax expense (benefit).............. 429 (18) 4 415
------ ----- ----- ------
Loss from Continuing Operations Before
Discontinued Operations and Cumulative
Effect of Change in Accounting
Principle............................... (982) (60) 62 (980)
Loss from Discontinued Operations, net of
tax..................................... -- (2) -- (2)
Cumulative Effect of Change in Accounting
Principle, net of tax................... (5) -- -- (5)
------ ----- ----- ------
NET LOSS.................................. $ (987) $ (62) $ 62 $ (987)
====== ===== ===== ======
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR-ENDED DECEMBER 31, 2003
Solutia and Solutia and
Subsidiaries in Subsidiaries not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
--------------- ------------------- ------------ ------------
Net cash provided by (used in) operating
activities.............................. $(99) $ 63 $-- $ (36)
Net cash provided by investing
activities.............................. 48 290 -- 338
Net cash provided by (used in) financing
activities.............................. 176 (336) -- (160)
---- ----- --- -----
Net increase in cash and cash
equivalents............................. 125 17 -- 142
Cash and cash equivalents:
Beginning of year..................... -- 17 -- 17
---- ----- --- -----
End of year........................... $125 $ 34 $-- $ 159
==== ===== === =====
2. SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The consolidated financial statements have been prepared in
accordance with Statement of Position 90-7 (SOP 90-7), Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code, and
on a going concern basis, which assumes the continuity of operations and
reflects the realization of assets and satisfaction of liabilities in
the ordinary course of business. However, as a result of the Chapter 11
proceedings, such realization of assets and satisfaction of liabilities
are subject to a significant number of uncertainties that have not been
reflected in the consolidated financial statements.
48
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Basis of Consolidation
The consolidated financial statements include the accounts of
Solutia and its majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation. Companies in which Solutia has a significant interest but
not a controlling interest are accounted for under the equity method of
accounting and included in Investments in Affiliates in the Statement of
Consolidated Financial Position. Solutia's proportionate share of these
companies' net earnings or losses is reflected net of tax in Equity
Earnings (Loss) from Affiliates in the Statement of Consolidated
Operations. In accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 46, Consolidation of Variable Interest
Entities, variable interest entities in which Solutia is the primary
beneficiary are consolidated within the consolidated financial
statements.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and that
affect revenues and expenses during the period reported. Estimates are
adjusted when necessary to reflect actual experience. Significant
estimates were used to account for restructuring reserves, environmental
reserves, self-insurance reserves, employee benefit plans, asset
impairments, contingencies, and classification of liabilities subject to
compromise. Actual results, particularly with respect to those matters
impacted by the Chapter 11 bankruptcy proceedings, could materially differ
from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and temporary investments
with maturities of three months or less when purchased.
Inventory Valuation
Inventories are stated at cost or market, whichever is less. Actual
cost is used to value raw materials and supplies. Standard cost, which
approximates actual cost, is used to value finished goods and goods in
process. Standard cost includes direct labor and raw materials, and
manufacturing overhead based on practical capacity. The cost of certain
inventories (67 percent as of December 31, 2003 and 2002, respectively)
is determined by the last-in, first-out (LIFO) method, which generally
reflects the effects of inflation or deflation on cost of goods sold
sooner than other inventory cost methods. The cost of other inventories
generally is determined by the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The cost of
plant and equipment is depreciated over 5 to 35 years for buildings and
improvements, and 3 to 15 years for machinery and equipment, by the
straight-line method.
Intangible Assets
Solutia discontinued the amortization of goodwill and identifiable
intangible assets that have indefinite useful lives in accordance with
Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and
Other Intangible Assets. Intangible assets that have finite useful lives
are amortized on a straight-line basis over their useful lives,
generally periods ranging from 5 to 20 years. Goodwill and
indefinite-lived intangible assets are assessed annually for impairment
in the fourth quarter.
Impairment of Long-Lived Assets
Impairment tests of long-lived assets are made when conditions
indicate a possible loss. Impairment tests are based on a comparison of
undiscounted cash flows to the recorded value of the asset. If an
impairment is indicated, the asset value is written down to its fair
value based upon market prices or, if not available, upon discounted
cash value, at an appropriate discount rate.
Environmental Remediation
Costs for remediation of waste disposal sites are accrued in the
accounting period in which the obligation is probable and when the cost
is reasonably estimable. Postclosure costs for hazardous waste
facilities at certain U.S. operating locations are accrued over the
estimated life of the facility as part of its anticipated closure cost.
Environmental liabilities are not discounted, and they have not been
reduced for any claims for recoveries from third parties. In those cases
where third-party indemnitors have agreed to pay any amounts and
management believes that collectability of such amounts is probable, the
amounts are reflected as receivables in the consolidated financial
statements.
49
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Self-Insurance and Insurance Recoveries
Solutia maintains self-insurance reserves to reflect its estimate of
uninsured losses. Self-insured losses are accrued based upon estimates
of the aggregate liability for claims incurred using certain actuarial
assumptions followed in the insurance industry, the Company's historical
experience and certain case specific reserves as required, including
estimated legal costs. The maximum extent of the self-insurance provided
by the Company is dependent upon a number of factors including the facts
and circumstances of individual cases and the terms and conditions of
the commercial policies. Solutia has purchased commercial insurance in
order to reduce its exposure to workers' compensation, product, general,
automobile and property liability claims. Policies for periods prior to
the spin-off are shared with Pharmacia. This insurance has varying
policy limits and deductibles.
Insurance recoveries are estimated in consideration of expected
losses, coverage limits and policy deductibles. When recovery from an
insurance policy is considered probable, a receivable is recorded.
Revenue Recognition
The Company's primary revenue-earning activities involve producing
and delivering goods. Revenues are considered to be earned when the
Company has completed the process by which it is entitled to such
revenues. The following criteria are used for revenue recognition:
persuasive evidence of an arrangement exists, delivery has occurred,
selling price is fixed or determinable and collection is reasonably
assured. In the case of the pharmaceutical services businesses, revenues
are primarily recorded as services are rendered.
Distribution Costs
The Company includes inbound freight charges, purchasing and
receiving costs, inspection costs, warehousing costs, internal transfer
costs and the other costs of its distribution network in cost of goods
sold within the Statement of Consolidated Operations.
Shipping and Handling Costs
Amounts billed for shipping and handling are included in net sales
and the costs incurred for these activities are included in cost of
goods sold on the Statement of Consolidated Operations.
Derivative Financial Instruments
Currency forward contracts are used to manage currency exposures for
financial instruments denominated in currencies other than the entity's
functional currency. Natural gas contracts are used to manage some of
the exposure for the cost of natural gas. Gains and losses on contracts
that are designated and effective as hedges are included in net income
(loss) and offset the exchange gain or loss of the transaction being
hedged.
Major currencies affecting the Company's business are the U.S.
dollar, the British pound sterling, the euro, the Canadian dollar, the
Australian dollar and the Brazilian real. Currency restrictions are not
expected to have a significant effect on Solutia's cash flows, liquidity
or capital resources.
Income Taxes
Solutia accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities at
enacted rates. The Company determines the appropriateness of valuation
allowances in accordance with the "more likely than not" recognition
criteria outlined in SFAS No. 109, Accounting for Income Taxes.
Currency Translation
The local currency has been used as the functional currency for
nearly all worldwide locations. The financial statements for most of
Solutia's ex-U.S. operations are translated into U.S. dollars at current
or average exchange rates. Unrealized currency translation adjustments
in the Statement of Consolidated Financial Position are accumulated as a
component of shareholders' deficit.
Earnings (Loss) per Share
Basic earnings (loss) per share is a measure of operating
performance that assumes no dilution from securities or contracts to
issue common stock. Diluted earnings (loss) per share is a measure of
operating performance by giving effect to the dilution that would occur
if securities or contracts to issue common stock were exercised or
converted.
50
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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 Operations, 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. The
following table illustrates the effect on net loss and loss per share if
the fair value based method had been applied to all outstanding and
unvested awards in each year ended December 31 as follows:
Year Ended December 31,
--------------------------------
2003 2002 2001
------ ------ ------
NET LOSS:
As reported........................................ $ (987) $ (151) $ (59)
Deduct: Total stock-based employee compensation
expense determined using the Black-Scholes
option-pricing model for all awards, net of
tax.............................................. (5) (7) (8)
------ ------ ------
Pro forma.......................................... $ (992) $ (158) $ (67)
====== ====== ======
LOSS PER SHARE:
Basic and Diluted--as reported..................... $(9.44) $(1.44) $(0.57)
Basic and Diluted--pro forma....................... $(9.48) $(1.51) $(0.64)
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.
In addition, Solutia believes that its plan of reorganization will
result in cancellation of its existing shares of common stock, as well
as options and warrants to purchase its common stock and that it is
unlikely that holders of options to purchase Solutia's common stock will
receive any consideration for those options in such a plan of
reorganization.
Recently Issued Accounting Standards
On January 13, 2004, the FASB issued FASB Staff Position (FSP)
106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act).
The FSP permits a sponsor of a postretirement health care plan that
provides a prescription drug benefit to make a one-time election to
defer accounting for the effects of the Act. Regardless of whether a
sponsor elects that deferral, the FSP requires certain disclosures
pending further consideration of the underlying accounting issues. The
guidance in this FSP is effective for interim or annual financial
statements of fiscal years ending after December 7, 2003. The election
to defer accounting for the Act is a one-time election that must be made
before net periodic postretirement benefit costs for the period that
includes the Act's enactment date are first included in reported
financial information pursuant to the requirements of SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
The Company has elected to defer recording the impact of the Act in its
consolidated financial statements for the year ended December 31, 2003
in view of the fact that specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when
issued, could require the Company to change previously reported
information. Consequently, the impact of the Act on the Company's
measure of the accumulated postretirement benefit obligation (APBO) and
net periodic postretirement benefit cost in the consolidated financial
statements and accompanying notes do not reflect the effects of the Act
on the other postretirement benefits plan as of and for the year-ended
December 31, 2003. See Note 16 for additional information.
On December 24, 2003, the FASB issued SFAS No. 132 (revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits,
to improve financial statement disclosures for defined benefit plans.
This Statement revises employers' disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement
or recognition of those plans required by SFAS No. 87, Employers'
Accounting for Pensions, SFAS No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and SFAS No. 106. This Statement retains the
disclosure requirements contained in SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, which it
replaces. It requires additional disclosures to those in the original
Statement 132 about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The information is required separately for
pension plans and for other postretirement
51
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
benefit plans. In addition to expanded annual disclosures, companies are
required to report the various elements of pension and other
postretirement benefit costs on a quarterly basis.
The provisions of Statement 132 remain in effect until the
provisions of this revised Statement are adopted. Except as noted below,
this Statement is effective for financial statements with fiscal years
ending after December 15, 2003. The interim-period disclosures required
by this Statement are effective for interim periods beginning after
December 15, 2003. Disclosure of information about foreign plans
required by paragraphs 5(d), 5(e), 5(g), and 5(k) of this Statement is
effective for fiscal years ending after June 15, 2004. Disclosure of
estimated future benefit payments required by paragraph 5(f) of this
Statement is effective for fiscal years ending after June 15, 2004. See
Note 16 for the Company's expanded disclosures concerning this newly
issued Statement.
On December 24, 2003, the FASB issued a revision of the FASB
Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46R). FIN 46R codifies both the proposed modifications and other
decisions previously issued through certain FSPs and supersedes the
original Interpretation No. 46 to include: (1) deferring the effective
date of the Interpretation's provisions for certain variable interests,
(2) providing additional scope exceptions for certain other variable
interests, (3) clarifying the impact of troubled debt restructurings on
the requirement to reconsider (a) whether an entity is a variable
interest entity (VIE) or (b) which party is the primary beneficiary of a
VIE, and (4) revising Appendix B of the Interpretation to provide
additional guidance on what constitutes a variable interest. Application
of FIN 46R is required in financial statements of public entities that
have interests in structures that are commonly referred to as
special-purpose entities for periods ending after December 15, 2003. The
Company originally adopted Interpretation No. 46 during the quarter
ended September 30, 2003, as more fully described in Note 12. FIN 46R
did not have an impact on the conclusions reached upon adoption of the
original Interpretation No. 46.
Reclassifications
Certain reclassifications to prior years' financial information have
been made to conform to the 2003 presentation. In connection with the
completion of the credit facility as of October 8, 2003, Solutia
Investments, LLC, and Solutia Business Enterprises, Inc. became
guarantors of the 11.25 percent notes due 2009 through cross-guarantor
provisions. Accordingly, for comparative purposes, the 2002 and 2001
consolidating condensed financial statements have been restated to
reflect the addition of these two new guarantors (as more fully
described in Note 25).
3. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET
Under Chapter 11 of the Bankruptcy Code, certain claims against the
Company in existence prior to the filing of the petitions for relief
under the federal bankruptcy laws are stayed while the Company continues
business operations as debtor-in-possession. These estimated claims are
reflected in the December 31, 2003, Statement of Consolidated Financial
Position as Liabilities Subject to Compromise and are summarized in the
table below. Such claims remain subject to future adjustments.
Adjustments may result from actions of the Bankruptcy Court,
negotiations, rejection or acceptance of executory contracts, the
determination as to the value of any collateral securing claims, proofs
of claim or other events.
The Company has received approval from the bankruptcy court to pay
or otherwise honor certain of its pre-petition obligations, including
(i) certain pre-petition compensation to employees and
employee-equivalent independent contractors; (ii) business expenses of
employees; (iii) obligations under employee benefit plans; (iv) employee
payroll deductions and withholdings; (v) costs and expenses incident to
the foregoing payments (including payroll-related taxes and processing
costs); (vi) certain pre-petition workers' compensation claims, premiums
and related expenses; (vii) certain pre-petition trust fund and
franchise taxes; (viii) pre-petition claims of certain contractors,
freight carriers, processors, customs brokers and related parties;
(ix) customer accommodation programs; and (x) pre-petition claims of critical
vendors in the ordinary course of business. Accordingly, these
pre-petition items have been excluded from Liabilities Subject to
Compromise as of December 31, 2003, as applicable.
52
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The amounts subject to compromise at December 31, 2003 consisted of
the following items:
Accounts payable............................................ $ 122
Postretirement benefits(a).................................. 1,153
Self-insurance reserves(b).................................. 156
Environmental reserves(c)................................... 85
Other miscellaneous liabilities............................. 80
6.72% debentures puttable 2004, due 2037.................... 150
7.375% debentures due 2027.................................. 300
11.25% notes due 2009....................................... 223
------
673
Unamortized debt discount and debt issuance costs........... (48)
------
TOTAL DEBT SUBJECT TO COMPROMISE........................ 625
------
TOTAL LIABILITIES SUBJECT TO COMPROMISE..................... $2,221
======
- --------
(a) Postretirement benefits include the Company's domestic (i) qualified pension plan of $420; (ii) unqualified
pension plan of $23; and (iii) other postretirement benefits of $710.
(b) An automatic stay has been imposed against the commencement or continuation of legal proceedings against the
Company outside of the bankruptcy court process. Consequently, the Company's accrued liability for
self-insurance has been classified entirely as liabilities subject to compromise.
(c) Represents remediation obligations related to properties that are not owned or operated by Solutia, including
non-owned properties adjacent to current operating sites.
Reorganization items, net are presented separately in the Statement
of Consolidated Operations and represent items of income, expense, gain,
or loss that are realized or incurred by the Company because it is in
reorganization under Chapter 11 of the Bankruptcy Code. For the year
ended December 31, 2003, reorganization items consisted entirely of
professional fees of $1. In addition, while operating during the Chapter
11 proceedings, the Company has ceased recording interest on all debt it
believes is under-secured pre-petition indebtedness in accordance with
SOP 90-7 with the exception of the 11.25 percent notes due 2009 for
which the Bankruptcy Court has permitted continued payments of the
contractual interest through January 2005. The amount of contractual
interest not recorded in 2003 was $1.
53
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
4. ACQUISITIONS AND DIVESTITURES
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 in
cash, plus an upfront payment of $10 for a period of exclusivity. On
January 31, 2003, the sale was completed resulting in a pre-tax gain of
$24; accordingly, the assets and liabilities of the discontinued
operations were 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 borrowings under the amended credit
facility in accordance with bank agreements. As a result, all borrowings
under this facility were classified as short-term as December 31, 2002.
The Company retained certain tax liabilities of approximately
$40 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:
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
====
The operating results of the resins, additives and adhesives
businesses have been reported separately as discontinued operations in
the consolidated financial statements for each year presented. The
operating results exclude certain corporate expenses of $10 in 2002 and
$12 in 2001, which had previously been allocated to the resins,
additives and adhesives businesses. In addition, interest expense of
$24 in 2003, $26 in 2002 and $20 in 2001, 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 2003. Net sales and income (loss) from discontinued
operations are as follows:
Year Ended December 31,
--------------------------
2003 2002 2001
---- ---- ----
Net sales................................................... $53 $559 $549
Income before income tax expense............................ 7 34 47
Income tax expense.......................................... (9) (10) (25)
--- ---- ----
Income (loss) from Discontinued Operations.................. $(2) $ 24 $ 22
=== ==== ====
Other Acquisitions and Divestitures
On May 31, 2002, Solutia acquired Axio Research Corporation (Axio)
for approximately $5, 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 complements the
54
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
pharmaceutical services offering within the Performance Products and
Services segment. The allocation of the purchase price to assets and
liabilities acquired resulted in current assets of $1, non-current
assets of $1, goodwill of $4 and current liabilities of $1. 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 year ended December 31, 2002.
During the first quarter of 2002, Solutia sold its 50 percent
interest in the Advanced Elastomer Systems (AES) joint venture to
ExxonMobil Chemical Company, a division of Exxon Mobil Corporation and
Exxon Chemical Asset Management Partnership, a subsidiary of ExxonMobil
Corporation for approximately $102. The sale resulted in a gain of $5.
5. LOSS PER SHARE
Year Ended December 31,
--------------------------------
2003 2002 2001
------ ------ ------
Loss from Continuing Operations Before Discontinued
Operations and Cumulative Effect of Change in Accounting
Principle................................................. $ (980) $ (8) $ (81)
Income (Loss) from Discontinued Operations, net of tax...... (2) 24 22
Cumulative Effect of Change in Accounting Principle......... (5) (167) --
------ ------ ------
Net Loss.................................................... $ (987) $ (151) $ (59)
====== ====== ======
Basic and Diluted Loss per Share:
Loss from Continuing Operations Before Discontinued
Operations and Cumulative Effect of Change in Accounting
Principle................................................. $(9.37) $(0.08) $(0.78)
Income (Loss) from Discontinued Operations, net of tax...... (0.02) 0.23 0.21
Cumulative Effect of Change in Accounting Principle, net
of tax.................................................... (0.05) (1.59) --
------ ------ ------
Basic and Diluted Loss per Share............................ $(9.44) $(1.44) $(0.57)
------ ------ ------
Basic and Diluted Weighted Average Shares Outstanding
(in millions)............................................. 104.6 104.7 103.9
------ ------ ------
At December 31, 2003, 2002 and 2001, 0.1 million, 0.2 million and
1.2 million common share equivalents, respectively, were excluded
because the effect would be antidilutive.
6. RESTRUCTURING RESERVES
During 2003 the Company recorded restructuring and severance charges
of $56. The restructuring charges resulted from the Company's continued
strategic evaluation of its businesses, and the resulting decisions to
shut down certain operations due to various market and economic
conditions. Included in these restructuring charges were $22 of
severance charges associated with workforce reductions precipitated by
the sale of the resins, additives and adhesives businesses and other
ongoing cost reduction initiatives; $17 of asset write-downs; $14
related to non-cancelable operating leases, which the Company is no
longer utilizing the properties or services underlying these lease
arrangements; and $3 in contract termination costs. As a result of the
aforementioned severance actions, Solutia reduced its workforce by
approximately 530 positions. Cash outlays associated with the
restructuring actions were funded from 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 30 percent of the workforce reductions. Of
this $56 in restructuring and severance charges, $47 was recorded in the
Performance Products and Services segment, $5 was recorded in the
Integrated Nylon segment, and $4 was recorded in Corporate/Other.
55
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes the above noted restructuring
charges, amounts utilized to carry out those plans and amount remaining
at December 31, 2003:
Future
Employment Asset Write- Lease Other
Reductions downs Payments Costs Total
---------- ------------ -------- ----- -----
Balance at January 1, 2003..................... $ -- $ -- $-- $-- $ --
Charges taken............................. 22 17 14 3 56
Amounts utilized.......................... (22) (17) -- -- (39)
---- ---- --- --- ----
BALANCE AT DECEMBER 31, 2003................... $ -- $ -- $14 $ 3 $ 17
==== ==== === === ====
During 2001 Solutia reduced its workforce by approximately
700 positions. Additionally, Solutia eliminated more than 750 contractor
positions during 2001. 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 and sales offices. Management positions
represented approximately one-third of the workforce reductions. During
the fourth quarter of 2001, Solutia determined that the original
provision taken for its 2001 restructuring program was insufficient to
cover its total costs. Actual costs to terminate certain European and
North American management employees and certain employee benefit costs
for involuntary terminations were higher than the original estimates. As
a result, Solutia recorded additional restructuring charges of $9 to
cost of goods sold to cover these higher costs. The restructuring
actions contemplated by this reserve were completed by the end of 2001.
Certain severance payments owed to individuals terminated late in the
fourth quarter of 2001 were included in accrued liabilities at December
31, 2001, and were paid during the first quarter of 2002. The closure of
non-strategic facilities is not anticipated to have a significant impact
on future operations.
The following table summarizes the 2000 restructuring charge and
amounts utilized to carry out those plans:
Employment Shutdown of
Reductions Facilities Total
---------- ----------- -----
Balance at January 1, 2000........................ $ -- $-- $ --
Charges taken................................ 50 3 53
Amounts utilized............................. -- (3) (3)
---- --- ----
Balance at December 31, 2000...................... $ 50 $-- $ 50
---- --- ----
Charges taken................................. 9 -- 9
Amounts utilized.............................. (59) -- (59)
---- --- ----
BALANCE AT DECEMBER 31, 2001...................... $ -- $-- $ --
==== === ====
During 2000 Solutia identified excess production capacity for
certain Solutia resins products that allowed for consolidation of
production facilities. As a result, Solutia exited its operations at the
Port Plastics site in Addyston, Ohio. An $8 ($5 after-tax) charge to
cost of goods sold was recorded to carry out the exit plan. The charge
included $2 to write down plant assets to their fair value of
approximately $1, $2 of dismantling costs and $4 of estimated costs for
which Solutia was 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 is required to provide 24 months notice
of intent to exit and is 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. The contractually obligated costs represent
direct manufacturing, overhead, utilities and severance. The financial
impact was not material to Solutia as production shifted to other
production facilities.
56
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes the restructuring charge, amounts
utilized to carry out those plans and amount remaining at
December 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....................... -- -- (3) (3)
--- --- --- ---
BALANCE AT DECEMBER 31, 2003............... $-- $-- $ 1 $ 1
=== === === ===
As a result of the Company's Chapter 11 filing, the remaining $1 is
subject to compromise and will be addressed in conjunction with the
ongoing bankruptcy proceedings.
7. IMPAIRMENT OF LONG-LIVED ASSETS
During 2003 Solutia recorded an $18 impairment charge to Cost of
Goods Sold for the write down of certain fixed assets and a $14 charge
to Impairment of Intangible Assets for the write down of certain
finite-lived intangible assets, both included within the Pharmaceutical
Services business line of the Performance Products and Services
operating segment. As a result of current operating losses, primarily
because of industry consolidations and the projected future competitive
market conditions that they face, a strategic review of the business was
commenced in order to better align the cost structure of the business
with future revenue projections.
Certain under-utilized assets in the Pharmaceutical Services
business line, located in Switzerland, were identified from this review
and a plan was commenced to streamline operations through the
consolidation of these assets during 2003. In conjunction with this
plan, an impairment analysis in accordance with SFAS No. 144, Accounting
for the Impairment of Disposal of Long-lived Assets, was completed based
upon the indicators of impairment present within the asset group being
reviewed, including historical losses and declining estimates of
forecasted results given current economic and market conditions in the
Pharmaceutical Service industry. The carrying value of the assets was
compared to undiscounted expected cash flows indicating an impairment
was present, as the carrying value of the assets were above the
undiscounted cash flow amount. Therefore, the assets were written down
to fair value, as determined by discounting expected future cash flows,
using an appropriate discount rate. The assumptions used in the cash
flow projections approximated the market conditions experienced in 2003.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
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. Fair value
measurements of the reporting units upon adoption in 2002 were estimated
by a third-party specialist utilizing both income and market multiple
approaches. Based on this analysis, Solutia recorded an impairment loss
of $167 during 2002 for the resins, additives and adhesives businesses,
which is presented as discontinued operations, due to declining
estimates of future results given current economic and market
conditions. The goodwill impairment charge was non-deductible for tax
purposes and is reflected as the cumulative effect of change in
accounting principle in the Statement of Consolidated Operations.
57
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net loss and loss per share, excluding discontinued operations, for
the year ended December 31, 2001, adjusted to exclude the non-
amortization provisions of SFAS No. 142, net of tax, are as follows:
2001
------
Net Loss:
Loss from Continuing Operations........................ $ (81)
Goodwill amortization.................................. 8
Equity method goodwill amortization.................... 2
Trademark amortization................................. 2
------
ADJUSTED NET LOSS........................................... $ (69)
======
2001
------
Basic and Diluted loss per share:
Loss from Continuing Operations......................... $(0.78)
Goodwill amortization................................... 0.08
Equity method goodwill amortization..................... 0.02
Trademark amortization.................................. 0.02
------
ADJUSTED BASIC AND DILUTED LOSS PER SHARE................... $(0.66)
======
During the fourth quarter 2003, the Company recorded an impairment
charge of $64 within the Pharmaceutical Services reporting unit in
accordance with SFAS No. 142 for the write down of goodwill of $53 and
certain indefinite-lived intangible assets of $11 and based upon fair
value estimates of the reporting unit by third party specialists using
income and market approaches. In addition, the Company recorded a
$14 impairment charge for certain finite-lived intangible assets, as
determined through an impairment test performed in accordance with SFAS
No. 144, as more fully described in Note 7. These impairment charges
totaling $78 are recorded in the Impairment of Intangible Assets line
within the Statement of Consolidated Operations and are included within
the results of operations of the Performance Products and Services
operating segment. These charges were precipitated by the declining
estimates of forecasted results given current economic and market
conditions within the pharmaceutical services industry.
There were no material acquisitions of intangible assets and there
have been no changes to amortizable lives or methods during 2003. The
Company's acquisition of Axio (as more fully described in Note 4) during
2002 resulted in goodwill of approximately $4. Amortization expense for
the net carrying amount of finite-lived intangible assets is estimated
to be $3 annually in 2004 through 2008. Goodwill and indefinite-lived
intangible assets are assessed annually for impairment in the fourth
quarter.
58
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Goodwill and trademarks are allocated to the Performance Products
and Services segment, which includes the CPFilms and Pharmaceutical
Services reporting units. Trademarks are included within Identified
Intangible Assets in the Statement of Consolidated Financial Position.
The allocation of these items is as follows:
Total
Performance
Phamaceutical Products
CPFilms Services and Services
------- -------------- ------------
Goodwill, December 31, 2002................................. $74 $ 70 $144
Translation................................................. -- 6 6
Impairment.................................................. -- (53) (53)
--- ---- ----
Goodwill, December 31, 2003................................. $74 $ 23 $ 97
--- ---- ----
Trademarks, December 31, 2002............................... $26 $ 11 $ 37
Translation................................................. -- 1 1
Impairment.................................................. -- (11) (11)
--- ---- ----
Trademarks, December 31, 2003............................... $26 $ 1 $ 27
--- ---- ----
Amortized identified intangible assets generally comprise of patents
and contract-based intangible assets and are summarized in aggregate as
follows:
December 31, 2003
----------------------------------------------------
Gross Carrying Accumulated Net Carrying
Value Amortization Value
-------------- ------------ ------------
Amortized Intangible Assets, December 31, 2002............. $ 42 $(13) $ 29
Impairment................................................. (14) -- (14)
Translation................................................ 5 -- 5
Amortization............................................... -- (4) (4)
---- ---- ----
Amortized Intangible Assets, December 31, 2003............. $ 33 $(17) $ 16
---- ---- ----
December 31, 2002
----------------------------------------------------
Gross Carrying Accumulated Net Carrying
Value Amortization Value
-------------- ------------ ------------
Amortized Intangible Assets, December 31, 2001............. $ 38 $ (9) $ 29
Asset Acquisition.......................................... 1 -- 1
Intangible Assets Subsumed into Goodwill................... (2) -- (2)
Translation................................................ 5 -- 5
Amortization............................................... -- (4) (4)
---- ---- ----
Amortized Intangible Assets, December 31, 2002............. $ 42 $(13) $ 29
---- ---- ----
9. RISK MANAGEMENT ACTIVITIES
Effective January 1, 2001, Solutia adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, which
requires that all derivative instruments be reported on the balance
sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The cumulative effect of
adopting SFAS No. 133 as of January 1, 2001, resulted in a cumulative
addition to other comprehensive income of $2 after-tax, principally
attributable to unrealized gains in commodity cash flow hedges.
Solutia's business operations give rise to market risk exposures
that result from changes in currency exchange rates, interest rates and
certain commodity prices. To manage the volatility relating to these
exposures, Solutia enters into various hedging transactions that enable
it to alleviate the adverse effects of financial market risk.
Designation is performed on a specific exposure basis to support hedge
accounting. The changes in fair value of these hedging instruments are
offset in part or in whole by corresponding changes in the fair value or
cash flows
59
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
of the underlying exposures being hedged. Solutia's hedging transactions
are carried out under policies and procedures approved by the Audit and
Finance Committee of the Board of Directors, which do not permit the
purchase or holding of any derivative financial instruments for trading
purposes.
Foreign Currency Exchange Rate Risk
Solutia manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. Solutia uses foreign currency hedging
instruments to manage the volatility associated with foreign currency
purchases of materials and other assets and liabilities created in the
normal course of business. Solutia primarily uses forward exchange
contracts and purchased options to hedge these risks with maturities of
less than 18 months.
Solutia also enters into certain foreign currency derivative
instruments primarily to protect against exposure related to
intercompany financing transactions. Solutia has chosen not to designate
these instruments as hedges and to allow the gains and losses that arise
from marking the contracts to market to be recorded in other income
(expense), net in the period. The net impact of the related gains and
losses was not material.
Foreign currency hedging activity is not material to Solutia's
financial statements.
Interest Rate Risk
Interest rate risk is primarily related to the changes in fair value
of fixed-rate long-term debt and short-term, floating rate debt. Solutia
believes its current debt structure appropriately protects the Company
from changes in interest rates and is not actively using any contracts
to manage interest rate risk.
Commodity Price Risk
Certain raw materials and energy sources used by Solutia are subject
to price volatility caused by weather, crude oil prices, supply
conditions, political and economic variables and other unpredictable
factors. Historically, Solutia routinely uses forward and option
contracts to manage a portion of the volatility related to anticipated
energy purchases with maturities up to 6 months. These market
instruments are designated as cash flow hedges. The mark-to-market gain
or loss on qualifying hedges is included in other comprehensive income
(loss) to the extent effective, and reclassified into cost of goods sold
in the period during which the hedged transaction affects earnings. The
mark-to-market gains or losses on ineffective portions of hedges are
recognized in cost of goods sold immediately. As of December 31, 2003
there were no outstanding cash flow hedges and no gains/losses recorded
in other comprehensive loss as of December 31, 2003. The net impact on
other comprehensive loss included approximately $1 after-tax for
realized losses on cash flow hedges at December 31, 2002. No cash flow
hedges were discontinued during the year due to changes in expectations
on the original forecasted transactions.
Credit Risk
Credit risk arising from the inability of a counterparty to meet the
terms of Solutia's financial instrument contracts is generally limited
to the amounts, if any, by which the counterparty's obligations exceed
the obligations of the Company. It is Solutia's policy to enter into
financial instruments with a number of creditworthy counterparties.
Therefore, Solutia does not expect to incur material credit losses on
its risk management or other financial statement instruments.
10. INVESTMENTS IN AFFILIATES
At December 31, 2003, Solutia's investments in affiliates consisted
principally of its 50 percent interests in the Flexsys and Astaris joint
ventures for which Solutia applies the equity method of accounting.
Solutia received dividends from affiliates of approximately $25 in 2002
60
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
and $30 in 2001. There were no dividends received during 2003.
Summarized combined financial information for 100 percent of the Flexsys
and Astaris joint ventures and the results of operations for AES for the
period up until the sale during the first quarter of 2002 is as follows:
Year Ended December 31,
----------------------------
2003 2002 2001
---- ---- ------
Results of operations:
Net sales............................................ $890 $962 $1,241
Gross profit......................................... 102 152 226
Operating income (loss).............................. (242) 30 (63)
Net income (loss).................................... (273) 12 (48)
December 31,
----------------------------
2003 2002 2001
---- ---- ------
Financial position:
Current assets....................................... $344 $353 $ 493
Noncurrent assets.................................... 493 650 768
Current liabilities.................................. 398 336 498
Noncurrent liabilities............................... 181 273 205
Solutia's investment in Astaris as of December 31, 2003 and 2002
exceeded Solutia's proportionate share of the underlying equity of
Astaris by $59 and $14, respectively, primarily due to the guarantee of
debt recorded in 2003 (as more fully described below) and goodwill
recorded by Solutia at inception of the joint venture. Solutia's
investment in Flexsys as of December 31, 2003 and 2002 exceeded
Solutia's proportionate share of the underlying equity of Flexsys by
$4 and $10, respectively, primarily due to goodwill recorded by Solutia at
inception of the joint venture.
During 2003, the results of operations of both Astaris and Flexsys
were negatively affected by $89, net of tax, in restructuring and
litigation charges resulting from (i) the Astaris joint venture for
select production asset and product rationalizations, including the
Conda, Idaho, purified phosphoric acid facility, which had performed
significantly below expectations; (ii) restructuring charges related to
asset impairments at the Flexsys joint venture; (iii) severance charges
at both the Flexsys and Astaris joint ventures; and (iv) in the fourth
quarter of 2003, the Flexsys joint venture recorded a charge related to
litigation expenses.
In connection with the external financing agreement for Astaris,
which expires in September of 2005, Solutia and its equal partner in the
venture, FMC Corporation, contractually agreed to provide Astaris with
funding in the event the joint venture fails to meet certain financial
benchmarks. The financial benchmarks were based on forecasted earnings
that were developed when the financing was originated in September 2000.
Astaris earnings have fallen short of the forecast underlying its
external financing agreement due to numerous factors including
significantly less than planned productivity of its purified phosphoric
acid technology, lower sales volumes and lower average selling prices.
As a result of these earnings shortfalls in comparison to the original
expectations, Solutia and FMC each made additional investments of
$63 and $30 during 2003 and 2002, respectively.
On October 8, 2003, Solutia and Astaris amended its external
financing agreement to release the Astaris lenders' security interests
in certain Solutia assets in exchange for Solutia's posting of a
$67 letter of credit, representing fifty percent of the Astaris lenders'
outstanding commitments to Astaris as of October 8, 2003. The agreement
was also amended to provide for a dollar-for-dollar reduction of the
Astaris lenders' commitments with future payments made by Solutia and
FMC under their existing support agreements to Astaris. This additional
amendment will effectively provide a $67 limitation for each of Solutia
and FMC on future funding in the event the joint venture continues to
fail to meet certain financial benchmarks. Solutia's $67 letter of
credit will also reduce dollar-for-dollar as future payments are made by
Solutia under its existing support agreement. The remaining commitment
to Astaris as of December 31, 2003 is $51. This amount is recorded as a
liability in the Statement of Consolidated Financial Position in
accordance with FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.
During the first quarter of 2002, Solutia sold its 50 percent
interest in the AES joint venture to ExxonMobil Chemical Company, a
division of ExxonMobil Corporation and Exxon Chemical Asset Management
Partnership, a subsidiary of ExxonMobil Corporation for approximately
$102. The sale resulted in a gain of $5 ($3 after-tax).
61
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
11. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
December 31,
---------------------
2003 2002
INVENTORIES ------- -------
Finished goods.............................................. $ 192 $ 179
Goods in process............................................ 92 101
Raw materials and supplies.................................. 83 83
------- -------
Inventories, at FIFO cost................................... 367 363
Excess of FIFO over LIFO cost............................... (127) (101)
------- -------
TOTAL....................................................... $ 240 $ 262
======= =======
Inventories at FIFO approximate current cost. The effects of LIFO
inventory liquidations were not significant.
December 31,
---------------------
2003 2002
PROPERTY, PLANT AND EQUIPMENT ------- -------
Land........................................................ $ 19 $ 19
Buildings................................................... 420 375
Machinery and equipment..................................... 3,038 2,946
Construction in progress.................................... 29 26
------- -------
Total property, plant and equipment......................... 3,506 3,366
Less accumulated depreciation............................... (2,597) (2,436)
------- -------
TOTAL....................................................... $ 909 $ 930
======= =======
December 31,
---------------------
2003 2002
OTHER ASSETS ------- -------
Cash underlying collateralized letters of credit............ $ 132 $ 11
Intangible pension asset.................................... 81 99
Computer software........................................... 48 59
Other....................................................... 111 104
------- -------
TOTAL....................................................... $ 372 $ 273
======= =======
12. VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This Interpretation
provides guidance related to identifying variable interest entities
(VIEs) and determining whether such entities should be consolidated. The
Interpretation must be applied immediately to VIEs created, or interests
in VIEs obtained, after January 31, 2003. For those VIEs created, or
interests in VIEs obtained, on or before January 31, 2003, the guidance
in the Interpretation must be applied in the first fiscal year or
interim period beginning after December 15, 2003. The Company early
adopted the provisions of the Interpretation for VIEs obtained on or
before January 31, 2003, during the third quarter 2003. There have been
no VIEs created, or interests in VIEs obtained, after January 31, 2003.
The Company has one operating lease related to its corporate
headquarters in St. Louis, Missouri, entered into in 1999, that
qualifies as a VIE under this Interpretation. Based on the current terms
of the lease agreement and the residual value guarantee the Company
provides to the lessor, the Company concluded it is the primary
beneficiary of the VIE. The residual value guarantee is $35 as of
December 31, 2003. As a result, the Company consolidated the property,
plant and equipment of $37 and long-term debt of $43 held by this VIE,
and recorded minority interest of $1 and a resulting after-tax charge of
$5, reported as a cumulative effect of a change in accounting principle,
net of tax. The assets and liabilities of $37 and $43, respectively,
which were consolidated as part of adoption of this Interpretation, were
not included within the Statement of Consolidated Cash Flows for the
year ended December 31, 2003, as these items represent non-cash
transactions upon adoption of this Interpretation.
62
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
13. INCOME TAXES
The components of loss from continuing operations before income
taxes were:
2003 2002 2001
----- ---- -----
United States............................................. $(499) $(53) $(137)
Outside United States..................................... (66) 34 13
----- ---- -----
TOTAL..................................................... $(565) $(19) $(124)
===== ==== =====
The components of income tax expense (benefit) recorded in
continuing operations were:
2003 2002 2001
----- ---- ----
Current:
U.S. federal........................................... $ -- $ -- $(30)
U.S. state............................................. -- -- --
Outside United States.................................. 17 27 23
----- ---- ----
17 27 (7)
----- ---- ----
Deferred:
U.S. federal........................................... (110) (23) (17)
U.S. state............................................. (21) (9) (13)
Outside United States.................................. (18) (6) (17)
----- ---- ----
(149) (38) (47)
----- ---- ----
Valuation Allowances....................................... 547 -- 11
----- ---- ----
TOTAL...................................................... $ 415 $(11) $(43)
===== ==== ====
Factors causing Solutia's effective tax rate for continuing
operations to differ from the U.S. federal statutory rate were:
2003 2002 2001
---- ---- ----
U.S. federal statutory rate................................. (35)% (35)% (35)%
U.S. state income taxes..................................... (2) (32) (7)
Export tax benefit.......................................... (1) (17) (2)
Taxes related to foreign income (loss), net of credits...... 8 65 (7)
Valuation allowances........................................ 97 -- 9
Income (loss) from equity affiliates recorded net of tax.... 5 (25) 3
Other....................................................... 2 (14) 4
--- --- ---
EFFECTIVE INCOME TAX RATE................................... 74% (58)% (35)%
=== === ===
63
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Deferred income tax balances were related to:
2003 2002
----- -----
Property.................................................... $(178) $(191)
Postretirement benefits..................................... 404 426
Restructuring reserves...................................... 5 2
Environmental liabilities................................... 62 55
Inventory................................................... 5 12
Tax credit carryforward..................................... 7 13
Net operating losses........................................ 222 66
Valuation allowances........................................ (585) (5)
Other....................................................... 22 8
----- -----
NET DEFERRED TAX ASSETS (LIABILITIES)....................... $ (36) $ 386
===== =====
At December 31, 2003, research and development tax credit
carryforwards available to reduce possible future U.S. income taxes
amounted to approximately $5, all of which will expire in 2019 through
2023. At December 31, 2003, various federal, state and foreign net
operating loss carryforwards are available to offset future taxable
income. These net operating losses expire in years after 2004 or have an
indefinite carryforward period. Valuation allowances have been provided
for the tax credit and net operating loss carryforwards that are not
likely to be utilized. Income taxes and remittance taxes have not been
recorded on $77 in undistributed earnings of subsidiaries, either
because any taxes on dividends would be offset substantially by net
operating loss carryforwards or foreign tax credits or because Solutia
intends to reinvest those earnings indefinitely. It is not practicable
to estimate the tax effect of remitting these earnings to the United
States.
The Company provided additional valuation allowances of $580 in 2003
of which $547 was recorded in Income Tax Expense (Benefit) in the
Statement of Consolidated Operations and $33 was recorded in Accumulated
Other Comprehensive Loss in the Statement of Consolidated Comprehensive
Loss. The additional valuation allowances were principally provided for
the U.S. deferred tax assets as the Company no longer believed that the
"more likely than not" recognition criteria outlined in SFAS No. 109,
Accounting for Income Taxes, were appropriate given a combination of
factors surrounding the Company's Chapter 11 bankruptcy filing
including: (i) the possibility that all or a substantial portion of the
loss and credit carryforwards and tax bases of assets could be reduced
to the extent of cancellation of indebtedness occurring as part of a
reorganization plan; (ii) the possibility that all or a substantial
portion of the loss and credit carryforwards could become limited if a
change in ownership occurs as a result of a reorganization plan; and
(iii) due to updated expectations regarding near-term taxable income.
14. DEBT OBLIGATIONS
As of December 31, 2003, Solutia's debt obligations include
borrowings against the revolving credit facility, interim DIP facility,
notes and debentures. The weighted average interest rate on short-term
debt outstanding was 11.7 percent at December 31, 2003 and 7.2 percent
at December 31, 2002. The weighted average interest rate on total debt
outstanding was 8.9 percent at December 31, 2003 and 7.8 percent at
December 31, 2002. Excluding debt subject to compromise, the weighted
average interest rate on total debt was 9.3 percent at December 31,
2003. As a result of the Chapter 11 filing, the Company was in default
on all its debt agreements as of December 31, 2003, with the exception
of the interim DIP financing arrangement. While operating during the
Chapter 11 proceedings, the Company has ceased recording interest on all
unsecured pre-petition indebtedness in accordance with SOP 90-7 with the
exception of the 11.25 percent notes due 2009 for which the Bankruptcy
Court has permitted continued payments of the contractual interest. The
amount of contractual accrued interest not recorded in 2003 was $1.
October 2003 Credit Facility
On October 8, 2003, Solutia entered into a new $350 credit facility.
The proceeds of the loans made under the facility were used to retire
the Company's pre-existing bank debt and for general working capital
purposes, including fees and expenses related to the credit facility.
The amount of outstanding borrowings under the credit facility as of
December 31, 2003 was approximately $286. The facility was paid in full
and cancelled as part of the final DIP facility entered into by the
Company as of January 16, 2004, as more fully described in Note 21.
The October 2003 credit facility consisted of (i) a $150 revolving
credit component available for borrowing or for the issuance of letters
of credit and (ii) a $200 term loan. The revolving credit component only
became available when the term loan was fully drawn. Availability
64
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
under the revolving credit component was subject to a working capital
borrowing base formula and limited to a maximum of $150. A component of
the term loan was scheduled to amortize at the rate of $.8 per month
starting in April 2004. The credit facility was subject to various
mandatory commitment reductions and prepayments in connection with asset
sales, equity issuances, receipt of extraordinary proceeds and certain
other events.
Certain of the Company's substantial manufacturing facilities which
formerly secured, among other things, Solutia's bank debt, its keepwell
obligations with respect to the Astaris credit agreement, and
obligations of Solutia relative to various public debentures were not
included as collateral for the October 2003 credit facility. The release
of the liens upon these properties resulted in three series of Solutia
debt instruments reverting from secured debt to unsecured debt: its
6.72%, 2037 debentures which, but for the protection afforded by the
Chapter 11 proceedings, are puttable in October 2004 ($150 outstanding);
its guaranty of its subsidiary SESA's 6.25 percent, February 2005
Euronotes ((euro) 200 million outstanding); and its 7.375%, October 2027
debentures ($300 outstanding). These debt instruments were unsecured
when issued but, as a result of "equal and ratable" clauses in their
indentures, became secured in 2002, in accordance with their governing
documents, when liens on certain property, plant and equipment securing
debt in an amount greater than 15 percent of Solutia's consolidated net
tangible assets were granted to Solutia's bank group and to the Astaris
lenders. Upon completion of the October 2003 credit facility, the above
debt instruments, which aggregated approximately $680 at October 8,
2003, reverted to unsecured status.
Interim DIP Financing
On December 19, 2003, the U.S. Bankruptcy Court entered an interim
order authorizing Solutia to borrow up to $85 of DIP financing for the
period between the entry of the interim order and the entry of a final
order authorizing a full DIP facility. Accordingly, on December 19,
2003, Solutia entered into an interim financing facility providing for
$515 of total DIP financing, of which $85 was immediately available
under the interim Bankruptcy Court order, with an additional $430 of DIP
financing to be available upon entry of a final Bankruptcy Court order
approving the total $515. In aggregate, the interim DIP facility
approved on December 19, 2003 consisted of (i) a $50 term loan
component; (ii) a $315 term loan component; and (iii) a $150 borrowing-based
revolving credit component, which included a $150 letter of credit
subfacility. As of December 31, 2003, $75 was outstanding under the
interim DIP facility, which amount was subsequently paid in full through
the final DIP facility entered into as of January 16, 2004, as more fully
described in Note 21.
Long-Term Debt
Long-term debt consisted of the following as of December 31,
2003 2002
---- ----
6.72% debentures puttable 2004, due 2037.................... $150 $150
6.25% euro notes due 2005................................... 251 208
11.25% notes due 2009....................................... 223 223
7.375% debentures due 2027.................................. 300 300
Other....................................................... 43 --
---- ----
Total principal amount.................................. 967 881
Unamortized net discount(a)................................. -- (42)
---- ----
967 839
Less amounts subject to compromise (Note 3)................. (673) --
---- ----
TOTAL....................................................... $294 $839
==== ====
- --------
(a) Unamortized net discount as of December 31, 2003 of $38 is included in
liabilities subject to compromise, as further described in Note 3.
While operating during the Chapter 11 proceedings, the Company has
ceased recording interest expense on all unsecured pre-petition
indebtedness in accordance with SOP 90-7. The amount of contractual
interest not recorded in 2003 was $1. Therefore, interest for long-term
debt will only be payable on the 6.25 percent Euronotes due 2005, the
other long-term debt, and the 11.25 percent notes due 2009, for which the
bankruptcy court has permitted continued payments of the contractual
interest for the 2009 notes through January 2005. As of December 31,
2003, contractual interest was payable annually, on February 14, for the
6.25 percent Euronotes. However, the Euronote indenture was amended in
January 2004 whereby the maturity was extended to December 15, 2008,
interest rate was increased to 10 percent, and the timing of
65
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
interest payments changed to semi-annual payments due February and
August each year. The modification to the Euronotes is more fully
described in Note 21. Contractual interest is payable semiannually, on
January 15 and July 15 for the 11.25 percent notes and monthly for the
other long-term debt.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value of Solutia's long-term debt not subject to
compromise was $305 as of December 31, 2003 and $650 as of December 31,
2002. These estimates compare with the recorded amount of $294 in 2003
and $839 in 2002. Fair value of the debt subject to compromise cannot be
fairly determined due to the inherent uncertainties underlying the
valuation assumptions impacted by the Chapter 11 proceedings.
The recorded amounts of cash, trade receivables, third-party
guarantees, accounts payable and short-term debt approximate their fair
values at both December 31, 2003 and 2002, respectively. The estimated
fair value of the Company's foreign currency forward contracts on
intercompany financing transactions was approximately $2 at December 31,
2003 and $16 at December 31, 2002. Notional amounts for purchase and
sales contracts were $186 and $413 at December 31, 2003 and December 31,
2002, respectively.
Fair values are estimated by the use of quoted market prices,
estimates obtained from brokers and other appropriate valuation
techniques and are based upon information available as of December 31,
2003 and 2002, respectively. The fair-value estimates do not necessarily
reflect the values Solutia could realize in the current market.
16. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension benefits are based on the employee's age, years of service
and/or compensation level. The domestic qualified pension plan is funded
in accordance with Solutia's long-range projections of the plan's
financial conditions. These projections take into account benefits
earned and expected to be earned, anticipated returns on pension plan
assets and income tax and other regulations. Prior to the spin-off, the
majority of Solutia's employees participated in Pharmacia's
noncontributory pension plans. In conjunction with the spin-off, Solutia
assumed pension liabilities and received related assets from those plans
for its applicable active employees and for certain former employees who
left Pharmacia in earlier years.
Certain employees also participate in benefit programs that provide
certain health care and life insurance benefits for retired employees.
All regular, full-time U.S. employees and certain employees in other
countries, who were employed by the Company on or before December 31,
1998, may become eligible for these benefits if they reach retirement
age while employed by Solutia and have the required years of service.
These postretirement benefits are unfunded and are generally based on
the employee's age, years of service and/or compensation level. The
costs of postretirement benefits are accrued by the date the employees
become eligible for the benefits. In connection with the spin-off,
Solutia assumed retiree medical liabilities for its applicable active
employees and for approximately two-thirds of the retired U.S. employees
of Pharmacia.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act
introduces a prescription drug benefit under Medicare (Medicare Part D)
as well as a federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially equivalent to
Medicare Part D. As a result of the Act's passage, the FASB issued FASB
Staff Position (FSP) No. 106-1, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization
Act of 2003. The FSP permits a sponsor of a postretirement health care
plan that provides a prescription drug benefit to make a one-time
election to defer accounting for the effects of the Act. Accordingly,
the Company has elected to defer recording the impact of the Act in its
consolidated financial statements for the year ended December 31, 2003
in view of the fact that specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when
issued, could require the Company to change previously reported
information. Consequently, the impact of the Act on the Company's
measure of the APBO and net periodic postretirement benefit cost in the
consolidated financial statements and accompanying notes do not reflect
the effects of the Act on the other postretirement benefits plan as of
and for the year-ended December 31, 2003.
The Company uses a measurement date of December 31 for the majority
of its pension and other postretirement benefit plans. The amounts
disclosed below do not reflect the impact of any changes to the benefit
plans that might be contemplated as a result of the bankruptcy filing.
In addition, the accrued liabilities for pension and other
postretirement obligations have been classified as liabilities subject
to compromise as of December 31, 2003 (see Note 3).
66
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Periodic Cost
For the years ended December 31, 2003, 2002, and 2001, Solutia's
pension and healthcare and other benefit costs were as follows:
Healthcare and
Pension Benefits Other Benefits
----------------------------- --------------------------
2003 2002 2001 2003 2002 2001
----- ----- ----- ---- ---- ----
Service costs for benefits earned.......................... $ 27 $ 26 $ 30 $ 9 $ 9 $ 10
Interest cost on benefit obligation........................ 95 112 122 50 52 53
Assumed return on plan assets.............................. (100) (129) (145) -- -- --
Prior service costs........................................ 17 20 21 (13) (13) (15)
Transition asset........................................... -- -- (2) -- -- --
Recognized net (gain)/loss................................. 3 (6) (8) 9 9 10
Settlement charge(a)....................................... 35 17 1 -- -- --
----- ----- ----- ---- ---- ----
TOTAL...................................................... $ 77 $ 40 $ 19 $ 55 $ 57 $ 58
===== ===== ===== ==== ==== ====
- --------
(a) Represents pre-tax pension settlement losses in 2003, 2002 and 2001, as required by SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.
The settlement losses resulted from the significant amount of lump sum distributions from Solutia's domestic
pension plans during these years respectively, primarily relating to workforce reductions.
The significant actuarial assumptions used to determine net periodic
cost for the Company's principal pension, healthcare and other benefit
plans were as follows:
Healthcare and
Pension Benefits Other Benefits
----------------- -----------------
2003 2002 2003 2002
----- ----- ----- -----
Discount rate............................................... 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets.............................. 9.00% 9.25% N/A N/A
Rate of compensation increase............................... 3.75% 4.00% N/A N/A
Assumed trend rate for healthcare costs..................... N/A N/A 10.00% 5.25%
Ultimate trend rate for healthcare costs.................... N/A N/A 5.00% 5.25%
The expected long-term rate of return on assets assumption is based
on the target asset allocation policy and the expected future rates of
return on these assets. The expected future rate of return assumptions
use historical returns as a reference point but are conservatively set
below the historical average returns.
A 1 percent change in the assumed health care cost trend rates would
have the following effect as of December 31, 2003:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total service and interest cost components........ $ -- $ --
Effect on postretirement benefit obligation................. 2 (2)
Solutia's costs for postretirement medical benefits are capped for
many current retirees and for active employees; therefore, the impact of
this hypothetical change in the assumed health care cost trend rate is
limited.
67
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Benefit Obligations
Components of the changes in the benefit obligation of Solutia's
principal pension, healthcare and other benefit plans were as follows:
Healthcare and
Pension Benefits Other Benefits
------------------- ----------------
2003 2002 2003 2002
------ ------ ----- ----
CHANGES IN BENEFIT OBLIGATION
Benefit obligation at January 1............................. $1,626 $1,709 $ 803 $802
Service costs............................................... 27 26 10 9
Interest cost............................................... 95 112 50 52
Contributions............................................... 1 -- 17 14
Actuarial (gain) losses..................................... 35 42 (2) 30
Plan divestiture(a)......................................... -- (13) -- --
Benefits paid............................................... (336) (250) (104) (104)
------ ------ ----- ----
BENEFIT OBLIGATION AT DECEMBER 31........................... $1,448 $1,626 $ 774 $803
====== ====== ===== ====
- --------
(a) Represents the removal of pension obligation related to the divestiture of the Company's interest
in the AES joint venture in 2002.
The accumulated benefit obligation was $1,382 and $1,532 as of
December 31, 2003 and 2002, respectively.
The significant actuarial assumptions used to estimate the projected
benefit obligation for the Company's principal pension, healthcare and
other benefit plans were as follows:
Healthcare and
Pension Benefits Other Benefits
----------------- -----------------
2003 2002 2003 2002
----- ----- ----- -----
Discount rate............................................... 6.25% 6.75% 6.25% 6.75%
Expected return on plan assets.............................. N/A N/A N/A N/A
Rate of compensation increase............................... 3.25% 3.75% N/A N/A
Assumed trend rate for healthcare costs..................... N/A N/A 9.00% 10.00%
Ultimate trend rate for healthcare costs.................... N/A N/A 5.00% 5.00%
Plan Assets
Components of the changes in fair value of plan assets of Solutia's
pension plans were as follows:
Pension Benefits
-------------------
2003 2002
------ ------
CHANGES IN FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at January 1...................... $1,039 $1,384
Actual return on plan assets................................ 222 (113)
Contributions............................................... 7 24
Plan divestiture(a)......................................... -- (10)
Benefits paid............................................... (336) (246)
------ ------
FAIR VALUE OF PLAN ASSETS AT DECEMBER 31.................... $ 932 $1,039
====== ======
- --------
(a) Represents the removal of plan assets related to the divestiture of the Company's interest in the AES joint
venture in 2002.
The other postretirement benefits plans are unfunded as of
December 31, 2003 and 2002.
68
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The asset allocation for Solutia's U.S. pension plans as of
December 31, 2003 and 2002, and the target allocation for 2004, by asset
category, follows. The fair value of plan assets for these U.S. plans was
$840 and $969, as of December 31, 2003 and 2002, respectively.
Percentage of Plan Assets at
December 31,
-----------------------------
Asset Category 2004 Target Allocation 2003 2002
- -------------------------------------------------------- ---------------------- ----- -----
U.S. equity securities.................................. 46% 47% 45%
Debt securities......................................... 30 29 31
International equity securities......................... 15 15 15
Real estate............................................. 5 4 4
Other................................................... 4 5 5
--- --- ---
Total................................................... 100% 100% 100%
=== === ===
The Solutia defined benefit plan investment strategy is to maintain
an asset allocation that is diversified between multiple different asset
classes, and between multiple managers within each asset class, in order
to minimize the risk of large losses and to maximize the long-term
risk-adjusted rate of return.
Funded Status
The funded status of Solutia's principal pension, healthcare and
other benefit plans at December 31, 2003, and 2002 was as follows:
Healthcare and
Pension Benefits Other Benefits
----------------- -----------------
2003 2002 2003 2002
----- ----- ----- -----
FUNDED STATUS............................................... $(516) $(587) $(774) $(803)
Unrecognized actuarial loss................................. 176 298 139 151
Unrecognized prior service costs............................ 78 95 (78) (92)
----- ----- ----- -----
ACCRUED NET LIABILITY AT DECEMBER 31........................ $(262) $(194) $(713) $(744)
===== ===== ===== =====
The accrued net liability was included in as of December 31:
Healthcare and
Pension Benefits Other Benefits
----------------- -----------------
2003 2002 2003 2002
----- ----- ----- -----
Prepaid benefit cost........................................ $ 21 $ 18 $ -- $ --
Accrued benefit cost........................................ (467) (513) (713) (744)
Intangible asset............................................ 81 99 -- --
Deferred tax asset.......................................... 5 75 -- --
Accumulated other comprehensive loss........................ 98 127 -- --
----- ----- ----- -----
ACCRUED NET LIABILITY....................................... $(262) $(194) $(713) $(744)
===== ===== ===== =====
69
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plans with projected benefit
obligation in excess of plan assets and for the pension plans with
accumulated benefit obligations in excess of plan assets were as follows
as of December 31:
Projected Benefit Accumulated Benefit
Obligation Exceeds the Obligation Exceeds the
Fair Value of Plan Assets Fair Value of Plan Assets
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Projected benefit obligation................. $1,448 $1,626 $1,415 $1,601
Accumulated benefit obligation............... 1,382 1,532 1,357 1,508
Fair value of plan assets.................... 932 1,039 903 1,017
The accumulated postretirement benefit obligation exceeds plan
assets for all of the Company's other postretirement benefit plans.
The Company is actively managing the funding of the pension plan in
order to meet the requirements of the IRS and the Pension Benefits
Guarantee Corporation (a U.S. federal agency). No contributions were
made during 2003. In 2002, Solutia made discretionary contributions of
$17 to the qualified pension plan to reduce the probability of larger
contribution requirements in the future and to utilize available tax
benefits. The Company also contributed $7 in 2002 to fund its other
benefit plans. According to current IRS funding rules, Solutia does not
expect to be required to make pension contributions in 2004. However,
the Company may elect to make voluntary contributions to the Pension
trust in 2004 in order to minimize future required contributions.
17. EMPLOYEE SAVINGS PLANS
In connection with the spin-off, Pharmacia common stock held by the
Pharmacia Employee Stock Ownership Plan (ESOP) and related Pharmacia
ESOP borrowings were allocated between Solutia and Pharmacia. As a
result of this allocation, Pharmacia received 2.4 million shares of
Pharmacia common stock and assumed $29 of ESOP debt to third parties.
Simultaneously, Solutia created its own ESOP, established a trust to
hold the Pharmacia shares, and issued a $29 loan to the trust. The trust
used the proceeds of the loan to repay the assumed third-party debt.
Subsequent to the spin-off, the ESOP trust was required by government
regulations to divest its holdings of Pharmacia common stock and to use
the proceeds to acquire Solutia common stock. The divestiture of
Pharmacia common stock and the purchase of Solutia common stock were
completed in early 1998. At inception, the trust held 10,737,097 shares
of Solutia common stock all of which have been allocated to
participants. The ESOP loans to Solutia were repaid in 2002. The ESOP is
no longer leveraged. During 2002 and 2003, the ESOP purchased Solutia
common stock on the open market to fund the company match. Effective
December 15, 2003, the ESOP component of the Solutia Savings and
Investment Plan (SIP) was eliminated. All future matching contributions
will be invested in the same manner as participants' personal SIP
contributions.
Substantially all U.S. employees of Solutia are eligible to
participate in the SIP, a 401(k) plan. Prior to December 15, 2003,
shares held in the ESOP were used to make Solutia's matching
contribution to eligible participants' accounts under this plan. The
number of shares released was computed on each pay date based on a
formula that considers the participant contribution, the Solutia
matching rate, and Solutia's closing stock price. Shares allocated to
participant accounts totaled 433,536 shares in 2002, and 1,160,203
shares in 2001. The value of these contributions was $4 in 2002, and
$15 in 2001. Company cash contributions during 2002 were used to repay ESOP
loans of $2 and to purchase Solutia common stock on the open market of
$11. Company cash contributions were $12 during 2003 and were used to
purchase Solutia common stock on the open market of $11 and $1 was
invested in accordance with participants' personal investment elections.
Compensation expense is equal to the cost to purchase Solutia's common
stock on the open market and the cost to purchase investment funds in
the Savings and Investment Plan as directed by participants. In
addition, Solutia believes that its plan of reorganization will result
in cancellation of its existing shares of common stock, as well as
options and warrants to purchase its common stock and that it is
unlikely that holders of Solutia's common stock, including options and
warrants to purchase Solutia's common stock, will receive any
consideration for that stock or those options and warrants in such a
plan of reorganization.
70
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Information regarding the ESOP for the year-ended December 31 is as
follows:
2003 2002 2001
---- ---- ----
Total ESOP expense.............................. $12 $13 $8
Interest portion of total ESOP expense.......... -- -- 1
Cash contributions.............................. 12 13 7
18. STOCK OPTION PLANS
Solutia has two stock-based incentive plans under which awards are
available for grant to officers and employees; the Solutia Inc. 2000
Stock-Based Incentive Plan (2000 Plan) and the Solutia Inc. 1997
Stock-Based Incentive Plan (1997 Plan). The 2000 Plan authorizes up to
5,400,000, and the 1997 Plan up to 7,800,000, shares of Solutia common
stock for grants of non-qualified and incentive stock options, stock
appreciation rights, restricted stock awards and bonus stock awards. The
shares used may be newly issued shares, treasury shares or a
combination. Under both plans, the exercise price of a stock option must
be no less than the fair market value of Solutia's common stock on the
option grant date. Additionally, the plans provide that the term of any
stock option granted may not exceed 10 years. At December 31, 2003
approximately 1,199,684 shares from the 2000 plan and 368,937 shares
from the 1997 plan remained available for grants.
During 2003, non-qualified options to purchase 51,000 shares of
Solutia common stock were granted under the plans to current executive
officers and other senior executives as a group, and non-qualified stock
options to purchase 936,274 shares were granted to other employees at an
average exercise price of $1.281 per share. Total shares covered by
options granted under the plans to current executive officers and other
senior executives as a group totaled 3,011,000 and other employees
totaled 10,016,592, through December 31, 2003. The options granted to
Solutia's executive officers and other senior executives are primarily
performance options that become exercisable upon the earlier of
achievement of specified share price targets or the ninth anniversary of
the option grant. The options granted to the other management employees
are time-based. They generally become exercisable in thirds, one-third
on each of the first three anniversaries of the option grant date.
The Solutia Inc. Non-Employee Director Compensation Plan provides
incentives to non-employee members of Solutia's Board of Directors. This
plan authorizes up to 400,000 shares for grants of non-qualified stock
options and for grants of deferred shares in payment of all or a portion
of the annual retainer for the non-employee directors. Only treasury
shares may be used. Under this plan, the exercise price of a stock
option must be no less than the fair market value of Solutia's common
stock on the grant date and the term of any stock option granted under
the plan may not exceed 10 years. At December 31, 2003, 25,174 shares of
Solutia's common stock remained available for grants under the plan.
Shares covered by options granted to non-employee directors totaled
16,000 in 2003, 24,833 in 2002, and 25,167 in 2001.
As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, Solutia has elected 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 net loss within the Statement
of Consolidated Operations, 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 compensation cost for
these plans been based on the fair value at the grant dates for awards
under these plans, consistent with the method of SFAS No. 123, Solutia's
net loss would have been increased to the pro forma amounts indicated in
Note 2. Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options
and warrants to purchase its common stock and that it is unlikely that
holders of options to purchase Solutia's common stock, will receive any
consideration for those options in such a plan of reorganization.
The following weighted-average assumptions were used for grants of
Solutia options during the year ended December 31:
2003 2002 2001
----- ---- ----
Expected dividend yield..................... 0.0% 0.4% 0.2%
Expected volatility......................... 123.8% 54.7% 34.0%
Risk-free interest rates.................... 3.2% 4.3% 5.8%
Expected option lives (years)............... 5.0 5.0 5.0
The weighted-average fair values of options granted were $1.14 in
2003, $5.08 in 2002, and $5.57 in 2001.
71
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
A summary of the status of Solutia's stock option plans for years
ended December 31, 2003, 2002 and 2001 follows:
Outstanding
---------------------------------
Exercisable Weighted-Average
Options Options Exercise Price
----------- ---------- ----------------
December 31, 2000........................ 23,613,549 27,013,291 $15.21
---------- ---------- ------
Granted.............................. 1,762,417 $13.68
Exercised............................ (1,796,038) 6.14
Expired.............................. (1,278,689) 16.32
---------- ---------- ------
December 31, 2001........................ 22,015,711 25,700,981 $15.68
---------- ---------- ------
Granted.............................. 1,597,633 $10.23
Exercised............................ (365,394) 5.57
Expired.............................. (1,582,710) 15.99
---------- ---------- ------
December 31, 2002........................ 21,712,940 25,350,510 $15.47
---------- ---------- ------
Granted.............................. 1,003,274 $ 1.36
Exercised............................ 0 0.00
Expired.............................. (2,874,547) 11.49
---------- ---------- ------
DECEMBER 31, 2003........................ 20,838,155 23,500,239 $15.31
========== ========== ======
The following table summarizes information about stock options
outstanding at December 31, 2003:
OPTIONS OUTSTANDING:
Weighted-Average
Range of Remaining Weighted-Average
Exercise Prices Number Contractual Life Exercise Price
- ------------------------------------- ---------- ---------------- ----------------
$ 0 to 2.99......................... 919,600 9.4 $ 1.25
3 to 7.99......................... 1,311,346 0.8 6.83
8 to 11.99......................... 1,475,808 6.1 10.34
12 to 15.99......................... 4,764,193 4.0 13.80
16 to 18.99......................... 8,992,248 2.5 16.48
19 to 22.99......................... 5,823,581 3.2 19.70
23 to 29.99......................... 213,463 3.4 27.44
---------- --- ------
$ 0 to 29.99......................... 23,500,239 3.4 $15.31
========== === ======
OPTIONS EXERCISABLE:
Range of Weighted-Average
Exercise Prices Number Exercise Price
- -------------------------------------------------------- ---------- ----------------
$ 3 to 7.99............................................ 1,262,523 $ 6.94
8 to 11.99............................................ 768,049 10.36
12 to 15.99............................................ 4,052,791 13.80
16 to 18.99............................................ 8,992,248 16.48
19 to 22.99............................................ 5,549,081 19.67
23 to 29.99............................................ 213,463 27.44
---------- ------
$ 3 to 29.99............................................ 20,838,155 $16.12
========== ======
72
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
19. CAPITAL STOCK
On December 17, 2003, following the announcement that Solutia had
filed for Chapter 11 protection, the New York Stock Exchange halted
trading in Solutia's common stock and announced that it would apply to
the U.S. Securities and Exchange Commission to remove the common stock
from listing on the Exchange. The SEC granted the application, and
Solutia's common stock was delisted on February 24, 2004. Solutia's
common stock is currently being quoted under the ticker symbol SOLUQ on
the Pink Sheets Electronic Quotation Service maintained by The Pink
Sheets LLC and on the Over the Counter Bulletin Board.
The declaration and payment of dividends is made at the discretion
of the Company's Board of Directors. There was no annual dividend paid
in 2003 whereas a $0.04 per share annual dividend was paid in 2002. The
Company is currently prohibited by both the Bankruptcy Code and the DIP
financing facility from paying dividends to shareholders.
In conjunction with the settlement of the Anniston PCB litigation
during 2003, Solutia issued Monsanto warrants to purchase up to
10 million shares of Solutia common stock at an exercise price of
$1.10 per common share. The warrants issued pursuant to the settlement are
to be exercisable only if Solutia's common stock reaches an average closing
price target exceeding $10.00 per share for any thirty-day period, or
upon a change-of-control of Solutia. The Company has determined the
value of the warrants as of the date of the courts' approval of the
settlement to be $37 based on the share price on that date. The warrants
were not included within the Financing Activities section of the
Statement of Consolidated Cash Flows in 2003, as the agreement to issue
the warrants represents a non-cash transaction.
Solutia's Board of Directors declared a dividend of one preferred
stock purchase right for each share of Solutia's common stock issued in
the distribution of shares by Pharmacia to its shareholders on the
effective date of the spin-off and authorized the issuance of one right
for each share of common stock issued after the effective date of the
spin-off until the earlier of the date the rights become exercisable and
the termination date of the rights plan. If a person or group acquires
beneficial ownership of 20 percent or more, or announces a tender offer
that would result in beneficial ownership of 20 percent or more, of
Solutia's outstanding common stock, the rights become exercisable. Then,
for every right held, the owner will be entitled to purchase one
one-hundredth of a share of a series of preferred stock for $125. If
Solutia is acquired in a business combination transaction while the
rights are outstanding, for every right held, the holder will be
entitled to purchase, for $125, common shares of the acquiring company
having a market value of $250. In addition, if a person or group
acquires beneficial ownership of 20 percent or more of Solutia's
outstanding common stock, for every right held, the holder (other than
such person or members of such group) will be entitled to purchase, for
$125, a number of shares of Solutia's common stock having a market value
of $250. Furthermore, at any time after a person or group acquires
beneficial ownership of 20 percent or more (but less than 50 percent) of
Solutia's outstanding common stock, Solutia's Board of Directors may, at
its option, exchange part or all of the rights (other than rights held
by the acquiring person or group) for shares of Solutia's common stock
on a one-share-for-every-one-right basis. At any time prior to the
acquisition of such a 20 percent position, Solutia can redeem each right
for $0.01. The Board of Directors is also authorized to reduce the
aforementioned 20 percent thresholds to not less than 10 percent. The
rights expire in the year 2007. However, Solutia believes that its plan
of reorganization will result in cancellation of its existing shares of
common stock, as well as options and warrants to purchase its common
stock and that it is unlikely that holders of Solutia's common stock,
including options and warrants to purchase Solutia's common stock, will
receive any consideration for that stock or those options and warrants
in such a plan of reorganization. Consequently, this preferred stock
purchase right plan would be cancelled if the underlying common stock
were to be cancelled.
The Company has 10 million shares of preferred stock, par value
$0.01 per share, authorized. As of December 31, 2003, there were no
preferred shares issued or outstanding.
20. COMMITMENTS AND CONTINGENCIES
Commitments, principally in connection with uncompleted additions to
property, were approximately $14 and $7 at December 31, 2003 and 2002,
respectively. In addition, as of December 31, 2003, the Company was
contingently liable under letters of credit totaling $181, $132 of which
were cash collaterized, primarily related to environmental remediation,
keepwell payments related to the Astaris joint venture (as more fully
described in Note 10) and various insurance related activities. The cash
underlying these collateralized letters of credit is contractually
restricted and accordingly is excluded from cash and cash equivalents
and recorded in Other Assets within the Statement of Financial Position
as of December 31, 2003.
Solutia's future minimum payments under noncancelable operating
leases, capital leases and various unconditional purchase obligations
are $30 for 2004, $26 for 2005, $20 for 2006, $58 for 2007, $12 for
2008, and $64 thereafter. The amounts of these commitments have not
73
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
been adjusted to reflect any potential impact that the bankruptcy
proceedings may have upon the timing and valuation of such commitments.
Solutia has entered into agreements with certain customers to supply
a guaranteed quantity of certain products annually at prices specified
in the agreements. In return, the customers have advanced funds to
Solutia to cover the costs of expanding capacity to provide the
guaranteed supply. Solutia has recorded the advances as deferred credits
and amortizes the amounts to income as the customers purchase the
products. The unamortized deferred credits were approximately $168 at
December 31, 2003 and $161 at December 31, 2002.
The more significant concentrations in Solutia's trade receivables
at December 31, 2003 and 2002 were:
2003
----------------------------------------------------------
NORTH EUROPE/ LATIN ASIA
AMERICA AFRICA AMERICA PACIFIC TOTAL
------- ------- ------- ------- -----
Glass.................................. $13 $55 $11 $15 $94
Chemicals.............................. 28 17 2 9 56
Carpet................................. 28 1 -- 1 30
2002
----------------------------------------------------------
North Europe/ Latin Asia
America Africa America Pacific Total
------- ------- ------- ------- -----
Glass.................................. $11 $38 $10 $11 $70
Chemicals.............................. 42 18 2 9 71
Carpet................................. 28 1 -- 1 30
Management does not anticipate losses on its trade receivables in
excess of established allowances.
Off-Balance Sheet Arrangements
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.
This arrangement enabled the Company to lease the facility rather than
acquire it. Solutia historically made operating lease payments of
approximately $2 annually and the lease term was co-terminous with the
amended credit facility. As required by the amended credit facility,
Solutia used a portion of the proceeds from the sale of the resins,
additives and adhesives business to purchase the co-generation facility
from the trust for approximately $32 during 2003.
In 1999, the Company's corporate headquarters office building was
constructed in St. Louis, Missouri. Solutia financed the construction of
the building by placing the facility in a trust that was funded by a
syndicate of financial institutions. This arrangement enabled the
Company to lease the facility rather than acquire it. Solutia makes
operating lease payments of approximately $3 annually. The lease term
expires in August 2007 at which time the Company has the option to
refinance the building through a similar lease arrangement, purchase the
building from the trust for the lease balance of approximately $43 or
sell the building on behalf of the trust and deliver the proceeds to the
trust. Solutia has provided the trust a residual value guaranty of
approximately $35 in the event that the building is sold for less than
the lease balance or cannot be sold. Although current commercial real
estate values in St. Louis, Missouri metropolitan area have declined
recently because of the general weakening of the economy in the United
States, the Company estimates that the fair value of the building
exceeds the residual value guaranty and will continue to do so in the
foreseeable future. Based on the terms of the lease agreements and the
residual value guarantee Solutia provides to the trust, the Company is
the primary beneficiary of the trust, as defined by FASB Interpretation
No. 46, Consolidation of Variable Interest Entities. As a result,
Solutia consolidated the assets and liabilities held by the trust during
the third quarter of 2003 (as more fully described in Note 12).
In connection with the external financing agreement for Astaris, a
50 percent owned joint venture, which expires in September of 2005,
Solutia and its equal partner in the venture, FMC Corporation,
contractually agreed to provide Astaris with funding in the event the
joint venture fails to meet certain financial benchmarks. The financial
benchmarks were based on forecasted earnings that were developed when
the financing was originated in September 2000. Astaris' earnings have
fallen short of the forecast underlying its external financing agreement
due to numerous factors including significantly less than planned
productivity of its purified wet acid technology, lower sales
74
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
volumes and lower average selling prices. As a result of these earnings
shortfalls in comparison to the original expectations, Solutia and FMC
each made additional investments of $63 during 2003.
As of October 8, 2003, Solutia and Astaris amended its external
financing agreement to release the Astaris lenders' security interests
in certain Solutia assets in exchange for Solutia's posting of a
$67 letter of credit, representing fifty percent of the Astaris lenders'
outstanding commitments to Astaris as of October 8, 2003. The agreement
was also amended to provide for a dollar-for-dollar reduction of the
Astaris lenders' commitments with future payments made by Solutia and
FMC under their existing support agreements to Astaris. This additional
amendment will effectively provide a $67 limitation for each of Solutia
and FMC on future funding in the event the joint venture continues to
fail to meet certain financial benchmarks. Solutia's $67 letter of
credit will also reduce dollar-for-dollar as future payments are made by
Solutia under its existing support agreement. The remaining commitment
to Astaris as of December 31, 2003 is $51. This amount is recorded as a
liability in the Statement of Financial Position in accordance with FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, and is expected to be satisfied in full during
2004.
FMC and Solutia also agreed conceptually to allow Astaris to defer
up to $30 each of obligations to FMC and Solutia arising under existing
operating agreements over the next 24-36 months to provide liquidity
assistance to Astaris as it implements its recently announced business
restructuring. Astaris, FMC and Solutia are currently negotiating
definitive agreements to allow for the deferral of these obligations,
including repayment terms and conditions.
Contingencies
Litigation
----------
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 its spin-off from Pharmacia, Solutia assumed
the defense of specified legal proceedings and agreed to indemnify
Pharmacia for obligations arising in connection with those proceedings.
Solutia has determined that these defense and indemnification
obligations to Pharmacia are pre-petition obligations under the U.S.
Bankruptcy Code that Solutia is prohibited from performing, except
pursuant to a confirmed plan of reorganization. As a result, Solutia has
ceased performance of these obligations. Solutia's cessation of
performance may give rise to a pre-petition unsecured claim against
Solutia which Pharmacia may assert in Solutia's Chapter 11 case. Solutia
had an accrued liability of $156 as of December 31, 2003 and $102 as of
December 31, 2002 for self-insurance liabilities, including the
following litigation matters.
Following is a summary of legal proceedings that management believes
it is reasonably possible could result in an outcome that is material to
the consolidated financial statements.
Anniston, Alabama Litigation
(1) Abernathy v. Monsanto and Tolbert v. Monsanto: Abernathy
involved four consolidated cases, the first of which was served
on April 1, 1996, that were originally filed in Circuit Court
for Calhoun County, Alabama (and were later transferred to
Etowah County, Alabama) on behalf of 3,516 plaintiffs who own or
rent homes, own or operate businesses, attend churches, or have
otherwise resided in or visited neighborhoods near the Anniston
plant. Plaintiffs sought compensatory and punitive damages and
injunctive relief requiring the Company to remove alleged
contamination. The individual plaintiffs claimed to have
suffered permanent adverse health effects and to fear future
disease. They asserted the need for medical monitoring,
diminution in the value of their properties in the case of
residential and commercial property owners and commercial losses
in the case of business owners. The Tolbert case, which was
served on June 4, 2001, was filed in the U.S. District Court for
the Northern District of Alabama. It ultimately included the
claims of approximately 18,233 plaintiffs. Plaintiffs claimed
that they were exposed to PCBs and suffer from unspecified
physical injuries and emotional distress as a result. Plaintiffs
sought compensatory and punitive damages and requested medical
testing, monitoring and treatment, injunctive relief and, in the
case of property owners, property damage.
In August 2003, the parties in both Abernathy and Tolbert
entered into a Global Settlement Agreement to resolve these and
several related cases. The Global Settlement Agreement has been
approved by both the Abernathy and Tolbert trial courts. The
Global Settlement Agreement provides for cash payments of
$600, as well as a broad array of community health initiatives for
low-income residents of Anniston and Calhoun County. In
connection with the Global Settlement Agreement, Solutia entered
into a separate agreement with Pharmacia and Monsanto pursuant
to which Solutia agreed to pay $50 of the $600 cash settlement,
payable in ten equal annual installments, without interest,
beginning in August 2004. Approximately $160 of the settlement
is expected to be provided through the parties' commercial
insurance. Monsanto agreed to pay the remaining $390. Solutia
arranged
75
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
for Pfizer Inc., the parent of Pharmacia, to provide the community
health initiatives described above. In addition, Solutia issued
Monsanto warrants to purchase up to 10 million shares of Solutia
common stock at an exercise price of $1.10 per common share (see
Note 19). Solutia is a named defendant in the Abernathy and
Tolbert cases. As a result, Solutia filed a Suggestion of
Bankruptcy in both cases. On January 22, 2004, the court entered
an order in the Tolbert case dismissing Solutia, without
prejudice. With respect to the Abernathy case, the court had
previously entered an order on August 6, 2003, finding that in
the event Solutia became a debtor in a case under Chapter 11 of
the U.S. Bankruptcy Code, Solutia would be immediately severed
and dismissed, without prejudice, from the Abernathy case
without further action from the court. Solutia has determined
that the Bankruptcy Code prohibits it from paying Solutia's
portion of the settlement obligation, except pursuant to a
confirmed plan of reorganization.
(2) Anniston Partial Consent Decree: The U.S. District Court for the
Northern District of Alabama approved the revised Partial
Consent Decree on August 4, 2003 that had been lodged with the
court in an action captioned United States of America v.
Pharmacia Corporation (f/k/a Monsanto Company) and Solutia. This
Partial Consent Decree provides for Pharmacia and Solutia to
sample certain residential properties and remove soils found on
those properties if PCBs are at a level of 1 part per million
(ppm) or above, to conduct a Remedial Investigation and
Feasibility Study to provide information for the selection by
the EPA of a cleanup remedy for the Anniston PCB site, and to
pay EPA's past response costs and future oversight costs related
to this work. The decree also provided for the creation of an
educational trust fund of approximately $3 to be funded over a
12-year period to provide supplemental educational services for
school children in west Anniston. A dispute currently exists
between the EPA and Solutia regarding the scope and application
of the automatic stay arising as a result of Solutia's Chapter
11 filing to the remaining obligations under the Partial Consent
Decree.
(3) Owens v. Monsanto: On October 27, 2003, a motion was filed in
U.S. District Court for the Northern District of Alabama,
contending that the Global Settlement Agreement in Tolbert and
Abernathy also requires the payment of additional funds to
plaintiffs in Owens v. Monsanto, another Anniston-related PCB
case settled by Solutia in April 2001. On January 8, 2004, the
District Court granted plaintiffs' motion, ruling that the Owens
plaintiffs were entitled to receive a total of approximately
$1 as a result of the Global Settlement Agreement. Plaintiffs'
motion for reconsideration was denied on January 24, 2004, and
plaintiffs have filed a timely appeal to the U.S. Court of
Appeals for the Eleventh Circuit. Solutia is not a named
defendant in this litigation and therefore has taken no action
to stay the litigation in connection with its Chapter 11
proceedings. Solutia assumed the defense of this litigation at
the time of its spin-off from Pharmacia. Solutia has determined
that its obligation to defend and indemnify Pharmacia with
regard to this litigation is a pre-petition obligation that
Solutia is prohibited from performing, except pursuant to a
confirmed plan of reorganization. Solutia has ceased defending
Pharmacia with respect to this litigation.
(4) Payton v. Monsanto: This case was brought in Circuit Court in
Shelby County, Alabama on July 15, 1997, on behalf of a
purported class of all owners, lessees and licensees of
properties located on Lay Lake, which is downstream from Lake
Logan Martin on the Coosa River. Plaintiffs seek compensatory
and punitive damages in an unspecified amount for an alleged
increased risk of physical injury and illness, emotional
distress caused by fear of future injury or illness, medical
monitoring and diminishment in the value of their properties and
their riparian rights. The parties have reached a tentative
agreement to settle this case for a cash payment of $5 and an
equitable component that has yet to be determined. Solutia is
not a named defendant in this litigation and therefore has taken
no action to stay the litigation in connection with its
Chapter 11 proceedings. Solutia assumed the defense of this litigation
at the time of its spin-off from Pharmacia. Solutia has
determined that its obligation to defend and indemnify Pharmacia
with regard to this litigation is a pre-petition obligation that
Solutia is prohibited from performing, except pursuant to a
confirmed plan of reorganization. Solutia has ceased defending
Pharmacia with respect to this litigation.
(5) Other Anniston Cases: Claims made by five plaintiffs in two
cases pending in Circuit Court for Jefferson County, by seven
plaintiffs in one case pending in Circuit Court for Calhoun
County, Alabama and by one plaintiff in one case pending in U.S.
District Court for the Northern District of Alabama have been
resolved and are subject to the Global Settlement Agreement of
the Abernathy and Tolbert cases described above. In addition,
claims of property damages made by one plaintiff in one case
pending in Circuit Court for Calhoun County, Alabama have been
settled for a nominal sum. Approximately ten cases remain
pending in various Circuit Courts in the state of Alabama.
Solutia is a named defendant in those ten proceedings. As a
result, Solutia has filed a Suggestion of Bankruptcy in each
case staying the litigation against it. Solutia believes that
any direct claims against it relating to these actions
constitute pre-petition unsecured claims that will be discharged
as part of its Chapter 11 case. Solutia has also defended
Pharmacia with respect to this litigation. Solutia has
determined that its obligation to defend and indemnify Pharmacia
76
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
with regard to this litigation is a pre-petition obligation that
Solutia is prohibited from performing, except pursuant to a
confirmed plan of reorganization. Solutia has ceased defending
Pharmacia with respect to this litigation.
PENNDOT Case
Pharmacia is one of several defendants added on February 7, 1997, to
a case then pending in the Commonwealth Court of Pennsylvania. This
action was originally filed against United States Mineral Products
Company in 1990 by the Commonwealth of Pennsylvania, seeking damages
caused by the presence of asbestos fireproofing in the Transportation
and Safety Building ("T & S Building") in Harrisburg, Pennsylvania. In
June 1994 a fire broke out in the T & S Building. Testing following the
fire revealed the presence of low levels of PCBs at various locations in
the building. The Commonwealth claims that PCBs used in fluorescent
light ballasts, in adhesives in fiberglass ductboard that was part of
the heating and ventilation system and in caulking used on the exterior
of the building contaminated the building and necessitated its
demolition. The Commonwealth seeks recovery of costs it allegedly
incurred in testing, monitoring, cleanup, demolition and temporary
relocation of Commonwealth employees caused by the alleged
contamination. In addition, the Commonwealth seeks the cost of
constructing a new building on the site of the T & S Building. On August
23, 2000, the jury returned a verdict of $90 against Pharmacia. The
verdict was reduced to $45 by the trial court because the manufacturer
of the fiberglass ductboard reached a settlement with the Commonwealth
during trial. On behalf of Pharmacia, Solutia filed extensive post-trial
motions, seeking judgment notwithstanding the jury's verdict or a new
trial. The trial court denied these motions in orders filed on October
16, 2002. On November 15, 2002, Solutia filed an appeal as of right to
the Supreme Court of Pennsylvania. On November 17, 2003, the Supreme
Court of Pennsylvania remanded the case to the trial court for an
opinion solely on the issue of juror misconduct. In response to
Solutia's application, the Supreme Court of Pennsylvania ordered the
trial court to file its opinion on that issue by March 15, 2004. Oral
argument before the Supreme Court of Pennsylvania on this matter is
scheduled for May 11, 2004. Solutia is not a named defendant in this
litigation and therefore has taken no action to stay the litigation in
connection with its Chapter 11 proceedings. Solutia assumed the defense
of this litigation at the time of its spin-off from Pharmacia. Solutia
has determined that its obligation to defend and indemnify Pharmacia
with regard to this litigation is a pre-petition obligation that Solutia
is prohibited from performing, except pursuant to a confirmed plan of
reorganization. Solutia has ceased defending Pharmacia with respect to
this litigation. Solutia does, however, continue to provide a $20 letter
of credit to secure a portion of Pharmacia's obligations with respect to
the appeal bond.
Premises Based Asbestos Litigation
Like a great number of other companies that used high temperature
manufacturing processes, Pharmacia historically used asbestos insulating
materials in piping and other equipment at its chemicals plants. As a
result, Pharmacia and Solutia have been named as defendants along with
numerous other premises owners in actions brought by employees of
contractors who claim that they were exposed to asbestos at Solutia's
facilities and at the facilities of these other owners. Currently, there
are approximately 520 asbestos actions involving an estimated 3,500 to
4,500 plaintiffs brought against Pharmacia and/or Solutia. Solutia does
not have any product-based asbestos litigation. In all of the cases in
which Solutia is a named defendant, it has filed a Suggestion of
Bankruptcy staying the litigation against it. Solutia believes that any
direct claims against it relating to these actions constitute
pre-petition unsecured claims that will be discharged as part of its
Chapter 11 case. Solutia has also defended Pharmacia with respect to
this litigation. Solutia has determined that its obligation to defend
and indemnify Pharmacia with regard to this litigation is a pre-petition
obligation that Solutia is prohibited from performing, except pursuant
to a confirmed plan of reorganization. Solutia has ceased defending
Pharmacia with respect to this litigation.
Flexsys Related Litigation
Antitrust authorities in the United States, Europe and Canada are
investigating past commercial practices in the rubber chemicals
industry. Flexsys, Solutia's 50/50 joint venture with Akzo Nobel N.V.,
is a subject of such an investigation and has been fully cooperating
with the authorities and in the ongoing investigation will continue to
do so. In addition, a number of purported class actions have been filed
against Flexsys and other producers of rubber chemicals.
Environmental Liabilities
-------------------------
Environmental compliance and remediation costs incurred by the
Company fall into two broad categories: (a) obligations related to
properties currently owned or operated by Solutia and (b) obligations
related to properties that are not owned by Solutia, including non-
owned properties adjacent to current operating sites. For the owned and
operated sites, Solutia had an accrued liability of $81 as of
December 31, 2003 for solid and hazardous waste remediation, which represents
the Company's best estimate of the underlying obligation. In addition, this
balance also includes post-closure costs at certain of the Company's
operating locations. This liability is not classified as
77
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
subject to compromise in the Statement of Financial Position because,
irrespective of the bankruptcy proceedings, the Company will be required
to comply with environmental requirements in the conduct of its
business, regardless of when the underlying environmental contamination.
However, the Company ultimately expects to seek recovery against other
potentially responsible parties at certain of these locations.
The Company had an accrued liability of $85 as of December 31, 2003
for properties not owned or operated by Solutia. Included within this
liability classification is the $24 charge taken in the second quarter
related to the partial consent decree approved by the U.S. District
Court for the Northern District of Alabama with respect to properties
adjacent to the Anniston, Alabama operating site. This decree requires
an expedited residential cleanup of identified properties to achieve the
EPA's cleanup standard, and performance of a Remedial Investigation and
Feasibility Study (RI/FS). The RI/FS to be performed under the partial
consent decree will outline the work that will lead to a comprehensive
approach to the cleanup of PCBs in waterways and commercial properties
in the Anniston area. This liability is classified as subject to
compromise in the Statement of Financial Position as the Company
currently believes it constitutes a pre-petition claim that will be
discharged in the bankruptcy process. The EPA is currently contesting
this view.
In addition to the bankruptcy proceedings, the Company's
environmental liabilities are also subject to changing governmental
policy and regulations, discovery of unknown conditions, judicial
proceedings, method and extent of remediation, existence of other
potentially responsible parties and future changes in technology. The
Company believes that the known and unknown environmental matters, when
ultimately resolved, which may be over an extended period of time, could
have a material effect on the consolidated financial position, liquidity
and profitability of the Company.
UCB S.A. Dispute
----------------
On December 2, 2002, Solutia signed a definitive stock and asset
purchase agreement (SAPA) to sell its resins, additives and adhesives
businesses to UCB S.A. for $500 in cash, plus an upfront payment of
$10 for a period of exclusivity. On January 31, 2003, the sale was completed
resulting in a pre-tax gain of $24. During 2003 a number of disputes
arose between the parties as to amounts due under various provisions of
the SAPA which were unresolved as of Chapter 11 filing date. The Company
had approximately $30 recorded for this liability at December 31, 2003.
As a result of the Company's Chapter 11 filing, these liabilities are
subject to compromise and will be addressed in conjunction with the
ongoing bankruptcy proceedings.
Impact of Chapter 11 Proceedings
--------------------------------
During the reorganization process, substantially all pending
litigation against the Company and its subsidiaries that filed for
reorganization under Chapter 11 (Debtors) is stayed, as well as the
majority of all other pre-petition claims. Exceptions would generally
include pre-petition claims addressed by the court, as well as fully
secured claims. Such claims may be subject to future adjustments.
Adjustments may result from actions of the Bankruptcy Court,
negotiations, rejection of executory contracts, the determination as to
the value of any collateral securing claims, proofs of claims, or other
events. Additional pre-filing claims not currently reflected in the
consolidated financial statements may be identified through the proof of
claim reconciliation process and may arise in connection with actions
taken by the Debtors in the cases. The amount of pre-filing claims
ultimately allowed by the Court in respect to contingent claims may be
materially different from the amounts reflected in the consolidated
financial statements. Generally, claims against Debtors arising from
actions or omissions prior to its filing date will be compromised in
connection with the plan of reorganization. The ultimate resolution of
all of these claims may be settled through negotiation as compared to
court proceedings, with the result being the Company retaining certain
obligations currently classified as Liabilities Subject to Compromise
in the Statement of Consolidated Financial Position.
21. SUBSEQUENT EVENT
Final DIP Financing
On January 16, 2004, pursuant to authorization from the bankruptcy
court, Solutia entered into a final $525 DIP credit facility. This DIP
facility consists of (i) a $50 multiple draw term loan component
("Term Loan A"); (ii) a $300 single draw term loan component ("Term Loan B");
and (iii) a $175 borrowing-based revolving credit component, which
included a $150 letter of credit subfacility. Proceeds from the final
DIP financing facility were used to retire the Company's existing
pre-petition $350 credit facility, repay the $75 provided by the interim
DIP facility and provide approximately $100 of new liquidity for general
operating purposes.
The final DIP facility has a maturity date which is the earliest of
(i) December 19, 2005; (ii) the earlier of the effective date and the
date of the substantial consummation (as defined in Section 1101(2) of
the Bankruptcy Code), in each case, of a plan of reorganization in the
78
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Chapter 11 cases confirmed by an order of the Bankruptcy Court; and
(iii) such earlier date on which all loans under the final DIP facility
shall become due and payable in accordance with the terms of the final
DIP facility or other loan documents. Additionally, the final DIP
facility is subject to various mandatory commitment reductions and
prepayments in connection with asset sales, equity issuances, receipt of
extraordinary proceeds and certain other events. In particular, the
final DIP facility significantly limits the Company's ability to use
divesture proceeds for any purpose other than the permanent reduction of
the final DIP facility.
Collateral
----------
The Bankruptcy Court's final order, issued on January 16, 2004,
authorized the Company to incur post-petition secured indebtedness, and
ordered the repayment of the $350 pre-petition facility and the
$75 interim DIP facility with the proceeds of the final DIP facility. In
addition, the final order granted all the perfected first priority and
senior liens, originally granted to the $350 pre-petition facility and
$75 interim DIP facility, to the lenders under the final DIP facility in
conjunction with its post-petition senior secured status. In particular,
the final DIP facility is secured by a lien on substantially all of the
Company's domestic assets, including (i) accounts receivable and
inventory; (ii) certain intellectual property; (iii) pledges of stock of
certain domestic subsidiaries; (iv) pledges of 65 percent of the
outstanding stock of certain foreign subsidiaries; (v) liens on
intercompany notes receivable held by parties to the loan; and
(vi) liens on property, plant and equipment located at St. Louis, Missouri;
Columbia, Tennessee; Foley, Alabama; Martinsville, Virginia;
Springfield, Massachusetts; Trenton, Michigan; Alvin, Texas; Pensacola,
Florida; Decatur, Alabama; and Greenwood, South Carolina.
Interest
--------
Borrowings under the revolving credit component bear interest at a
rate per annum equal to the prime rate or LIBOR plus 2.25 percent at the
election of the borrower. Borrowings under the term loan bear interest
at a rate per annum equal to the greater of (i) the prime rate plus
4.0 percent or (ii) 8.0 percent.
Guarantees
----------
The obligations of Solutia Inc. and Solutia Business Enterprises,
Inc., as borrowers under the final DIP facility, are guaranteed by
Solutia's other domestic subsidiaries which own substantially all of the
Company's domestic assets. These subsidiaries are Axio Research
Corporation, Beamer Road Management Company, CPFilms Inc., Monchem,
Inc., Monchem International, Inc., Solutia Greater China, Inc., Solutia
Inter-America, Inc., Solutia International Holding, LLC, Solutia
Investments, LLC, Solutia Management Company, Inc., Solutia Overseas,
Inc., Solutia Systems, Inc. and Solutia Taiwan, Inc. The obligations
must also be guaranteed by each of Solutia's subsequently acquired or
organized domestic subsidiaries, subject to certain exceptions. In
addition, Solutia Inc. and Solutia Business Enterprises, Inc. are
jointly and severally liable with respect to their obligations under the
final DIP facility, thus in effect each guaranteeing the other's debt.
Covenants and Other Restrictions
--------------------------------
The final DIP facility requires the Company to meet certain
financial covenants, including but not limited to, minimum EBITDA
targets, on a consolidated basis and for one of its operating units. In
addition, the credit facility contains certain covenants which, among
other things, limits the incurrence of additional debt, aggregate
capital expenditures, additional operating leases, issuance of capital
stock, issuance of guarantees, liens, investments, asset sales,
dividends, certain payments, acquisitions, mergers, consolidations and
dissolutions, 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.
The final DIP facility contains customary and other events of
default, including, among others, payment defaults, breaches of
representations and warranties, covenant defaults, cross-defaults to the
Company's Euronotes, failure of guaranties or security documentation to
be effective, judgment defaults, ERISA defaults, Solutia Inc. change of
control, conversion of the case from a Chapter 11 to a Chapter 7
bankruptcy and a material adverse effect default.
Modification of Euronotes
On January 30, 2004, the Company's subsidiary, SESA, restructured
its 6.25% Euronotes, due in 2005. The Euronotes are issued by SESA and
aggregate (euro) 200 million in principal amount. The restructuring
allows SESA to continue normal operations while Solutia Inc. and its
domestic subsidiaries reorganize under Chapter 11 bankruptcy protection.
79
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The restructuring was implemented in a two step process. The first
step was completed on December 16, 2003 at a meeting of Euronote holders
at which the required percentage of Euronote holders adopted resolutions
agreeing to forebear through January 30, 2004 the acceleration and
default of the Euronotes in the event of a Chapter 11 filing by Solutia
Inc. In consideration for that agreement, SESA made an additional
interest payment to the Euronote holders of approximately $2. The second
step of the restructuring was completed on January 30, 2004 at a meeting
of Euronote holders at which the required percentage of Euronote holders
adopted resolutions approving definitive documentation set forth in the
terms and conditions of the restructuring and approving other related
actions. The Euronotes were amended in the following manner:
1. Certain cross default provisions in the Euronotes that would have
resulted in default and acceleration upon the filing of a Chapter
11 proceeding by Solutia Inc. were eliminated. Solutia Inc.'s
guarantee of the Euronotes was also eliminated.
2. The maturity of the Euronotes was extended to December 15, 2008,
from the original maturity date of February 15, 2005.
3. Interest on the Euronotes was fixed at the rate of 10 percent per
annum, payable semi-annually in arrears.
4. SESA agreed to grant to the holders of the Euronotes security
interests in substantially all of the assets of SESA and certain
of its subsidiaries (excluding Flexsys Holding BV) and to cause
these subsidiaries to be added as guarantors of the Euronotes,
all to the extent permitted under applicable law and as further
provided in the underlying documentation implementing the
restructuring.
5. Certain redemption provisions were added that allow partial
redemption of the Euronotes as a result of permitted asset sales
and full redemption in certain circumstances. Full redemption is
barred for 18 months; thereafter, full redemption is allowed at
105 percent of principal for the next twelve months, 103 percent
of principal for the twelve months thereafter, 101 percent of
principal for the twelve months after that and at par thereafter.
6. Covenants were added that have the effect of limiting the ability
of SESA and its subsidiaries to transfer assets or cash out of
those entities until the Euronotes are paid.
7. SESA agreed to certain financial reporting requirements and to
indemnify Euronote holders against certain liabilities.
SESA and the holders of the Euronotes also entered into an Agreement
of Understanding that sets forth, among other items, the post-closing
process for implementing the guarantees, security and pledges associated
with the restructuring.
The Company has analyzed the modifications of the Euronotes in
accordance with the provisions of Emerging Issues Task Force (EITF)
No. 02-04, Determining Whether a Debtor's Modification or Exchange of Debt
Instruments is within the Scope of FASB Statement No. 15, and EITF
No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt
Instruments, and recorded a charge of approximately $15 during
January 2004 to record the Euronotes as modified at their fair value
on January 30, 2004.
80
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
22. SUPPLEMENTAL DATA
Supplemental income statement data from continuing operations were:
Year ended December 31,
------------------------------
2003 2002 2001
------ ------ ----
Raw material and energy costs............................... $1,088 $1,008 $969
Employee compensation and benefits.......................... 664 693 706
Taxes other than income..................................... 83 94 102
Rent expense................................................ 29 39 33
Provision for doubtful accounts (net of recoveries)......... 5 -- 11
Technological expenses:
Research and development................................ 46 39 43
Engineering, commercial development and patent.......... 7 8 7
------ ------ ----
Total technological expenses................................ 53 47 50
Interest expense:
Total interest cost..................................... 121 85 72
Less capitalized interest............................... 1 1 2
------ ------ ----
Net interest expense........................................ $ 120 $ 84 $ 70
23. SEGMENT AND GEOGRAPHIC DATA
Solutia's reportable segments and their major products and services
are as follows:
PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON
- ------------------------------------------------------------ ------------------------------------------------------------
SAFLEX(R) plastic interlayer Nylon intermediate "building block" chemicals
Polyvinyl butyral for KEEPSAFE(R) and KEEPSAFE MAXIMUM(R) Merchant polymer and nylon extrusion polymers, including
laminated window glass VYDYNE(R) and ASCEND(R)
LLUMAR(R), VISTA(R) and GILA(R) professional and retail Carpet fibers, including the WEAR-DATED(R) and ULTRON(R)
window films brands
VANCEVA(TM) plastic interlayer and films Industrial nylon fibers
Conductive and anti-reflective coated films and deep-dyed ACRILAN(R) acrylic fibers for apparel, upholstery fabrics,
films craft yarns and other applications
Industrial products, including THERMINOL(R) heat transfer
fluids, DEQUEST(R) water treatment chemicals, SKYDROL(R)
aviation hydraulic fluids, and chlorobenzenes
Services for process research and development, scale-up
manufacturing and small volume licensed production for the
pharmaceutical industry
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 restructuring and asset impairment charges that can
be directly attributable to the segment. Certain expenses and other
items that are managed outside of the segments are excluded. These
unallocated items consist primarily of corporate expenses, certain
equity earnings from affiliates, interest expense, other income, net and
expense items, gains and losses from asset dispositions and
restructuring charges that are not directly attributable to the
operating segment.
81
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Solutia's 2003, 2002 and 2001 segment information follows:
Year Ended December 31,
-----------------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
Net Net Net
Sales Profit Sales Profit Sales Profit
------ ------ ------ ------ ------ ------
SEGMENT:
Performance Products and Services............. $1,038 $ (39) $ 974 $ 78 $ 990 $ 77
Integrated Nylon.............................. 1,392 (59) 1,325 24 1,332 6
------ ----- ------ ---- ------ -----
SEGMENT TOTALS.................................... 2,430 (98) 2,299 102 2,322 83
RECONCILIATION TO CONSOLIDATED TOTALS:
Sales eliminations............................
Corporate expenses............................ (268) (61) (121)
Equity earnings (loss) from affiliates, net of
tax.......................................... (84) 14 (13)
Interest expense.............................. (120) (84) (70)
Other income (expense), net................... 6 10 (3)
Reorganization Items, net..................... (1) -- --
------ ------ ------
CONSOLIDATED TOTALS:
NET SALES..................................... $2,430 $2,299 $2,322
====== ----- ====== ---- ====== -----
LOSS BEFORE INCOME TAXES...................... $(565) $(19) $(124)
===== ==== =====
Year Ended December 31,
--------------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
Capital Depreciation Capital Depreciation
Expen- and Expen- and
Assets ditures Amortization Assets ditures Amortization
------ ------- ------------ ------ ------- ------------
SEGMENT:
Performance Products and
Services......................... $ 861 $24 $ 51 $ 923 $ 35 $ 50
Integrated Nylon.................. 812 53 80 882 21 79
------ --- ---- ------ ---- ----
SEGMENT TOTALS..................... $1,673 $77 $131 $1,805 $ 56 $129
RECONCILIATION TO CONSOLIDATED
TOTALS:
Unallocated amounts............... 773 1 6 901 3 5
------ --- ---- ------ ---- ----
CONSOLIDATED TOTALS................ $2,446 $78 $137 $2,706 $ 59 $134
====== === ==== ====== ==== ====
Year Ended December 31,
-------------------------------
2001
-------------------------------
Capital Depreciation
Expen- and
Assets ditures Amortization
------ ------- ------------
SEGMENT:
Performance Products and
Services......................... $ 889 $ 63 $ 56
Integrated Nylon.................. 901 20 83
------ ---- ----
SEGMENT TOTALS..................... $1,790 $ 83 $139
RECONCILIATION TO CONSOLIDATED
TOTALS:
Unallocated amounts............... 877 -- 4
------ ---- ----
CONSOLIDATED TOTALS................ $2,667 $ 83 $143
====== ==== ====
Solutia's geographic information for the year ended December 31,
2003, 2002 and 2001 follows:
Net Sales Long-Lived Assets
-------------------------------- -----------------
2003 2002 2001 2003 2002
------ ------ ------ ----- -----
U.S...................................... $1,475 $1,407 $1,488 $771 $777
Other countries.......................... 955 892 834 138 153
------ ------ ------ ---- ----
CONSOLIDATED TOTALS...................... $2,430 $2,299 $2,322 $909 $930
====== ====== ====== ==== ====
82
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
24. QUARTERLY DATA--UNAUDITED
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
Net Sales from Continuing Operations............. 2003 $ 611 $ 625 $ 594 $ 600 $2,430
Net Sales from Continuing Operations............. 2002 $ 534 $ 600 $ 588 $ 577 $2,299
Net Sales from Discontinued Operations........... 2002 $ 134 $ 151 $ 144 $ 130 $ 559
Net Sales Previously Reported on Form 10-Q....... 2002 $ 668 $ 751 $ 732 $ 707 $2,858
Gross Profit (Loss) from Continuing Operations... 2003 69 49 (50) (8) 60
Gross Profit from Continuing Operations.......... 2002 87 96 86 94 363
Gross Profit from Discontinued Operations........ 2002 35 41 34 21 131
Gross Profit Previously Reported on Form 10-Q.... 2002 122 137 120 115 494
Loss before Discontinued Operations and
Cumulative Effect of Change in Accounting
Principle...................................... 2003 (17) (38) (173) (752) (980)
Loss from Discontinued Operations................ 2003 (2) -- -- -- (2)
Loss before Cumulative Effect of Change in
Accounting Principle........................... 2003 (19) (38) (173) (752) (982)
Income (Loss) before Discontinued Operations and
Cumulative Effect of Change in Accounting
Principle...................................... 2002 4 11 (6) (17) (8)
Income from Discontinued Operations.............. 2002 10 12 6 (4) 24
Income (Loss) before Cumulative Effect of Change
in Accounting Principle........................ 2002 14 23 -- (21) 16
Basic and Diluted Earnings (Loss) per Share from
Continuing Operations.......................... 2003 (0.16) (0.36) (1.65) (7.19) (9.37)
2002 0.04 0.10 (0.06) (0.16) (0.08)
Net Income (Loss)................................ 2003 (19) (38) (178) (752) (987)
2002 (153) 23 -- (21) (151)
Common Stock Price:
2003..................................... HIGH 4.73 2.80 4.89 4.43 4.89
LOW 1.61 1.20 .91 .23 .23
2002..................................... High 13.20 8.92 7.10 5.95 13.20
Low 6.12 7.10 4.51 2.81 2.81
Net loss in the first quarter of 2003 includes charges of $11 for
workforce reductions taken worldwide and $5 for asset impairments and
severance charges at the Astaris and Flexsys joint ventures, and a
$4 gain related to the recovery of a receivable which had previously been
written off. Net loss in the second quarter of 2003 includes charges of
$9 for additional workforce reductions taken worldwide and contract
termination costs associated with restructuring, $27 for environmental
charges pursuant to the partial consent decree approved on August 4,
2003 related to remediation and the establishment of an educational
trust in Anniston, Alabama, and $2 for additional severance charges at
the Astaris and Flexsys joint ventures. Net loss in the third quarter of
2003 include charges of $1 for additional workforce reductions taken
worldwide, $57 for additional restructuring charges taken at the Astaris
and Flexsys joint ventures related to asset impairments and severance
charges, $30 for a pension settlement loss, and $99 related to the
Company's share of the Anniston PCB litigation settlement and to
increase certain other litigation accruals. Net loss in the fourth
quarter of 2003 includes charges of $35 for additional workforce
reductions and contract termination costs, $5 for a pension settlement
loss, $20 to increase the environmental reserve related to exiting the
Nitro, WV facility, $78 to write down goodwill and other identifiable
intangible assets within the Pharmaceutical Services reporting unit,
$25 of additional restructuring and litigation charges taken at the Astaris
and Flexsys joint ventures related to asset impairments and severance
charges, $14 for the write-off of unamortized debt issuance costs
related to the amended credit facility refinanced during the quarter,
and $543 in income tax expense to increase valuation allowances for
considerably all U.S. deferred tax assets.
83
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net loss in the first quarter of 2002 includes an after-tax gain of
$3 from the sale of the Company's 50 percent interest in the Advanced
Elastomer Systems joint venture. Net income in the third quarter of 2002
includes after-tax charges of $3 related to the resolution of a
construction dispute with the contractor of the acrylonitrile plant in
Alvin, Texas and an after-tax charge of $8 for a non-cash pension
settlement loss because of the significant amount of lump sum
distributions from the pension plan. Net loss in the fourth quarter of
2002 includes $4 of charges for the Flexsys joint venture related to the
write-down of production assets to fair market value at its Nitro, West
Virginia, facility, and an after-tax charge of $3 for a non-cash pension
settlement loss because of the significant amount of lump sum
distributions from the pension plan.
Under SFAS No. 128, Earnings per Share, the quarterly and total year
calculations of basic and diluted earnings (loss) per share are based on
weighted average shares outstanding for that quarterly or total year
period, respectively. As a result, the sum of diluted earnings (loss)
per share for the quarterly periods may not equal total year earnings
(loss) per share.
25. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
CPFilms, Inc., Monchem International, Inc., Monchem, Inc., Solutia
Systems, Inc., Solutia Investments, LLC and Solutia Business
Enterprises, Inc., wholly-owned subsidiaries of the Company (the
"Guarantors"), are guarantors of the holders of Solutia's 11.25 percent
Senior Secured Notes due 2009 (the "Notes"). In connection with the
completion of the October 2003 credit facility, Solutia Investments,
LLC, and Solutia Business Enterprises, Inc. became guarantors of the
Notes through cross-guarantor provisions. Accordingly, the 2002 and 2001
consolidating condensed financial statements have been restated to
reflect the addition of these two new guarantors. The Company's
obligations under the October 2003 facility were paid in full by the
proceeds of a final DIP facility dated as of January 16, 2004, which
payment did not affect the Guarantors' obligations in respect of the
Notes. Certain other wholly-owned subsidiaries of the Company (the "DIP
Guarantors") guaranteed the final DIP facility (as well as a smaller,
interim DIP facility put in place as of December 19, 2003), but the DIP
Guarantors were not required by the cross-guarantor provisions to
guaranty 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
December 31, 2003 and December 31, 2002, and for the years ended December 31,
2003, 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 such information is not material and would substantially
duplicate disclosures included elsewhere in this report.
84
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES............................ $1,839 $ 146 $ 776 $(331) $2,430
Cost of goods sold................... 1,973 67 680 (350) 2,370
------ ----- ----- ----- ------
GROSS PROFIT......................... (134) 79 96 19 60
Marketing expenses................... 105 20 31 -- 156
Administrative expenses.............. 100 7 35 -- 142
Technological expenses............... 49 3 1 -- 53
Amortization expense................. -- -- 3 -- 3
Impairment of intangible Assets...... -- -- 78 -- 78
------ ----- ----- ----- ------
OPERATING INCOME (LOSS).............. (388) 49 (52) 19 (372)
Equity losses from affiliates, net of
tax................................ (63) (65) (6) 51 (83)
Interest expense..................... (169) (6) (60) 115 (120)
Other income, net.................... 17 89 34 (129) 11
Reorganization items, net............ (1) -- -- -- (1)
------ ----- ----- ----- ------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT).................. (604) 67 (84) 56 (565)
Income tax expense (benefit)......... 376 53 (19) 5 415
------ ----- ----- ----- ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE.......................... (980) 14 (65) 51 (980)
Loss from Discontinued Operations,
net of tax......................... (2) (108) (109) 217 (2)
Cumulative Effect of Change in
Accounting Principle, net of tax... (5) -- -- -- (5)
------ ----- ----- ----- ------
NET LOSS............................. $ (987) $ (94) $(174) $ 268 $ (987)
====== ===== ===== ===== ======
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
TWELVE MONTHS ENDED DECEMBER 31, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET LOSS............................. $(987) $(94) $(174) $268 $(987)
OTHER COMPREHENSIVE LOSS:
Currency translation adjustments..... 55 59 31 (90) 55
Minimum pension liability
adjustments, net of tax............ 19 -- (1) 1 19
----- ---- ----- ---- -----
COMPREHENSIVE LOSS................... $(913) $(35) $(144) $179 $(913)
===== ==== ===== ==== =====
85
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2002
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES............................ $1,766 $ 153 $ 676 $(296) $2,299
Cost of goods sold................... 1,626 64 556 (310) 1,936
------ ----- ----- ----- ------
GROSS PROFIT......................... 140 89 120 14 363
Marketing expenses................... 103 19 25 -- 147
Administrative expenses.............. 91 7 30 -- 128
Technological expenses............... 43 2 2 -- 47
Amortization expense................. -- -- 3 -- 3
------ ----- ----- ----- ------
OPERATING INCOME (LOSS).............. (97) 61 60 14 38
Equity earnings from affiliates, net
of tax............................. (36) (179) -- 228 13
Interest expense..................... (148) (8) (123) 195 (84)
Other income, net.................... 22 108 77 (193) 14
------ ----- ----- ----- ------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT).................. (259) (18) 14 244 (19)
Income tax expense (benefit)......... (86) 54 25 (4) (11)
------ ----- ----- ----- ------
LOSS FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE............ (173) (72) (11) 248 (8)
Income from Discontinued Operations,
net of tax......................... 24 59 58 (117) 24
Cumulative Effect of Change in
Accounting Principle, net of tax... (2) -- (165) -- (167)
------ ----- ----- ----- ------
NET LOSS............................. $ (151) $ (13) $(118) $ 131 $ (151)
====== ===== ===== ===== ======
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
TWELVE MONTHS ENDED DECEMBER 31, 2002
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET LOSS............................. $(151) $(13) $(118) $ 131 $(151)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments..... 119 121 3 (124) 119
Net unrealized loss on derivative
instruments, net of tax............ 1 -- -- -- 1
Minimum pension liability
adjustments, net of tax............ (122) -- (11) 11 (122)
----- ---- ----- ----- -----
COMPREHENSIVE INCOME (LOSS).......... $(153) $108 $(126) $ 18 $(153)
===== ==== ===== ===== =====
86
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2001
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES............................ $1,811 $145 $ 680 $(314) $2,322
Cost of goods sold................... 1,716 63 562 (329) 2,012
------ ---- ----- ----- ------
GROSS PROFIT......................... 95 82 118 15 310
Marketing expenses................... 113 17 12 -- 142
Administrative expenses.............. 95 7 40 -- 142
Technological expenses............... 45 2 3 -- 50
Amortization expense................. -- 6 6 -- 12
------ ---- ----- ----- ------
OPERATING INCOME (LOSS).............. (158) 50 57 15 (36)
Equity earnings from affiliates, net
of tax............................. 122 3 (4) (134) (13)
Interest expense..................... (132) (7) (140) 209 (70)
Other income, net.................... (19) 132 105 (223) (5)
------ ---- ----- ----- ------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT).................. (187) 178 18 (133) (124)
Income tax expense (benefit)......... (106) 54 9 -- (43)
------ ---- ----- ----- ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... (81) 124 9 (133) (81)
Income from Discontinued Operations,
net of tax......................... 22 45 46 (91) 22
------ ---- ----- ----- ------
NET INCOME (LOSS).................... $ (59) $169 $ 55 $(224) $ (59)
====== ==== ===== ===== ======
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
TWELVE MONTHS ENDED DECEMBER 31, 2001
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS).................... $(59) $169 $55 $(224) $(59)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments..... (37) (45) 20 25 (37)
Cumulative effect of accounting
change, net of tax................. 2 -- -- -- 2
Net loss on derivative instruments,
net of tax......................... (3) -- -- -- (3)
Minimum pension liability
adjustments, net of tax............ 2 -- -- -- 2
---- ---- --- ----- ----
COMPREHENSIVE INCOME (LOSS).......... $(95) $124 $75 $(199) $(95)
==== ==== === ===== ====
87
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 105 $ 20 $ 34 $ -- $ 159
Trade receivables, net............... 8 135 138 -- 281
Intercompany receivables............. 65 677 100 (842) --
Miscellaneous receivables............ 56 -- 28 -- 84
Prepaid expenses..................... 25 1 5 -- 31
Deferred income tax benefit.......... -- -- 6 3 9
Inventories.......................... 130 24 102 (16) 240
------- ------ ------ ------- -------
TOTAL CURRENT ASSETS............. 389 857 413 (855) 804
PROPERTY, PLANT AND EQUIPMENT, net... 695 75 139 -- 909
INVESTMENTS IN AFFILIATES............ 2,176 29 34 (2,033) 206
GOODWILL............................. -- 72 25 -- 97
IDENTIFIED INTANGIBLE ASSETS, net.... 2 27 14 -- 43
LONG-TERM DEFERRED INCOME TAX
BENEFIT............................ -- -- 15 -- 15
INTERCOMPANY ADVANCES................ 128 1,392 962 (2,482) --
OTHER ASSETS......................... 340 -- 32 -- 372
------- ------ ------ ------- -------
TOTAL ASSETS..................... $ 3,730 $2,452 $1,634 $(5,370) $ 2,446
======= ====== ====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable..................... $ 46 $ 1 $ 33 $ (2) $ 78
Intercompany payables................ 9 20 87 (116) --
Accrued liabilities.................. 185 9 109 -- 303
Postretirement liabilities........... -- -- 1 -- 1
Short-term debt...................... 361 -- -- -- 361
Intercompany short-term debt......... -- -- 419 (419) --
------- ------ ------ ------- -------
TOTAL CURRENT LIABILITIES............ 601 30 649 (537) 743
LONG-TERM DEBT....................... 43 -- 251 -- 294
INTERCOMPANY LONG-TERM DEBT.......... -- -- 574 (574) --
POSTRETIREMENT LIABILITIES........... -- -- 31 -- 31
OTHER LIABILITIES.................... 263 -- 19 -- 282
------- ------ ------ ------- -------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE......................... 907 30 1,524 (1,111) 1,350
LIABILITIES SUBJECT TO COMPROMISE.... 3,948 412 75 (2,214) 2,221
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock......................... 1 -- -- -- 1
Additional contributed capital... 56 -- -- -- 56
Treasury stock................... (251) -- -- -- (251)
Net (deficiency) excess of assets at
spin-off and subsidiary capital.... (113) 2,010 35 (2,045) (113)
Accumulated other comprehensive
loss............................... (72) -- -- -- (72)
Accumulated deficit.................. (746) -- -- -- (746)
------- ------ ------ ------- -------
TOTAL SHAREHOLDERS' EQUITY
(DEFICIT).......................... (1,125) 2,010 35 (2,045) (1,125)
------- ------ ------ ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)................... $ 3,730 $2,452 $1,634 $(5,370) $ 2,446
======= ====== ====== ======= =======
88
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
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............. 28 590 334 (952) --
Miscellaneous receivables............ 69 -- 28 -- 97
Inventories.......................... 167 23 92 (20) 262
Prepaid expenses..................... 14 1 2 -- 17
Deferred income tax benefit.......... 82 -- 19 7 108
Current Assets--Discontinued
Operations......................... 85 10 541 -- 636
------ ------ ------ ------- ------
TOTAL CURRENT ASSETS............. 457 770 1,145 (965) 1,407
PROPERTY, PLANT AND EQUIPMENT, net... 698 78 154 -- 930
INVESTMENTS IN AFFILIATES............ 2,990 23 30 (2,811) 232
GOODWILL, net........................ -- 72 72 -- 144
IDENTIFIED INTANGIBLE ASSETS, net.... 3 26 37 -- 66
LONG-TERM DEFERRED INCOME TAX
BENEFIT............................ 278 -- 12 -- 290
INTERCOMPANY ADVANCES................ 128 2,241 1,346 (3,715) --
OTHER ASSETS......................... 241 1 31 -- 273
------ ------ ------ ------- ------
TOTAL ASSETS..................... $4,795 $3,211 $2,827 $(7,491) $3,342
====== ====== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable..................... $ 191 $ 8 $ 35 $ -- $ 234
Intercompany payables................ 463 152 337 (952) --
Accrued liabilities.................. 199 10 147 -- 356
Postretirement liabilities........... 92 -- 1 -- 93
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.......... 1,586 226 1,411 (3,223) --
POSTRETIREMENT LIABILITIES........... 1,137 -- 27 -- 1,164
OTHER LIABILITIES.................... 279 -- 104 (1) 382
LONG-TERM LIABILITIES--DISCONTINUED
OPERATIONS......................... -- -- -- -- --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock......................... 1 -- -- -- 1
Additional contributed capital... 19 -- -- -- 19
Treasury stock................... (251) -- -- -- (251)
Net (deficiency) excess of assets
at spin-off and subsidiary
capital........................ (113) 2,792 31 (2,823) (113)
Accumulated other comprehensive
loss............................... (146) -- -- -- (146)
Reinvested earnings.................. 241 -- -- -- 241
------ ------ ------ ------- ------
TOTAL SHAREHOLDERS' EQUITY
(DEFICIT).......................... (249) 2,792 31 (2,823) (249)
------ ------ ------ ------- ------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)................... $4,795 $3,211 $2,827 $(7,491) $3,342
====== ====== ====== ======= ======
89
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS....... $(176) $ 98 $ 42 $-- $ (36)
----- ---- ----- --- -----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases.......................... (61) (2) (15) -- (78)
Acquisition and investment payments,
net of cash acquired............... (63) -- -- -- (63)
Property disposals and investment
proceeds........................... 174 -- 305 -- 479
----- ---- ----- --- -----
CASH FROM (USED IN) INVESTING
ACTIVITIES......................... 50 (2) 290 -- 338
----- ---- ----- --- -----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................ 128 -- (125) -- 3
Net change in cash collateralized
letters of credit.................. (121) -- -- -- (121)
Debt issuance costs.................. (31) -- -- -- (31)
Other financing activities........... (11) -- -- -- (11)
Changes in investments and advances
from (to) affiliates............... 265 (76) (189) -- --
----- ---- ----- --- -----
CASH FROM (USED IN) FINANCING
ACTIVITIES......................... 230 (76) (314) -- (160)
----- ---- ----- --- -----
INCREASE IN CASH AND CASH
EQUIVALENTS........................ 104 20 18 -- 142
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.................... -- -- 17 -- 17
----- ---- ----- --- -----
END OF PERIOD........................ $ 104 $ 20 $ 35 $-- $ 159
===== ==== ===== === =====
90
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31, 2002
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS....... $ (72) $ 130 $ 113 $-- $ 171
----- ----- ----- --- -----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases.......................... (36) (6) (26) -- (68)
Acquisition and investment payments,
net of cash acquired............... (37) -- -- -- (37)
Property disposals and investment
proceeds........................... 118 -- -- -- 118
----- ----- ----- --- -----
CASH FROM (USED IN) INVESTING
ACTIVITIES......................... 45 (6) (26) -- 13
----- ----- ----- --- -----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................ (450) -- 123 -- (327)
Net change in long-term debt
obligations........................ 181 -- 1 -- 182
Issuance of stock warrants........... 19 -- -- -- 19
Common stock issued under employee
stock plans........................ 2 -- -- -- 2
Other financing activities........... (66) -- -- -- (66)
Changes in investments and advances
from (to) affiliates............... 338 (125) (213) -- --
----- ----- ----- --- -----
CASH FROM (USED IN) FINANCING
ACTIVITIES......................... 24 (125) (89) -- (190)
----- ----- ----- --- -----
DECREASE IN CASH AND CASH
EQUIVALENTS........................ (3) (1) (2) -- (6)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.................... 3 1 19 -- 23
----- ----- ----- --- -----
END OF PERIOD........................ $ -- $ -- $ 17 $-- $ 17
===== ===== ===== === =====
91
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31, 2001
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS....... $(130) $ 164 $ 11 $(1) $ 44
----- ----- ---- --- ----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases.......................... (41) (11) (42) -- (94)
Acquisition and investment payments,
net of cash acquired............... (33) -- (2) -- (35)
Property disposals and investment
proceeds........................... 8 -- 35 -- 43
----- ----- ---- --- ----
CASH USED IN INVESTING ACTIVITIES.... (66) (11) (9) -- (86)
----- ----- ---- --- ----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................ 48 -- (7) -- 41
Common stock issued under employee
stock plans........................ 13 -- -- -- 13
Deferred debt issuance costs and
dividend payments.................. (9) -- 1 -- (8)
Changes in investments and advances
from (to) affiliates............... 136 (152) 15 1 --
----- ----- ---- --- ----
CASH FROM (USED IN) FINANCING
ACTIVITIES......................... 188 (152) 9 1 46
----- ----- ---- --- ----
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................ (8) 1 11 -- 4
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.................... 11 -- 8 -- 19
----- ----- ---- --- ----
END OF PERIOD........................ $ 3 $ 1 $ 19 $-- $ 23
===== ===== ==== === ====
****
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on
Form 10-K, Solutia carried out an evaluation, under the supervision and with
the participation of Solutia's management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design
and operation of Solutia's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934). 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. There were
no significant changes in the Company's internal control over financial
reporting that occurred during the year-end ended December 31, 2003,
that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting.
92
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The following table shows information about Solutia's directors on
March 12, 2004:
- -----------------------------------------------------------------------------------------------------------------------------
Name, Age, Year First Other Business Experience Since At
Became a Solutia Director Principal Occupation Other Directorships Least January 1, 1999
- -----------------------------------------------------------------------------------------------------------------------------
John C. Hunter III, 57 Chairman, President, Chief Hercules Incorporated; President, Chief Operating
1997 Executive Officer and Penford Corporation; Officer and Director of Solutia
Director, Solutia Inc. Missouri Baptist Medical Inc., 1997-1999
Center
- -----------------------------------------------------------------------------------------------------------------------------
Robert A. Clausen, 59 Vice Chairman, Chief Maryville University in Advisory Director, Solutia Inc.,
2003 Financial Officer, Chief St. Louis 1997-2003
Administrative Officer and
Director, Solutia Inc.
- -----------------------------------------------------------------------------------------------------------------------------
Paul H. Hatfield, 68 Principal, Hatfield Capital Penford Corporation; Bunge Chairman of the Board, President
1997 Group Limited; Maritz, Inc.; and Chief Executive Officer,
Engineered Products Inc. Petrolite Corporation, 1995-1997
- -----------------------------------------------------------------------------------------------------------------------------
Robert H. Jenkins, 61 Retired Chairman of the AK Steel Holdings Chairman of the Board and Chief
1997 Board and Chief Executive Corporation; CLARCOR Inc.; Executive Officer, Sundstrand
Officer, Sundstrand Sentry Insurance; Visteon Corporation, 1997-1999
Corporation Corporation
- -----------------------------------------------------------------------------------------------------------------------------
Philip R. Lochner, 61 Director Adelphia Communications Senior Vice President and Chief
2002 Corporation; Apria Administrative Officer, Time
Healthcare Group Inc.; Warner Inc., 1991-1998;
GTECH Holdings Corporation; Commissioner, Securities and
CLARCOR Inc. Exchange Commission, 1990-1991
- -----------------------------------------------------------------------------------------------------------------------------
Frank A. Metz, Jr., 70 Retired Senior Vice Allegheny Energy, Inc. Senior Vice President, Finance and
1997 President, Finance and until February 5, 2004 Planning and Chief Financial
Planning and Chief Officer, International Business
Financial Officer, Machines Corporation (IBM),
International Business 1986-1993 and a Director of IBM,
Machines Corporation 1991-1993
- -----------------------------------------------------------------------------------------------------------------------------
J. Patrick Mulcahy, 60 Chief Executive Officer, Energizer Holdings, Inc. Chairman and Chief Executive
1999 Energizer Holdings, Inc. Officer, Eveready Battery Company
Inc., a subsidiary of Ralston
Purina Company from 1987-2000, and
a corporate officer of Ralston
Purina Company from 1984-2000
- -----------------------------------------------------------------------------------------------------------------------------
Sally G. Narodick, 58 Educational Technology and Penford Corporation; Puget Chief Executive Officer, Apex
2000 e-learning Consultant Sound Energy, Inc.; Learning, Inc. (an educational
Click2learn, Inc. software company) from its
founding in 1998 until 2000
- -----------------------------------------------------------------------------------------------------------------------------
John B. Slaughter, 69 President and Chief International Business Irving R. Melbo professor of
1997 Executive Officer, National Machines Corporation; leadership in education,
Action Council for Northrop Grumman Corp. University of Southern California
Minorities in Engineering, and President Emeritus, Occidental
Inc. (a non-profit College, 1999-2000; President,
corporation) Occidental College, 1988-1999;
Director, National Science
Foundation, 1980-1982
- -----------------------------------------------------------------------------------------------------------------------------
93
The above listed individuals are elected for staggered three-year
terms, or until their successors are duly elected and have qualified, or
until their earlier death, resignation or removal. Normally, the elected
term of office for Messrs. Hunter and Lochner and Dr. Slaughter would
expire in April 2004. Additionally, on that date, Mr. Metz and
Dr. Slaughter would normally retire in accordance with Solutia's retirement
policy for non-employee directors. However, as a result of the Company's
Chapter 11 filing, Solutia anticipates that these directors will remain
in office beyond April 2004 as Solutia does not anticipate holding a
shareholders' meeting to elect directors in the foreseeable future.
OFFICERS
The following table shows information about Solutia's executive
officers on March 12, 2004:
- ---------------------------------------------------------------------------------------------------------------------------------
Year First
Became an
Executive
Present Position Officer of
Name and Age with Solutia Solutia Other Business Experience Since At Least January 1, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
John C. Hunter III, 57 President, Chief Operating 1997 President, Chief Operating Officer and Director,
Executive Officer and Solutia 1997-1999
Director
- ---------------------------------------------------------------------------------------------------------------------------------
Robert A. Clausen, 59 Vice Chairman, Chief 1997 Senior Vice President, Chief Financial Officer and
Financial Officer, Chief Advisory Director, 1997-2003
Administrative Officer and
Director
- ---------------------------------------------------------------------------------------------------------------------------------
Jeffry N. Quinn, 45 Senior Vice President, 2003 Executive Vice President, Chief Administrative Officer and
General Counsel and Chief General Counsel, Premcor Inc., 2000-2002; Senior Vice
Restructuring Officer President of Law and Human Resources, Secretary and
General Counsel, Arch Coal, Inc., 1995-2000
- ---------------------------------------------------------------------------------------------------------------------------------
Luc De Temmerman, 49 Vice President and General 2003 Worldwide Commercial Director for Laminated Glazing
Manager, Performance Products and Services, Solutia, 2001-2002; Business
Products Director, Saflex-Europe/Africa, Solutia, 2000-2001;
Worldwide Director, Saflex Technology, Solutia, 1997-2000
- ---------------------------------------------------------------------------------------------------------------------------------
John F. Saucier, 50 Vice President and General 2001 Vice President, Strategic Planning, Mergers and
Manager, Integrated Nylon Acquisitions, 1997-2001
- ---------------------------------------------------------------------------------------------------------------------------------
The above listed individuals are elected to the offices set opposite
their names to hold office until their successors are duly elected and
have qualified, or until their earlier death, resignation or removal.
AUDIT AND FINANCE COMMITTEE; AUDIT COMMITTEE FINANCIAL EXPERT
The members of Solutia's Audit and Finance Committee, which met six
times in 2003, are Mr. Metz, Chairman; Mr. Mulcahy; and Dr. Slaughter.
Solutia's Board of Directors has concluded that each member of the
committee is independent within the meaning of Rule 10A-3 using the
New York Stock Exchange's listing standards. The board has also concluded
that Mr. Metz is an audit committee financial expert, as that term is
defined in the rules issued under the Sarbanes-Oxley Act of 2002.
The purpose of the committee is to:
* assist the board in reviewing and monitoring the integrity of
Solutia's financial statements, the qualifications and
independence of the independent auditor, the performance of the
independent auditor and Solutia's internal audit function, and
Solutia's compliance with legal and regulatory requirements; and
* assist the board in reviewing and monitoring Solutia's financial
policies, including planning and capital structure, so that they
conform to Solutia's requirements for sound operation and render
advice and counsel to Solutia's financial officers in the
execution of their responsibility.
Among the committee's responsibilities is the selection of Solutia's
independent auditor.
The board has amended the committee's written charter, which sets
out the functions the committee is to perform, in light of the
Sarbanes-Oxley Act of 2002.
94
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires
Solutia's directors and executive officers to file reports of holdings
and transactions in Solutia's common stock with the Securities and
Exchange Commission. Based on the Company's records and information,
Solutia's directors and executive officers met all applicable Securities
and Exchange Commission reporting requirements.
CODE OF ETHICS
Solutia's Board of Directors has adopted a Code of Ethics for Senior
Financial Officers. This code applies to Solutia's Chief Executive
Officer and the other senior officers who have financial
responsibilities, including Solutia's Chief Financial Officer,
Treasurer, Controller, General Counsel and Chief Restructuring Officer.
This code is filed as an exhibit to this report. Any amendments to, or
waivers from, the provisions of this code will be posted to the
"Investor" section of Solutia's web site: www.solutia.com.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table shows information about the compensation of
Solutia's chief executive officer and the Company's four most highly
compensated executive officers other than the chief executive officer
who were serving as executive officers at the end of 2003.
- --------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted Securities All Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Salary Bonus sation Awards Options Payouts sation
Position Year ($) ($)(1) ($) ($)(2) (#) ($) ($)(3)
- --------------------------------------------------------------------------------------------------------------------------------
J. C. Hunter III 2003 800,000 -- -0- -0- -0- -0- 93,028
Chairman, President, 2002 791,667 1,200,000 -0- -0- 150,000 -0- 95,291
Chief Executive Officer and 2001 700,000 -0- -0- -0- 150,000 -0- 100,720
Director
- --------------------------------------------------------------------------------------------------------------------------------
R. A. Clausen 2003 395,833 -- -0- -0- -0- -0- 36,828
Vice Chairman, Chief Financial 2002 345,833 500,000 -0- -0- 50,000 -0- 33,390
Officer, Chief Administrative 2001 300,000 -0- -0- -0- 25,000 -0- 25,871
Officer and Director
- --------------------------------------------------------------------------------------------------------------------------------
J. N. Quinn(4) 2003 290,909 200,000(5) -0- -0- 65,000 -0- 9,603
Senior Vice President, General
Counsel, Chief Restructuring
Officer
- --------------------------------------------------------------------------------------------------------------------------------
L. De Temmerman(6) 2003 275,424(7) -- 20,851(8) -0- 50,000 -0- 228
Vice President and General
Manager, Performance Products
- --------------------------------------------------------------------------------------------------------------------------------
J. F. Saucier 2003 300,000 -- -0- -0- 50,000 -0- 9,828
Vice President and General 2002 266,667 110,000 -0- -0- 30,000 -0- 9,746
Manager, Integrated Nylon 2001 200,689 50,000 -0- -0- 30,000 -0- 8,300
- --------------------------------------------------------------------------------------------------------------------------------
(1) Annual incentive awards, if any, for Messrs. Hunter, Clausen, Quinn, De Temmerman and Saucier have not yet
been determined.
(2) On December 31, 2003, the named executive officers owned the restricted shares shown in the table below. All
of these restricted shares are attributable to payouts in 2000 under the Solutia Inc. 1998-1999 Long-Term
Incentive Plan. The shares are restricted against sale or other disposition until the earliest of
December 31, 2004, the executive's retirement, death, total and permanent disability or involuntary termination other
than for cause, or a change of control. Dividends are not currently being paid to any stockholders, but
through December 31, 2002, dividends were paid on the restricted shares at the same rate paid to all
Solutia's stockholders. The market value is based on the closing price of Solutia's common stock on
December 31, 2003, which was $0.365.
----------------------------------------------------------------------------------------------------------------
Mr. Hunter Mr. Clausen Mr. Saucier
----------------------------------------------------------------------------------------------------------------
Number of Shares 207,698 62,691 17,233
----------------------------------------------------------------------------------------------------------------
Market Value on December 31, 2003 $75,810 $22,882 $6,290
----------------------------------------------------------------------------------------------------------------
Solutia believes that its plan of reorganization will result in cancellation of its existing shares of common
stock and that it is unlikely that these officers will receive any consideration for the restricted shares in
such a plan of reorganization.
(3) Amounts shown for 2003 include:
* contributions to thrift/savings plans, as follows: Mr. Hunter, $92,800; Mr. Clausen, $36,600; Mr. Quinn,
$9,375; and Mr. Saucier, $9,600; and
* cost of executive travel accident protection for each executive officer named in this table: $228.
95
(4) Mr. Quinn joined Solutia on January 13, 2003.
(5) Amount shown represents a special recognition award that Mr. Quinn received during 2003.
(6) Dr. De Temmerman became an executive officer of Solutia on January 1, 2003. Therefore, under SEC rules, his
compensation for 2001 and 2002 is not included in this table.
(7) Dr. De Temmerman, who is based in Belgium, was paid in euros. His salary has been converted into U.S. dollars
at the weighted average exchange rate for 2003 (1.12115 U.S. dollars to 1 euro).
(8) Of this amount, $11,837 represents the grossed up reimbursement for certain taxes and $9,014 is attributable
to a customary Belgian representation allowance.
OPTION GRANTS IN 2003
The following table shows information about options to purchase
shares of Solutia's common stock that were granted during 2003 to the
Company's executive officers who are named in the Summary Compensation
Table. All of the options were granted under the Solutia Inc. 2000
Stock-Based Incentive Plan. Solutia believes that its plan of
reorganization will result in cancellation of its existing shares of
common stock, as well as options and warrants to purchase its common
stock and that it is unlikely that holders of options to purchase
Solutia's common stock, will receive any consideration for those options
in such a plan of reorganization.
- -------------------------------------------------------------------------------------------------------
Grant
Individual Grants(1) Date Value
- -------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or Grant Date
Options Granted Employees in Base Price Expiration Present Value
Name (#) Fiscal Year ($/Share)(2) Date ($)(3)
- -------------------------------------------------------------------------------------------------------
J. C. Hunter III -0- N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------
R. A. Clausen -0- N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------
J. N. Quinn 40,000(4) 4.01 3.90 1/28/13 128,093
25,000(4) 2.51 1.22 7/24/13 25,061
- -------------------------------------------------------------------------------------------------------
L. De Temmerman 50,000(5) 5.01 1.22 7/24/13 50,123
- -------------------------------------------------------------------------------------------------------
J. F. Saucier 50,000(4) 5.01 1.22 7/24/13 50,123
- -------------------------------------------------------------------------------------------------------
(1) All Solutia management stock options have a minimum one-year holding period, except in the event of a change
of control. They expire ten years from the grant date unless forfeited earlier. They all carry stock tax
withholding rights.
(2) The exercise price of the options equals 100% of the fair market value per underlying share of Solutia common
stock on the grant date.
(3) In accordance with SEC rules, Solutia has chosen the Black-Scholes option pricing model to estimate the grant
date present value of the options shown in this table. The following assumptions were made for purposes of
calculating the original grant date present value: an option life of 5 years, volatility of 123.8%, a
dividend yield of 0% and a risk-free interest rate of 3.2%. Solutia's use of this model should not be
construed as an endorsement of its accuracy at valuing options. There is no assurance that the value realized
by an executive, if any, will be at or near the value estimated by the Black-Scholes model. This is
particularly true in light of recent developments (see "Chapter 11 Proceedings" in Item 1).
(4) These options become exercisable in accordance with the following schedule:
--------------------------------------------------------------
Percentage Increase in
Fair Market Value of
Company Common Stock Percentage of Option
from Option Grant Date Exercisable
--------------------------------------------------------------
20 25
--------------------------------------------------------------
30 50
--------------------------------------------------------------
50 75
--------------------------------------------------------------
75 100
--------------------------------------------------------------
(5) The option to purchase these shares becomes exercisable on January 7, 2007.
The required increases in fair market value shown above must be
maintained for a period of ten consecutive trading days in order for the
respective percentages of the options to become exercisable. To avoid
variable accounting treatment, these options become exercisable on the
ninth anniversary of the option grant date even if the required
percentage increases in fair market value have not been achieved.
96
AGGREGATED OPTION EXERCISES IN 2003 AND YEAR-END OPTION VALUES
The following table shows information about unexercised options held
by named executive officers on December 31, 2003. There were no options
exercised by the named executive officers during 2003, and none of the
options held by them at the end of 2003 were "in the money."
- -----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options at In-the-Money
FY-End Options at FY-End
Shares (#) ($)
Acquired on -----------------------------------------
Exercise Value Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------
J. C. Hunter III -0- N/A 351,799/555,000 -0-/-0-
- -----------------------------------------------------------------------------------------------------------
R. A. Clausen -0- N/A 259,237/135,000 -0-/-0-
- -----------------------------------------------------------------------------------------------------------
J. N. Quinn -0- N/A 0/65,000 -0-/-0-
- -----------------------------------------------------------------------------------------------------------
L. De Temmerman -0- N/A 53,216/80,000 -0-/-0-
- -----------------------------------------------------------------------------------------------------------
J. F. Saucier -0- N/A 35,248/139,000 -0-/-0-
- -----------------------------------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
Targets for Incentive award opportunities were not established for
the January 1, 2003 through December 31, 2005 performance period under
the Solutia Inc. 2002-2006 Long-Term Incentive Plan. No awards will be
paid for this performance cycle.
PENSION PLANS
The named executive officers are eligible for benefits payable under
the defined benefit pension plans applicable to Solutia's regular
full-time employees. An executive's benefits are based on his service,
if any, with Pharmacia prior to the spin-off of Solutia and service with
Solutia since the spin-off. Solutia's defined benefit pension plans for
its U.S. employees consist of two accounts: a "Prior Plan Account" (for
those employees who earned benefits under Pharmacia's pension plan
before the spin-off) and a "Cash Balance Account."
The opening balance of the Prior Plan Account was the December 31,
1996 present value of the executive's lump sum retirement benefit earned
prior to January 1, 1997, under Pharmacia's defined benefit pension
plans, calculated using the assumption that the monthly benefit would be
payable at age 55 with no reduction for early payment. The formula used
to calculate the opening balance was the greater of 1.4% (1.2% for
executives hired on or after April 1, 1986) of average final
compensation multiplied by years of service, without reduction for
Social Security or other offset amounts, or 1.5% of average final
compensation multiplied by years of service, less a 50% Social Security
offset. Average final compensation for purposes of determining the
opening balance was the greater of (1) average compensation received
during the 36 months of employment with Pharmacia prior to 1997 or
(2) average compensation received during the highest three of the five
calendar years of employment with Pharmacia prior to 1997. For each year
of the executive's continued employment with Solutia (including all of
1997), the executive's Prior Plan Account increases by 4% to recognize
that prior plan benefits would have grown as a result of pay increases.
For each year during which the executive is employed by Solutia,
3% of annual compensation in excess of the Social Security wage base and a
percentage, based on age, of annual compensation (salary and annual
bonus) are credited to the Cash Balance Account. The applicable
percentages and age ranges are: 3% before age 30, 4% for ages 30 to 39,
5% for ages 40 to 44, 6% for ages 45 to 49, and 7% for age 50 and over.
In addition, the Cash Balance Account of executives who earned benefits
under Pharmacia's defined benefit pension plans before 1997 is credited
each year (for up to ten years based on prior years of service with
Pharmacia before 1997) during which the executive is employed by Solutia
(including all of 1997) with an amount equal to a percentage (based on
age) of annual compensation. The applicable percentages and age ranges
are: 2% before age 30, 3% for ages 30 to 39, 4% for ages 40 to 44,
5% for ages 45 to 49, and 6% for age 50 and over.
The estimated annual benefits payable as a single life annuity
beginning at age 65 (assuming that each executive officer remains
employed by the company until age 65 and receives 4% annual compensation
increases) are as follows: Mr. Hunter, $702,958; Mr. Clausen, $402,310;
Mr. Quinn, $211,098; and Mr. Saucier, $264,997.
The following table shows the annual normal retirement benefits
payable under the pension plan applicable to Dr. De Temmerman and other
employees of Solutia's Belgian subsidiary. The benefit levels in the
table assume retirement at age 65 and payment in the form of a single
life annuity. Remuneration is an average of the final three years of
pay, excluding vacation pay and bonuses. Compensation used for
97
pension formula purposes equates to salary reported in column (c) of the
Summary Compensation Table minus approximately $20,097 attributable to
vacation pay. The benefit formula is integrated with the Belgian social
security earnings ceiling, and the amounts shown in the table reflect
integration based on the current Belgian social security ceiling.
- --------------------------------------------------------------------------------------------------------------------------------
Remuneration Years of Service
(in U.S.$) 15 20 25 30 35
- --------------------------------------------------------------------------------------------------------------------------------
125,000 25,712 34,282 42,853 51,423 59,994
- --------------------------------------------------------------------------------------------------------------------------------
150,000 32,705 43,607 54,508 65,410 76,312
- --------------------------------------------------------------------------------------------------------------------------------
175,000 39,699 52,931 66,164 79,397 92,630
- --------------------------------------------------------------------------------------------------------------------------------
200,000 46,692 62,256 77,820 93,384 108,948
- --------------------------------------------------------------------------------------------------------------------------------
225,000 53,685 71,580 89,476 107,371 125,266
- --------------------------------------------------------------------------------------------------------------------------------
250,000 60,679 80,905 101,131 121,358 141,584
- --------------------------------------------------------------------------------------------------------------------------------
300,000 74,666 99,554 124,443 149,331 174,220
- --------------------------------------------------------------------------------------------------------------------------------
400,000 102,639 136,852 171,066 205,279 239,492
- --------------------------------------------------------------------------------------------------------------------------------
450,000 116,626 155,502 194,377 233,252 272,128
- --------------------------------------------------------------------------------------------------------------------------------
500,000 130,613 174,151 217,688 261,226 304,764
- --------------------------------------------------------------------------------------------------------------------------------
As of January 1, 2004, Dr. De Temmerman had 19.33 years of credited
service and final average earnings of $201,301, as converted from euros
using a rate of 1.12115 U.S. dollars per euro, the weighted average
exchange rate for 2003.
AGREEMENTS WITH EXECUTIVE OFFICERS
Retention Agreements
Effective June 30, 2003, Solutia entered into retention agreements,
approved by the Board, with Messrs. Hunter and Clausen to assure that
Solutia would have their continued dedication over the immediately
following 30-month period. Under the terms of these agreements, each of
these executive officers will receive a payment equal to his annual base
salary on each of the first and second year anniversaries of the
effective date of the agreement and a payment equal to half his annual
base salary on the thirty-month anniversary of the effective date,
provided that the executive remains employed by Solutia on such
anniversaries or his employment has been terminated by Solutia without
cause (as defined in the agreement) or by the executive officer for good
reason (as defined in the agreement). The retention payments, which are
not considered compensation for purposes of any Solutia benefit or
compensation plans or programs, are secured by an irrevocable standby
letter of credit.
If the executive dies or becomes disabled (as defined in the
retention agreement), he or his estate, as applicable, will receive a
cash payment equal to 250% of his annual base salary as of the effective
date multiplied by (x) a fraction the numerator of which is equal to the
number of full months that the executive was employed by Solutia after
the effective date of the agreement and the denominator of which is
equal to 30, less (y) the amount of all payments already made under the
agreement. The retention agreements further provide that any payments
made to the executive under his change-of-control employment agreement
with Solutia (see paragraph immediately below) will be reduced in
accordance with a formula set forth in the retention agreement. Finally,
each named executive officer is entitled to an additional payment, if
necessary, to make him whole as a result of any excise tax imposed by
the Internal Revenue Code on certain change-of-control payments (unless
the safe harbor below which the excise tax is imposed is not exceeded by
more than ten percent, in which event the payments will be reduced to
avoid the excise tax).
Solutia has also entered into retention agreements with Messrs.
Quinn and Saucier and Dr. De Temmerman. Each of these agreements
provides for a special incentive award equal to 100% of the executive's
annual base salary, payable in two equal installments as soon as
practical on or after June 30, 2004, and December 31, 2004. The
executive is entitled to receive these payments if he continues to be
employed by Solutia or if he becomes totally and permanently disabled
(as defined in the agreement) or is involuntarily terminated without
cause (as defined in the agreement). The retention payments are not
considered compensation for purposes of any Solutia benefit or
compensation plans or programs. These agreements, which were entered
into before Solutia's Chapter 11 filing, are subject to Bankruptcy Court
approval.
Change-of-Control Employment Agreements
The executives named in the Summary Compensation Table each have a
change-of-control employment agreement. These agreements become
effective upon a "change-of-control" of Solutia (as defined in the
agreements). The agreements provide for the continuing employment of the
executive after the change-of-control on terms and conditions no less
favorable than those in effect before the change of control. If the
executive's employment is terminated by the company without "cause," or
if the executive terminates his own employment
98
for "good reason" (each as defined in the change-of-control employment
agreement), the executive is entitled to severance benefits equal to a
"multiple" of his annual compensation (including bonus) and continuation
of certain benefits for a number of years equal to the multiple. The
multiple is three for Messrs. Hunter, Clausen and Quinn, and two for
Mr. Saucier and Dr. De Temmerman and (or, in either case, the shorter number
of years until the executive's normal retirement date). In addition,
Messrs. Hunter, Clausen and Quinn are each entitled to receive the
severance benefits if he voluntarily terminates his own employment
during the 30-day period beginning on the first anniversary of certain
changes-of-control. Finally, each named executive officer is entitled to
an additional payment, if necessary, to make him whole as a result of
any excise tax imposed by the Internal Revenue Code on certain
change-of-control payments (unless the safe harbor below which the
excise tax is imposed is not exceeded by more than ten percent, in which
event the payments will be reduced to avoid the excise tax).
Effect of Chapter 11 on Agreements
Before confirmation of a plan of reorganization, Solutia is required
to (a) decide which of its executory contracts it wishes to assume and
which it wishes to reject and (b) seek approval of the bankruptcy court
for those decisions. Solutia's agreements with its executive officers
described above constitute executory contracts that were entered into
prior to Solutia's Chapter 11 filing. No decision has yet been made as
to whether Solutia will seek to assume or reject such contracts. If they
are assumed, Solutia will be required to perform its obligations under
such contracts. If they are rejected, Solutia will not have to perform
its obligations, and the affected executive officers may have
pre-petition unsecured claims for damages to be asserted in the
Chapter 11 proceedings. However, because the retention agreements with Messrs.
Hunter and Clausen are secured by irrevocable letters of credit, even if
those retention agreements are rejected, they will receive the benefits
provided for in those agreements.
COMPENSATION OF DIRECTORS
Directors who are Solutia employees do not receive payment for their
services as directors.
The following table displays all components of compensation for
non-employee directors under the compensation program that was in effect
in 2003.
- ----------------------------------------------------------------------------
Form of Compensation Amount of Compensation
- ----------------------------------------------------------------------------
Annual Board Retainer* $50,000
- ----------------------------------------------------------------------------
Annual Retainer for Committee Chairman $5,000
- ----------------------------------------------------------------------------
Committee Attendance Fee
(each meeting) $1,000
- ----------------------------------------------------------------------------
Initial Option Grant option on 8,000 shares of
(upon first election to board) Solutia common stock
- ----------------------------------------------------------------------------
Annual Option Grant** option on 2,000 shares of
Solutia common stock
- ----------------------------------------------------------------------------
* At least half of the annual retainer was credited to the director's
deferred stock account in quarterly installments. Each non-employee
director was able to elect to receive the other half of the annual
retainer in cash or to defer all or a part into the deferred stock
account, an interest-bearing cash account, or both. If credited before
May 2003, the deferred stock units are to be paid out in Solutia common
stock and, if credited in or after May 2003, the deferred stock units
are to be paid in cash. In either case, payment does not occur until
the termination of the director's service on the board. In 2004,
directors are receiving all compensation in the form of cash; there are
no further deferrals.
** The exercise price of these non-qualified stock options is equal to the
fair market value of Solutia common stock on the date of the grant. The
stock options generally become exercisable in three equal annual
installments. The stock options have a term of ten years but terminate
two years after a director's board service ends for any reason, if
earlier. On April 23, 2003, each non-employee director continuing in
office following the annual meeting of stockholders received an option
to buy 2000 shares of Solutia common stock with an exercise price of
$1.26 per share.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock and that it is
unlikely that directors will receive any consideration for the deferred
stock units or options awarded in 2003 as part of a plan of
reorganization.
Non-employee directors do not have a retirement plan, nor do they
participate in Solutia's benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation and Development Committee is comprised of
three directors: Mr. Hatfield, chairman and Messrs. Jenkins and Metz.
None of these individuals is a current or former officer or employee of
Solutia or any of its subsidiaries, nor did any of these individuals
have any reportable transactions with Solutia or any of its
subsidiaries.
99
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table shows Solutia common stock owned beneficially by
Solutia's directors and executive officers, as of December 31, 2003,
including those deferred shares credited to the account of each
non-employee director that are payable in stock. Solutia believes that
its plan of reorganization will result in cancellation of its existing
shares of common stock and that it is unlikely that its directors or
executive officers will receive any consideration for their stock or
those options in such a plan of reorganization. In general, "beneficial
ownership" includes those shares a person has the power to vote, or the
power to transfer, and stock options that are exercisable currently or
become exercisable within 60 days. Except as otherwise noted, each
person has sole voting and investment power over his or her shares.
- ---------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock Shares Underlying
Beneficially Owned Options Exercisable
Name (a)(b)(c) Within 60 Days(d) Total
- ---------------------------------------------------------------------------------------------------------------------------
Robert A. Clausen 113,290 259,237 372,527
- ---------------------------------------------------------------------------------------------------------------------------
Luc De Temmerman 50 63,216 63,266
- ---------------------------------------------------------------------------------------------------------------------------
Paul Donovan(e) 6,238 6,777 13,015
- ---------------------------------------------------------------------------------------------------------------------------
Paul H. Hatfield 31,602 17,333 48,935
- ---------------------------------------------------------------------------------------------------------------------------
John C. Hunter III 342,098 351,799 693,897
- ---------------------------------------------------------------------------------------------------------------------------
Robert H. Jenkins 24,372(f) 17,333 41,705
- ---------------------------------------------------------------------------------------------------------------------------
Philip R. Lochner, Jr. 2,859 2,944 5,803
- ---------------------------------------------------------------------------------------------------------------------------
Frank A. Metz, Jr. 13,912 17,333 31,245
- ---------------------------------------------------------------------------------------------------------------------------
J. Patrick Mulcahy 31,348 13,499 44,847
- ---------------------------------------------------------------------------------------------------------------------------
Sally G. Narodick 16,426 11,166 27,592
- ---------------------------------------------------------------------------------------------------------------------------
Jeffry N. Quinn 45,820(g) -0- 45,820
- ---------------------------------------------------------------------------------------------------------------------------
John F. Saucier 29,745(h) 35,148 64,893
- ---------------------------------------------------------------------------------------------------------------------------
John B. Slaughter 13,766(i) 17,333 31,099
- ---------------------------------------------------------------------------------------------------------------------------
All directors and executive officers (13 persons) 671,663 813,118 1,484,781
- ---------------------------------------------------------------------------------------------------------------------------
(a) The number of shares shown includes shares held under the Solutia Inc.
Savings and Investment Plan ("SIP"):
------------------------------------------------------
Mr. Hunter 67,456
------------------------------------------------------
Mr. Clausen 10,471
------------------------------------------------------
Mr. Quinn 5,820
------------------------------------------------------
Mr. Saucier 12,492
------------------------------------------------------
Directors and executive officers as a group 96,239
------------------------------------------------------
Executive officers have sole discretion over voting shares held
under SIP and, within limitations imposed by SIP, sole discretion
over investment of shares. Shares are voted by the trustee of SIP
in accordance with instructions from participants. If the trustees
do not receive instructions as to the voting of particular shares,
the shares are voted in proportion to instructions actually
received from other participants in SIP.
100
(b) The number of shares shown includes those deferred shares credited to
the account of each non-employee director that are scheduled to be paid
out in the form of stock, as follows:
------------------------------------------------------
Mr. Donovan 6,238
------------------------------------------------------
Mr. Hatfield 24,202
------------------------------------------------------
Mr. Jenkins 24,202
------------------------------------------------------
Mr. Lochner 2,859
------------------------------------------------------
Mr. Metz 12,103
------------------------------------------------------
Mr. Mulcahy 20,348
------------------------------------------------------
Mrs. Narodick 16,426
------------------------------------------------------
Dr. Slaughter 12,492
------------------------------------------------------
The non-employee directors have no current voting or investment
power over these deferred shares.
(c) The number of shares shown includes restricted stock granted under the
Solutia Inc. 1997 Stock-Based Incentive Plan:
------------------------------------------------------
Mr. Hunter 207,698
------------------------------------------------------
Mr. Clausen 62,691
------------------------------------------------------
Mr. Saucier 17,233
------------------------------------------------------
Directors and executive officers as a group 287,622
------------------------------------------------------
(d) The shares shown represent stock options granted under Solutia's
incentive plans, including stock options resulting from the
conversion of Pharmacia stock options at the time of the spin-off
of Solutia by Pharmacia in 1997.
(e) Mr. Donovan retired as a director effective February 29, 2004.
(f) The number of shares shown for Mr. Jenkins includes 170 shares owned
jointly by Mr. Jenkins and his wife.
(g) The number of shares shown for Mr. Quinn includes 20,000 shares owned
in trust by Mr. Quinn's wife. Mr. Quinn expressly disclaims beneficial
ownership of these shares.
(h) The number of shares shown for Mr. Saucier includes 20 shares owned
by Mr. Saucier's wife.
(i) The number of shares shown for Dr. Slaughter includes 137 shares owned
by Dr. Slaughter's wife. Dr. Slaughter expressly disclaims beneficial
ownership of these shares.
The total share holdings reported above for all directors and
executive officers as a group equal approximately 1.42% of the number of
shares of Solutia common stock outstanding on December 31, 2003.
OWNERSHIP BY OTHERS
The following table shows all persons or entities that Solutia knows
were "beneficial owners" of more than five percent of Solutia common
stock on December 31, 2003.
- ----------------------------------------------------------------------------------------------------
Amount and Nature of
Beneficial Ownership of Solutia Percent of
Name and Address of Beneficial Owner Common Stock Class
- ----------------------------------------------------------------------------------------------------
FMR Corp. 10,641,280(a) 10.181%(a)
82 Devonshire Street
Boston, Massachusetts 02109
- ----------------------------------------------------------------------------------------------------
(a) This information is based on a Schedule 13G that FMR Corp. filed with
the SEC on behalf of itself, its subsidiary Fidelity Management &
Research Company, and certain FMR shareholders. Fidelity Management &
Research Company, an investment adviser registered under the Investment
Advisers Act of 1940, is the beneficial owner of 10,641,280 shares
(10.181% of Solutia's common stock) as a result of acting as investment
adviser to various investment companies registered under the Investment
Company Act of 1940. One of these investment companies, Fidelity Low
Priced Stock Fund, is the beneficial owner of 10,452,080 of these
shares (10% of Solutia's common stock). FMR Corp. and Fidelity
Management & Research Company have no sole or shared power to vote or
direct the voting of these shares. They do have sole power to dispose
of, or direct the disposition of, the shares.
101
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about Solutia's equity
compensation plans as of December 31, 2003.
- ----------------------------------------------------------------------------------------------------------------------------
Number of Securities
Number of Securities to be Weighted-Average Remaining Available for
Issued upon Exercise Exercise Price Future Issuance under
of Outstanding Options of Outstanding Options, Equity Compensation Plans
Warrants, and Rights Warrants, and Rights (Excluding Securities
Plan Category (a) (b) Reflected in Column (a))
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders 23,338,902 15.31 1,568,621(1)
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 279,821(3) 14.63(4) 25,174(5)
approved by security holders(2)
- ----------------------------------------------------------------------------------------------------------------------------
Total 23,618,723 15.31 1,593,795
- ----------------------------------------------------------------------------------------------------------------------------
(1) In addition to options and stock appreciation rights, both the Solutia Inc. 2000 Stock-Based Incentive Plan
(2000 Plan) and the Solutia Inc. 1997 Stock-Based Incentive Plan (1997 Plan) provide for awards of restricted
and unrestricted stock. Of the shares remaining available for future issuance under the 2000 plan, up to
162,000 shares may be used for awards of restricted stock. The 2000 plan does not limit the number of shares
that may be used for awards of unrestricted stock, but unrestricted shares may be awarded only in lieu of
cash payments under other incentive plans of Solutia and its subsidiaries. Because of forfeitures,
368,937 shares are available for issuance under the 1997 plan. These may be used for awards of restricted or
unrestricted stock or for stock options. Because of Solutia's Chapter 11 filing, it is unlikely that these
available shares will ever be used.
(2) The Solutia Inc. Non-Employee Director Compensation Plan was not approved by Solutia's stockholders. This
plan authorizes the use of up to 400,000 treasury shares of Solutia common stock for non-qualified stock
options and deferred stock. Shares subject to awards that are forfeited or terminated may not be re-issued
under this plan. The participants in the plan are those directors of Solutia who are not employed by Solutia
or any subsidiary of Solutia.
Stock Options: The plan provides for an initial stock option grant on the date the director first becomes a
non-employee director. In addition, each director elected or continuing in office receives an annual stock
option grant on the date of the annual meeting of stockholders. If a director is first elected at a time
other than the date of the annual meeting, the director's annual grant for the first year is prorated to
reflect the number of months or partial months served before the next annual meeting of stockholders. The
exercise price of these options is equal to the fair market value of a share of Solutia common stock on the
grant date. The stock options become exercisable in three equal annual installments. The options have a term
of ten years but terminate two years after a director's board service ends for any reason, if earlier.
Deferred Stock: Until May 2003, half of a director's annual retainer was mandatorily credited under this plan
to the director's deferred stock account on a quarterly basis, with the deferred stock units to be paid out
in shares of Solutia common stock following termination of the director's service on the Company's board. The
number of shares credited each quarter was determined by dividing the dollar amount of 1/8 of the retainer by
the value of a share of Solutia common stock on the first trading day in the plan quarter. Each director was
able to elect to receive the other half of the annual retainer in cash or to defer all or a part into the
deferred stock account, an interest-bearing cash account, or both, with any deferred stock units to be paid
in shares of Solutia common stock. In April 2003, the Board of Directors adopted the Solutia Inc. 2003
Non-Employee Director Compensation Plan, which provides for deferred stock units to be paid in cash, and
beginning in May 2003 deferred stock units payable in cash were credited under that plan, and deferred stock
units payable in stock ceased to be granted under this plan.
(3) This number includes options to purchase 161,337 shares of Solutia common stock and 118,484 deferred stock
units to be paid out in shares of Solutia common stock.
(4) This weighted average exercise price of outstanding options excludes deferred stock units, which do not have
an exercise price.
(5) No further grants of deferred stock units will be made under the Solutia Inc. Non-Employee Director
Compensation Plan. In addition, because of the Company's Chapter 11 filing, it is unlikely that these
available shares will be used for stock options either.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There are no reportable relationships or transactions between
Solutia and its subsidiaries and any director or executive officer of
Solutia, or to Solutia's knowledge, holder of 5% of Solutia's common
stock. However, Messrs. Hunter, Clausen and Saucier are unsecured
creditors of Solutia by virtue of their participation in Solutia's
401(k) excess benefit plan and non-qualified defined benefit pension
plan. Amounts owed to them under these plans at the time that Solutia
filed for Chapter 11 are as follows:
- ----------------------------------------------------------------------------------------------------------
Named Executive Officer 401(k) Excess Benefit Plan Non-Qualified Pension Plan
- ----------------------------------------------------------------------------------------------------------
J. C. Hunter III $587,003 $1,807,455
- ----------------------------------------------------------------------------------------------------------
R. A. Clausen 619,967 995,863
- ----------------------------------------------------------------------------------------------------------
J. N. Quinn -0- 23,273(1)
- ----------------------------------------------------------------------------------------------------------
J. F. Saucier 1,040 43,554
- ----------------------------------------------------------------------------------------------------------
(1) This amount has not vested.
It is anticipated that none of these amounts will be paid to the
individuals listed as a result of Solutia's Chapter 11 proceedings. In
that case, each such individual will have an unsecured claim as a
creditor in the Chapter 11 case for amounts shown.
102
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
FEES PAID TO INDEPENDENT AUDITOR
The Audit and Finance Committee of Solutia's Board of Directors
appointed Deloitte & Touche LLP as principal independent auditors to
examine the consolidated financial statements of Solutia and its
subsidiaries. This appointment was ratified by Solutia's shareholders
for 2003 and 2002. The following table displays the aggregate fees
billed to Solutia for the fiscal years ended December 31, 2003 and 2002
by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu,
and their respective affiliates.
- --------------------------------------------------------------------------------
Type of Fee 2003 2002
- --------------------------------------------------------------------------------
Audit Fees $1,372,000 $1,269,000
- --------------------------------------------------------------------------------
Audit-Related Fees(1) 494,000 1,365,000
- --------------------------------------------------------------------------------
Tax Fees(2) 498,000 967,000
- --------------------------------------------------------------------------------
All Other Fees(3) 679,000 552,000
- --------------------------------------------------------------------------------
(1) Audit-Related Fees include fees for audits of employee benefit plans; agreed-upon or expanded audit
procedures related to accounting records required to respond to or comply with financial, accounting or
regulatory reporting matters; consultations on the accounting or disclosure treatment of transactions or
events and/or the actual or potential impact of final or proposed rules, standards or interpretations by the
Securities and Exchange Commission, FASB or other regulatory or standard-setting bodies; and attest services
not required by statute or regulation.
(2) Tax Fees include fees for domestic tax planning and advice; domestic tax compliance; international tax
planning and advice; international tax compliance; and review of federal, state, local and international
income, franchise and other tax returns.
(3) All Other Fees include fees for expatriate tax return preparation and various other international assignment
services.
PRE-APPROVAL POLICIES AND PROCEDURES
Consistent with the Sarbanes-Oxley Act of 2002 and the SEC's rules
relating to auditor independence, the Audit and Finance Committee has
adopted a policy to pre-approve all audit and permissible non-audit
services provided by Solutia's independent auditor, Deloitte & Touche
LLP. Under this policy, the committee or its designated member must
pre-approve services before a specified service is begun. Each approval
includes a specified range of fees for the approved service. If approval
is by the designated member, the decision is reported to the committee
at its next meeting. Requests for pre-approval are submitted to the
committee or its designated member by both the independent auditor and
either the chief executive officer, treasurer or controller, with a
joint statement as to whether, in their view, the request is consistent
with the Securities and Exchange Commission's rules on auditor
independence.
The Audit and Finance Committee pre-approved all services for which
the fees shown above were paid.
103
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements--See the Index to Consolidated Financial
Statements and Financial Statement Schedule at page 38 of this
report.
2. The following supplemental schedule for the years ended
December 31, 2003, 2002 and 2001
II--Valuation and Qualifying Accounts
All other supplemental schedules are omitted because of the
absence of the conditions under which they are required.
3. Exhibits--See the Exhibit Index beginning at page 106 of this
report. For a listing of all management contracts and
compensatory plans or arrangements required to be filed as
exhibits to this report, see the exhibits listed under Exhibit
Nos. 10(a), 10(b), 10(d) through 10(q) on pages 107 and 108 of
the Exhibit Index. The following exhibits listed in the Exhibit
Index are filed with this report:
10(q) Form of retention agreement between Solutia Inc. and other
named executive officers
10(y) Amendment No. 1 to Financing Agreement and Waiver dated as
of March 1, 2004 by and among Solutia Inc. and Solutia
Business Enterprises, Inc., as debtors,
debtors-in-possession and as Borrowers; certain subsidiaries
of Solutia, Inc., as debtors, debtors-in-possession and as
Guarantors; the lenders from time to time party thereto, as
Lenders; Citicorp USA, Inc., as Collateral Agent,
Administrative Agent and Co-Documentation Agent and Wells
Fargo Foothill, LLC, as Co-Documentation Agent
12 Computation of the Ratio of Earnings to Fixed Charges
14 Solutia Inc. Code of Ethics for Senior Financial Officers
21 Subsidiaries of the Registrant
23(a) Independent Auditors' Consent
23(b) Independent Auditors' Consent
24(a) Powers of Attorney
24(b) Certified copy of board resolution authorizing Form 10-K
filing using powers of attorney
31(a) Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31(b) Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32(a) Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32(b) Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K during the quarter ended December 31, 2003:
On October 14, 2003, Solutia filed a Form 8-K with the SEC. Under
Item 5, the Company furnished Solutia's press release announcing
its new credit facility. Solutia also attached a press release
discussing its third quarter results and financial outlook.
On October, 22, 2003, Solutia filed a Form 8-K with the SEC. Under
Item 5, the Company furnished Solutia's press release announcing
that it had initiated discussions with its bondholders concerning
a restructuring of the Company's debt and obligations.
On October 24, 2003, Solutia furnished a Form 8-K to the SEC.
Under Item 12, the Company furnished Solutia's press release
reporting its financial results for the quarter ended September
30, 2003.
On December 5, 2003, Solutia filed a Form 8-K with the SEC. Under
Item 5, the Company filed Solutia's press release announcing that
it had notified Monsanto Company and Pharmacia Corporation that
Solutia would not be making a $3M payment to satisfy litigation
settlements in two asbestos cases brought against Pharmacia.
On December 17, 2003, Solutia filed a Form 8-K with the SEC. Under
Item 3, the Company disclosed that Solutia and its U.S.
subsidiaries had filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. Under Item 5, the
Company disclosed that it had reached agreement with the required
percentage of holders of the Euronotes issued by SESA to allow it
to file for relief under Chapter 11 of the U.S. Bankruptcy Code.
Solutia also disclosed certain information that it had disclosed
to the holders of the Euronotes and their advisers.
On December 23, 2003, Solutia furnished a Form 8-K to the SEC.
Under Item 9, the Company furnished certain financial information
and projections that it had disclosed to the holders of the
Euronotes and their advisers.
On December 24, 2003, Solutia filed a Form 8-K with the SEC. Under
Item 5, the Company disclosed Bankruptcy Court interim approval of
Solutia's debtor-in-possession financing. In addition, under
Item 9, the Company furnished additional projections that had been
disclosed to the holders of the Euronotes and their advisers.
104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ JAMES M. SULLIVAN
-------------------------------
James M. Sullivan
Vice President and Controller
(Principal Accounting Officer)
Dated: March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Chairman, President, March 15, 2004
- --------------------------------------------- Chief Executive Officer and Director
John C. Hunter III (Principal Executive Officer)
* Vice Chairman, Chief Financial Officer, Chief March 15, 2004
- --------------------------------------------- Administrative Officer and Director
Robert A. Clausen (Principal Financial Officer)
/s/ J. M. SULLIVAN Vice President and Controller (Principal March 15, 2004
- --------------------------------------------- Accounting Officer)
James M. Sullivan
* Director March 15, 2004
- ---------------------------------------------
Paul H. Hatfield
* Director March 15, 2004
- ---------------------------------------------
Robert H. Jenkins
* Director March 15, 2004
- ---------------------------------------------
Philip R. Lochner, Jr.
* Director March 15, 2004
- ---------------------------------------------
Frank A. Metz, Jr.
* Director March 15, 2004
- ---------------------------------------------
J. Patrick Mulcahy
* Director March 15, 2004
- ---------------------------------------------
Sally G. Narodick
* Director March 15, 2004
- ---------------------------------------------
John B. Slaughter
* Jeffry N. Quinn, by signing his name hereto, does sign this document on behalf of the above noted individuals,
pursuant to powers of attorney duly executed by such individuals which have been filed as an Exhibit to this Form 10-K.
/s/ JEFFRY N. QUINN
---------------------------------
Jeffry N. Quinn, Attorney-in-Fact
105
EXHIBIT INDEX
These exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit No. Description
- ----------- -----------
2(a) Distribution Agreement (incorporated by reference to Exhibit
2 of Solutia's Registration Statement on Form S-1
(333-36355) filed September 25, 1997)
2(b) Amendment to Distribution Agreement, dated as of July 1,
2002, by and among Pharmacia Corporation, Solutia Inc., and
Monsanto Company (incorporated by reference to Exhibit 2 of
Solutia's Form 10-Q for the quarter ended June 30, 2002)
2(c) Joint Venture Agreement between Solutia Inc. and FMC
Corporation* (incorporated by reference to Exhibit 2(i) of
Solutia's Form 8-K filed on April 27, 2000)
2(d) First Amendment to Joint Venture Agreement between Solutia
Inc. and FMC Corporation (incorporated by reference to
Exhibit 2(ii) of Solutia's Form 8-K filed on April 27, 2000)
2(e) Second Amendment to Joint Venture Agreement between Solutia
Inc. and FMC Corporation (incorporated by reference to
Exhibit 2(iii) of Solutia's Form 8-K filed on April 27,
2000)
2(f) Third Amendment to Joint Venture Agreement between Solutia
Inc. and FMC Corporation (incorporated by reference to
Exhibit 2(iv) of Solutia's Form 8-K filed on April 27, 2000)
2(g) Stock and Asset Purchase Agreement by and between UCB S.A.
and Solutia Inc., dated as of December 2, 2002 (incorporated
by reference to Exhibit 2 of Solutia's Form 8-K filed on
February 18, 2003)
3(a) Restated Certificate of Incorporation of Solutia
(incorporated by reference to Exhibit 3(a) of Solutia's
Registration Statement on Form S-1 (333-36355) filed
September 25, 1997)
3(b) By-Laws of Solutia Inc., as amended February 26, 2003
(incorporated by reference to Exhibit 3(b) of Solutia's
Form 10-K for the year ended December 31, 2003)
4(a) Rights Agreement (incorporated by reference to Exhibit 4 of
Solutia's Registration Statement on Form 10 filed on
August 7, 1997)
4(b) Amendment to the Rights Agreement (incorporated by reference
to Exhibit 4.4, of Solutia's Registration Statement on
Form S-3 (333-75812) filed December 21, 2001)
4(c) Indenture dated as of October 1, 1997, between Solutia Inc.
and The Chase Manhattan Bank, as Trustee (incorporated by
reference to Exhibit 4.1 of Solutia's Form 10-Q for the
quarter ended September 30, 1997)
4(d) 7.375% Debentures due 2027 in the principal amount of
$200,000,000 (incorporated by reference to Exhibit 4.3 of
Solutia's Form 10-Q for the quarter ended September 30,
1997)
4(e) 7.375% Debentures due 2027 in the principal amount of
$100,000,000 (incorporated by reference to Exhibit 4.4 of
Solutia's Form 10-Q for the quarter ended September 30,
1997)
4(f) 6.72% Debentures due 2037 in the principal amount of
$150,000,000 (incorporated by reference to Exhibit 4.5 of
Solutia's Form 10-Q for the quarter ended September 30,
1997)
4(g) Terms and Conditions of Euronotes (incorporated by reference
to Exhibit 99.2 of Solutia's Form 8-K filed on February 23,
2004)
4(h) Form of Global Note for Euronotes (incorporated by reference
to Exhibit 99.5 of Solutia's Form 8-K filed on February 23,
2004)
4(i) Indenture dated as of July 9, 2002, between SOI Funding
Corp. and HSBC Bank USA, as Trustee (incorporated by
reference to Exhibit 4.2 of Solutia's Form S-4 (333-99699)
filed September 17, 2002)
- ------------
* Confidential treatment has been granted for a portion of this exhibit.
106
EXHIBIT INDEX (CONTINUED)
Exhibit No. Description
- ----------- -----------
4(j) First Supplemental Indenture, dated as of July 25, 2002, among
Solutia Inc., SOI Funding Corp., the Subsidiary Guarantors and
HSBC Bank USA, as Trustee (incorporated by reference to
Exhibit 4.3 of Solutia's Form S-4 (333-99699) filed September 17,
2002)
4(k) Second Supplemental Indenture, dated as of October 24, 2002, among
Solutia Inc., the subsidiary guarantors named therein and HSBC
Bank USA (incorporated by reference to Exhibit 4 of Solutia's
Form 10-Q for the quarter ended September 30, 2002)
4(l) Third Supplemental Indenture, dated as of October 8, 2003, among
Solutia Inc., the subsidiary guarantors named therein and HSBC
Bank USA (incorporated by reference to Exhibit 4(c) of Solutia's
Form 10-Q for the quarter ended September 30, 2003)
4(m) Amended, Restated and Novated Junior Intercreditor Agreement,
dated as of October 8, 2003, among Solutia Inc., Solutia Business
Enterprises, Inc., each of the subsidiary guarantors named
therein, Ableco Finance LLC and HSBC Bank USA (incorporated by
reference to Exhibit 4(a) of Solutia's Form 10-Q for the quarter
ended September 30, 2003)
4(n) Amended, Restated and Novated Junior Security Agreement, dated as
of October 8, 2003, among Solutia Inc., Solutia Business
Enterprises, Inc., each of the subsidiary guarantors named
therein, Ableco Finance LLC and HSBC Bank USA (incorporated by
reference to Exhibit 4(b) of Solutia's Form 10-Q for the quarter
ended September 30, 2003)
4(o) Terms and Conditions of Euronotes (incorporated by reference to
Exhibit 99.2 of Solutia's Form 8-K filed February 23, 2004)
4(p) Form of Global Note (incorporated by reference to Exhibit 99.5 of
Solutia's Form 8-K filed February 23, 2004)
9 Omitted--Inapplicable
10(a) Financial Planning and Tax Preparation Services Program for the
Executive Leadership Team (incorporated by reference to Exhibit
10(a) of Solutia's Form 10-K for the year ended December 31, 1997)
10(b) Employee Benefits Allocation Agreement (incorporated by reference
to Exhibit 10(a) of Solutia's Registration Statement on Form S-1
(333-36355) filed September 25, 1997)
10(c) Tax Sharing and Indemnification Agreement (incorporated by
reference to Exhibit 10(b) of Solutia's Registration Statement on
Form S-1 (333-36355) filed September 25, 1997)
10(d) Solutia Inc. Management Incentive Replacement Plan as amended in
1999 (incorporated by reference to Exhibit 10(2) of Solutia's
Form 10-Q for the quarter ended June 30, 1999)
10(e) Solutia Inc. 1997 Stock-Based Incentive Plan as amended in 1999
and 2000 (incorporated by reference to Exhibit 10(1) of Solutia's
Form 10-Q for the quarter ended June 30, 2000)
10(f) Solutia Inc. 2000 Stock-Based Incentive Plan (incorporated by
reference to Appendix A of the Solutia Inc. Notice of Annual
Meeting and Proxy Statement dated March 9, 2000)
10(g) Solutia Inc. Non-Employee Director Compensation Plan, as amended
in 1999, 2000, and 2001 (incorporated by reference to Exhibit 10
of Solutia's Form 10-Q for the quarter ended June 30, 2001)
10(h) Solutia Inc. 2003 Non-Employee Director Compensation Plan
(incorporated by reference to Exhibit 10(a) of Solutia's Form 10-Q
for the quarter ended June 30, 2003)
10(i) Form of Employment Agreement with certain Named Executive
Officers (incorporated by reference to Exhibit 10(1) of Solutia's
Form 10-Q for the quarter ended March 31, 1998)
10(j) Form of Employment Agreement with other executive officers
(incorporated by reference to Exhibit 10(2) of Solutia's Form 10-Q
for the quarter ended March 31, 1998)
10(k) Change of Control Agreement between Solutia Inc. and Jeffry N.
Quinn dated as of February 26, 2003 (incorporated by reference to
Exhibit 10 of Solutia's Form 10-Q for the quarter ended March 31,
2003)
107
EXHIBIT INDEX (CONTINUED)
Exhibit No. Description
- ----------- -----------
10(l) Solutia Inc. Annual Incentive Plan (incorporated by reference to
Appendix B of the Solutia Inc. Notice of Annual Meeting and Proxy
Statement dated March 9, 2000)
10(m) Solutia Inc. Deferred Compensation Plan, as amended in 2002
(incorporated by reference to Exhibit 10(l) of Solutia's Form 10-K
for the year ended December 31, 2002)
10(n) 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(o) Retention Agreement with John C. Hunter III dated June 30, 2003
(incorporated by reference to Exhibit 10(c) of Solutia's Form 10-Q
for the quarter ended June 30, 2003)
10(p) Retention Agreement with Robert A. Clausen dated June 30, 2003
(incorporated by reference to Exhibit 10(d) of Solutia's Form 10-Q
for the quarter ended June 30, 2003)
10(q) Form of Retention Agreement between Solutia Inc. and other named
Executive Officers
10(r) Protocol Agreement, dated as of July 1, 2002, by and among
Pharmacia Corporation, Solutia Inc., and Monsanto Company
(incorporated by reference to Exhibit 10(b) of Solutia's Form 10-Q
for the quarter ended June 30, 2002)
10(s) Protocol Agreement, dated as of November 15, 2002, by and among
Pharmacia Corporation, Solutia Inc. and Monsanto Company
(incorporated by reference to Exhibit 10.1 of Solutia's Form 8-K
filed November 18, 2002)
10(t) Amendment to Protocol Agreement, dated as of March 3, 2003, by
and among Pharmacia Corporation, Solutia Inc. and Monsanto Company
(incorporated by reference to Exhibit 10(t) of Solutia's Form 10-K
for the year ended December 31, 2003)
10(u) Amendment to Protocol Agreement, dated August 4, 2003, by and
among Pharmacia Corporation, Monsanto Company and Solutia Inc.
(incorporated by reference to Exhibit 10(e) of Solutia's Form 10-Q
for the quarter ended June 30, 2003)
10(v) Financing Agreement, dated as of January 16, 2004, by and among
Solutia Inc. and Solutia Business Enterprises, Inc., as debtors
and debtors-in-possession, as Borrowers, certain subsidiaries of
Solutia Inc. listed as a Guarantor, as debtors and
debtors-in-possession, as Guarantors, the lenders from time to
time party thereto, as Lenders, Citicorp USA, Inc., as Collateral
Agent, Administrative Agent and Documentation Agent (incorporated
by reference to Exhibit 99.2 of Solutia's Form 8-K filed
January 23, 2004)
10(w) Fiscal Agency Agreement, dated February 11, 2004, among Solutia
Europe S.A./N.V., Kredietbank S.A. Luxembourgeoise, as fiscal
agent and paying agent, and KBC Bank N.V., as principal paying
agent (incorporated by reference to Exhibit 99.3 of Solutia's
Form 8-K filed on February 23, 2004)
10(x) Collateral Agency Agreement, dated February 11, 2004, among KBC
Bank N.V., as Collateral Agent, Solutia Europe S.A./N.V., and the
Subsidiary Guarantors (incorporated by reference to Exhibit 99.4
of Solutia's Form 8-K filed on February 23, 2004)
10(y) Amendment No. 1 to Financing Agreement and Waiver dated as of
March 1, 2004 by and among Solutia Inc. and Solutia Business
Enterprises, Inc., as debtors, debtors-in-possession and as
Borrowers; certain subsidiaries of Solutia Inc., as debtors,
debtors-in-possession and as Guarantors; the lenders from time to
time party thereto, as Lenders; Citicorp USA, Inc., as Collateral
Agent, Administrative Agent and Co-Documentation Agent and Wells
Fargo Foothill, LLC, as Co-Documentation Agent
11 Omitted--Inapplicable; see "Statement of Consolidated Operations"
on page 42
12 Computation of the Ratio of Earnings to Fixed Charges (see
page 110)
14 Solutia Inc. Code of Ethics for Senior Financial Officers
16 Omitted--Inapplicable
108
EXHIBIT INDEX (CONTINUED)
Exhibit No. Description
- ----------- -----------
18 Omitted--Inapplicable
21 Subsidiaries of the Registrant (see page 111)
22 Omitted--Inapplicable
23(a) Independent Auditors' Consent (see page 112)
23(b) Independent Auditors' Consent (see page 113)
24(a) Powers of Attorney
24(b) Certified copy of board resolution authorizing Form 10-K filing
utilizing powers of attorney
31(a) Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31(b) Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
109
SCHEDULE II
SOLUTIA INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(DOLLARS IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
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Additions
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Balance at Charged to Charged Balance at
beginning costs and to other end
Description of year expenses accounts Deductions of period
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YEAR ENDED DECEMBER 31, 2003
Valuation accounts for doubtful receivables............ $16 $ 5 $(7) $-- $14
Restructuring reserves................................. 4 56 -- 42 18
YEAR ENDED DECEMBER 31, 2002
Valuation accounts for doubtful receivables............ $20 $-- $(1) $ 3 $16
Restructuring reserves................................. 6 -- -- 2 4
YEAR ENDED DECEMBER 31, 2001
Valuation accounts for doubtful receivables............ $10 $11 $-- $ 1 $20
Restructuring reserves................................. 56 9 -- 59 6