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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 JUNE 30, 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
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 JUNE 30, 2004
----- -------------
COMMON STOCK, $0.01 PAR VALUE 104,486,639 SHARES
----------------------------- ------------------
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
NET SALES ......................................................... $699 $625 $1,342 $1,236
Cost of goods sold................................................. 655 576 1,227 1,118
---- ---- ------ ------
GROSS PROFIT....................................................... 44 49 115 118
Marketing expenses................................................. 40 40 74 79
Administrative expenses............................................ 33 33 58 63
Technological expenses............................................. 16 11 26 23
Amortization expense............................................... 1 -- 1 1
---- ---- ------ ------
OPERATING LOSS..................................................... (46) (35) (44) (48)
Equity loss from affiliates........................................ (3) (1) (12) (6)
Interest expense (a)............................................... (23) (25) (72) (48)
Other income, net.................................................. -- 1 -- 8
Loss on debt modification.......................................... -- -- (15) --
Reorganization items, net.......................................... (24) -- (49) --
---- ---- ------ ------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT)........................... (96) (60) (192) (94)
Income tax expense (benefit)....................................... 2 (22) 6 (39)
---- ---- ------ ------
LOSS FROM CONTINUING OPERATIONS.................................... (98) (38) (198) (55)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX...................... -- -- -- (2)
---- ---- ------ ------
NET LOSS........................................................... $(98) $(38) $ (198) $ (57)
==== ==== ====== ======
BASIC AND DILUTED LOSS PER SHARE:
Loss from Continuing Operations ................................... $(0.94) $(0.36) $(1.90) $(0.52)
Net Loss........................................................... $(0.94) $(0.36) $(1.90) $(0.54)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING.............. 104.5 104.6 104.5 104.6
===== ===== ===== =====
(a) Interest expense excludes unrecorded contractual interest expense for
the three and six months ended June 30, 2004 of $8 and $16,
respectively.
See accompanying Notes to Condensed Consolidated Financial Statements.
1
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
NET LOSS......................................................... $ (98) $ (38) $ (198) $ (57)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments ................................ 1 6 (1) 43
Minimum pension liability adjustments, net of tax ............... 18 -- 18 --
------ ------- ------ -----
COMPREHENSIVE LOSS............................................... $ (79) $ (32) $ (181) $ (14)
====== ======= ====== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
2
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2004 2003
---- ----
(UNAUDITED)
-----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 98 $ 159
Trade receivables, net of allowances of $14 in 2004 and 2003.............. 341 281
Miscellaneous receivables ................................................ 87 84
Inventories............................................................... 248 240
Prepaid expenses and other assets......................................... 28 40
------ ------
TOTAL CURRENT ASSETS...................................................... 802 804
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$2,628 in 2004 and $2,597 in 2003....................................... 858 909
INVESTMENTS IN AFFILIATES................................................. 193 206
GOODWILL.................................................................. 97 97
IDENTIFIED INTANGIBLE ASSETS, net ........................................ 42 43
OTHER ASSETS.............................................................. 201 387
------ ------
TOTAL ASSETS.............................................................. $2,193 $2,446
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 155 $ 78
Accrued liabilities ...................................................... 264 304
Short-term debt .......................................................... -- 361
------ ------
TOTAL CURRENT LIABILITIES ................................................ 419 743
LONG-TERM DEBT ........................................................... 599 294
OTHER LIABILITIES ........................................................ 288 313
------ ------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,306 1,350
LIABILITIES SUBJECT TO COMPROMISE ........................................ 2,194 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 (13,913,996 shares in 2004 and 13,838,717 in
2003) (251) (251)
Net deficiency of assets at spin-off...................................... (113) (113)
Accumulated other comprehensive loss...................................... (56) (72)
Accumulated deficit....................................................... (944) (746)
------ ------
TOTAL SHAREHOLDERS' DEFICIT............................................... (1,307) (1,125)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $2,193 $2,446
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
3
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------
2004 2003
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss ...................................................................... $ (198) $ (57)
Adjustments to reconcile to Cash From Operations:
Depreciation and amortization............................................. 64 68
Loss from discontinued operations, net of tax............................. -- 2
Amortization of deferred credits.......................................... (19) (7)
Restructuring expenses and other charges.................................. 138 52
Reorganization items, net................................................. 49 --
Other, net................................................................ 3 8
Changes in assets and liabilities:
Income and deferred taxes............................................ (2) (42)
Trade receivables.................................................... (60) (34)
Inventories.......................................................... (8) (7)
Accounts payable..................................................... 77 (22)
Liabilities subject to compromise.................................... (27) --
Other assets and liabilities......................................... (21) (2)
------- ------
CASH USED IN OPERATING ACTIVITIES--CONTINUING OPERATIONS....................... (4) (41)
CASH USED IN OPERATING ACTIVITIES--DISCONTINUED OPERATIONS..................... -- (11)
------- ------
CASH USED IN OPERATING ACTIVITIES.............................................. (4) (52)
------- ------
INVESTING ACTIVITIES:
Property, plant and equipment purchases........................................ (22) (46)
Acquisition and investment payments............................................ (36) (27)
Other investing activities..................................................... -- (1)
------- ------
CASH USED IN INVESTING ACTIVITIES--CONTINUING OPERATIONS....................... (58) (74)
CASH PROVIDED BY INVESTING ACTIVITIES--DISCONTINUED OPERATIONS................. -- 477
------- ------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................ (58) 403
------- ------
FINANCING ACTIVITIES:
Net change in short-term debt obligations...................................... (361) (239)
Proceeds from long-term debt obligations....................................... 300 --
Net change in cash collateralized letters of credit............................ 76 (39)
Deferred debt issuance costs................................................... (13) --
Other financing activities..................................................... (1) (1)
------- ------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES--CONTINUING OPERATIONS......... 1 (279)
CASH USED IN FINANCING ACTIVITIES--DISCONTINUED OPERATIONS..................... -- (5)
------- ------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................ 1 (284)
------- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... (61) 67
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.............................................................. 159 17
------- ------
END OF PERIOD.................................................................. $ 98 $ 84
======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for reorganization items (included in other assets and
liabilities above)........................................................... $ (16) $ --
======== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 fluids; 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 the 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 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 an 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 predict 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 condensed 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 condensed 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 condensed
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 condensed consolidated financial
statements reflect all adjustments that, in the opinion of management, are
necessary to present fairly the financial position, results of operations,
comprehensive 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 and six months ended June 30, 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
June 30, 2004 and December 31, 2003, and for the three and six months ended
June 30, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2004
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
ASSETS
Current assets............................ $ 551 $ 347 $ (96) $ 802
Property, plant and equipment, net........ 724 134 -- 858
Investment in subsidiaries and affiliates. 346 236 (389) 193
Intangible assets, net.................... 102 37 -- 139
Other assets.............................. 151 50 -- 201
------------------------------------------------------------
TOTAL ASSETS........................... $1,874 $804 $(485) $2,193
============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities....................... $ 407 $195 $(183) $419
Long-term debt............................ 344 255 -- 599
Other liabilities......................... 236 52 -- 288
------------------------------------------------------------
Total liabilities not subject to compromise 987 502 (183) 1,306
Liabilities subject to compromise......... 2,194 -- -- 2,194
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,307) 302 (302) (1,307)
------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) ................................ $1,874 $804 $(485) $2,193
============================================================
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2003
Solutia and
Subsidiaries Subsidiaries Solutia and
in 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET SALES................................. $ 573 $ 223 $ (97) $699
Cost of goods sold........................ 575 183 (103) 655
------------------------------------------------------------
GROSS PROFIT.............................. (2) 40 6 44
Marketing, administrative and technological
expenses.................................. 74 15 -- 89
Amortization expense...................... -- 1 -- 1
------------------------------------------------------------
OPERATING INCOME (LOSS)................... (76) 24 6 (46)
Equity earnings (loss) from affiliates.... 13 (2) (14) (3)
Interest expense.......................... (17) (6) -- (23)
Reorganization items, net................. (24) -- -- (24)
Other income, net......................... 6 -- (6) --
------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE .. (98) 16 (14) (96)
Income tax expense ....................... -- 2 -- 2
------------------------------------------------------------
NET INCOME (LOSS)......................... $ (98) $ 14 $ (14) $(98)
============================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET SALES................................. $1,096 $432 $(186) $1,342
Cost of goods sold........................ 1,067 359 (199) 1,227
------------------------------------------------------------
GROSS PROFIT.............................. 29 73 13 115
Marketing, administrative and technological
expenses.................................. 128 30 -- 158
Amortization expense...................... -- 1 -- 1
------------------------------------------------------------
OPERATING INCOME (LOSS)................... (99) 42 13 (44)
Equity loss from affiliates............... (4) -- (8) (12)
Interest expense.......................... (59) (13) -- (72)
Loss on debt modification................. -- (15) -- (15)
Reorganization items, net................. (49) -- -- (49)
Other income (expense), net............... 13 (2) (11) --
------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE .. (198) 12 (6) (192)
Income tax expense ....................... -- 6 -- 6
------------------------------------------------------------
NET INCOME (LOSS)......................... $(198) $ 6 $ (6) $ (198)
============================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. $(16) $12 $-- $(4)
NET CASH USED IN INVESTING ACTIVITIES....... (48) (10) -- (58)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.................................. (9) 10 -- 1
------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (73) 12 -- (61)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................ 125 34 -- 159
------------------------------------------------------------
END OF YEAR.............................. $ 52 $46 $-- $98
============================================================
8
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Recently Issued Accounting Standards
In May 2004, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the Act). 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. FSP 106-2 provides guidance on
the accounting for the effects of the Act for employers that sponsor
postretirement health care plans that provide drug benefits. This FSP also
requires those employers to provide certain disclosures regarding the effect
of the federal subsidy provided by the Act and supercedes existing FASB
guidance with respect to the Act; FSP 106-1. Solutia adopted the provisions
of FSP 106-2 in the quarter ended June 30, 2004, as further described in
Note 10.
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 Condensed Consolidated Statement of Financial Position as Liabilities
Subject to Compromise as of June 30, 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 assumption 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 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 June 30, 2004 and December 31, 2003.
The amounts subject to compromise consisted of the following items:
JUNE 30, DECEMBER 31,
2004 2003
---- ----
Postretirement benefits (a)............................... $1,135 $1,153
Litigation reserves (b)................................... 146 146
Accounts payable (c)...................................... 122 122
Environmental reserves (d)................................ 84 85
Other miscellaneous liabilities........................... 82 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................... $2,194 $2,221
====== ======
9
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(a) Postretirement benefits include Solutia's domestic (i) qualified
pension plan of $425 and $420 as of June 30, 2004 and December 31,
2003, respectively; (ii) non-qualified pension plan of $18 and $23
as of June 30, 2004 and December 31, 2003, respectively; and (iii)
other postretirement benefits of $692 and $710 as of June 30, 2004
and December 31, 2003, respectively. Pursuant to bankruptcy court
order, Solutia made payments with respect to postretirement
obligations of approximately $22 and $42 in the three and six
months ended June 30, 2004, respectively.
(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 with respect to pre-petition legal proceedings has been
classified as subject to compromise as of June 30, 2004 and
December 31, 2003.
(c) Pursuant to bankruptcy court order, Solutia made payments of
approximately $2 and $17 in the three and six months ended June 30,
2004, respectively. Solutia also reclassified into accounts payable
subject to compromise, from balances previously accrued in
liability accounts not subject to compromise, approximately $2 and
$17 in the three and six months ended June 30, 2004, respectively.
(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. Solutia made
payments of approximately $1 in the six months ended June 30, 2004
with respect to these environmental obligations subject to
compromise. See Note 9 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 three and six
months ended June 30, 2004 was approximately $8 and $16,
respectively.
(f) Pursuant to bankruptcy court order, Solutia is required to continue
payments of the contractual interest for the 11.25% notes due 2009
through January 2005. Whether or not interest is paid on those
notes after January 2005 will depend on resolution of several
issues, including the nature of the original issue discount on the
notes and the amount of the discount attributable to warrants that
were issued contemporaneously, and on a determination as to whether
the notes are fully secured. The amount of contractual interest
paid with respect to these notes was approximately $13 in the six
months ended June 30, 2004 and the accrued interest related to
these notes was included in Accrued Liabilities classified as not
subject to compromise as of both June 30, 2004 and December 31,
2003.
Reorganization Items, Net
Reorganization items, net are presented separately in the Condensed
Consolidated Statement of 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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2004
------------- -------------
Professional fees (a)............................. $ (11) $ (24)
Contract rejection and termination costs (b)...... (11) (20)
Severance and employee retention costs (c)........ (4) (7)
Net gain on settlement of pre-petition claims (d). 2 2
----- -----
TOTAL REORGANIZATION ITEMS, NET................... $ (24) $ (49)
===== =====
(a) Professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization
proceedings.
(b) Asset write-offs associated with contract rejections and
terminations resulting from the ongoing reorganization-related
evaluation of the financial viability of the Company's existing
contracts. The potential claim amount against Solutia with respect
to these contract rejections and terminations cannot be reasonably
determined at this point and accordingly no amount has been
recorded as of June 30, 2004.
(c) Expense provisions related to (i) employee severance costs incurred
directly as part of the Chapter 11 reorganization process and (ii)
a retention plan for certain Solutia employees approved by the
bankruptcy court.
(d) Solutia recorded a net gain of $2 representing the difference
between the settlement amount of certain pre-petition obligations
and the corresponding amounts previously recorded. The pre-petition
obligations were for certain
10
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
retirement benefits and retention obligations involving particular
employees severed during the three months ended June 30, 2004.
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
Condensed Consolidated Statement of Operations.
Net sales and loss from discontinued operations for the six months
ended June 30, 2003 were as follows:
Net sales......................................................... $53
Income before income tax expense.................................. 7
Income tax expense................................................ 9
----
Loss from discontinued operations................................. $ (2)
====
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
to follow 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 Condensed Consolidated
Statement of 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
NET LOSS:
As reported.................................... $ (98) $ (38) $ (198) $ (57)
Deduct: Total stock-based employee
compensation expense determined using the
Black-Scholes option-pricing model for all
awards, net of tax......................... (1) (1) (2) (3)
------ ------ ------ ------
Pro forma...................................... $ (99) $ (39) $ (200) $ (60)
====== ====== ====== ======
LOSS PER SHARE:
Basic and diluted - as reported................ $(0.94) $(0.36) $(1.90) $(0.54)
Basic and diluted - pro forma.................. $(0.95) $(0.37) $(1.92) $(0.57)
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.
11
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. GOODWILL AND OTHER INTANGIBLE ASSETS
There were no acquisitions of intangible assets and there have been
no changes to amortizable lives or amortization methods in the six months
ended June 30, 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.
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 Condensed Consolidated Statement of Financial Position.
The allocation of these items is as follows:
TOTAL
PERFORMANCE
PHARMACEUTICAL PRODUCTS AND
CPFILMS SERVICES SERVICES
--------------------------------------------------
Goodwill, December 31, 2003...................... $ 74 $ 23 $ 97
Translation...................................... 1 (1) --
--------------------------------------------------
GOODWILL, JUNE 30, 2004.......................... $ 75 $ 22 $ 97
==================================================
Trademarks, December 31, 2003.................... $ 26 $ 1 $ 27
Translation...................................... -- -- --
--------------------------------------------------
TRADEMARKS, JUNE 30, 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
Amortization..................................... -- (1) (1)
------------------------------------------------
AMORTIZED INTANGIBLE ASSETS, JUNE 30, 2004....... $ 33 $ (18) $ 15
================================================
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
INVENTORIES JUNE 30, DECEMBER 31,
2004 2003
---- ----
Finished goods................................................ $ 198 $ 192
Goods in process.............................................. 104 92
Raw materials and supplies.................................... 93 83
-------- --------
Inventories, at FIFO cost..................................... 395 367
Excess of FIFO over LIFO cost................................. (147) (127)
-------- --------
TOTAL INVENTORIES............................................. $ 248 $ 240
======== ========
Inventories at FIFO approximate current cost.
12
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, December 31,
OTHER ASSETS 2004 2003
---- ----
Computer software............................................. $ 42 $ 48
Cash underlying collateralized letters of credit (a).......... 29 132
Intangible pension asset...................................... 11 81
Other......................................................... 119 126
-------- -------
TOTAL OTHER ASSETS............................................ $ 201 $ 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 Condensed Consolidated
Statement of Cash Flows in the six months ended June 30, 2004.
JUNE 30, December 31,
ACCRUED LIABILITIES 2004 2003
---- ----
Accrued rebates and sales returns/allowances.................. $ 27 $ 32
Accrued interest.............................................. 25 28
Wages and benefits............................................ 20 24
Astaris keepwell guarantee.................................... 10 51
Other......................................................... 182 169
------- --------
TOTAL ACCRUED LIABILITIES..................................... $ 264 $ 304
======= ========
7. RESTRUCTURING RESERVES
During the three months ended June 30, 2004, Solutia recorded $12
of restructuring costs to Cost of Goods Sold principally related to the
closure of Solutia's chlorobenzenes operations as well as certain other
non-strategic operations, including $9 for decommissioning and dismantling
costs, $1 of severance and retraining costs, and $2 of various other
restructuring costs. These restructuring charges were recorded in the
Performance Products and Services segment and resulted principally from
Solutia's continued strategic evaluation of its businesses. In addition,
Solutia recorded $2 of severance costs during the three months ended June
30, 2004 in Reorganization Items, net related to management positions within
the corporate unallocated function with respect to workforce reduction
initiatives directly associated with the bankruptcy reorganization process.
During the six months ended June 30, 2004, Solutia recorded
restructuring charges of $17 to cost of goods sold principally related to
the closure of Solutia's chlorobenzenes operations as well as certain other
non-strategic operations, including $10 for decommissioning and dismantling
costs, $2 related to non-cancelable operating leases; $2 of severance and
retraining costs; and $3 of other various restructuring charges. These
restructuring charges were recorded in the Performance Products and Services
segment and resulted principally from Solutia's continued strategic
evaluation of its businesses. In addition, Solutia recorded $2 of severance
costs during the six months ended June 30, 2004 in Reorganization Items, net
related to management positions within the corporate unallocated function
with respect to workforce reduction initiatives directly associated with
the bankruptcy reorganization process.
The severance and retraining charges of $3 and $4 recorded in the
three and six months ended June 30, 2004, respectively, involved the
termination of approximately 90 and 110 positions, respectively.
Additionally, Solutia eliminated a modest number of positions through
planned attrition in the three and six months ended June 30, 2004. Solutia
expects to incur approximately $1 in retraining costs and $1 in severance
costs in the third and fourth quarters of 2004 related to workforce
reduction initiatives involving approximately 30 positions. However, Solutia
cannot forecast the level of future restructuring
13
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
charges beyond this specifically identified $2 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 three and six months
ended June 30, 2004 is presented as follows:
FUTURE
DECON/ LEASE EMPLOYMENT
DISMANTLING PAYMENTS REDUCTIONS OTHER COSTS TOTAL
-------------------------------------------------------------------------
Balance at December 31, 2003......... $ -- $ 14 $ -- $ 3 $ 17
Charges taken...................... 1 2 1 1 5
Amounts utilized................... (1) -- -- (1) (2)
-------------------------------------------------------------------------
BALANCE AT MARCH 31, 2004............ $-- $16 $ 1 $ 3 $ 20
Charges taken...................... 9 -- 3 2 14
Amounts utilized................... (3) (1) -- (2) (6)
-------------------------------------------------------------------------
BALANCE AT JUNE 30, 2004............. $6 $15 $4 $ 3 $28
=========================================================================
8. INCOME TAXES
The income tax expense of $2 and $6 in the three and six months
ended June 30, 2004, respectively, was 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 three and six months
ended June 30, 2004. Consequently, the increases in federal and state
deferred tax assets, as a result of the increases in net operating losses
generated during the three and six months ended June 30, 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. 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. This estimated unsecured claim amount was
classified as a liability subject to compromise as of both June 30, 2004 and
December 31, 2003 in the amount of $146.
Solutia's 2003 Form 10-K/A described a number of legal proceedings
in which Solutia was a named defendant or was defending solely due to its
indemnification obligations referred to above. The Company is prohibited
from performing with respect to these obligations, and developments, if any,
in these matters are currently managed by other named defendants.
Accordingly, in this and subsequent reports filed with the Securities and
Exchange Commission, Solutia will cease reporting on the status of those
legal proceedings. The legal proceedings which are in this category are
(i) Owens v. Monsanto; (ii) Payton v. Monsanto; (iii) other Anniston cases;
(iv) the PENNDOT case; and (v) premises based asbestos litigation.
14
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Following is a summary of legal proceedings that Solutia or certain
of its equity affiliates continue to manage that could result in an outcome
that is material to the condensed 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 to be funded over a 12-year period to provide
supplemental educational services for school children in West Anniston.
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 are 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 has asked the District Court to reconsider its order and to bring it
into accord with the Stipulation and Agreed Order consented to by the EPA
and entered by the U.S. Bankruptcy Court.
Flexsys Related Litigation
Solutia's 2003 Form 10-K/A and its Form 10-Q for the quarter ended
March 31, 2004 describe an investigation by antitrust authorities in the
United States, Europe and Canada of past commercial practices in the rubber
chemicals industry against Flexsys, Solutia's 50/50 joint venture with Akzo
Nobel N.V., and other producers of rubber chemicals. Those periodic filings
also describe a number of purported class actions that have been filed
against Flexsys and other producers of rubber chemicals as well as related
shareholder derivative actions and shareholder class actions that have been
filed against Solutia and certain of its officers and directors. Set forth
below is a description of the material developments in those cases as well
as other material litigation developments that have occurred since our first
quarter Form 10-Q filing.
Actions against Flexsys. A purported class action has been filed in
Massachusetts state court against Flexsys and other past and present rubber
chemical producers on behalf of all indirect consumers of rubber chemicals
for damages sustained as a result of alleged anti-competitive practices in
the sale of rubber chemicals. In addition to the Massachusetts case,
thirteen state court actions filed by retail tire purchasers against Flexsys
and other producers of rubber chemicals remain pending either on appeal or
at the trial court level in preliminary motion phases. On July 15, 2004, RBX
Industries, Inc. v. Bayer Corp., Flexsys, et al. was filed against Flexsys
and other producers of rubber chemicals in the United States District Court
for the Western District of Pennsylvania. Plaintiff alleges that during the
period 1995 through 2001 the defendants conspired through marketing and
sales practices to cause plaintiff to pay supra-competitive prices and seeks
treble damages from the defendants. Solutia is not a named defendant in any
of these cases.
In May 2004, two purported class actions were filed in the Province
of Quebec Canada against Flexsys and other rubber chemical producers
alleging that collusive sales and marketing activities of the defendants
damaged all persons in Quebec during the period July 1995 through September
2001. Statutory damages of (CAD) $14.6 along with exemplary damages of (CAD)
$.000025 per person are being sought. A hearing is tentatively scheduled to
15
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
determine which case will be allowed to go forward. Solutia is not a named
defendant in either of these class actions.
Actions against Solutia. Solutia's 2003 Form 10-K/A and its Form
10-Q for the quarter ended March 31, 2004 describe a consolidated class
action in the U.S. District Court in California brought by individuals who
allegedly purchased Solutia stock at inflated prices as a result of the
incorporation of Solutia's share of Flexsys' financial results which were
purportedly inflated as a result of anticompetitive collusion between
Flexsys and other rubber chemical producers during the period December 1998
through October 2002. 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. On
July 28, 2004, the court granted the individual defendants' motion to
dismiss for failure to state a claim but also granting plaintiffs ten days
to file an amended compliant.
Environmental Liabilities
Environmental compliance and remediation costs incurred by the
Company generally 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 $76 and $81 as of June 30, 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 Condensed Consolidated Statement
of Financial Position because, irrespective of the bankruptcy proceedings,
the Company will be required to comply with environmental requirements in
the conduct of its business, regardless of when the underlying environmental
contamination occurred. However, the Company ultimately expects to seek
recovery against other potentially responsible parties at certain of these
locations.
The Company had an accrued liability of $84 and $85 as of June 30,
2004 and December 31, 2003, respectively, primarily for properties not owned
or operated by Solutia. This liability is classified as subject to
compromise in the Condensed Consolidated Statement of Financial Position as
of both June 30, 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, remediation activities are currently being funded
by Monsanto for certain of these properties not owned or operated by
Solutia. Monsanto's funding of these remediation activities may give rise to
a claim against Solutia which Monsanto may assert in Solutia's Chapter 11
case.
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 Joint Venture
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
provided a $67 limitation for each of Solutia and FMC on future funding in
the event the joint venture continued to fail to meet certain financial
benchmarks. Solutia's $67 letter of credit was reduced dollar-for-dollar as
payments were made by Solutia under its existing support agreement. Solutia
made approximately $36 of investment payments in the six months ended June 30,
2004 to keep the Astaris joint venture in
16
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
compliance with its financial covenants. The remaining commitment to Astaris
was $10 and $51 as of June 30, 2004 and December 31, 2003, respectively, and
was recorded as a liability in the Condensed Consolidated Statement of
Financial Position in these periods accordingly.
FMC and Solutia also agreed conceptually to allow Astaris to defer
up to approximately $30 of payment obligations to each of FMC and Solutia
under existing operating agreements and certain other agreements over the
next 12-15 months to provide liquidity assistance to Astaris as it
implements its business restructuring. Astaris, FMC and Solutia are
currently negotiating a definitive agreement to allow for the deferral of
these obligations, including repayment terms and conditions with respect to
the deferred amounts. The deferral amount outstanding from Astaris to
Solutia was $14 and $2 as of June 30, 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 June 30, 2004 and December 31, 2003. As a result of Solutia's
Chapter 11 filing, this liability has been classified as subject to
compromise in the Condensed Consolidated Statement of 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,
assumption or 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 condensed
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 with respect to contingent claims may be
materially different from the amounts reflected in the condensed
consolidated financial statements. Generally, claims against Debtors arising
from actions or omissions prior to their filing date may be subject to
compromise 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 may
retain certain obligations currently classified as subject to compromise in
the Condensed Consolidated Statement of Financial Position.
17
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
For the three and six months ended June 30, 2004 and 2003,
Solutia's pension and healthcare and other benefit costs were as follows:
PENSION BENEFITS
----------------
THREE MONTHS SIX MONTHS
------------ ----------
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Service costs for benefits earned........ $ 6 $ 7 $ 13 $ 15
Interest cost on benefit obligation...... 35 28 56 57
Assumed return on plan assets............ (34) (30) (54) (62)
Prior service costs ..................... 2 5 6 10
Recognized net (gain)/loss............... 2 (1) 4 (1)
Curtailment and settlement net charges .. 62 -- 62 --
---- --- ---- ----
Total.................................... $ 73 $ 9 $ 87 $ 19
==== === ==== ====
HEALTHCARE AND OTHER BENEFITS
-----------------------------
THREE MONTHS SIX MONTHS
------------ ----------
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Service costs for benefits earned........ $ 2 $ 2 $ 5 $ 5
Interest cost on benefit obligation...... 13 10 24 25
Prior service costs ..................... (4) (2) (8) (6)
Recognized net loss...................... 2 1 5 3
--- ---- ---- ----
Total.................................... $13 $ 11 $ 26 $ 27
=== ==== ==== ====
Pension Curtailments and Settlements
- ------------------------------------
Solutia amended its U.S. qualified and non-qualified pension plans
in the second quarter 2004 to cease future benefit accruals effective July
1, 2004 for non-union participants in these plans. As a result, Solutia
recorded a pension curtailment net loss of $63 due to the reduction in
anticipated future service of participants in Solutia's U.S. qualified and
non-qualified pension plans. In addition, Solutia recorded a pension
settlement net gain of $1 resulting from the significant reduction in the
number of participants in Solutia's non-qualified pension plan principally
resulting from workforce reduction initiatives.
Adoption of FSP 106-2
- ---------------------
On December 8, 2003, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the "Act") was signed into law. The Act
introduces a prescription drug benefit under Medicare (Medicare Part D) as
well as a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare
Part D. As a result of the Act's passage, the FASB issued FASB Staff
Position ("FSP") No. 106-1, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of
2003. The FSP permitted 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.
18
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
In May 2004, the FASB issued FSP 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act). FSP 106-2 provides guidance on the
accounting for the effects of the Act for employers that sponsor
postretirement health care plans that provide drug benefits. This FSP also
requires those employers to provide certain disclosures regarding the effect
of the federal subsidy provided by the Act and supercedes FSP 106-1. Solutia
adopted the provisions of FSP 106-2 in the three months ended June 30, 2004.
The second quarter 2004 adoption of FSP 106-2 resulted in a
reduction in the accumulated postretirement benefit obligation ("APBO")
related to benefits attributed to past service of approximately $26. In
addition, net periodic postretirement benefit expense was reduced by
approximately $1 in the three months ended June 30, 2004, reflecting
amortization of the actuarial gain with respect to the subsidy, as well as a
reduction in current period interest costs due to the subsidy. Employer
Contributions
Employer Contributions
Solutia 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 six months ended June 30,
2004. According to current IRS funding rules, Solutia is not required to make
pension contributions in 2004 for its qualified domestic pension plan.
However, the Company's current plan, subject to bankruptcy court approval,
is to make a voluntary contribution of approximately $11 to the qualified
domestic pension plan in the third quarter 2004. This voluntary contribution
coupled with the cessation of future benefit accruals, effective July 1,
2004, will result in the reduction in required contributions, as well as the
deferral of the timing of future required contributions.
11. LOSS PER SHARE
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Loss from Continuing Operations........................... $ (98) $ (38) $ (198) $ (55)
Loss from Discontinued Operations, net of tax............. -- -- -- (2)
------ ------ ------- ------
Net Loss.................................................. $ (98) $ (38) $ (198) $ (57)
====== ====== ======= ======
Basic and Diluted Loss per Share:
Loss from Continuing Operations...........................$ (0.94) $ (0.36) $ (1.90) $(0.52)
------- ------- ------- ------
Loss from Discontinued Operations, net of tax............. -- -- -- (0.02)
------- ------- ------- ------
Basic and Diluted Loss per Share..........................$ (0.94) $ (0.36) $ (1.90) $(0.54)
======= ======= ======= ======
Basic and Diluted Weighted Average Shares
Outstanding (in millions)................................. 104.5 104.6 104.5 104.6
===== ===== ===== =====
19
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
12. 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 KEEPSAFE MAXIMUM(R) Merchant polymer and nylon extrusion polymers,
laminated window glass including VYDYNE(R) and ASCEND(R)
LLUMAR(R), VISTA(R) and GILA(R) professional and Carpet fibers, including the WEAR-DATED(R) and
retail window films ULTRON(R) brands
VANCEVA(TM) plastic interlayer films Industrial nylon fibers
Industrial products, including THERMINOL(R) heat ACRILAN(R) acrylic fibers for apparel, upholstery
transfer fluids, DEQUEST(R) water treatment chemicals, fabrics, craft yarns and other applications
and SKYDROL(R) aviation hydraulic fluids
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. There were no inter-segment sales in the periods presented below.
20
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Segment data for the three and six months ended June 30, 2004 and
2003 are as follows:
THREE MONTHS ENDED JUNE 30,
---------------------------
2004 2003
---------------------- -----------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
--------- ----------- --------- ------------
SEGMENT:
Performance Products and Services... $286 $ 27 $268 $ 26
Integrated Nylon.................... 413 5 357 (20)
------- ------- --- ----
SEGMENT TOTALS...................... 699 32 625 6
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses.............. (78) (41)
Equity loss from affiliates..... (3) (1)
Interest expense................ (23) (25)
Reorganization items, net....... --
Other income, net............... -- 1
CONSOLIDATED TOTALS: ---- ----
NET SALES....................... $699 $625
==== ------ ==== ------
LOSS BEFORE INCOME TAXES........ $ (96) $ (60)
====== ======
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
---------------------- -----------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
--------- ----------- --------- ------------
SEGMENT:
Performance Products and Services... $556 $ 52 $ 518 $ 43
Integrated Nylon.................... 786 (7) 718 (31)
----- ------- ------ ------
SEGMENT TOTALS...................... 1,342 45 1,236 12
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses.............. (89) (56)
Equity loss from affiliates..... (12) (7)
Interest expense................ (72) (48)
Loss on debt modification....... (15) --
Reorganization items, net....... (49) --
Other income, net............... -- 5
CONSOLIDATED TOTALS: ------ ------
NET SALES....................... $1,342 $1,236
====== ------- ====== ------
LOSS BEFORE INCOME TAXES........ $ (192) $ (94)
======= ======
13. 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% 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 condensed consolidating 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
21
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 condensed consolidating 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 June 30, 2004 and
December 31, 2003, and for the three and six months ended June 30, 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.
22
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES................................ $518 $52 $ 226 $ (97) $699
Cost of goods sold....................... 550 23 185 (103) 655
----------------------------------------------------------------------------
GROSS PROFIT............................. (32) 29 41 6 44
Marketing expenses....................... 26 6 8 -- 40
Administrative expenses.................. 23 2 8 -- 33
Technological expenses................... 15 -- 1 -- 16
Amortization expense..................... -- -- 1 -- 1
----------------------------------------------------------------------------
OPERATING INCOME (LOSS).................. (96) 21 23 6 (46)
Equity earnings (loss) from affiliates... 53 19 (2) (73) (3)
Interest expense......................... (33) (1) (13) 24 (23)
Other income, net........................ 2 19 8 (29) --
Reorganization items, net................ (24) -- -- -- (24)
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ....... (98) 58 16 (72) (96)
Income tax expense ...................... -- -- 2 -- 2
----------------------------------------------------------------------------
NET INCOME (LOSS)........................ $ (98) $ 58 $ 14 $ (72) $ (98)
============================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS)........................ $ (98) $ 58 $ 14 $ (72) $ (98)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments......... 1 -- 5 (5) 1
Minimum pension liability adjustments, net
of tax................................... 18 -- -- -- 18
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS).............. $ (79) $ 58 $ 19 $ (77) $ (79)
============================================================================
23
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES ................................... $ 468 $ 42 $ 199 $ (84) $ 625
Cost of goods sold .......................... 481 19 165 (89) 576
----------------------------------------------------------------------------
GROSS PROFIT ................................ (13) 23 34 5 49
Marketing expenses........................... 27 5 8 -- 40
Administrative expenses...................... 21 2 10 -- 33
Technological expenses....................... 10 -- 1 -- 11
----------------------------------------------------------------------------
OPERATING INCOME (LOSS) ..................... (71) 16 15 5 (35)
Equity earnings (loss) from affiliates....... 44 3 (1) (47) (1)
Interest expense ............................ (39) (1) (13) 28 (25)
Other income, net ........................... 3 24 6 (32) 1
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ........... (63) 42 7 (46) (60)
Income tax expense (benefit) ................ (25) 1 2 -- (22)
----------------------------------------------------------------------------
NET INCOME (LOSS) ........................... $ (38) $ 41 $ 5 $ (46) $ (38)
============================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS) ........................... $ (38) $ 41 $ 5 $ (46) $ (38)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments ............ 6 6 (11) 5 6
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) ................. $ (32) $ 47 $ (6) $ (41) $ (32)
===========================================================================
24
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES.................................. $1,000 $91 $437 $(186) $1,342
Cost of goods sold......................... 1,022 41 363 (199) 1,227
----------------------------------------------------------------------------
GROSS PROFIT............................... (22) 50 74 13 115
Marketing expenses......................... 47 11 16 -- 74
Administrative expenses.................... 39 4 15 -- 58
Technological expenses..................... 24 1 1 -- 26
Amortization expense....................... -- -- 1 -- 1
----------------------------------------------------------------------------
OPERATING INCOME (LOSS).................... (132) 34 41 13 (44)
Equity earnings (loss) from affiliates..... 68 11 -- (91) (12)
Interest expense........................... (91) (1) (28) 48 (72)
Other income, net.......................... 6 38 14 (58) --
Loss on debt modification.................. -- -- (15) -- (15)
Reorganization items, net.................. (49) -- -- -- (49)
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ......... (198) 82 12 (88) (192)
Income tax expense ........................ -- -- 6 -- 6
----------------------------------------------------------------------------
NET INCOME (LOSS).......................... $(198) $82 $6 $(88) $(198)
============================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
SIX MONTHS ENDED JUNE 30, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS).......................... $ (198) $ 82 $ 6 $ (88) $ (198)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments........... (1) (1) 8 (7) (1)
Minimum pension liability adjustments, net
of tax..................................... 18 -- -- -- 18
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)................ $ (181) $ 81 $ 14 $ (95) $ (181)
========================================== =================================
25
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SOLUTIA INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES ................................... $ 942 $ 75 $ 385 $ (166) $ 1,236
Cost of goods sold .......................... 935 33 326 (176) 1,118
---------------------------------------------------------------------------
GROSS PROFIT ................................ 7 42 59 10 118
Marketing expenses .......................... 54 10 15 -- 79
Administrative expenses ..................... 42 4 17 -- 63
Technological expenses ...................... 21 1 1 -- 23
Amortization expense ........................ -- -- 1 -- 1
---------------------------------------------------------------------------
OPERATING INCOME (LOSS) ..................... (110) 27 25 10 (48)
Equity earnings (loss) from affiliates....... 95 23 -- (124) (6)
Interest expense ............................ (75) (4) (32) 63 (48)
Other income, net ........................... 6 49 20 (67) 8
---------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ........... (84) 95 13 (118) (94)
Income benefit .............................. (29) -- (12) 2 (39)
---------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (55) 95 25 (120) (55)
Loss from Discontinued Operations, net of tax (2) (103) (103) 206 (2)
---------------------------------------------------------------------------
NET LOSS .................................... $ (57) $ (8) $ (78) $ 86 $ (57)
===========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
SIX MONTHS ENDED JUNE 30, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET LOSS .................................... $ (57) $ (8) $ (78) $ 86 $ (57)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments ............ 43 44 19 (63) 43
--------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) ................. $ (14) $ 36 $ (59) $ 23 $ (14)
==========================================================================
26
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:.............................
Cash and cash equivalents................... $ 14 $ 36 $ 48 $ -- $ 98
Trade receivables, net...................... 1 198 142 -- 341
Intercompany receivables.................... 196 680 67 (943) --
Miscellaneous receivables................... 65 -- 22 -- 87
Inventories................................. 127 29 106 (14) 248
Prepaid expenses and other current assets... 13 -- 12 3 28
--------------------------------------------------------------------------
TOTAL CURRENT ASSETS........................ 416 943 397 (954) 802
PROPERTY, PLANT AND EQUIPMENT, NET.......... 651 73 134 -- 858
INVESTMENTS IN AFFILIATES................... 2,241 201 34 (2,283) 193
GOODWILL.................................... -- 72 25 -- 97
IDENTIFIED INTANGIBLE ASSETS, NET........... 3 27 12 -- 42
INTERCOMPANY ADVANCES....................... 128 1,238 722 (2,088) --
OTHER ASSETS................................ 151 -- 50 -- 201
--------------------------------------------------------------------------
TOTAL ASSETS................................ $ 3,590 $ 2,554 $ 1,374 $ (5,325) $ 2,193
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 111 $ 9 $ 37 $ (2) $ 155
Intercompany payables....................... 69 33 114 (216) --
Accrued liabilities......................... 160 10 94 -- 264
Intercompany short-term debt................ -- -- 185 (185) --
--------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES................... 340 52 430 (403) 419
LONG-TERM DEBT.............................. 343 -- 256 -- 599
INTERCOMPANY LONG-TERM DEBT................. -- -- 413 (413) --
OTHER LIABILITIES........................... 236 -- 52 -- 288
--------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE. 919 52 1,151 (816) 1,306
LIABILITIES SUBJECT TO COMPROMISE........... 3,978 411 20 (2,215) 2,194
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) 2,091 203 (2,294) (113)
Accumulated other comprehensive loss........ (56) -- -- -- (56)
Accumulated deficit......................... (944) -- -- -- (944)
--------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (1,307) 2,091 203 (2,294) (1,307)
--------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................... $3,590 $ 2,554 $ 1,374 $ (5,325) $ 2,193
==========================================================================
27
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED 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
==========================================================================
28
SOLUTIA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS.... $ 24 $ 15 $(43) $ -- $ (4)
---------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases.. (11) (2) (9) -- (22)
Other investing activities............... (36) -- -- -- (36)
---------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES........ (47) (2) (9) -- (58)
---------------------------------------------------------------------------
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................................ 76 -- -- -- 76
Changes in investments and advances from
(to) affiliates.......................... (74) 3 71 -- --
Deferred debt issuance costs............. (8) -- (5) -- (13)
Other financing activities............... (1) -- -- -- (1)
---------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................... (68) 3 66 -- 1
---------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. (91) 16 14 -- (61)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................ 105 20 34 -- 159
---------------------------------------------------------------------------
END OF PERIOD............................ $ 14 $ 36 $ 48 $ -- $ 98
===========================================================================
29
SOLUTIA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS........ $(132) $ 65 $ 15 $-- $ (52)
----------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases ..... (41) (1) (4) -- (46)
Acquisition and investment payments, net of
cash acquired.......................... (27) -- -- -- (27)
Property disposals and investment proceeds .. 170 -- 306 -- 476
----------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 102 (1) 302 -- 403
----------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations ... (113) -- (126) -- (239)
Net change in cash collateralized letters of
credit................................. (39) -- -- -- (39)
Changes in investments and advances from (to)
affiliates............................. 209 (64) (145) -- --
Other financing activities .................. (6) -- -- -- (6)
----------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 51 (64) (271) -- (284)
----------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS ....... 21 -- 46 -- 67
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR ........................... -- -- 17 -- 17
----------------------------------------------------------------------------
END OF PERIOD ............................... $ 21 -- 63 -- $ 84
============================================================================
30
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 six months ended June 30, 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
The discussions below and accompanying condensed 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.
Summary of Significant Second Quarter Events
Jeffry N. Quinn was elected President and Chief Executive Officer
and James M. Sullivan was elected Senior Vice President and Chief Financial
Officer on May 3, 2004 succeeding John C. Hunter, formerly Chairman and
Chief Executive Officer and Robert A. Clausen, formerly Vice Chairman and
Chief Financial Officer. Mr. Hunter and Mr. Clausen retired from the Company
effective May 31, 2004. Mr. Quinn was also elected to the Company's Board of
Directors. Mr. Quinn had previously served as Senior Vice President, General
Counsel and Chief Restructuring Officer and Mr. Sullivan had previously
served as Vice President and Controller. Additionally, Luc De Temmerman,
formerly Vice President and General Manager of Solutia's Performance
Products division, was elected Senior Vice President and Chief Operating
Officer. In conjunction with these changes in senior management, a broader
reorganization of the Company's general and administrative functions was
completed.
In addition to the employee reductions, Solutia amended its U.S.
qualified pension plan to cease future benefit accruals effective July 1,
2004 for non-union participants. These actions were taken as the Company
continues to reduce its cost position to remain competitive in the markets
in which it competes. Also, Solutia has petitioned the bankruptcy court for
approval to make a voluntary contribution to the U.S. qualified pension plan
in the third quarter 2004. This contribution coupled with the cessation of
future benefit accruals will result in a significant reduction in the
required future contributions to the pension plan, as well as defer the
timing of these contributions. In addition, as part of continued evaluation
of its portfolio, during the quarter Solutia decided to close its
chlorobenzenes business due to its unprofitable financial performance.
Finally, the Company initiated an amendment of its DIP financing agreement
to provide greater flexibility to the Company in executing certain actions
contemplated in its financial projections. This amendment was approved early
in the third quarter.
31
Results of Operations - Second Quarter 2004 Compared with Second Quarter 2003
Net sales and operating losses of Solutia for the three months
ended June 30, 2004 and 2003 are as follows:
- ----------------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003
---- ----
Net Sales.................................................................... $ 699 $ 625
====== ======
Operating Loss:
Performance Products and Services Segment Profit......................... $ 27 $ 26
Integrated Nylon Segment Profit (Loss)................................... 5 (20)
Less: Corporate Expenses............................................ (78) (41)
------- -------
Operating Loss............................................................... $ (46) $ (35)
======= =======
Charges included in Operating Loss........................................... $ (75) $ (36)
======= =======
- ----------------------------------------------------------------------------------------------------------
The $74 million, or 12 percent, increase in net sales as compared
to the second quarter 2003 was primarily a result of increased sales volumes
of approximately 7 percent, higher average selling prices of approximately 4
percent, and favorable currency exchange rate fluctuations of approximately
1 percent. The $11 million, or 31 percent, increase in operating losses as
compared to the second quarter 2003 resulted primarily from higher charges
in 2004 as compared to 2003, which are described in greater detail in the
Results of Operations section below, as well as higher raw material and
energy costs. Partially offsetting this increase in operating losses were
higher net sales and favorable manufacturing variances, which were
principally due to cost containment activities and higher capacity
utilization levels.
Results of Operations - Six Months Ended June 30, 2004 Compared with
Six Months Ended June 30, 2003
Net sales and operating losses of Solutia for the six months ended
June 30, 2004 and 2003 are as follows:
- ----------------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003
---- ----
Net Sales.................................................................... $ 1,342 $ 1,236
======= =======
Operating Loss:
Performance Products and Services Segment Profit......................... $ 52 $ 43
Integrated Nylon Segment Loss............................................ (7) (31)
Less: Corporate Expenses............................................ (89) (56)
Less: Equity (Earnings) Loss from Affiliates and Other (Income)
Expense items included in Segment Profit (Loss)..................... -- (4)
----- ----
Operating Loss............................................................... $(44) $(48)
===== ====
Charges included in Operating Loss........................................... $ (80) $(47)
===== ====
- ----------------------------------------------------------------------------------------------------------
The $106 million, or 9 percent, increase in net sales as compared
to the six months ended June 30, 2003 was primarily a result of increased
sales volumes of approximately 5 percent, higher average selling prices of
approximately 2 percent, and favorable currency exchange rate fluctuations
of approximately 2 percent. The $4 million improvement in operating losses
as compared to the six months ended June 30, 2003 resulted primarily from
higher net sales, controlled spending and favorable manufacturing variances,
partially offset by higher raw material and energy costs and higher charges
in 2004 as compared to 2003, which are described in greater detail in the
Results of Operations section below.
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).
32
Solutia's subsidiaries outside the United States were not included in the
Chapter 11 filing. Information concerning the 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 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 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 an 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 predict 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.
33
Financial Information
Summarized financial information concerning Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as of
and for the three and six months ended June 30, 2004 is presented as
follows:
Solutia and Subsidiaries Solutia and
Subsidiaries in not in Subsidiaries
(dollars in millions) Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
Three Months Ended June 30, 2004:
- ---------------------------------
Net Sales................................. $ 573 $ 223 $ (97) $ 699
Operating Income (Loss)................... (76) 24 6 (46)
Net Income (Loss)......................... (98) 14 (14) (98)
Six Months Ended June 30, 2004:
- -------------------------------
Net Sales................................. $ 1,096 $ 432 $ (186) $ 1,342
Operating Income (Loss)................... (99) 42 13 (44)
Net Income (Loss)......................... (198) 6 (6) (198)
As of June 30, 2004:
- --------------------
Total Assets.............................. $ 1,874 $ 804 $ (485) $ 2,193
Liabilities not Subject to Compromise..... 987 502 (183) 1,306
Liabilities Subject to Compromise......... 2,194 -- -- 2,194
Total Shareholders' Equity (Deficit)...... (1,307) 302 (302) (1,307)
RESULTS OF OPERATIONS--SECOND QUARTER 2004 COMPARED WITH SECOND QUARTER 2003
Performance Products and Services
--------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Net Sales.............................................................. $286 $268
==== ====
Segment Profit ........................................................ $ 27 $ 26
==== ====
Charges included in Segment Profit................................. $(12) $ (5)
==== ====
--------------------------------------------------------------------------------------------------
The $18 million, or 7 percent, increase in net sales as compared to
the second quarter 2003 resulted primarily from higher sales volumes of
approximately 6 percent and favorable currency exchange rate fluctuations of
approximately 3 percent, partially offset by lower average selling prices of
approximately 2 percent. Higher volumes were experienced in SAFLEX(R) and
VANCEVA(TM) plastic interlayer products, CPFilms window film and precision
coated products, and in the Pharmaceutical Services businesses, partially
offset by lower volumes due to the cessation of certain operations beginning
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 second quarter 2003. Lower average selling
prices were experienced primarily in the SAFLEX(R) plastic interlayer
products in comparison to second quarter 2003 resulting principally from the
completion of new sales contracts in a competitive pricing environment.
The $1 million, or 4 percent, increase in segment profit in
comparison to the second quarter 2003 resulted primarily from higher net
sales and favorable manufacturing variances resulting from cost containment
activities and increased capacity utilization, partially offset by higher
raw material and energy costs. In addition, segment profit in the second
quarter 2004 was affected by $12 million of plant closure costs principally
related to Solutia's chlorobenzenes operations, including costs for
decommissioning and dismantling activities, asset write-offs, and severance
and
34
retraining costs. The second quarter 2003 included restructuring charges of
$5 million related to severance and retraining costs, as well as contract
termination costs.
Integrated Nylon
--------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Net Sales.............................................................. $ 413 $ 357
===== =====
Segment Profit (Loss).................................................. $ 5 $ (20)
===== =====
Charges included in Segment Profit (Loss).......................... $ -- $ (2)
===== =====
--------------------------------------------------------------------------------------------------
The $56 million, or 16 percent, increase in net sales as compared
to the second quarter 2003 resulted primarily from higher average selling
prices of approximately 8 percent and increased sales volumes of 8 percent.
Higher average selling prices were experienced principally in the
intermediate and carpet fibers businesses. Carpet fiber increases resulted
from price increases implemented across several product lines, whereas the
intermediate chemicals business benefited from formula-based sales contracts
tied to raw material costs. Increased sales volumes were experienced
principally in carpet fibers and nylon plastics and polymers, while
increased volumes in other product lines were predominately offset by
restructuring actions taken in 2003 and contract terminations in 2004.
The $25 million, or 125 percent, improvement in segment profit in
comparison to the second quarter 2003 resulted principally from higher net
sales, controlled spending, and favorable manufacturing variances resulting
from cost containment activities and increased capacity utilization,
partially offset by higher raw material and energy costs of approximately
$33 million. Segment loss for the second quarter 2003 included severance
charges of $2 million associated with workforce reductions. In addition, an
unplanned outage was experienced at the Pensacola, Florida operating
facility in late June 2004 that had a modest impact on the segment results
in the second quarter 2004. However, it will have a negative impact on
segment results in the third quarter 2004 of approximately $5 million.
Corporate Expenses
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Corporate Expenses........................................................... $ 78 $ 41
===== ======
Charges included in Corporate Expenses................................... $ (63) $ (29)
====== =======
- ----------------------------------------------------------------------------------------------------------
The $37 million, or 90 percent, increase in corporate expenses in
comparison to the second quarter 2003 was primarily a result of higher
charges. Charges included in the second quarter 2004 were comprised of net
pension curtailment charges of $63 million (as more fully described in Note
10 to the accompanying condensed consolidated financial statements), whereas
charges included in the second quarter 2003 consisted primarily of a $27
million charge related to the Anniston Consent Decree and $2 million of
severance costs related to workforce reductions. In addition, the second
quarter 2004 included higher pension expenses, partially offset by lower
headcount.
35
Equity Earnings (Loss) from Affiliates
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Equity Loss from Affiliates not included in Reportable Segment
Profit (Loss).............................................................. $ (3) $ (1)
-------- ---------
Equity Earnings from Affiliates included in Reportable Segment
Profit (Loss)............................................................. $ -- $ --
-------- ---------
Equity Loss from Affiliates..................................................... $ (3) $ (1)
======== =========
Charges included in Equity Loss from Affiliates............................ $ (7) $ (3)
======== =========
- -----------------------------------------------------------------------------------------------------------
Equity loss from affiliates in the three months ended June 30, 2004
was adversely affected by $7 million of charges including $5 million in
asset impairment and severance charges at the Flexsys joint venture and $2
million of severance charges at the Astaris joint venture. These charges in
the second quarter 2004 are in comparison to $3 million of restructuring
charges in the second quarter 2003 primarily related to severance charges at
both the Flexsys and Astaris joint ventures. In addition to these charges in
the second quarter 2004, Astaris experienced lower interest expense
resulting from lower outstanding debt levels, higher average selling prices
and benefits experienced from the shutdown of certain unprofitable
businesses, in comparison to the second quarter 2003.
Interest Expense
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Interest Expense............................................................. $ 23 $ 25
===== ======
Charges included in Interest Expense.................................... $ -- $ --
===== ======
- ----------------------------------------------------------------------------------------------------------
The $2 million, or 8 percent, decrease in interest expense in the
second quarter 2004 in comparison to the second quarter 2003 resulted
principally from the Company ceasing to record approximately $8 million of
interest on its 6.72% debentures puttable 2004, due 2037 and its 7.375%
debentures due 2027 in accordance with SOP 90-7 while under Chapter 11
protection. This $8 million of unrecorded interest was partially offset by
the increased interest expense on the Euronotes, which were refinanced in
the first quarter 2004.
Reorganization Items, net
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Reorganization Items, net.................................................... $ (24) $ --
======= ====
- ----------------------------------------------------------------------------------------------------------
Reorganization items, net are presented separately in the
Condensed Consolidated Statement of 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 second quarter 2004 included $11
million of professional fees for services provided by debtor and creditor
professionals directly related to Solutia's reorganization proceedings; $11
million of asset write-offs associated with a contract rejection; $4 million
of expense provisions for (i) employee severance costs incurred directly as
part of the Chapter 11 reorganization process and (ii) a retention plan for
certain Solutia employees approved by the bankruptcy court; and a $2 million
gain representing the difference between the settlement amount of certain
pre-petition obligations and the corresponding amounts previously recorded.
36
Income Tax Expense (Benefit)
- ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Income Tax Expense (Benefit) ................................................ $ 2 $ (22)
==== ======
- ---------------------------------------------------------------------------------------------------------
The $24 million change in income tax expense (benefit) in the
second quarter 2004 in comparison to the comparable period in 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 second quarter 2004 due to Solutia's Chapter 11
filing. Consequently, the increases in federal and state deferred tax assets
resulting from the increases in net operating losses during the second
quarter 2004 were offset by corresponding increases in valuation allowances.
The $2 million of income tax expense in the second quarter 2004 represents
principally taxes on foreign earnings.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS
ENDED JUNE 30, 2003
Performance Products and Services
--------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
----------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Net Sales.............................................................. $556 $518
==== ====
Segment Profit ........................................................ $ 52 $ 43
==== ====
Charges included in Segment Profit................................. $(17) $(11)
==== ====
--------------------------------------------------------------------------------------------------
The $38 million, or 7 percent, increase in net sales as compared to
the six months ended June 30, 2003 resulted primarily from higher sales
volumes of approximately 5 percent and favorable currency exchange rate
fluctuations of approximately 4 percent, partially offset by lower average
selling prices of approximately 2 percent. Higher volumes were experienced
in SAFLEX(R) and VANCEVA(TM) plastic interlayer products, CPFilms window film
and precision coated products, and in the Pharmaceutical Services
businesses, partially offset by lower volumes due to the cessation of
certain operations beginning 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 six
months ended June 30, 2003. Lower average selling prices were experienced
primarily in the SAFLEX(R) plastic interlayer products in comparison to the
six months ended June 30, 2003 resulting principally from the completion of
new sales contracts in a competitive pricing environment.
The $9 million, or 21 percent, increase in segment profit in
comparison to the six months ended June 30, 2003 resulted principally from
higher net sales and favorable manufacturing variances resulting from cost
containment activities and increased capacity utilization, partially offset
by higher raw material and energy costs. In addition, segment profit in 2004
was affected by $17 million of plant closure costs principally related to
Solutia's chlorobenzenes operations, including costs for decommissioning and
dismantling activities, asset write-offs, future costs for non-cancelable
operating leases, and severance and retraining costs, whereas 2003 included
restructuring charges of $11 million related to severance and retraining
costs, as well as contract termination costs.
37
Integrated Nylon
--------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
----------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Net Sales.............................................................. $786 $718
==== ====
Segment Loss........................................................... $ (7) $(31)
==== ====
Charges included in Segment Loss................................... $ -- $ (5)
==== ====
--------------------------------------------------------------------------------------------------
The $68 million, or 9 percent, increase in net sales as compared to
the six months ended June 30, 2003 resulted primarily from higher average
selling prices of approximately 5 percent and increased sales volume of
approximately 4 percent. Higher average selling prices were experienced in
the carpet and acrylic fiber businesses resulting from price increases
implemented across several product lines, whereas the intermediate chemicals
sales benefited from formula-based sales contracts tied to raw material
costs. Increased sales volumes were experienced in carpet fibers and nylon
plastics and polymers, partially offset by lower volumes in intermediate
chemicals and acrylic fibers, while increased volumes in other product lines
were predominately offset by restructuring actions taken in 2003 and
contract terminations in 2004.
The $24 million, or 77 percent, improvement in the segment loss in
comparison to the six months ended June 30, 2003 resulted primarily from
higher net sales, controlled spending, and favorable manufacturing variances
resulting from cost containment activities and increased capacity
utilization, partially offset by higher raw material and energy costs of
approximately $58 million. Segment loss for the six months ended June 30,
2003 included severance charges of $5 million associated with workforce
reductions. In addition, an unplanned outage was experienced at the Pensacola,
Florida operating facility in late June 2004 that had a modest impact on
segment results in the six months ended June 30, 2004. However, it will have
a negative impact on segment results in the third quarter 2004 of
approximately $5 million.
Corporate Expenses
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
----------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Corporate Expenses........................................................... $ 89 $ 56
===== ====
Charges included in Corporate Expenses................................... $ (63) $(31)
===== ====
- ----------------------------------------------------------------------------------------------------------
The $33 million, or 59 percent, increase in corporate expenses in
comparison to the six months ended June 30, 2003 was primarily a result of
higher charges included in corporate expenses. Charges included in the six
months ended June 30, 2004 were comprised of net pension curtailment charges
of $63 million (as more fully described in Note 10 to the accompanying
condensed consolidated financial statements), whereas charges included in
the comparable period of 2003 consisted of a $27 million charge related to
the Anniston Consent Decree and $4 million of severance costs related to
workforce reductions. In addition, the six months ended June 30, 2004
included higher pension expense, mostly offset by lower headcount.
38
Equity Earnings (Loss) from Affiliates
- -----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
----------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Equity Loss from Affiliates not included in Reportable Segment Profit (Loss). $ (12) $ (7)
-------- ---------
Equity Earnings from Affiliates included in Reportable Segment Profit (Loss). $ -- $ 1
-------- ---------
Equity Loss from Affiliates.................................................. $ (12) $ (6)
======== =========
Charges included in Equity Loss from Affiliates......................... $ (18) $ (9)
======== =========
- -----------------------------------------------------------------------------------------------------------
Equity loss from affiliates in the six months ended June 30, 2004
was adversely affected by $18 million of charges including $5 million in
contract termination costs, $3 million in dismantling charges, $2 million of
severance costs, and $1 million of asset impairments at the Astaris joint
venture, as well as $7 million of asset impairment and severance charges at
the Flexsys joint venture. These charges in the six months ended June 30,
2004 are in comparison to $9 million of restructuring charges in the
comparable period of 2003 related to asset impairment charges at the Flexsys
joint venture and severance charges at both the Flexsys and Astaris joint
ventures. In addition to these charges in the six months ended June 30,
2004, Astaris experienced lower interest expense resulting from lower
outstanding debt levels, higher average selling prices and benefits
experienced from the shutdown of certain unprofitable businesses, in
comparison to the six months ended June 30, 2003.
Interest Expense
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
----------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Interest Expense............................................................. $ 72 $ 48
===== ======
Charges included in Interest Expense.................................... $ (25) $ --
===== ======
- ----------------------------------------------------------------------------------------------------------
The $24 million, or 50 percent, increase in interest expense in
2004 in comparison to the six months ended June 30, 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. Higher interest expense was also a result of increased interest
expense on the Euronotes, which were refinanced in the first quarter 2004.
In addition, 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 six months of 2004 was $16
million.
Reorganization Items, net
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
----------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Reorganization Items, net.................................................... $ (49) $ --
======= ======
- ----------------------------------------------------------------------------------------------------------
Reorganization items, net are presented separately in the Condensed
Consolidated Statement of 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 six months ended June 30, 2004 included $24 million of
professional fees for services provided by debtor and creditor professionals
directly related to Solutia's reorganization proceedings; $20 million of
asset write-offs associated with contract rejections and terminations; $7
million of expense provisions for (i) employee severance costs incurred
directly as part of the Chapter 11 reorganization process and (ii) a
retention plan for certain Solutia employees
39
approved by the bankruptcy court; and a $2 million gain representing the
difference between the settlement amount of certain pre-petition obligations
and the corresponding amounts previously recorded.
Other Income, net
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
----------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Other Income, net ........................................................... $ -- $ 8
========= ========
Other Income, net included in Reportable Segment Profit.................. $ -- $ 3
========= ========
Gain included in Other Income, net........................................... $ -- $ 4
========= ========
- ----------------------------------------------------------------------------------------------------------
During the six months ended June 30, 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)
- ---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
----------------
JUNE 30,
--------
(dollars in millions) 2004 2003
---- ----
Income Tax Expense (Benefit) ................................................ $ 6 $ (39)
======== ===========
- ---------------------------------------------------------------------------------------------------------
The $45 million change in income tax expense (benefit) in 2004 in
comparison to the comparable period of 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 six
months ended June 30, 2004 due to Solutia's Chapter 11 filing. Consequently,
the increases in federal and state deferred tax assets resulting from the
increases in net operating losses during the six months ended June 30, 2004
were offset by corresponding increases in valuation allowances. The $6
million of income tax expense in the six months ended June 30, 2004
represents principally taxes on foreign earnings.
40
Summary of Events Affecting Comparability
Charges and gains recorded in the six months ended June 30, 2004
and 2003, and other events affecting comparability have been summarized in
the tables below (dollars in millions):
2004
-----------------------------------------------------------------
INCREASE/(DECREASE) PERFORMANCE
-----------
PRODUCTS AND INTEGRATED CORPORATE/
------------ ---------- ----------
SERVICES NYLON OTHER CONSOLIDATED
- ------------------------------------------- -------- ----- ----- ------------
IMPACT ON:
- -------------------------------------------
Cost of goods sold.................. $17 $-- $-- $17 (a)
47 47 (b)
----------------------------------------------------------------
Total cost of goods sold......... 17 -- 47 64
Marketing .......................... 4 4 (b)
Administrative ..................... 7 7 (b)
Technological ...................... 5 5 (b)
----------------------------------------------------------------
OPERATING LOSS IMPACT.......... (17) -- (63) (80)
Equity loss from affiliates......... (18) (18) (c)
Interest expense.................... (25) (25) (d)
Loss on debt modification........... (15) (15) (e)
----------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT (17) -- (121) (138)
===============================================
Income tax benefit impact........... (6) (f)
-----------------
AFTER-TAX INCOME STATEMENT IMPACT $(132)
=================
2004 EVENTS
- -----------
a) Restructuring costs related principally to the closure of Solutia's
chlorobenzenes operations as well as certain other non-strategic
operations, including costs for decommissioning and dismantling
activities, asset write-offs, future costs for non-cancelable operating
leases, and severance and retraining costs ($17 million pre-tax and
after-tax - see note (f) below).
b) Net pension curtailment charge due to the reduction in anticipated
future service of participants in Solutia's U.S. qualified and
non-qualified pension plans that resulted from Solutia's plan amendment
to cease future benefit accruals for non-union participants in these
plans effective July 1, 2004 ($63 million pre-tax and after-tax - see
note (f) below).
c) The Flexsys and Astaris joint ventures, in each of which the Company
has a fifty percent interest, incurred restructuring charges related to
contract terminations, dismantling costs, asset impairments and
severance charges ($18 million pre-tax and after-tax - see note (f)
below).
d) 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 (f) below).
e) Loss due to the modification of the Company's Euronotes in January 2004
($15 million pre-tax and $9 million after-tax).
f) With the exception of item (e) above, which relates to ex-U.S.
operations, the above items are considered to have like pre-tax and
after-tax impact, as the tax benefit realized from the charges is
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.
41
2003
---------------------------------------------------------------
PERFORMANCE
-----------
PRODUCTS AND INTEGRATED CORPORATE/
------------ ---------- ---------
INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED
- --------------------------------------------- -------- ----- ----- ------------
IMPACT ON:
- -------------------------------------------------------------------------------------------------------------
Cost of goods sold ....................... $6 $5 $ -- $11 (g)
27 27 (h)
---------------------------------------------------------------
Total cost of goods sold ................. 6 5 27 38
Marketing ................................ 2 2 (g)
Administrative ........................... 2 4 6 (g)
Technological ............................ 1 1 (g)
---------------------------------------------------------------
OPERATING LOSS IMPACT................ (11) (5) (31) (47)
Equity earnings (loss) from affiliates.... (9) (9) (i)
Other income (expense) ................... 4 4 (j)
---------------------------------------------------------------
PRETAX INCOME STATEMENT IMPACT....... (11) (5) (36) (52)
===============================================
Income tax benefit impact ................ (19)
----------------
AFTERTAX INCOME STATEMENT IMPACT $ (33)
================
2003 EVENTS
- -----------
g) Restructuring charges for workforce reductions and contract termination
costs ($20 million pre-tax and $12 million after-tax).
h) Environmental charges related to remediation in Anniston, Alabama ($27
million pre-tax and $17 million after-tax).
i) The Flexsys and Astaris joint ventures incurred restructuring charges
related to asset impairments and severance charges ($9 million pre-tax
and $7 million after-tax).
j) The Company recovered certain receivables, established prior to 1997,
which had previously been written off ($4 million pre-tax and $3
million after-tax).
42
FINANCIAL CONDITION AND LIQUIDITY
As discussed previously, 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 six months of 2004. Cash
used in continuing operations was $4 million in the first six months of
2004, an improvement of $37 million from $41 million used in continuing
operations for the comparable period of 2003. This improvement 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 higher accounts receivable and payments for
reorganization related items. Higher accounts receivable was a result of
higher net sales in the six months ended June 30, 2004 relative to the
comparable period of 2003.
FMC and Solutia have agreed conceptually to allow Astaris to defer
up to approximately $30 million of payment obligations to each of FMC and
Solutia under existing operating agreements and certain other agreements
over the next 12-15 months to provide liquidity assistance to Astaris as it
implements its business restructuring. The amount deferred and resulting
negative impact on cash from operations was $12 million in the six months
ended June 30, 2004.
Capital spending decreased $24 million to $22 million in the first
six months of 2004, compared to $46 million in the comparable period of
2003. This variance was primarily from the mandatory purchase of the
co-generation facility in Pensacola, Florida in 2003, for approximately $32
million, whereas the expenditures in the first six months of 2004 were used
primarily to fund various minor capital improvements, as well as certain
cost reduction projects.
During the first six months of 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 $1,224 million as of June 30, 2004, including $599
million not subject to compromise and $625 million subject to compromise,
decreased by $56 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 composition of Solutia's debt changed during the first six
months of 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 June 30, 2004. In addition, the Euronotes were
increased by $15 million during the first six months of 2004 due to the
January 2004 modification.
As a result of the Chapter 11 filing, Solutia was in default on all
its debt agreements as of June 30, 2004, with the exception of its DIP
credit facility and Euronotes.
Solutia's working capital increased by $322 million to $383 million
at June 30, 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 six months of 2004 and the seasonal increase in working capital,
partially offset by lower cash on-hand as of June 30, 2004.
Solutia had a shareholders' deficit of $1,307 million at June 30,
2004 compared to a deficit of $1,125 million at December 31, 2003. The $182
million increase in shareholders' deficit principally resulted from the $198
million net loss in the first six months of 2004, partially offset by the
$18 million decrease in additional minimum pension liability resulting
principally from the pension curtailment in 2004 (as more fully described in
Note 10 to the accompanying condensed consolidated financial statements).
43
The weighted average interest rate on Solutia's total debt
outstanding at June 30, 2004 was approximately 8.7 percent compared to 7.7
percent at June 30, 2003. This increase was primarily a result of the
increase in the interest rate for the Euronotes resulting from the January
2004 modification of these notes
At June 30, 2004, Solutia's total liquidity was $243 million in the
form of $145 million of availability under the final DIP credit facility and
approximately $98 million of cash on-hand, of which $46 million was cash of
Solutia's subsidiaries that are not parties to the Chapter 11 proceedings.
At December 31, 2003, all of the Company's liquidity was in the form of cash
in the amount of $159 million, of which $34 million was cash of Solutia's
subsidiaries that are not parties to the Chapter 11 proceedings.
Solutia 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 six months ended June 30,
2004. According to current IRS funding rules, Solutia is not required to make
pension contributions in 2004 for its qualified domestic pension plan.
However, the Company's current plan, subject to bankruptcy court approval,
is to make a voluntary contribution of approximately $11 million to
the qualified domestic pension plan in the third quarter 2004. This
voluntary contribution coupled with the cessation of future benefit accruals
(as discussed in Note 10 to the accompanying condensed consolidated
financial statements), effective July 1, 2004, will result in the reduction
in required contributions, as well as the deferral of the timing of future
required contributions. Based upon current actuarial assumptions, these two
actions will result in the reduction of future required contributions to the
qualified domestic pension plan of approximately $100 million over the next
five years.
Amendment to DIP Financing Agreement
The Company amended its DIP financing agreement on July 20, 2004,
after receiving bankruptcy court approval. The amendment provides greater
flexibility to the Company in executing certain actions contemplated in its
financial projections, provides cost savings through lower requirements of
certain letters of credit, and enhances liquidity opportunities through
retaining certain potential receipts which were previously required to be
used to reduce the commitment amount. No changes were made to the financial
covenants contained in the DIP agreement.
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. This estimated unsecured claim amount was
classified as a liability subject to compromise as of both June 30, 2004 and
December 31, 2003 in the amount of $146 million.
Solutia's 2003 Form 10-K/A described a number of legal proceedings
in which Solutia was a named defendant or was defending solely due to its
indemnification obligations referred to above. The Company is prohibited
from performing with respect to these obligations, and developments, if any,
in these matters are currently managed by other named defendants.
Accordingly, in this and subsequent reports filed with the Securities and
Exchange Commission, Solutia will cease reporting on the status of those
legal proceedings. The legal proceedings which are in this category are (i)
Owens v. Monsanto; (ii) Payton v. Monsanto; (iii) other Aniston cases; (iv)
the PENNDOT case; and (v) premises based asbestos litigation.
Following is a summary of legal proceedings that Solutia or certain
of its equity affiliates continue to manage that could result in an outcome
that is material to the condensed consolidated financial statements.
44
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.
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 are 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 has asked the District Court to reconsider its order and to bring it
into accord with the Stipulation and Agreed Order consented to by the EPA
and entered by the U.S. Bankruptcy Court.
Flexsys Related Litigation
Solutia's 2003 Form 10-K/A and its Form 10-Q for the quarter ended
March 31, 2004 describe an investigation by antitrust authorities in the
United States, Europe and Canada of past commercial practices in the rubber
chemicals industry against Flexsys, Solutia's 50/50 joint venture with Akzo
Nobel N.V., and other producers of rubber chemicals. Those periodic filings
also describe a number of purported class actions that have been filed
against Flexsys and other producers of rubber chemicals as well as related
shareholder derivative actions and shareholder class actions that have been
filed against Solutia and certain of its officers and directors. Set forth
below is a description of the material developments in those cases as well
as other material litigation developments that have occurred since our first
quarter Form 10-Q filing.
Actions against Flexsys. A purported class action has been filed in
Massachusetts state court against Flexsys and other past and present rubber
chemical producers on behalf of all indirect consumers of rubber chemicals
for damages sustained as a result of alleged anti-competitive practices in
the sale of rubber chemicals. In addition to the Massachusetts case,
thirteen state court actions filed by retail tire purchasers against Flexsys
and other producers of rubber chemicals remain pending either on appeal or
at the trial court level in preliminary motion phases. On July 15, 2004, RBX
Industries, Inc. v. Bayer Corp., Flexsys, et al. was filed against Flexsys
and other producers of rubber chemicals in the United States District Court
for the Western District of Pennsylvania. Plaintiff alleges that during the
period 1995 through 2001 the defendants conspired through marketing and
sales practices to cause plaintiff to pay supra-competitive prices and seeks
treble damages from the defendants. Solutia is not a named defendant in any
of these cases.
In May 2004, two purported class actions were filed in the Province
of Quebec Canada against Flexsys and other rubber chemical producers
alleging that collusive sales and marketing activities of the defendants
damaged all persons in Quebec during the period July 1995 through September
2001. Statutory damages of (CAD) $14.6 million along with exemplary damages
of (CAD) $25 per person are being sought. A hearing is tentatively scheduled
to determine which case will be allowed to go forward. Solutia is not a
named defendant in either of these class actions.
Actions against Solutia. Solutia's 2003 Form 10-K/A and its Form
10-Q for the quarter ended March 31, 2004 describe a consolidated class
action in the U.S. District Court in California brought by individuals who
allegedly purchased Solutia stock at inflated prices as a result of the
incorporation of Solutia's share of Flexsys' financial results which were
purportedly inflated as a result of anticompetitive collusion between
Flexsys and other rubber chemical producers during the period December 1998
through October 2002. The consolidated action has
45
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. On July 28, 2004, the court granted the individual
defendants' motion to dismiss for failure to state a claim but also granting
plaintiffs ten days to file an amended compliant.
Environmental Liabilities
Environmental compliance and remediation costs incurred by the
Company generally 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 $76 million and $81 million as of
June 30, 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 Condensed Consolidated Statement
of Financial Position because, irrespective of the bankruptcy proceedings,
the Company will be required to comply with environmental requirements in
the conduct of its business, regardless of when the underlying environmental
contamination occurred. However, the Company ultimately expects to seek
recovery against other potentially responsible parties at certain of these
locations.
The Company had an accrued liability of $84 million and $85 million
as of June 30, 2004 and December 31, 2003, respectively, primarily for
properties not owned or operated by Solutia. This liability is classified as
subject to compromise in the Condensed Consolidated Statement of Financial
Position as of June 30, 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, remediation activities are currently being funded
by Monsanto for certain of these properties not owned or operated by
Solutia. Monsanto's funding of these remediation activities may give rise to
a claim against Solutia which Monsanto may assert in Solutia's Chapter 11
case.
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 Joint Venture
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 million 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 provided a $67 million limitation for each of Solutia and FMC on
future funding in the event the joint venture continued to fail to meet
certain financial benchmarks. Solutia's $67 million letter of credit was
reduced dollar-for-dollar as payments were made by Solutia under its
existing support agreement. Solutia made approximately $36 million of
investment payments in the six months ended June 30, 2004 to keep the
Astaris joint venture in compliance with its financial covenants. The
remaining commitment to Astaris was $10 million and $51 million as of June
30, 2004 and December 31, 2003, respectively, and was recorded as a
liability in the Condensed Consolidated Statement of Financial Position in
these periods accordingly.
FMC and Solutia also agreed conceptually to allow Astaris to defer
up to approximately $30 million of payment obligations to each of FMC and
Solutia under existing operating agreements and certain other agreements, as
more fully described in the Financial Condition and Liquidity section.
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
46
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 June
30, 2004 and December 31, 2003. As a result of Solutia's Chapter 11 filing,
this liability has been classified as subject to compromise in the Condensed
Consolidated Statement of 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,
assumption or 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 condensed
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 with respect to contingent claims may be
materially different from the amounts reflected in the condensed
consolidated financial statements. Generally, claims against Debtors arising
from actions or omissions prior to their filing date may be subject to
compromise 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 may
retain certain obligations currently classified as subject to compromise in
the Condensed Consolidated Statement of Financial Position.
47
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
There have been no material changes in market risk exposures during
the six months ended June 30, 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 June 30, 2004, that have materially affected, or are reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
48
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Solutia's 2003 Form 10-K/A described a number of legal proceedings
in which Solutia was a named defendant or was defending solely due to its
indemnification obligations referred to above. The Company is prohibited
from performing with respect to these obligations, and developments, if any,
in these matters are currently managed by other named defendants.
Accordingly, in this and subsequent reports filed with the Securities and
Exchange Commission, Solutia will cease reporting on the status of those
legal proceedings. The legal proceedings which are in this category are (i)
Owens v. Monsanto; (ii) Payton v. Monsanto; (iii) other Anniston cases; (iv)
the PENNDOT case; and (v) premises based asbestos litigation.
Flexsys Related Litigation
Solutia's 2003 Form 10-K/A and its Form 10-Q for the quarter ended
March 31, 2004 describe an investigation by antitrust authorities in the
United States, Europe and Canada of past commercial practices in the rubber
chemicals industry against Flexsys, Solutia's 50/50 joint venture with Akzo
Nobel N.V., and other producers of rubber chemicals. Those periodic filings
also describe a number of purported class actions that have been filed
against Flexsys and other producers of rubber chemicals as well as related
shareholder derivative actions and shareholder class actions that have been
filed against Solutia and certain of its officers and directors. Set forth
below is a description of the material developments in those cases as well
as other material litigation developments that have occurred since our first
quarter Form 10-Q filing.
Actions against Flexsys. A purported class action has been filed in
Massachusetts state court against Flexsys and other past and present rubber
chemical producers on behalf of all indirect consumers of rubber chemicals
for damages sustained as a result of alleged anti-competitive practices in
the sale of rubber chemicals. In addition to the Massachusetts case,
thirteen state court actions filed by retail tire purchasers against Flexsys
and other producers of rubber chemicals remain pending either on appeal or
at the trial court level in preliminary motion phases. On July 15, 2004, RBX
Industries, Inc. v. Bayer Corp., Flexsys, et al. was filed against Flexsys
and other producers of rubber chemicals in the United States District Court
for the Western District of Pennsylvania. Plaintiff alleges that during the
period 1995 through 2001 the defendants conspired through marketing and
sales practices to cause plaintiff to pay supra-competitive prices and seeks
treble damages from the defendants. Solutia is not a named defendant in any
of these cases.
In May 2004, two purported class actions were filed in the Province
of Quebec Canada against Flexsys and other rubber chemical producers
alleging that collusive sales and marketing activities of the defendants
damaged all persons in Quebec during the period July 1995 through September
2001. Statutory damages of (CAD) $14.6 million along with exemplary damages
of (CAD) $25 per person are being sought. A hearing is tentatively scheduled
to determine which case will be allowed to go forward. Solutia is not a
named defendant in either of these class actions.
Actions against Solutia. Solutia's 2003 Form 10-K/A and its Form
10-Q for the quarter ended March 31, 2004 describe a consolidated class
action in the U.S. District Court in California brought by individuals who
allegedly purchased Solutia stock at inflated prices as a result of the
incorporation of Solutia's share of Flexsys' financial results which were
purportedly inflated as a result of anticompetitive collusion between
Flexsys and other rubber chemical producers during the period December 1998
through October 2002. 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. On July
28, 2004, the court granted the individual defendants' motion to dismiss for
failure to state a claim but also granting plaintiffs ten days to file an
amended compliant.
49
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
This table provides information with respect to purchases by
Solutia of shares of its common stock during the second quarter of 2004:
ISSUER'S PURCHASES OF EQUITY SECURITIES*
- ------------------------------------------------------------------------------------------------------------
TOTAL NUMBER OF APPROXIMATE DOLLAR
TOTAL NUMBER AVERAGE SHARES PURCHASED VALUE OF SHARES THAT
OF PRICE AS MAY YET BE
SHARES PAID PER PART OF PUBLICLY PURCHASED
PERIOD PURCHASED** SHARE** ANNOUNCED PLAN UNDER THE PLAN*
- ------------------------------------------------------------------------------------------------------------
April 1, 2004 through
April 30, 2004 -- N/A -- N/A
- ------------------------------------------------------------------------------------------------------------
May 1, 2004 through
May 31, 2004 -- N/A -- N/A
- ------------------------------------------------------------------------------------------------------------
June 1, 2004 through
June 30, 2004 75,279 $0.28 -- N/A
- ------------------------------------------------------------------------------------------------------------
TOTAL 75,279 $0.28 -- N/A
- ------------------------------------------------------------------------------------------------------------
* On April 26, 2000, Solutia announced that its Board of Directors
authorized the purchase of up to 15 million shares of Solutia's common
stock (the "2000 Repurchase Program") in addition to the normal
repurchase of shares for Solutia's compensation and benefits programs.
There have not been any purchases under the 2000 Stock Purchase Plan
since October 2000. Because of Solutia's Chapter 11 filing and the
covenants contained in Solutia's DIP financing agreement, there cannot
be any further repurchases under the 2000 Repurchase Program.
** These columns reflect the following transaction during the second
quarter of 2004: the surrender to Solutia of shares of Solutia common
stock to satisfy tax withholding obligations in connection with the
vesting of restricted stock awards.
50
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit Index at page 53 of this report.
(b) Reports filed on Form 8-K during the quarter ended June 30, 2004:
On May 5, 2004, we filed with the SEC a Form 8-K. Under Item 5, we
filed our press release announcing certain management changes.
On May 25, 2004, we furnished to the SEC a Form 8-K. Under Item 9,
we furnished unaudited consolidated and consolidating financial
statements of Solutia Europe S.A./N.V. and its subsidiaries.
51
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/ TIMOTHY J. SPIHLMAN
-----------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: August 5, 2004
52
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10(a) Amended and Restated Separation Agreement and Release of Claims
by and between Solutia Inc. and John C. Hunter III dated as of
May 19, 2004
10(b) Amended and Restated Separation Agreement and Release of Claims
by and between Solutia Inc. and Robert A. Clausen dated as of
May 19, 2004
10(c) Agreement by and between Solutia Inc. and Jeffry N. Quinn dated
as of July 19, 2004
10(d) Agreement by and between Solutia Inc. and James M. Sullivan
dated as of July 19, 2004
10(e) Agreement by and between Solutia Inc. and John F. Saucier dated
as of July 19, 2004
10(f) Amendment No. 2 to Financing Agreement and Waiver dated as of
July 20, 2004 by and among Solutia Inc. and Solutia Business
Enterprises, Inc., as debtors, debtors-in-possession and as
Borrowers; certain subsidiaries of Solutia Inc. as debtors,
debtors-in-possession and as Guarantors; the lenders from time
to time party thereto, as Lenders; Citicorp USA, Inc., as
Collateral Agent, Administrative Agent and Co-Documentation
Agent and Wells Fargo Foothill, LLC, as Co-Documentation Agent
11 Omitted--Inapplicable; see "Condensed Consolidated Statement of
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
53