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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
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SOLUTIA INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
- --------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED
FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE
ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT
CLASS MARCH 31, 2004
----- --------------
COMMON STOCK, $0.01 PAR VALUE 104,561,918 SHARES
----------------------------- ------------------
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED OPERATIONS
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
------ ------
NET SALES................................................... $ 643 $ 611
Cost of goods sold.......................................... 572 542
------ ------
GROSS PROFIT................................................ 71 69
Marketing expenses.......................................... 34 39
Administrative expenses..................................... 25 30
Technological expenses...................................... 10 12
Amortization expense........................................ -- 1
------ ------
OPERATING INCOME (LOSS)..................................... 2 (13)
Equity loss from affiliates................................. (9) (5)
Interest expense (excluding unrecorded contractual interest
expense of $8 in 2004).................................... (49) (23)
Loss on debt modification................................... (15) --
Reorganization items, net................................... (25) --
Other income, net........................................... -- 7
------ ------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT).................... (96) (34)
Income tax expense (benefit)................................ 4 (17)
------ ------
LOSS FROM CONTINUING OPERATIONS............................. (100) (17)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX............... -- (2)
------ ------
NET LOSS.................................................... $ (100) $ (19)
====== ======
BASIC AND DILUTED LOSS PER SHARE:
Loss from Continuing Operations............................. $(0.96) $(0.16)
Net Loss.................................................... $(0.96) $(0.18)
====== ======
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING....... 104.6 104.7
====== ======
See accompanying Notes to Consolidated Financial Statements.
1
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
----- ----
NET LOSS.................................................... $(100) $(19)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments............................ (2) 37
----- ----
COMPREHENSIVE INCOME (LOSS)................................. $(102) $ 18
===== ====
See accompanying Notes to Consolidated Financial Statements.
2
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 124 $ 159
Trade receivables, net of allowances of $15 in 2004 and $14
in 2003................................................... 321 281
Miscellaneous receivables................................... 91 84
Inventories................................................. 254 240
Prepaid expenses and other assets........................... 35 40
------- -------
TOTAL CURRENT ASSETS........................................ 825 804
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $2,614 in 2004 and $2,597 in 2003......... 889 909
INVESTMENTS IN AFFILIATES................................... 197 206
GOODWILL.................................................... 97 97
IDENTIFIED INTANGIBLE ASSETS, net........................... 42 43
OTHER ASSETS................................................ 282 387
------- -------
TOTAL ASSETS................................................ $ 2,332 $ 2,446
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................ $ 157 $ 78
Accrued liabilities......................................... 277 304
Short-term debt............................................. -- 361
------- -------
TOTAL CURRENT LIABILITIES................................... 434 743
LONG-TERM DEBT.............................................. 601 294
OTHER LIABILITIES........................................... 296 313
------- -------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE................. 1,331 1,350
LIABILITIES SUBJECT TO COMPROMISE........................... 2,228 2,221
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value
$0.01)
Issued: 118,400,635 shares in 2004 and 2003............... 1 1
Additional contributed capital............................ 56 56
Treasury stock, at cost (13,838,717 shares in 2004 and
2003)................................................... (251) (251)
Net deficiency of assets at spin-off........................ (113) (113)
Accumulated other comprehensive loss........................ (74) (72)
Accumulated deficit......................................... (846) (746)
------- -------
TOTAL SHAREHOLDERS' DEFICIT................................. (1,227) (1,125)
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $ 2,332 $ 2,446
======= =======
See accompanying Notes to Consolidated Financial Statements.
3
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CONSOLIDATED CASH FLOWS
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss.................................................... $(100) $ (19)
Adjustments to reconcile to Cash From Operations:
Depreciation and amortization........................... 32 34
Loss from discontinued operations, net of tax........... -- 2
Amortization of deferred credits........................ (9) (3)
Restructuring expenses and other charges................ 56 13
Reorganization items, net............................... 25 --
Other, net.............................................. 2 4
Changes in assets and liabilities:
Income and deferred taxes........................... 2 (16)
Trade receivables................................... (40) (41)
Inventories......................................... (14) (8)
Accounts payable.................................... 79 7
Liabilities subject to compromise................... 7 --
Other assets and liabilities........................ (51) (8)
----- -----
CASH USED IN OPERATIONS--CONTINUING OPERATIONS.............. (11) (35)
CASH USED IN OPERATIONS--DISCONTINUED OPERATIONS............ -- (11)
----- -----
CASH USED IN OPERATIONS..................................... (11) (46)
----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (11) (40)
Other investing activities.................................. (1) --
----- -----
CASH USED IN INVESTING ACTIVITIES--CONTINUING OPERATIONS.... (12) (40)
CASH PROVIDED BY INVESTING ACTIVITIES--DISCONTINUED
OPERATIONS................................................ -- 482
----- -----
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............. (12) 442
----- -----
FINANCING ACTIVITIES:
Net change in short-term debt obligations................... (361) (352)
Proceeds from long-term debt obligations.................... 300 --
Net change in cash collateralized letters of credit......... 61 (39)
Deferred debt issuance costs................................ (12) --
----- -----
CASH USED IN FINANCING ACTIVITIES--CONTINUING OPERATIONS.... (12) (391)
CASH USED IN FINANCING ACTIVITIES--DISCONTINUED
OPERATIONS................................................ -- (5)
----- -----
CASH USED IN FINANCING ACTIVITIES........................... (12) (396)
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS....................... (35) --
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 159 17
----- -----
END OF PERIOD............................................... $ 124 $ 17
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for reorganization items (included in other
assets and liabilities above).............................. $ (4) $ --
===== =====
See accompanying Notes to Consolidated Financial Statements.
4
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.
Bankruptcy 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. Information concerning status of the
ongoing bankruptcy proceedings may be obtained from Solutia's
website at www.solutia.com and at www.nysb.uscourts.gov, the
official website for the bankruptcy court.
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 achieve these objectives 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 a
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 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. 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.
5
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Basis of Presentation
- ---------------------
These financial statements should be read in conjunction with
the audited financial statements and notes to consolidated financial
statements included in Solutia's 2003 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission ("SEC") on
March 15, 2004, and Amendment No. 1 to Form 10-K included in
Solutia's Form 10-K/A, filed with the SEC on March 18, 2004
(collectively referred to hereafter as "10-K/A").
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. Continuation of
the Company as a going concern is contingent upon, among other
things, Solutia'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 U.S. 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.
The accompanying unaudited consolidated financial statements
reflect all adjustments that, in the opinion of management, are
necessary to present fairly the financial position, results of
operations, comprehensive income (loss), and cash flows for the
interim periods reported. Such adjustments are of a normal,
recurring nature. In addition, footnote disclosures which would
substantially duplicate the disclosures in the audited consolidated
financial statements have been omitted in the accompanying unaudited
condensed consolidated financial statements. The results of
operations for the three month period ended March 31, 2004 are not
necessarily indicative of the results to be expected for the full
year.
Certain reclassifications of prior year's financial information
have been made to conform to the 2004 presentation.
Condensed Consolidating Financial Statements
- --------------------------------------------
Condensed consolidating financial statements for Solutia and
subsidiaries in reorganization and subsidiaries not in
reorganization as of March 31, 2004 and December 31, 2003, and for
the three months ended March 31, 2004 are presented below. These
condensed consolidating financial statements include investments in
subsidiaries carried under the equity method.
6
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2004
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
--------------- ------------------- ------------ ------------
ASSETS
Current assets........................ $ 595 $329 $ (99) $ 825
Property, plant and equipment, net.... 753 136 -- 889
Investment in subsidiaries and
affiliates.......................... 327 238 (368) 197
Intangible assets, net................ 102 37 -- 139
Other assets.......................... 230 52 -- 282
------- ---- ----- -------
TOTAL ASSETS...................... $ 2,007 $792 $(467) $ 2,332
======= ==== ===== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities................... $ 421 $349 $(336) $ 434
Long-term debt........................ 343 258 -- 601
Other liabilities..................... 242 54 -- 296
------- ---- ----- -------
Total liabilities not subject to
compromise.......................... 1,006 661 (336) 1,331
Liabilities subject to compromise..... 2,228 -- -- 2,228
TOTAL SHAREHOLDERS' EQUITY
(DEFICIT)........................... (1,227) 131 (131) (1,227)
------- ---- ----- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT).................... $ 2,007 $792 $(467) $ 2,332
======= ==== ===== =======
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
Long-term debt........................ 43 251 -- 294
Other liabilities..................... 259 54 -- 313
------- ---- ----- -------
Total 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)
------- ---- ----- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT).................... $ 2,114 $782 $(450) $ 2,446
======= ==== ===== =======
7
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
--------------- ------------------- ------------ ------------
Net sales............................. $ 523 $209 $(89) $ 643
Cost of goods sold.................... 492 176 (96) 572
----- ---- ---- -----
Gross profit.......................... 31 33 7 71
Marketing, administrative and
technological expenses.............. 54 15 -- 69
----- ---- ---- -----
Operating income (loss)............... (23) 18 7 2
Equity earnings (loss) from
affiliates.......................... (17) 2 6 (9)
Interest expense...................... (42) (7) -- (49)
Loss on debt modification............. -- (15) -- (15)
Reorganization items, net............. (25) -- -- (25)
Other income (expense), net........... 7 (2) (5) --
----- ---- ---- -----
Loss before income tax expense........ (100) (4) 8 (96)
Income tax expense.................... -- 4 -- 4
----- ---- ---- -----
NET LOSS.............................. $(100) $ (8) $ 8 $(100)
===== ==== ==== =====
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2004
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
--------------- ------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES................ $(24) $13 $-- $(11)
NET CASH USED IN INVESTING
ACTIVITIES.......................... (7) (5) -- (12)
NET CASH PROVIDED BY FINANCING
ACTIVITIES.......................... (18) 6 -- (12)
---- --- ---- ----
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... (49) 14 -- (35)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR................. 125 34 -- 159
---- --- ---- ----
END OF YEAR....................... $ 76 $48 $-- $124
==== === ==== ====
2. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET
Liabilities Subject to Compromise
Under Chapter 11 of the U.S. Bankruptcy Code certain claims
against Solutia 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 a debtor-in-possession.
These estimated claims are reflected in the Statement of
Consolidated Financial Position as Liabilities Subject to Compromise
as of March 31, 2004 and December 31, 2003 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,
determination as to the value of any collateral securing claims,
proofs of claim or other events.
Solutia 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
8
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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. As applicable,
these pre-petition items have been excluded from Liabilities Subject
to Compromise as of March 31, 2004 and December 31, 2003.
The amounts subject to compromise consisted of the following
items:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Postretirement benefits (a)................................. $1,159 $1,153
Litigation reserves (b)..................................... 146 146
Accounts payable (c)........................................ 122 122
Environmental reserves (d).................................. 85 85
Other miscellaneous liabilities............................. 91 90
6.72% debentures puttable 2004, due 2037 (e)................ 150 150
7.375% debentures due 2027 (e).............................. 300 300
11.25% notes due 2009 (f)................................... 223 223
------ ------
673 673
Unamortized debt discount and debt issuance costs........... (48) (48)
------ ------
TOTAL DEBT SUBJECT TO COMPROMISE........................ 625 625
------ ------
TOTAL LIABILITIES SUBJECT TO COMPROMISE..................... $2,228 $2,221
====== ======
(a) Postretirement benefits include Solutia's domestic (i) qualified pension plan of $433 and $420 as of
March 31, 2004 and December 31, 2003, respectively; (ii) unqualified pension plan of $23 as of both
March 31, 2004 and December 31, 2003; and (iii) other postretirement benefits of $703 and $710 as of
March 31, 2004 and December 31, 2003, respectively. Pursuant to bankruptcy court order, Solutia made
$20 in payments with respect to postretirement obligations in the first quarter 2004.
(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 subject to compromise as of March 31, 2004 and December 31, 2003.
(c) Pursuant to bankruptcy court order, Solutia made approximately $15 in payments in the first quarter 2004 and
reclassified approximately $15 into accounts payable subject to compromise from balances previously accrued
in liability accounts not subject to compromise.
(d) Represents remediation obligations related primarily to properties that are not owned or operated by Solutia,
including non-owned properties adjacent to current operating sites, as of March 31, 2004 and December 31,
2003. Solutia made payments of less than $1 in the first quarter 2004 with respect to these environmental
obligations subject to compromise. See Note 10 for further disclosure with respect to ongoing legal
proceedings concerning environmental liabilities subject to compromise.
(e) While operating during the Chapter 11 proceedings, Solutia has ceased recording interest on its 6.72%
debentures puttable 2004, due 2037 and its 7.375% debentures due 2027. The amount of contractual interest
expense not recorded in the first quarter 2004 was approximately $8.
(f) Pursuant to bankruptcy court order, Solutia is required to continue payments of the contractual interest for
the 11.25 percent notes due 2009 through January 2005. The amount of contractual interest paid with respect
to these notes was approximately $13 in the first quarter 2004 and the accrued interest related to these notes
was included in Accrued Liabilities classified as not subject to compromise as of both March 31, 2004 and
December 31, 2003.
9
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Reorganization Items, net
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 Solutia
because it is in reorganization under Chapter 11 of the U.S.
Bankruptcy Code.
Reorganization items, net consisted of the following items for
the quarter ended March 31, 2004:
Professional fees (a)....................................... $13
Contract termination costs (b).............................. 9
Employee retention plan provision (c)....................... 3
---
TOTAL REORGANIZATION ITEMS, NET............................. $25
===
(a) Professional fees for services provided by debtor and creditor professionals directly related to Solutia's
reorganization proceedings.
(b) Costs associated with a contract termination with a third-party vendor resulting from the ongoing
reorganization-related evaluation of the financial viability of the Company's existing contracts.
(c) Expense provision related to a retention plan Solutia intends to provide to certain employees, which remains
subject to approval of the bankruptcy court.
3. 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. In addition, the operating results of the
resins, additives and adhesives businesses were reported separately
as discontinued operations in the Statement of Consolidated
Operations. Interest expense of $24 in the first quarter 2003
associated with debt that was repaid with the sales proceeds was
allocated to discontinued operations.
Net sales and loss from discontinued operations for the quarter
ended March 31, 2003 are as follows:
Net sales................................................... $53
Income before income tax expense............................ 7
Income tax expense.......................................... 9
---
Loss from discontinued operations........................... $(2)
===
10
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
4. STOCK OPTION PLANS
Effective January 1, 2003, Solutia adopted Statement of
Financial Accounting Standard ("SFAS") No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure, which allowed
Solutia to continue following the guidance of Accounting Principles
Board 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 as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
------ ------
NET LOSS:
As reported....................................... $ (100) $ (19)
Deduct: Total stock-based employee compensation
expense determined using the Black-Scholes
option-pricing model for all awards, net of
tax............................................. (1) (2)
------ ------
Pro forma......................................... $ (101) $ (21)
====== ======
LOSS PER SHARE:
Basic and diluted--as reported........................ $(0.96) $(0.18)
Basic and diluted--pro forma.......................... $(0.97) $(0.20)
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.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
There were no material acquisitions of intangible assets and
there have been no changes to amortizable lives or amortization
methods in the first quarter 2004. Annual amortization expense for
the net carrying amount of finite-lived intangible assets is
estimated to be $2 in both 2004 and 2005, $1 in 2006, and less than
$1 in both 2007 and 2008. Goodwill and indefinite-lived intangible
assets are assessed annually for impairment in the fourth quarter in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
However, 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.
11
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, net in the Statement of
Consolidated Financial Position. The allocation of these items is as
follows:
TOTAL
PERFORMANCE
PHARMACEUTICAL PRODUCTS
CPFILMS SERVICES AND SERVICES
------- -------------- ------------
Goodwill, December 31, 2003......... $74 $23 $97
Translation......................... 1 (1) --
--- --- ---
GOODWILL, MARCH 31, 2004............ $75 $22 $97
=== === ===
Trademarks, December 31, 2003....... $26 $ 1 $27
Translation......................... -- -- --
--- --- ---
TRADEMARKS, MARCH 31, 2004.......... $26 $ 1 $27
=== === ===
Amortized identified intangible assets generally include
contract-based intangible assets and are summarized in aggregate as
follows:
GROSS NET
CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE
-------- ------------ --------
Amortized Intangible Assets, December 31,
2003................................... $33 $(17) $16
Translation.............................. (1) -- (1)
Amortization............................. -- -- --
--- ---- ---
AMORTIZED INTANGIBLE ASSETS, MARCH 31,
2004................................... $32 $(17) $15
=== ==== ===
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
INVENTORIES
Finished goods.................................... $198 $192
Goods in process.................................. 109 92
Raw materials and supplies........................ 87 83
---- ----
Inventories, at FIFO cost......................... 394 367
Excess of FIFO over LIFO cost..................... (140) (127)
---- ----
TOTAL INVENTORIES................................. $254 $240
==== ====
12
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Inventories at FIFO approximate current cost.
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
OTHER ASSETS
Intangible pension asset.......................... $ 81 $ 81
Computer software................................. 45 48
Cash underlying collateralized letters of
credit (a)...................................... 44 132
Other............................................. 112 126
---- ----
TOTAL OTHER ASSETS................................ $282 $387
==== ====
(a) In the first quarter 2004, Solutia settled a $27 pre-petition letter of credit paid by the intermediary
financial institution to the letter of credit counterparty. This letter of credit was collateralized by cash
that Solutia had disbursed prior to the bankruptcy filing, and accordingly, has been presented as a non-cash
transaction with respect to the Statement of Consolidated Cash Flows in the first quarter 2004.
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
ACCRUED LIABILITIES
Astaris keepwell guarantee........................ $ 51 $ 51
Wages and benefits................................ 33 24
Accrued rebates and sales returns/allowances...... 27 32
Other............................................. 166 197
---- ----
TOTAL ACCRUED LIABILITIES......................... $277 $304
==== ====
7. RESTRUCTURING RESERVES
During the first quarter 2004, Solutia recorded restructuring charges
of $5 to cost of goods sold including $2 related to non-cancelable operating
leases; $1 of severance and retraining costs associated with workforce
reduction initiatives; and $2 of other various restructuring charges. These
restructuring charges resulted from Solutia's continued strategic evaluation
of its businesses and were recorded in the Performance Products and Services
segment.
Solutia reduced its workforce by approximately 10 positions in the first
quarter 2004 related to workforce reduction initiatives. In addition,
Solutia expects to incur approximately $3 in remaining severance and
retraining costs related to these workforce reduction initiatives. However,
Solutia cannot forecast the level of future restructuring charges beyond
this specifically identified $3 of workforce reduction charges due to the
inherent uncertainty involved in operating as a debtor-in-possession under
Chapter 11 bankruptcy protection.
A summary of restructuring activity during the first quarter
2004 is presented as follows:
FUTURE LEASE EMPLOYMENT
PAYMENTS REDUCTIONS OTHER COSTS TOTAL
------------ ---------- ----------- -----
Balance at December 31, 2003................... $14 $-- $ 3 $17
Charges taken............................. 2 1 2 5
Amounts utilized.......................... -- -- (2) (2)
--- ---- --- ---
BALANCE AT MARCH 31, 2004...................... $16 $ 1 $ 3 $20
=== ==== === ===
13
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
8. INCOME TAXES
The income tax expense of $4 in the first quarter 2004 is primarily a
result of foreign income taxes. As a result of Solutia's Chapter 11 filing
the Company did not record any U.S. income tax benefit for losses incurred
from its domestic operations (including temporary differences) during the
first quarter 2004. Consequently, the increases in federal and state
deferred tax assets as a result of the increases in net operating losses
generated during the first quarter 2004 were offset by corresponding
increases in valuation allowances. See Note 13 of Solutia's 2003 Form 10-K/A
for additional information concerning the Company's deferred tax assets and
increases in valuation allowances due to Solutia's Chapter 11 filing.
9. DEBT OBLIGATIONS
As of March 31, 2004, Solutia's debt obligations include
borrowings from the DIP credit facility, notes and debentures. As a
result of Solutia's Chapter 11 filing, the Company was in default on
all its debt agreements as of March 31, 2004, with the exception of
its DIP credit facility and Euro Notes ("Euronotes"), issued by
Solutia Europe S.A./N.V. ("SESA"). While operating during the
Chapter 11 proceedings, Solutia has ceased recording interest on its
6.72% debentures puttable 2004, due 2037 and its 7.375% debentures
due 2027. The amount of contractual interest expense not recorded in
the first quarter 2004 was approximately $8.
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 $75 provided by the interim DIP facility and
provided 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 U.S. 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 Solutia's ability to use
divestiture proceeds for any purpose other than the permanent
reduction of the final DIP facility.
Collateral
----------
The bankruptcy court's 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.
14
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Interest
--------
Borrowings under the revolving credit component bear interest at
a rate per annum equal to (i) the prime rate or (ii) 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, limit 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 EUR 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.
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.
15
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
The Company 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.
10. 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 accrued
liabilities of $157 and $156 as of March 31, 2004 and December 31,
2003, respectively, 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 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 polychlorinated biphenyls ("PCBs") are
at a level of 1 part per million ("ppm") or above, to conduct a
Remedial
16
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Investigation and Feasibility Study to provide information for the
selection by the U.S. Environmental Protection Agency ("EPA") of a
cleanup remedy for the Anniston PCB site, and to pay the 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.
On April 19, 2004, the United States District Court for the
Northern District of Alabama issued a two sentence order finding that
the Anniston Partial Consent Decree enforces police and regulatory
powers under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA") and as a result the automatic stay
provisions of the United States Bankruptcy Code were inapplicable to
the Company's obligations under the Partial Consent Decree. On April
30, 2004, the United States Bankruptcy Court for the Southern District
of New York entered a Stipulation and Agreed Order in which the EPA
and the Company stipulate that the automatic stay is applicable to
certain of the Partial Consent Decree's requirements. The Company
believes that the District Court's April 19th order is in error and
has asked the District Court to reconsider its order and to resolve
the conflict between such order and the bankruptcy court's Stipulation
and Agreed Order.
Owens v. Monsanto
Solutia's 2003 Form 10-K/A described several cases in Anniston,
Alabama involving PCBs. Among these cases was Owens v. Monsanto
("Owens"), an action that had been settled in April, 2001. On
October 27, 2003, a motion was filed in the U.S. District Court for
the Northern District of Alabama contending that the Global
Settlement Agreement in the Tolbert and Abernathy cases also
requires the payment of additional funds to plaintiffs in Owens. 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.
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.
17
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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. 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
Solutia's 2003 Form 10-K/A described a case in the Commonwealth
Court of Pennsylvania seeking damages allegedly resulting from PCBs
found in the Transportation and Safety Building in Harrisburg,
Pennsylvania, which was owned by the Commonwealth of Pennsylvania.
On March 11, 2004, the trial court issued a supplemental opinion on
the issue of juror misconduct, finding that the motion on behalf of
Pharmacia for a declaration of mistrial for jury misconduct was
properly denied. On April 12, 2004, Pharmacia filed its supplemental
brief with the Supreme Court of Pennsylvania in connection with its
post-trial motions seeking judgment notwithstanding the jury's
verdict or a new trial. Oral argument before the Supreme Court of
Pennsylvania 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 but 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.
18
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Flexsys Related Litigation
Solutia's 2003 Form 10-K/A described an investigation by
antitrust authorities in the United States, Europe and Canada of
commercial practices in the rubber chemicals industry and a number
of purported class actions filed against Flexsys, Solutia's 50/50
joint venture with Akzo Nobel N.V., and other producers of rubber
chemicals. Among these were a number of state court actions by
retail tire purchasers and federal actions alleging violations of
federal securities laws.
State court actions by retail tire purchasers. Ten state court
actions by retail tire purchasers remain pending either on appeal or
at the trial court level in preliminary motion phases. In addition,
Flexsys and Solutia have received a demand on behalf of a purported
consumer of various goods in Massachusetts containing or produced
using rubber chemicals, that a good faith offer of restitution be
made for damages sustained as a result of purported anti-competitive
practices in the sale of rubber chemicals by major producers,
including Flexsys. Such a demand is required under Massachusetts law
before a class action can be filed in state court. Solutia's
bankruptcy filing will stay any attempt to file a suit against it by
this claimant.
Federal court actions alleging violations of federal securities
laws. On March 19, 2004, a consolidated complaint was filed in the
U.S. District Court for the Northern District of California joining
into a single complaint five purported shareholder class actions
previously filed in that court against Solutia, its chief executive
officer, its chief financial officer and its former chief executive
officer alleging that from August 7, 1998 until October 10, 2002,
Solutia's accounting practices regarding incorporation of Flexsys's
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 that period. The amended and
consolidated complaint, which seeks damages and equitable relief,
added two new defendants, Solutia's current controller and his
predecessor. The consolidated action has been automatically stayed
with respect to Solutia by virtue of Section 362(a) of the
Bankruptcy Code but has not been stayed with respect to the
individual defendants.
Environmental Liabilities
Environmental compliance and remediation costs incurred by the
Company fall into two broad categories: (i) obligations related
to properties currently owned or operated by Solutia and
(ii) 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 $78 and $81 as of March 31, 2004 and December
31, 2003, respectively, 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 Consolidated 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 as of both March 31,
2004 and December 31, 2003 primarily for properties not owned or
operated by Solutia. This liability is classified as subject to
compromise in the Statement of Consolidated Financial Position as of
both March 31, 2004 and December 31, 2003, as the Company currently
believes it constitutes a pre-petition claim that will be discharged
in the bankruptcy process. The EPA and/or Pharmacia are currently
contesting this view (as more fully disclosed in the above Anniston
Partial Consent Decree disclosure).
In addition to the bankruptcy proceedings, Solutia's
environmental liabilities are also subject to changing governmental
policy and regulations, discovery of unknown conditions, judicial
proceedings, method and extent of
19
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
remediation, existence of other potentially responsible parties and
future changes in technology. Solutia 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.
Astaris Keepwell Arrangement
On October 8, 2003, Solutia and Astaris, a 50/50 joint venture
with FMC Corporation, 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. 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 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. Solutia did not make any
payments in the first quarter 2004 or the comparable period in 2003
for investment payments to keep the Astaris joint venture in
compliance with its financial covenants. The remaining commitment to
Astaris was $51 as of both March 31, 2004 and December 31, 2003.
This amount is recorded as a liability in the Statement of
Consolidated Financial Position and is expected to be paid within
the next twelve months.
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 ongoing
business restructuring. Astaris, FMC and Solutia are currently
negotiating definitive agreements to allow for the deferral of these
obligations, including repayment terms and conditions. The deferral
amount outstanding from Astaris to Solutia was $7 and $2 as of
March 31, 2004 and December 31, 2003, respectively.
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. 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 Solutia's Chapter 11 filing date.
Solutia had approximately $30 recorded for this liability as of both
March 31, 2004 and December 31, 2003. As a result of Solutia's
Chapter 11 filing, these liabilities have been classified as subject
to compromise in the Statement of Consolidated Financial Position
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 Solutia 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 bankruptcy 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, 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. The amount of
pre-filing claims ultimately allowed by the bankruptcy 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 their filing date may be
compromised in connection with the plan of
20
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
reorganization. The ultimate resolution of all of these claims may
be settled through negotiation as compared to court proceedings,
with the result being that the Company retains certain obligations
currently classified as subject to compromise in the Statement of
Consolidated Financial Position.
11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
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 Financial Accounting Standards Board ("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 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 was pending and that guidance, when issued, could
require the Company to change previously reported information.
Because no further specific authoritative guidance on accounting for the
federal subsidy had been issued as of March 31, 2004, Solutia continued to
defer recording the impact of the Act in its consolidated financial
statements in the first quarter 2004. Accordingly the consolidated financial
statements do not reflect any adjustments regarding the impact of the Act.
For the quarterly periods ended March 31, 2004 and 2003,
Solutia's pension and healthcare and other benefit costs were as
follows:
HEALTHCARE AND
PENSION BENEFITS OTHER BENEFITS
----------------------- -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service costs for benefits earned...................... $ 7 $ 8 $ 3 $ 3
Interest cost on benefit obligation.................... 21 29 11 15
Assumed return on plan assets.......................... (20) (32) -- --
Prior service costs.................................... 4 5 (4) (4)
Recognized net loss.................................... 2 -- 3 2
--- --- --- ---
TOTAL.................................................. $14 $10 $13 $16
=== === === ===
Employer Contributions
Solutia previously disclosed in its 2003 Form 10-K/A that it did
not expect to be required to make contributions to its qualified
domestic pension plan in 2004 according to current IRS funding
rules. No contributions have been made to the qualified domestic
pension plan in the first quarter 2004. According to current IRS
funding rules including related legislation recently passed by the
U.S. Congress, Solutia is not required to make pension contributions
in 2004 for its qualified domestic pension plan. However, the
Company may elect to make voluntary contributions to the qualified
domestic pension plan in 2004.
21
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
12. LOSS PER SHARE
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
------ ------
Loss from Continuing Operations............................. $ (100) $ (17)
Loss from Discontinued Operations, net of tax............... -- (2)
------ ------
Net Loss.................................................... $ (100) $ (19)
====== ======
Basic and Diluted Loss per Share:
Loss from Continuing Operations............................. $(0.96) $(0.16)
Loss from Discontinued Operations, net of tax............... -- (0.02)
------ ------
Basic and Diluted Loss per Share............................ $(0.96) $(0.18)
====== ======
Basic and Diluted Weighted Average Shares Outstanding (in
millions)................................................. 104.6 104.7
===== =====
13. SEGMENT DATA
Solutia's management is organized around two strategic business
platforms: Performance Products and Services and Integrated Nylon.
Solutia's reportable segments and their major products are as
follows:
PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON
--------------------------------- ----------------
SAFLEX(R) plastic interlayer Nylon intermediate "building block" chemicals
Polyvinyl butyral for KEEPSAFE(R), and Merchant polymer and nylon extrusion
KEEPSAFE MAXIMUM(R) laminated window glass polymers, including VYDYNE(R) and ASCEND(R)
LLUMAR(R), VISTA(R) and GILA(R) professional Carpet fibers, including the WEAR-DATED(R) and
and retail window films ULTRON(R) brands
VANCEVA(TM) plastic interlayer films Industrial nylon fibers
Industrial products, including THERMINOL(R) ACRILAN(R) acrylic fibers for apparel,
heat transfer fluids, DEQUEST(R) water upholstery fabrics, craft yarns and other
treatment chemicals, SKYDROL(R) aviation applications
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, restructuring and asset impairment charges,
and other income and expense items that can be directly attributable
to the segment. Certain expenses and other items that are managed
outside 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. In addition, there were no inter-segment sales in
the periods presented below.
22
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Segment data for the quarterly periods ended March 31, 2004, and
2003 are as follows:
2004 2003
----------------- ------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products and Services........................... $270 $ 25 $250 $ 17
Integrated Nylon............................................ 373 (12) 361 (11)
---- ---- ---- ----
SEGMENT TOTALS.............................................. 643 13 611 6
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses...................................... (11) (15)
Equity loss from affiliates............................. (9) (6)
Interest expense........................................ (49) (23)
Loss on debt modification............................... (15) --
Reorganization items, net............................... (25) --
Other income, net....................................... -- 4
CONSOLIDATED TOTALS:
---- ----
NET SALES............................................... $643 $611
==== ---- ==== ----
LOSS BEFORE INCOME TAXES................................ $(96) $(34)
==== ====
14. 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 2003 consolidating condensed financial statements
below 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 with 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
guarantee 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 which do not guarantee the debt (the
"Non-Guarantors") under the equity method; Non-Guarantors on a
combined, or where appropriate, consolidated basis; eliminating
adjustments; and consolidated totals as of March 31, 2004 and
December 31, 2003, and for the quarterly periods ended March 31,
2004 and 2003. 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. Solutia 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.
23
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.............................. $ 482 $39 $211 $(89) $ 643
Cost of goods sold..................... 472 18 178 (96) 572
----- --- ---- ---- -----
GROSS PROFIT........................... 10 21 33 7 71
Marketing expenses..................... 21 5 8 -- 34
Administrative expenses................ 16 2 7 -- 25
Technological expenses................. 9 1 -- -- 10
----- --- ---- ---- -----
OPERATING INCOME (LOSS)................ (36) 13 18 7 2
Equity earnings (loss) from
affiliates........................... 15 (8) 2 (18) (9)
Interest expense....................... (58) -- (15) 24 (49)
Loss on debt modification.............. -- -- (15) -- (15)
Reorganization items, net.............. (25) -- -- -- (25)
Other income, net...................... 4 19 6 (29) --
----- --- ---- ---- -----
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE.............................. (100) 24 (4) (16) (96)
Income tax expense..................... -- -- 4 -- 4
----- --- ---- ---- -----
NET INCOME (LOSS)...................... $(100) $24 $ (8) $(16) $(100)
===== === ==== ==== =====
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS)...................... $(100) $24 $(8) $(16) $(100)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments....... (2) (1) 3 (2) (2)
----- --- --- ---- -----
COMPREHENSIVE INCOME (LOSS)............ $(102) $23 $(5) $(18) $(102)
===== === === ==== =====
24
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.............................. $474 $ 33 $186 $(82) $611
Cost of goods sold..................... 454 14 161 (87) 542
---- ---- ---- ---- ----
GROSS PROFIT........................... 20 19 25 5 69
Marketing expenses..................... 27 5 7 -- 39
Administrative expenses................ 21 2 7 -- 30
Technological expenses................. 11 1 -- -- 12
Amortization expense................... -- -- 1 -- 1
---- ---- ---- ---- ----
OPERATING INCOME (LOSS)................ (39) 11 10 5 (13)
Equity earnings (loss) from
affiliates........................... 51 20 1 (77) (5)
Interest expense....................... (36) (3) (19) 35 (23)
Other income, net...................... 3 25 14 (35) 7
---- ---- ---- ---- ----
INCOME (LOSS) BEFORE INCOME TAX
BENEFIT.............................. (21) 53 6 (72) (34)
Income tax benefit..................... (4) (1) (14) 2 (17)
---- ---- ---- ---- ----
INCOME (LOSS) FROM CONTINUING
OPERATIONS........................... (17) 54 20 (74) (17)
Loss from Discontinued Operations, net
of tax............................... (2) (103) (103) 206 (2)
---- ---- ---- ---- ----
NET LOSS............................... $(19) $(49) $(83) $132 $(19)
==== ==== ==== ==== ====
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2003
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET LOSS............................... $(19) $(49) $(83) $132 $(19)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments....... 37 38 30 (68) 37
---- ---- ---- ---- ----
COMPREHENSIVE INCOME (LOSS)............ $ 18 $(11) $(53) $ 64 $ 18
==== ==== ==== ==== ====
25
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING BALANCE SHEET
MARCH 31, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 46 $ 30 $ 48 $ -- $ 124
Trade receivables, net...................... 6 196 119 -- 321
Intercompany receivables.................... 125 625 109 (859) --
Miscellaneous receivables................... 65 -- 26 -- 91
Inventories................................. 132 29 108 (15) 254
Prepaid expenses and other current assets... 21 1 10 3 35
------- ------ ------ ------- -------
TOTAL CURRENT ASSETS.................... 395 881 420 (871) 825
PROPERTY, PLANT AND EQUIPMENT, NET.......... 679 74 136 -- 889
INVESTMENTS IN AFFILIATES................... 2,191 28 35 (2,057) 197
GOODWILL.................................... -- 72 25 -- 97
IDENTIFIED INTANGIBLE ASSETS, NET........... 3 27 12 -- 42
INTERCOMPANY ADVANCES....................... 128 1,387 953 (2,468) --
OTHER ASSETS................................ 229 -- 53 -- 282
------- ------ ------ ------- -------
TOTAL ASSETS............................ $ 3,625 $2,469 $1,634 $(5,396) $ 2,332
======= ====== ====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 114 $ 7 $ 38 $ (2) $ 157
Intercompany payables....................... 20 4 108 (132) --
Accrued liabilities......................... 169 8 100 -- 277
Short-term debt............................. -- -- -- -- --
Intercompany short-term debt................ -- -- 413 (413) --
------- ------ ------ ------- -------
TOTAL CURRENT LIABILITIES................... 303 19 659 (547) 434
LONG-TERM DEBT.............................. 343 -- 258 -- 601
INTERCOMPANY LONG-TERM DEBT................. -- -- 566 (566) --
OTHER LIABILITIES........................... 246 1 49 -- 296
------- ------ ------ ------- -------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE................................ 892 20 1,532 (1,113) 1,331
LIABILITIES SUBJECT TO COMPROMISE........... 3,960 413 71 (2,216) 2,228
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) 2,036 31 (2,067) (113)
Accumulated other comprehensive loss........ (74) -- -- -- (74)
(Accumulated deficit) reinvested earnings... (846) -- -- -- (846)
------- ------ ------ ------- -------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (1,227) 2,036 31 (2,067) (1,227)
------- ------ ------ ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................. $ 3,625 $2,469 $1,634 $(5,396) $ 2,332
======= ====== ====== ======= =======
26
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
Inventories................................. 130 24 102 (16) 240
Prepaid expenses and other current assets... 25 1 11 3 40
------ ------ ------ ------- ------
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
INTERCOMPANY ADVANCES....................... 128 1,392 962 (2,482) --
OTHER ASSETS................................ 340 -- 47 -- 387
------ ------ ------ ------- ------
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 9 110 -- 304
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) --
OTHER LIABILITIES........................... 263 -- 50 -- 313
------ ------ ------ ------- ------
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
====== ====== ====== ======= ======
27
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS.......... $ 6 $(36) $19 $-- $ (11)
----- ---- --- ---- -----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases............................. (6) (1) (4) -- (11)
Other investing activities.............. -- -- (1) -- (1)
----- ---- --- ---- -----
CASH USED IN INVESTING ACTIVITIES....... (6) (1) (5) -- (12)
----- ---- --- ---- -----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................... (361) -- -- -- (361)
Proceeds from long-term debt
obligations........................... 300 -- -- -- 300
Net change in cash collateralized
letters of credit..................... 61 -- -- -- 61
Changes in investments and advances from
(to) affiliates....................... (51) 47 4 -- --
Deferred debt issuance costs............ (8) -- (4) -- (12)
----- ---- --- ---- -----
CASH FROM (USED IN) FINANCING
ACTIVITIES............................ (59) 47 -- -- (12)
----- ---- --- ---- -----
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (59) 10 14 -- (35)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................... 105 20 34 -- 159
----- ---- --- ---- -----
END OF PERIOD........................... $ 46 $ 30 $48 $-- $ 124
===== ==== === ==== =====
28
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS.......... $(63) $ 23 $ (6) $-- $(46)
---- ---- ---- ---- ----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases............................. (37) -- (3) -- (40)
Property disposals and investment
proceeds.............................. 172 -- 310 -- 482
---- ---- ---- ---- ----
CASH FROM INVESTING ACTIVITIES.......... 135 -- 307 -- 442
---- ---- ---- ---- ----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................... (227) -- (125) -- (352)
Net change in cash collateralized
letters of credit..................... (39) -- -- -- (39)
Changes in investments and advances from
(to) affiliates....................... 206 (23) (183) -- --
Other financing activities.............. (5) -- -- -- (5)
---- ---- ---- ---- ----
CASH USED IN FINANCING ACTIVITIES....... (65) (23) (308) -- (396)
---- ---- ---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 7 -- (7) -- --
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................... -- -- 17 -- 17
---- ---- ---- ---- ----
END OF PERIOD........................... $ 7 $-- $ 10 $-- $ 17
==== ==== ==== ==== ====
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking
statements include all statements regarding expected future
financial position, results of operations, profitability, cash flows
and liquidity. Important factors that could cause actual results to
differ materially from the expectations reflected in the
forward-looking statements herein include, among others, 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; customer acceptance of new products; raw material and
energy costs or shortages; limited access to capital resources;
currency and interest rate fluctuations; increased competitive
and/or customer pressure; gain or loss of significant customers;
compression of credit terms with suppliers; exposure to product
liability and other litigation; environmental remediation costs;
changes in accounting principles generally accepted in the U.S.;
ability to implement cost reduction initiatives in a timely manner;
geopolitical instability; and changes in pension assumptions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the first quarter 2004 with
respect to Solutia's critical accounting policies, as presented on
pages 17 through 19 of Solutia's 2003 Form 10-K/A.
SUMMARY RESULTS OF OPERATIONS--FIRST QUARTER 2004 COMPARED WITH
FIRST QUARTER 2003
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 for the
quarterly periods ended March 31, 2004 and 2003 are as follows:
2004 2003
(dollars in millions) ---- ----
Net Sales................................................... $643 $611
==== ====
Operating Income (Loss):
Performance Products and Services Segment Profit........ $ 25 $ 17
Integrated Nylon Segment Loss........................... (12) (11)
Less: Corporate Expenses............................ (11) (15)
Less: Equity (Earnings) Loss from Affiliates and
Other (Income) Expense items included in Segment
Profit (Loss)..................................... -- (4)
---- ----
Operating Income (Loss)..................................... $ 2 $(13)
==== ====
Charges included in Operating Income (Loss)................. $ (5) $(11)
==== ====
The $32 million, or 5 percent, increase in net sales as compared
to the first quarter 2003 was primarily a result of favorable
currency exchange rate fluctuations of approximately 3 percent and
higher sales volumes of approximately 2 percent. Average selling
prices were relatively comparable to first quarter 2003. The
$15 million increase in operating income as compared to the first
quarter 2003 resulted primarily from lower charges in 2004 as
compared to 2003, which are described in greater detail in the
Results of Operations section below. The 2004 results were also
affected by higher net sales, favorable manufacturing variances and
lower marketing, administrative and technological expenses,
partially offset by higher raw material costs.
30
BANKRUPTCY 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. Information concerning status of the
ongoing bankruptcy proceedings may be obtained from Solutia's
website at www.solutia.com and at www.nysb.uscourts.gov, the
official website for the bankruptcy court.
The filing was made to restructure Solutia'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 achieve these objectives 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 a
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 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 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.
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 U.S.
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.
Financial Information
Summarized financial information concerning Solutia and
subsidiaries in reorganization and subsidiaries not in
reorganization as of and for quarterly period ended March 31, 2004
is presented as follows:
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
(dollars in millions) --------------- ------------------- ------------ ------------
Net sales............................. $ 523 $209 $ (89) $ 643
Operating income (loss)............... (23) 18 7 2
Net loss.............................. (100) (8) 8 (100)
Total assets.......................... $2,007 $792 $(467) $2,332
Liabilities not subject to
compromise.......................... 1,006 661 (336) 1,331
Liabilities subject to compromise..... 2,228 -- -- 2,228
Total shareholders' equity
(deficit)........................... (1,227) 131 (131) (1,227)
31
RESULTS OF OPERATIONS--FIRST QUARTER 2004 COMPARED WITH FIRST
QUARTER 2003
Performance Products and Services
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
(dollars in millions) ---- ----
Net Sales............................................... $270 $250
==== ====
Segment Profit.......................................... $ 25 $ 17
==== ====
Charges included in Segment Profit.................. $ (5) $ (6)
==== ====
The $20 million, or 8 percent, increase in net sales as compared
to the first quarter 2003 resulted primarily from higher sales
volumes of approximately 5 percent and favorable currency exchange
rate fluctuations of approximately 5 percent, partially offset by
lower average selling prices of approximately 2 percent. Higher
volumes were experienced in SAFLEX(R) plastic interlayer products
and CPFilms window film and precision coated products, partially
offset by lower volumes due to the cessation of certain operations
in the fourth quarter 2003 including the shut-down of certain
chlorobenzenes, feed ingredients and L-Aspartic operations. In
addition, net sales were positively affected by the strengthening
euro in relation to the U.S. dollar in comparison to the first
quarter 2003. Lower average selling prices for SAFLEX(R) plastic
interlayer products in comparison to first quarter 2003 resulted
principally from the completion of new sales contracts in a
competitive pricing environment.
The $8 million, or 47 percent, increase in segment profit in
comparison to the first quarter 2003 resulted primarily from higher
net sales and favorable manufacturing variances, partially offset by
higher raw material costs. In addition, segment profit in 2004 was
affected by $5 million of severance charges for workforce
reductions, costs for non-cancelable operating leases, and various
other restructuring charges, whereas 2003 included severance charges
of $6 million related to workforce reductions.
Integrated Nylon
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
(dollars in millions) ---- ----
Net Sales............................................... $373 $361
==== ====
Segment Loss............................................ $(12) $(11)
==== ====
Charges included in Segment Loss.................... $-- $ (3)
==== ====
The $12 million, or 3 percent, increase in net sales as compared
to the first quarter 2003 resulted primarily from higher average
selling prices principally in the intermediate, carpet and acrylic
fibers businesses. Carpet and acrylic fiber increases resulted from
price increases implemented since January 2004 across several
segments, whereas the intermediate chemicals business benefited from
formula-based sales contracts tied to raw material costs. Sales
volumes overall were comparable to the first quarter 2003 with
volume increases experienced in nylon plastics and polymers and
carpet fibers, offset by lower volumes in intermediate chemicals and
acrylic fibers.
The $1 million, or 9 percent, increase in segment loss in
comparison to the first quarter 2003 resulted primarily from higher
raw material and energy costs of approximately $25 million, mostly
offset by higher net sales, lower marketing, administrative and
technological expenses, and favorable manufacturing variances. In
addition, segment loss for the first quarter 2003 included severance
charges of $3 million associated to workforce reductions.
Corporate Expenses
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
(dollars in millions) ---- ----
Corporate Expenses...................................... $ 11 $15
==== ===
Charges included in Corporate Expenses.............. $-- $(2)
==== ===
32
The $4 million, or 27 percent, decrease in corporate expenses in
comparison to the first quarter 2003 was primarily a result of lower
personnel and litigation expenses, partially offset by higher
pension expenses. In addition, the 2003 results included
restructuring charges of $2 million for workforce reductions.
Equity Earnings (Loss) from Affiliates
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
(dollars in millions) ---- ----
Equity Loss from Affiliates not included in Reportable
Segment Profit (Loss)................................. $ (9) $(6)
---- ---
Equity Earnings from Affiliates included in Reportable
Segment Profit (Loss)................................. $-- $ 1
---- ---
Equity Loss from Affiliates............................. $ (9) $(5)
==== ===
Charges included in Equity Loss from Affiliates..... $(11) $(6)
==== ===
Equity loss from affiliates in the first quarter 2004 was
adversely affected by $11 million of charges including $5 million in
contract termination costs, $3 million in dismantling charges and
$1 million of asset impairments at the Astaris joint venture, as
well as $2 million of severance charges at the Flexsys joint
venture. These charges in the first quarter 2004 are in comparison
to $6 million of restructuring charges in the first quarter 2003
related to asset impairments of $3 million at the Flexsys joint
venture and combined severance charges of $3 million at the Flexsys
and Astaris joint ventures.
Interest Expense
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
(dollars in millions) ---- ----
Interest Expense........................................ $ 49 $ 23
==== ====
Charges included in Interest Expense................ $(25) $--
==== ====
The $26 million, or 113 percent, increase in interest expense in
2004 in comparison to the first quarter 2003 resulted principally
from the write-off of unamortized debt issuance costs of $25 million
related to the October 2003 credit facility and interim DIP
facility; both retired in January 2004 with proceeds from the final
DIP facility. 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 expense not recorded in the first quarter 2004
was approximately $8 million.
Reorganization Items, net
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
(dollars in millions) ---- ----
Reorganization Items, net............................... $25 $--
=== ====
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 Solutia
because it is in reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Reorganization items incurred in the first quarter
2004 included $13 million of professional fees for services provided
by debtor and creditor professionals directly related to Solutia's
reorganization proceedings; $9 million of asset write-offs
associated with the termination of a contract with a third-party
vendor resulting from the on-going reorganization-related evaluation
of the financial viability of the Company's existing contracts; and
$3 million related to expense provision for a retention plan Solutia
intends to provide to certain employees, which remains subject to
approval of the bankruptcy court.
33
Other Income, net
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
(dollars in millions) ---- ----
Other Income, net....................................... $-- $7
==== ==
Other Income, net included in Reportable Segment
Profit............................................ $-- $3
==== ==
Gain included in Other Income, net...................... $-- $4
==== ==
During the first quarter 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.
Income Tax Expense (Benefit)
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
(dollars in millions) ---- ----
Income Tax Expense (Benefit)............................. $4 $(17)
== ====
The $21 million change in income tax expense (benefit) in 2004
in comparison to the first quarter 2003 was primarily a result of
Solutia not recording any U.S. income tax benefit for losses
incurred from its domestic operations (including temporary
differences) during the three months ended March 31, 2004 due to
Solutia's Chapter 11 filing. Consequently, the increases in federal
and state deferred tax assets as a result of the increases in net
operating losses during the three months ended March 31, 2004 were
offset by corresponding increases in valuation allowances.
Summary of Events Affecting Comparability
Charges and gains recorded in the quarterly periods ended
March 31, 2004 and 2003, and other events affecting comparability
have been summarized in the tables below (dollars in millions):
2004
-----------------------------------------------------------------
PERFORMANCE
PRODUCTS INTEGRATED CORPORATE/
INCREASE/(DECREASE) AND SERVICES NYLON OTHER CONSOLIDATED
- ---------------------------------------- ------------ ---------- ---------- ------------
IMPACT ON:
Cost of goods sold...................... $ 5 $-- $-- $ 5 (a)
--- ---- ---- ----
OPERATING INCOME IMPACT............. (5) -- -- (5)
Equity loss from affiliates............. (11) (11) (b)
Interest expense........................ (25) (25) (c)
Loss on debt modification............... (15) (15) (d)
--- ---- ---- ----
PRE-TAX INCOME STATEMENT IMPACT..... $(5) $-- $(51) (56)
=== ==== ====
Income tax benefit impact............... (6) (e)
----
AFTER-TAX INCOME STATEMENT IMPACT... $(50)
====
2004 CHARGES AND OTHER EVENTS
- ------------
(a) Restructuring charges for workforce reductions of approximately 10 positions across all world areas and
functions of the Company including severance and retraining costs; costs for non-cancelable operating leases;
and various other restructuring charges ($5 million pre-tax and after-tax--see note (e) below).
(b) The Flexsys and Astaris joint ventures, in which the Company has a fifty percent joint interest, incurred
restructuring charges during the quarter related to contract terminations, dismantling costs, asset
impairments and severance charges ($11 million pre-tax and after-tax--see note (e) below).
(c) Write-off of unamortized debt issuance costs related to the October 2003 and interim DIP credit facilities;
both retired in January 2004 with proceeds from the final DIP facility ($25 million pre-tax and
after-tax--see note (e) below).
(d) Loss on modification of Euro Notes ("Euronotes"), issued by Solutia Europe S.A./N.V. ("SESA") to record the
Euronotes at their fair value on January 30, 2004 ($15 million pre-tax and $9 million after-tax).
34
(e) With the exception of item (d) above, which relates to non-U.S. operations, the above items are considered to
have the same pre-tax and after-tax impact, as the tax benefit realized from the charges 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.
2003
-----------------------------------------------------------------
PERFORMANCE
PRODUCTS INTEGRATED CORPORATE/
INCREASE/(DECREASE) AND SERVICES NYLON OTHER CONSOLIDATED
- ---------------------------------------- ------------ ---------- ---------- ------------
IMPACT ON:
Cost of goods sold...................... $ 3 $ 3 $-- $ 6 (f)
Marketing, administrative, technological
and amortization expenses............. 3 2 5 (f)
--- --- ---- ----
OPERATING LOSS IMPACT............... (6) (3) (2) (11)
Equity loss from affiliates............. (6) (6) (g)
Other income, net....................... 4 4 (h)
--- --- ---- ----
PRE-TAX INCOME STATEMENT IMPACT..... $(6) $(3) $ (3) (13)
=== === ====
Income tax benefit impact............... (4)
----
AFTER-TAX INCOME STATEMENT IMPACT... $ (9)
====
2003 CHARGES, GAINS AND OTHER EVENTS
- ------------
(f) Restructuring charges for workforce reductions of approximately 170 people across all world areas and
functions of the Company ($11 million pre-tax and $7 million after-tax).
(g) The Flexsys and Astaris joint ventures, in which the Company has a fifty percent joint interest, incurred
restructuring charges during the quarter related to asset impairments and severance charges ($6 million pre-
tax and $5 million after-tax).
(h) The Company recovered certain receivables, established prior to 1997, which had previously been written off
($4 million pre-tax and $3 million after-tax).
FINANCIAL CONDITION AND LIQUIDITY
As discussed above, Solutia is operating as a
debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code.
As a result of the uncertainty surrounding Solutia'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, Solutia believes that
its liquidity and capital resources will be sufficient to maintain
its normal operations at current levels. Solutia's access to
additional financing while under Chapter 11 protection will likely
be very limited.
Financial Analysis
Solutia utilized its existing cash on-hand to finance operating
needs and capital expenditures during the first quarter 2004. Cash
used in continuing operations was $11 million in the first quarter
2004, a decrease of $24 million from $35 million used in continuing
operations for the comparable period of 2003. This decrease in cash
used in continuing operations was primarily attributable to the
continued build of post-petition accounts payable balances due to
improved vendor terms, partially offset by lower earnings.
Capital spending decreased $29 million to $11 million in the
first quarter 2004, compared to $40 million in the first quarter
2003. This variance was primarily from the mandatory purchase of the
co-generation facility in Pensacola, Florida, for approximately
$32 million in 2003, whereas the expenditures in the first quarter
2004 were used primarily to fund various minor capital improvements,
as well as certain cost reduction projects.
During the first quarter 2003, proceeds totaling $474 million
from the sale of the resins, additives and adhesives businesses were
included in cash provided by discontinued operations.
Total debt of $1,226 million as of March 31, 2004, including
$625 million subject to compromise and $601 million not subject to
compromise, decreased by $54 million as compared to $1,280 million
at December 31, 2003, including $625 million subject to compromise
and $655 million not subject to compromise. The
35
composition of Solutia's debt changed during the first quarter 2004 with the
completion of the final DIP facility in January 2004 and concurrent
retirement of the Company's borrowings under the October 2003 and interim
DIP credit facilities, which aggregated $361 million outstanding as of
December 31, 2003, with proceeds from the final DIP facility and existing
cash on-hand. Outstanding borrowings under the final DIP facility were $300
million as of March 31, 2004. In addition, the fair value of the Euronotes
was increased by $15 million during the first quarter 2004 due to the
modification of the Euronotes in January 2004 (as more fully described in
the below "Modification of Euronotes" section).
As a result of the Chapter 11 filing, Solutia was in default on
all its debt agreements as of March 31, 2004, with the exception of
its DIP credit facility and Euronotes.
Solutia's working capital increased by $330 million to
$391 million at March 31, 2004, compared to $61 million at
December 31, 2003. The increase in the working capital position
primarily resulted from the retirement of all of the short-term debt
outstanding as of December 31, 2003 during the first quarter 2004
with primarily the proceeds of a long-term debt facility and the
seasonal increase in working capital, partially offset by lower cash
on-hand as of March 31, 2004.
Solutia had a shareholders' deficit of $1,227 million at
March 31, 2004 compared to $1,125 million at December 31, 2003. The
$102 million increase in shareholders' deficit principally resulted
from the $100 million first quarter 2004 net loss.
The weighted average interest rate on Solutia's total debt
outstanding at March 31, 2004 was approximately 8.7 percent compared
to 7.8 percent at March 31, 2003. This increase is primarily a
result of the increase in the interest rate for the Euronotes
resulting from the modification of the Euronotes in January 2004.
While operating as a debtor-in-possession during the Chapter 11
proceedings, the Company has ceased paying interest on its 6.72%
debentures puttable 2004, due 2037 and its 7.375% debentures due
2027. The amount of contractual interest not recorded in the first
quarter 2004 was $8 million.
At March 31, 2004, Solutia's total liquidity was $228 million in
the form of $104 million of availability under the final DIP credit
facility and approximately $124 million of cash on-hand, of which
$47 million was cash of Solutia's subsidiaries that are not parties
to the Chapter 11 proceedings.
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 included a $150 million letter of credit subfacility. Proceeds
from the final DIP financing facility were used to retire the
Company's existing pre-petition $350 million credit facility, repay
the $75 million provided by the interim DIP facility and provided
approximately $100 million 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 U.S. 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 Solutia's ability to use
divestiture proceeds for any purpose other than the permanent
reduction of the final DIP facility.
Collateral
----------
The bankruptcy court's 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
36
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 (i) the prime rate or (ii) 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, limit 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
EUR 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.
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 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.
37
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.
Solutia 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.
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 accrued
liabilities of $157 million and $156 million as of March 31, 2004
and December 31, 2003, respectively, 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 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 polychlorinated biphenyls ("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
U.S. Environmental Protection Agency ("EPA") of a cleanup remedy for
the Anniston PCB site, and to pay the 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
38
application of the automatic stay arising as a result of Solutia's
Chapter 11 filing to the remaining obligations under the Partial
Consent Decree.
On April 19, 2004, the United States District Court for the
Northern District of Alabama issued a two sentence order finding that
the Anniston Partial Consent Decree enforces police and regulatory
powers under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA") and as a result the automatic stay
provisions of the United States Bankruptcy Code were inapplicable to
the Company's obligations under the Partial Consent Decree. On April
30, 2004, the United States Bankruptcy Court for the Southern District
of New York entered a Stipulation and Agreed Order in which the EPA
and the Company stipulate that the automatic stay is applicable to
certain of the Partial Consent Decree's requirements. The Company
believes that the District Court's April 19th order is in error and
has asked the District Court to reconsider its order and to resolve
the conflict between such order and the bankruptcy court's Stipulation
and Agreed Order.
Owens v. Monsanto
Solutia's 2003 Form 10-K/A described several cases in Anniston
Alabama involving PCBs. Among these cases was Owens v. Monsanto
("Owens"), an action that had been settled in April 2001. On
October 27, 2003, a motion was filed in the U.S. District Court for
the Northern District of Alabama contending that the Global
Settlement Agreement in the Tolbert and Abernathy cases also
requires the payment of additional funds to plaintiffs in Owens. 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.
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. 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.
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. 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,
39
except pursuant to a confirmed plan of reorganization. Solutia has ceased
defending Pharmacia with respect to this litigation.
PENNDOT Case
Solutia's 2003 Form 10-K/A described a case in the Commonwealth
Court of Pennsylvania seeking damages allegedly resulting from PCBs
found in the Transportation and Safety Building in Harrisburg,
Pennsylvania, which was owned by the Commonwealth of Pennsylvania.
On March 11, 2004, the trial court issued a supplemental opinion on
the issue of juror misconduct, finding that the motion on behalf of
Pharmacia for a declaration of mistrial for jury misconduct was
properly denied. On April 12, 2004, Pharmacia filed its supplemental
brief with the Supreme Court of Pennsylvania in connection with its
post-trial motions seeking judgment notwithstanding the jury's
verdict or a new trial. Oral argument before the Supreme Court of
Pennsylvania 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 but 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
Solutia's 2003 Form 10-K/A described an investigation by
antitrust authorities in the United States, Europe and Canada of
commercial practices in the rubber chemicals industry and a number
of purported class actions filed against Flexsys, Solutia's 50/50
joint venture with Akzo Nobel N.V., and other producers of rubber
chemicals. Among these were a number of state court actions by
retail tire purchasers and federal actions alleging violations of
federal securities laws.
State court actions by retail tire purchasers. Ten state court
actions by retail tire purchasers remain pending either on appeal or
at the trial court level in preliminary motion phases. In addition,
Flexsys and Solutia have received a demand on behalf of a purported
consumer of various goods in Massachusetts containing or produced
using rubber chemicals, that a good faith offer of restitution be
made for damages sustained as a result of purported anti-competitive
practices in the sale of rubber chemicals by major producers,
including Flexsys. Such a demand is required under Massachusetts law
before a class action can be filed in state court. Solutia's
bankruptcy filing will stay any attempt to file a suit against it by
this claimant.
Federal court actions alleging violations of federal securities laws. On
March 19, 2004, a consolidated complaint was filed in the U.S. District
Court for the Northern District of California joining into a single
complaint five purported shareholder class actions previously filed in that
court against Solutia, its chief executive officer, its chief financial
officer and its former chief executive officer alleging that from August 7,
1998 until October 10, 2002, Solutia's accounting practices regarding
incorporation of Flexsys's results into Solutia's financial reports violated
federal securities laws by misleading investors as to Solutia's actual
results and causing inflated
40
prices to be paid by purchasers of Solutia's publicly traded securities
during that period. The amended and consolidated complaint, which seeks
damages and equitable relief, added two new defendants, Solutia's current
controller and his predecessor. The consolidated action has been
automatically stayed with respect to Solutia by virtue of Section 362(a) of
the Bankruptcy Code but has not been stayed with respect to the individual
defendants.
Environmental Liabilities
Environmental compliance and remediation costs incurred by the
Company fall into two broad categories: (i) obligations related
to properties currently owned or operated by Solutia and
(ii) 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 $78 million and $81 million as of March 31,
2004 and December 31, 2003, respectively 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 Consolidated 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 both
March 31, 2004 and December 31, 2003 primarily for properties not
owned or operated by Solutia. This liability is classified as
subject to compromise in the Statement of Consolidated Financial
Position as of March 31, 2004 and December 31, 2003, as the Company
currently believes it constitutes a pre-petition claim that will be
discharged in the bankruptcy process. The EPA and/or Pharmacia are
currently contesting this view (as more fully disclosed in the above
Anniston Partial Consent Decree disclosure).
In addition to the bankruptcy proceedings, Solutia'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.
Solutia 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.
Astaris Keepwell Arrangement
On October 8, 2003, Solutia and Astaris, a 50/50 joint venture
with FMC Corporation, 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. 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. Solutia did
not make any payments in the first quarter 2004 or the comparable
period in 2003 for investment payments to keep the Astaris joint
venture in compliance with its financial covenants. The remaining
commitment to Astaris was $51 million as of both March 31, 2004 and
December 31, 2003. This amount is recorded as a liability in the
Statement of Consolidated Financial Position and is expected to be
paid within the next twelve months.
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 ongoing business restructuring.
Astaris, FMC and Solutia are currently negotiating definitive agreements to
allow for the deferral of these obligations, including repayment terms and
conditions. The deferral amount outstanding from Astaris to Solutia was
$7 million and $2 million as of March 31, 2004 and December 31, 2003,
respectively.
41
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. 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 Solutia's
Chapter 11 filing date. Solutia had approximately $30 million
recorded for this liability as of both March 31, 2004 and
December 31, 2003. As a result of Solutia's Chapter 11 filing, these
liabilities have been classified as subject to compromise in the
Statement of Consolidated Financial Position 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 Solutia 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 bankruptcy
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. The
amount of pre-filing claims ultimately allowed by the bankruptcy
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 their filing date may 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 that the Company retaining
certain obligations currently classified as subject to compromise in
the Statement of Consolidated Financial Position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
There have been no material changes in market risk exposures
during the first quarter 2004 that affect the disclosures presented
in the information appearing under "Derivative Financial
Instruments" on pages 28 and 29 of Solutia's Form 10-K/A for the
year-ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Form 10-Q, 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
Solutia's internal control over financial reporting that occurred
during the quarterly period ended March 31, 2004, that have
materially affected, or are reasonably likely to materially affect,
the Company's internal controls over financial reporting.
42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PENNDOT Case
Solutia's 2003 Form 10-K/A described a case in the Commonwealth
Court of Pennsylvania seeking damages allegedly resulting from
polychlorinated biphenyls ("PCBs") found in the Transportation and
Safety Building in Harrisburg, Pennsylvania, which was owned by the
Commonwealth of Pennsylvania. On March 11, 2004, the trial court
issued a supplemental opinion on the issue of juror misconduct,
finding that the motion on behalf of Pharmacia for a declaration of
mistrial for jury misconduct was properly denied. On April 12, 2004,
Pharmacia filed its supplemental brief with the Supreme Court of
Pennsylvania in connection with its post-trial motions seeking
judgment notwithstanding the jury's verdict or a new trial. Oral
argument before the Supreme Court of Pennsylvania 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 but 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.
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
U.S. Environmental Protection Agency ("EPA") of a cleanup remedy for
the Anniston PCB site, and to pay the 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.
On April 19, 2004, the United States District Court for the
Northern District of Alabama issued a two sentence order finding that
the Anniston Partial Consent Decree enforces police and regulatory
powers under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA") and as a result the automatic stay
provisions of the United States Bankruptcy Code were inapplicable to
the Company's obligations under the Partial Consent Decree. On April
30, 2004, the United States Bankruptcy Court for the Southern District
of New York entered a Stipulation and Agreed Order in which the EPA
and the Company stipulate that the automatic stay is applicable to
certain of the Partial Consent Decree's requirements. The Company
believes that the District Court's April 19th order is in error and
has asked the District Court to reconsider its order and to resolve
the conflict between such order and the bankruptcy court's Stipulation
and Agreed Order.
Flexsys Related Litigation
Solutia's 2003 Form 10-K/A described an investigation by
antitrust authorities in the United States, Europe and Canada of
commercial practices in the rubber chemicals industry and a number
of purported class actions filed against Flexsys, Solutia's 50/50
joint venture with Akzo Nobel N.V., and other producers of rubber
chemicals. Among these were a number of state court actions by
retail tire purchasers and federal actions alleging violations of
federal securities laws.
State court actions by retail tire purchasers. Ten state court
actions by retail tire purchasers remain pending either on appeal or
at the trial court level in preliminary motion phases. In addition,
Flexsys and Solutia have received a demand on behalf of a purported
consumer of various goods in Massachusetts containing or produced
using rubber chemicals, that a good faith offer of restitution be
made for damages sustained as a result of purported anti-competitive
practices in the sale of rubber chemicals by major producers,
including Flexsys. Such a
43
demand is required under Massachusetts law before a class action can
be filed in state court. Solutia's bankruptcy filing will stay any
attempt to file a suit against it by this claimant.
Federal court actions alleging violations of federal securities
laws. On March 19, 2004, a consolidated complaint was filed in the
U.S. District Court for the Northern District of California joining
into a single complaint five purported shareholder class actions
previously filed in that court against Solutia, its chief executive
officer, its chief financial officer and its former chief executive
officer alleging that from August 7, 1998 until 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 that period. The amended and
consolidated complaint, which seeks damages and equitable relief,
added two new defendants, Solutia's current controller and his
predecessor. The consolidated action has been automatically stayed
with respect to Solutia by virtue of Section 362(a) of the
Bankruptcy Code but has not been stayed with respect to the
individual defendants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As a result of Solutia's voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code, Solutia is in default
with respect to its 6.72% debentures puttable 2004, due 2037,
7.375% debentures due 2027 and 11.25% notes due 2009. Solutia has
ceased paying interest on its 6.72% debentures puttable 2004, due
2037 and its 7.375% debentures due 2027. Pursuant to bankruptcy
court order, Solutia will continue paying interest on its
11.25% notes due 2009 through January 2005.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit Index at page 46 of this report.
(b) Reports on Form 8-K during the quarter ended March 31, 2004:
On January 12, 2004, we filed a Form 8-K with the SEC. Under Item 5, we
disclosed that the final debtor-in-possession hearing in our Chapter 11
proceeding had been scheduled for January 16, 2004.
On January 23, 2004, we filed a Form 8-K with the SEC. Under Item 5, we
disclosed that the U.S. Bankruptcy Court had approved Solutia's final
debtor-in-possession financing, and we disclosed the rate of return on
assets of our U.S. qualified pension plan for the year ended
December 31, 2003.
On February 23, 2004, we filed a Form 8-K with the SEC. Under Item 5, we
disclosed that our subsidiary, Solutia Europe SA/NV, had successfully
restructured its 6.25% Euro Notes, due in 2005.
On March 11, 2003, we filed a Form 8-K with the SEC. Under Item 5, we
disclosed that CPFilms Vertriebs GmbH, a majority-owned subsidiary of
Solutia Europe SA/NV, had become party to the restructuring of Solutia
Europe's 6.25% Euro Notes due in 2005, which restructuring was completed
on January 30, 2004.
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SOLUTIA INC.
-----------------------------------
(Registrant)
/s/ JAMES M. SULLIVAN
-----------------------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: April 30, 2004
45
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 Omitted--Inapplicable; see "Statement of Consolidated
Operations" on page 1
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
99 Computation of the Ratio of Earnings to Fixed Charges
46
EXHIBIT 99
SOLUTIA INC.
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
THREE MONTHS
ENDED
1999 2000 2001 2002 2003 MARCH 31, 2004
----- ----- ----- ----- ----- ------------------
Income (loss) from continuing
operations, before income taxes
and equity earnings (loss) from
affiliates(1).................. $ 262 $ (5) $(111) $ (32) $ (482) $ (87)
Add:
Fixed charges................ 62 85 83 98 131 52
Amortization of capitalized
interest................... 7 7 7 7 6 2
Dividends from affiliated
companies.................. 60 45 30 25 0 0
Less:
Interest capitalized......... (13) (17) (2) (1) (1) (1)
----- ----- ----- ----- ------ ------
Income as adjusted....... $ 378 $ 115 $ 7 $ 97 $ (346) $ (34)
===== ===== ===== ===== ====== ======
Fixed charges:
Interest expensed and
capitalized................ 53 73 72 85 121 50
Estimate of interest within
rental expense............. 9 12 11 13 10 2
----- ----- ----- ----- ------ ------
Fixed charges............ $ 62 $ 85 $ 83 $ 98 $ 131 $ 52
===== ===== ===== ===== ====== ======
Ratio of Earnings to Fixed
Charges(2)..................... 6.10 1.35 0.08 0.99 (2.64) (0.65)
- -------
(1) Includes restructuring and other items of $45 for the quarter
ended March 31, 2004; $343 for the year ended December 31,
2003; $17 for the year ended December 31, 2002; $86 for the
year ended December 31, 2001; $107 for the year ended
December 31, 2000; and $61 for the year ended December 31,
1999.
(2) Earnings for the quarter ended March 31, 2004 and the years
ended December 31, 2003, 2002, and 2001, would have to be
$86, $477, $1 and $76 higher, respectively, in order to
achieve a one-to-one ratio.