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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 SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
---------
SOLUTIA INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
- --------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS. YES X NO
--- ---
INDICATE 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 SEPTEMBER 30, 2004
----- ------------------
COMMON STOCK, $0.01 PAR VALUE 104,474,694 SHARES
----------------------------- ------------------
==============================================================================
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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ ------
NET SALES....................................... $ 677 $ 594 $2,019 $1,830
Cost of goods sold.............................. 586 644 1,813 1,762
------ ------ ------ ------
GROSS PROFIT.................................... 91 (50) 206 68
Marketing expenses.............................. 31 38 105 117
Administrative expenses......................... 20 43 78 106
Technological expenses.......................... 7 14 33 37
Amortization expense............................ -- 1 1 2
------ ------ ------ ------
OPERATING INCOME (LOSS)......................... 33 (146) (11) (194)
Equity loss from affiliates..................... (16) (93) (28) (99)
Interest expense (a)............................ (21) (25) (93) (73)
Other income, net............................... 1 1 1 9
Loss on debt modification....................... -- -- (15) --
Reorganization items, net....................... (14) -- (63) --
------ ------ ------ ------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT)........ (17) (263) (209) (357)
Income tax expense (benefit).................... 1 (90) 7 (129)
------ ------ ------ ------
LOSS FROM CONTINUING OPERATIONS................. (18) (173) (216) (228)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX... -- -- -- (2)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX......................... -- (5) -- (5)
------ ------ ------ ------
NET LOSS........................................ $ (18) $ (178) $ (216) $ (235)
====== ====== ====== ======
BASIC AND DILUTED LOSS PER SHARE:
Loss from Continuing Operations................. $(0.17) $(1.65) $(2.07) $(2.18)
Net Loss........................................ $(0.17) $(1.70) $(2.07) $(2.25)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING................................... 104.5 104.5 104.5 104.6
====== ====== ====== ======
(a) Interest expense excludes unrecorded contractual interest expense for the three and nine months ended
September 30, 2004 of $8 and $24, respectively.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2004 2003 2004 2003
---- ----- ----- -----
NET LOSS............................................. $(18) $(178) $(216) $(235)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments..................... 1 5 -- 48
Minimum pension liability adjustments, net of tax.... -- 30 18 30
---- ----- ----- -----
COMPREHENSIVE LOSS................................... $(17) $(143) $(198) $(157)
==== ===== ===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
1
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 92 $ 159
Trade receivables, net of allowances of $14 in 2004 and
2003...................................................... 309 281
Miscellaneous receivables................................... 90 84
Inventories................................................. 247 240
Prepaid expenses and other assets........................... 38 40
------- -------
TOTAL CURRENT ASSETS........................................ 776 804
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $2,650 in 2004 and $2,597 in 2003......... 841 909
INVESTMENTS IN AFFILIATES................................... 177 206
GOODWILL.................................................... 97 97
IDENTIFIED INTANGIBLE ASSETS, net........................... 42 43
OTHER ASSETS................................................ 175 387
------- -------
TOTAL ASSETS................................................ $ 2,108 $ 2,446
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................ $ 158 $ 78
Accrued liabilities......................................... 260 304
Short-term debt............................................. -- 361
------- -------
TOTAL CURRENT LIABILITIES................................... 418 743
LONG-TERM DEBT.............................................. 559 294
OTHER LIABILITIES........................................... 280 313
------- -------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE................. 1,257 1,350
LIABILITIES SUBJECT TO COMPROMISE........................... 2,174 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 (13,925,941 shares in 2004 and
13,838,717 in 2003) (251) (251)
Net deficiency of assets at spin-off........................ (113) (113)
Accumulated other comprehensive loss........................ (54) (72)
Accumulated deficit......................................... (962) (746)
------- -------
TOTAL SHAREHOLDERS' DEFICIT................................. (1,323) (1,125)
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $ 2,108 $ 2,446
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
2
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss.................................................... $(216) $(235)
Adjustments to reconcile to Cash From Operations:
Cumulative effect of change in accounting principle, net
of tax................................................ -- 5
Loss from discontinued operations, net of tax........... -- 2
Depreciation and amortization........................... 95 102
Amortization of deferred credits........................ (30) (10)
Restructuring expenses and other charges................ 139 272
Other, net.............................................. 4 12
Changes in assets and liabilities:
Income and deferred taxes........................... -- (136)
Trade receivables................................... (28) (3)
Inventories......................................... (7) 15
Accounts payable.................................... 80 (75)
Liabilities subject to compromise................... (47) --
Other assets and liabilities........................ 1 55
----- -----
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES--CONTINUING
OPERATIONS................................................ (9) 4
CASH USED IN OPERATING ACTIVITIES--DISCONTINUED
OPERATIONS................................................ -- (11)
----- -----
CASH USED IN OPERATING ACTIVITIES........................... (9) (7)
----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (32) (59)
Acquisition and investment payments......................... (36) (48)
Other investing activities.................................. (1) 1
----- -----
CASH USED IN INVESTING ACTIVITIES--CONTINUING OPERATIONS.... (69) (106)
CASH PROVIDED BY INVESTING ACTIVITIES--DISCONTINUED
OPERATIONS................................................ -- 475
----- -----
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............. (69) 369
----- -----
FINANCING ACTIVITIES:
Change in short-term debt obligations....................... (361) (272)
Proceeds from long-term debt obligations.................... 300 --
Net change in cash collateralized letters of credit......... 85 (39)
Deferred debt issuance costs................................ (13) (6)
Other financing activities.................................. -- (2)
----- -----
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES--CONTINUING
OPERATIONS................................................ 11 (319)
CASH USED IN FINANCING ACTIVITIES--DISCONTINUED
OPERATIONS................................................ -- (5)
----- -----
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............. 11 (324)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (67) 38
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 159 17
----- -----
END OF PERIOD............................................... $ 92 $ 55
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for reorganization items (included in other
assets and liabilities above)............................. $ (30) $ --
===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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; 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 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
("Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court
for the Southern District of New York. The cases were consolidated
for the purpose of joint administration and were assigned case
number 03-17949 (PCB). Solutia's subsidiaries outside the United
States were not included in the Chapter 11 filing. The filing was
made to restructure Solutia's balance sheet by reducing indebtedness
to appropriate levels, to streamline operations and reduce costs, in
order to allow the Company to emerge 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
obstacles 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.
On September 28, 2004, the bankruptcy court set November 30,
2004 as the bar date for all pre-petition claims against the
Debtors. Differences between claim amounts identified by the Debtors
and claims filed by claimants will be investigated and resolved in
connection with the Debtors' claims resolution process. Considering
the potential number of claimants, this process may take
considerable time to finalize. The number and amount of allowed
claims is not presently known and, since the settlement terms of
such allowed claims are subject to a confirmed plan of
reorganization, the ultimate distribution with respect to allowed
claims is not presently ascertainable.
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 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
4
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
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, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code
("SOP 90-7"), 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 nine months ended September 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 September 30, 2004 and December 31, 2003, and
for the three and nine months ended September 30, 2004 are presented
below. These condensed consolidating financial statements include
investments in subsidiaries carried under the equity method.
5
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 SEPTEMBER 30, 2004
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
--------------- ------------------- ------------ ------------
ASSETS
Current assets........................ $ 514 $348 $ (86) $ 776
Property, plant and equipment, net.... 706 135 -- 841
Investment in subsidiaries and
affiliates.......................... 344 234 (401) 177
Intangible assets, net................ 102 37 -- 139
Other assets.......................... 122 53 -- 175
------- ---- ----- -------
TOTAL ASSETS...................... $ 1,788 $807 $(487) $ 2,108
======= ==== ===== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities................... $ 405 $185 $(172) $ 418
Long-term debt........................ 300 259 -- 559
Other liabilities..................... 232 48 -- 280
------- ---- ----- -------
Total liabilities not subject to
compromise.......................... 937 492 (172) 1,257
Liabilities subject to compromise..... 2,174 -- -- 2,174
TOTAL SHAREHOLDERS' EQUITY
(DEFICIT)........................... (1,323) 315 (315) (1,323)
------- ---- ----- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT).................... $ 1,788 $807 $(487) $ 2,108
======= ==== ===== =======
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2003
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
--------------- ------------------- ------------ ------------
ASSETS
Current assets........................ $ 557 $323 $ (76) $ 804
Property, plant and equipment, net.... 771 138 -- 909
Investment in subsidiaries and
affiliates.......................... 344 236 (374) 206
Intangible assets, net................ 102 38 -- 140
Other assets.......................... 340 47 -- 387
------- ---- ----- -------
TOTAL ASSETS...................... $ 2,114 $782 $(450) $ 2,446
======= ==== ===== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities................... $ 716 $341 $(314) $ 743
Long-term debt........................ 43 251 -- 294
Other liabilities..................... 259 54 -- 313
------- ---- ----- -------
Total liabilities not subject to
compromise.......................... 1,018 646 (314) 1,350
Liabilities subject to compromise..... 2,221 -- -- 2,221
TOTAL SHAREHOLDERS' EQUITY
(DEFICIT)........................... (1,125) 136 (136) (1,125)
------- ---- ----- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT).................... $ 2,114 $782 $(450) $ 2,446
======= ==== ===== =======
6
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 SEPTEMBER 30, 2004
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
--------------- ------------------- ------------ ------------
NET SALES............................. $ 546 $224 $(93) $ 677
Cost of goods sold.................... 498 185 (97) 586
----- ---- ---- -----
GROSS PROFIT.......................... 48 39 4 91
Marketing, administrative and
technological expenses.............. 42 16 -- 58
----- ---- ---- -----
OPERATING INCOME...................... 6 23 4 33
Equity loss from affiliates........... (1) (3) (12) (16)
Interest expense...................... (16) (5) -- (21)
Reorganization items, net............. (14) -- -- (14)
Other income, net..................... 7 (1) (5) 1
----- ---- ---- -----
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE............................. (18) 14 (13) (17)
Income tax expense.................... -- 1 -- 1
----- ---- ---- -----
NET INCOME (LOSS)..................... $ (18) $ 13 $(13) $ (18)
===== ==== ==== =====
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
--------------- ------------------- ------------ ------------
NET SALES............................. $1,642 $656 $(279) $2,019
Cost of goods sold.................... 1,565 544 (296) 1,813
------ ---- ----- ------
GROSS PROFIT.......................... 77 112 17 206
Marketing, administrative and
technological expenses.............. 170 46 -- 216
Amortization expense.................. -- 1 -- 1
------ ---- ----- ------
OPERATING INCOME (LOSS)............... (93) 65 17 (11)
Equity loss from affiliates........... (5) (3) (20) (28)
Interest expense...................... (75) (18) -- (93)
Loss on debt modification............. -- (15) -- (15)
Reorganization items, net............. (63) -- -- (63)
Other income (expense), net........... 20 (3) (16) 1
------ ---- ----- ------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE............................. (216) 26 (19) (209)
Income tax expense.................... -- 7 -- 7
------ ---- ----- ------
NET INCOME (LOSS)..................... $ (216) $ 19 $ (19) $ (216)
====== ==== ===== ======
7
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 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
--------------- ------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES................ $(50) $ 41 $-- $ (9)
NET CASH USED IN INVESTING
ACTIVITIES.......................... (56) (13) -- (69)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES................ 15 (4) -- 11
---- ---- ---- ----
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... (91) 24 -- (67)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR................. 125 34 -- 159
---- ---- ---- ----
END OF PERIOD..................... $ 34 $ 58 $-- $ 92
==== ==== ==== ====
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 filing of 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 September 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; and (ix) customer accommodation
programs. As applicable, these pre-petition items have been excluded
from Liabilities Subject to Compromise as of September 30, 2004 and
December 31, 2003.
8
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The amounts subject to compromise consisted of the following items:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Postretirement benefits (a)................................. $1,079 $1,153
Litigation reserves (b)..................................... 141 146
Accounts payable (c)........................................ 121 122
Environmental reserves (d).................................. 83 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
Other (g)................................................... 43 --
------ ------
716 673
Unamortized debt discount and debt issuance costs........... (48) (48)
------ ------
TOTAL DEBT SUBJECT TO COMPROMISE........................ 668 625
------ ------
TOTAL LIABILITIES SUBJECT TO COMPROMISE..................... $2,174 $2,221
====== ======
(a) Postretirement benefits include Solutia's domestic (i) qualified pension plan of $421 and $420 as of
September 30, 2004 and December 31, 2003, respectively; (ii) non-qualified pension plan of $18 and $23 as of
September 30, 2004 and December 31, 2003, respectively; and (iii) other postretirement benefits of $640 and
$710 as of September 30, 2004 and December 31, 2003, respectively. Pursuant to a bankruptcy court order,
Solutia made payments with respect to postretirement obligations of approximately $21 and $63 in the three
and nine months ended September 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 September 30, 2004 and
December 31, 2003. Pursuant to a bankruptcy court order, Solutia made a payment of $5 in the third quarter
2004 with respect to the Anniston litigation settlement reached in 2003.
(c) Pursuant to a bankruptcy court order, Solutia made payments of approximately $19 in the nine months ended
September 30, 2004. Solutia also reclassified into accounts payable subject to compromise, from balances
previously accrued in liability accounts not subject to compromise, approximately $18 net in the nine months
ended September 30, 2004.
(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 $2
in the nine months ended September 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 nine months ended September 30, 2004 was approximately $8 and $24,
respectively.
(f) Pursuant to a 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 $25 in the nine months ended September 30, 2004 and the accrued
interest related to these notes was included in Accrued Liabilities classified as not subject to compromise
as of both September 30, 2004 and December 31, 2003.
9
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(g) Represents the debt obligation included with the consolidation of the assets and liabilities of a synthetic
lease structure consolidated as part of the adoption of FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), in 2003. The obligation, representing the lease on the Company's
headquarters building, was reclassified to liabilities subject to compromise in the third quarter 2004 as
Solutia is unable to continue to perform on the debt obligation.
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 NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2004
------------------- ------------------
Professional fees (a)................................. $(13) $(37)
Contract rejection and termination costs (b).......... -- (20)
Severance and employee retention costs (c)............ (1) (8)
Net gain on settlement of pre-petition claims (d)..... -- 2
---- ----
TOTAL REORGANIZATION ITEMS, NET....................... $(14) $(63)
==== ====
(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 September 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 retirement benefits and retention obligations involving particular employees severed during the
second quarter 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 are reported separately
as discontinued operations in the Condensed Consolidated Statement
of Operations.
Net sales and loss from discontinued operations for the nine
months ended September 30, 2003 were as follows:
Net sales............................................. $53
Income before income tax expense...................... 7
Income tax expense.................................... 9
---
Loss from discontinued operations..................... $(2)
===
10
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ ------
NET LOSS:
As reported.................................. $ (18) $ (178) $ (216) $ (235)
Deduct: Total stock-based employee
compensation expense determined using the
Black-Scholes option-pricing model for all
awards, net of tax......................... (1) (1) (3) (4)
------ ------ ------ ------
Pro forma.................................... $ (19) $ (179) $ (219) $ (239)
====== ====== ====== ======
LOSS PER SHARE:
Basic and diluted--as reported............... $(0.17) $(1.70) $(2.07) $(2.25)
Basic and diluted--pro forma................. $(0.18) $(1.71) $(2.10) $(2.28)
Compensation expense resulting from the fair value method may
not be representative of compensation expense to be incurred on a
pro forma basis in future years. The fair value of each option grant
is estimated on the date of grant by use of the Black-Scholes
option-pricing model. In addition, Solutia believes that its plan of
reorganization will result in cancellation of its existing shares of
common stock, as well as options and warrants to purchase its common
stock and that it is unlikely that holders of options to purchase
Solutia's common stock will receive any consideration for those
options in such a plan of reorganization.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
There were no acquisitions of intangible assets and there have
been no changes to amortizable lives or amortization methods in the
nine months ended September 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.
11
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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
CPFILMS SERVICES AND SERVICES
------- -------------- ------------
Goodwill, December 31, 2003......... $74 $23 $97
Translation......................... -- -- --
--- --- ---
GOODWILL, SEPTEMBER 30, 2004........ $74 $23 $97
=== === ===
Trademarks, December 31, 2003....... $26 $ 1 $27
Translation......................... -- -- --
--- --- ---
TRADEMARKS, SEPTEMBER 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,
SEPTEMBER 30, 2004..................... $33 $(18) $15
=== ==== ===
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
INVENTORIES
Finished goods................................. $200 $ 192
Goods in process............................... 103 92
Raw materials and supplies..................... 101 83
---- -----
Inventories, at FIFO cost...................... 404 367
Excess of FIFO over LIFO cost.................. (157) (127)
---- -----
TOTAL INVENTORIES.............................. $247 $ 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)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
OTHER ASSETS
Computer software.............................. $ 40 $ 48
Cash underlying collateralized letters of
credit (a)................................... 20 132
Intangible pension asset....................... 11 81
Other.......................................... 104 126
---- -----
TOTAL OTHER ASSETS............................. $175 $ 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 nine
months ended September 30, 2004.
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ACCRUED LIABILITIES
Wages and benefits............................. $ 48 $ 24
Accrued rebates and sales returns/allowances... 29 32
Accrued interest............................... 11 28
Astaris keepwell guarantee..................... 10 51
Other.......................................... 162 169
---- ----
TOTAL ACCRUED LIABILITIES...................... $260 $304
==== ====
7. RESTRUCTURING RESERVES
During the three months ended September 30, 2004, Solutia
recorded a reduction of $1 to Cost of Goods Sold for the favorable
settlement of reserves established in 2003 related to the closure of
non-strategic facilities in the Company's Pharmaceutical Services
division. In addition, Solutia recorded $1 of severance and
retraining costs during the three months ended September 30, 2004 in
Reorganization Items, net with respect to workforce reduction
initiatives directly associated with the bankruptcy reorganization
process.
During the nine months ended September 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 operating leases where the underlying services and properties are
no longer providing benefit; $2 of severance and retraining costs;
and $3 of various other restructuring charges. In addition, Solutia
recorded a reduction of $1 to Cost of Goods Sold for the favorable
settlement of reserves established in 2003 related to the closure of
non-strategic facilities in the Company's Pharmaceutical Services
division. 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 $3 of severance and retraining costs
during the nine months ended September 30, 2004 in Reorganization
Items, net principally 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 $1 and $5 recorded in
the three and nine months ended September 30, 2004, respectively,
involved the termination of approximately 35 and 145 positions,
respectively. Additionally, Solutia eliminated a modest number of
positions through planned attrition in the three and nine months ended
13
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, 2004. In general, Solutia cannot forecast the level of future
restructuring charges due to the inherent uncertainty involved in operating
as a debtor-in-possession in the Chapter 11 bankruptcy proceedings.
A summary of restructuring activity during the three and nine
months ended September 30, 2004 is presented as follows:
DECOMMISSIONING/ FUTURE 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
Charges taken............ -- -- 1 -- 1
Amounts utilized......... (1) (1) (5) (3) (10)
---- ---- ---- ---- ----
BALANCE AT SEPTEMBER 30,
2004....................... $ 5 $ 14 $-- $-- $ 19
==== ==== ==== ==== ====
8. INCOME TAXES
The income tax expense of $1 and $7 in the three and nine months
ended September 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 nine months ended September 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 nine months ended September 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 September 30, 2004 and December 31, 2003 in the amount of $141
and $146, respectively.
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, Solutia
has ceased reporting on the status of those
14
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
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 filed a motion asking 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. The District Court held a hearing on this
motion on August 24, 2004. The District Court took the matter under
advisement and issued its ruling on September 9, 2004, denying
Solutia's motion and declaring that the automatic stay is
inapplicable to Solutia's obligations under the Consent Decree to
perform site work. Solutia has appealed this ruling to the 11th
Circuit Court of Appeals.
Flexsys Related Litigation
Solutia's 2003 Form 10-K/A and its Form 10-Qs for the quarters
ended March 31, 2004 and June 30, 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 the Company's 2003 Form
10-K/A.
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. A purported class action on behalf of indirect
consumers of rubber chemicals from numerous states has also been filed in
Florida state court by the same Massachusetts law firm with similar
allegations being made and similar relief being sought against Flexsys and
other past and present rubber chemical producers. In addition to the
15
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Massachusetts and Florida cases, ten 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 will be 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-Qs for the quarters ended March 31, 2004 and June 30, 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
complaint. Plaintiffs have filed an amended complaint and defendants
have again petitioned the court to dismiss as against the individual
defendants for failure to state a cause of action and plaintiffs
have opposed the motion which remains pending.
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 $75 and $81 as of September 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 $83 and $85 as of
September 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 September 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
16
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 nine months ended September 30, 2004 to
keep the Astaris joint venture in compliance with its financial
covenants. The remaining commitment to Astaris was $10 and $51 as of
September 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 have also agreed to allow Astaris to defer up to
$27 of payment obligations to each of FMC and Solutia under existing
operating agreements and certain other agreements over the next 12
months to provide liquidity assistance to Astaris as it implements
its business restructuring. Repayment in full of the deferred
amounts to FMC and Solutia is required by September 30, 2005. The
deferral amount outstanding from Astaris to Solutia was $14 and $2
as of September 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
September 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
17
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
For the three and nine months ended September 30, 2004 and 2003,
Solutia's pension and healthcare and other benefit costs were as
follows:
PENSION BENEFITS
-----------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service costs for benefits earned.............. $-- $ 6 $ 13 $ 21
Interest cost on benefit obligation............ 18 19 59 76
Assumed return on plan assets.................. (18) (20) (57) (82)
Prior service costs............................ -- 4 5 14
Recognized net loss............................ 1 2 6 1
Curtailment and settlement net charges......... 7 30 69 30
---- ---- ---- ----
Total.......................................... $ 8 $ 41 $ 95 $ 60
==== ==== ==== ====
HEALTHCARE AND OTHER BENEFITS
-----------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service costs for benefits earned.............. $ 1 $ 3 $ 6 $ 8
Interest cost on benefit obligation............ 8 15 32 40
Prior service costs............................ (2) (4) (10) (10)
Recognized net loss............................ 1 3 6 6
Curtailment gain............................... (38) -- (38) --
---- ---- ---- ----
Total.......................................... $(30) $ 17 $ (4) $ 44
==== ==== ==== ====
Curtailments and Settlements
- ----------------------------
Solutia amended its U.S. postretirement plan for non-union,
active participants during the third quarter 2004. These changes,
effective September 1, 2004, include discontinuation of all
postretirement benefits for a retiree or spouse after such person
attains age 65, changes to certain eligibility requirements for
pre-65 postretirement benefits with the eventual elimination of
these benefits by 2016, and elimination of retiree life insurance
benefits to future retirees. As a result, Solutia recorded a
curtailment gain of $38 due to the reduction in anticipated future
service of non-union participants in Solutia's U.S. postretirement
plan.
Solutia recorded a pension settlement of $6 during the third
quarter 2004 resulting principally from the significant amount of
lump sum distributions from Solutia's U.S. qualified pension plan
during 2004, primarily relating to headcount reductions throughout
2004. In addition, Solutia recorded a curtailment loss of $1 during
18
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
the third quarter 2004 due to the reduction in anticipated future
service of participants in Solutia's Canadian pension plan resulting
from headcount reductions.
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.
Employer Contributions
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 made a voluntary contribution of
$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, resulted in the
reduction of required contributions, as well as deferring the timing
of future required contributions.
11. LOSS PER SHARE
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ ------
Loss from Continuing Operations................ $ (18) $ (173) $ (216) $ (228)
Loss from Discontinued Operations, net of
tax.......................................... -- -- -- (2)
Cumulative Effect of Change in Accounting
Principle, net of tax........................ -- (5) -- (5)
------ ------ ------ ------
Net Loss....................................... $ (18) $ (178) $ (216) $ (235)
====== ====== ====== ======
Basic and Diluted Loss per Share:
Loss from Continuing Operations................ $(0.17) $(1.65) $(2.07) $(2.18)
Loss from Discontinued Operations, net of
tax.......................................... -- -- -- (0.02)
Cumulative Effect of Change in Accounting
Principle, net of tax........................ -- (0.05) -- (0.05)
------ ------ ------ ------
Basic and Diluted Loss per Share............... $(0.17) $(1.70) $(2.07) $(2.25)
====== ====== ====== ======
Basic and Diluted Weighted Average Shares
Outstanding (in millions).................... 104.5 104.5 104.5 104.6
===== ===== ===== =====
For the three and nine months ended September 30, 2003, .3
million and .1 million common share equivalents, respectively, were
excluded because the effect would be antidilutive.
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
VANCEVA(TM) plastic interlayer films Merchant polymer and nylon extrusion
polymers, including VYDYNE(R) and ASCEND(R)
Polyvinyl butyral for KEEPSAFE(R), and
KEEPSAFE MAXIMUM(R) laminated window glass Carpet fibers, including the WEAR-DATED(R)
and ULTRON(R) brands
LLUMAR(R), VISTA(R) and GILA(R) professional
and retail window films Industrial nylon fibers
THERMINOL(R) heat transfer fluids ACRILAN(R) acrylic fibers for apparel,
upholstery fabrics, craft yarns and other
DEQUEST(R) water treatment chemicals applications
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 nine months ended September 30,
2004 and 2003 are as follows:
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2004 2003
------------------ -------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products and Services...................... $ 274 $ 27 $ 261 $ 30
Integrated Nylon....................................... 403 (15) 333 (19)
------ ----- ------ -----
SEGMENT TOTALS......................................... 677 12 594 11
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate gain (expenses).......................... 22 (158)
Equity loss from affiliates........................ (16) (93)
Interest expense................................... (21) (25)
Reorganization items, net.......................... (13) --
Other income, net.................................. (1) 2
CONSOLIDATED TOTALS:
------ ------
NET SALES.......................................... $ 677 $ 594
====== ----- ====== -----
LOSS BEFORE INCOME TAXES........................... $ (17) $(263)
===== =====
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2004 2003
------------------ -------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products and Services...................... $ 830 $ 79 $ 779 $ 73
Integrated Nylon....................................... 1,189 (22) 1,051 (50)
------ ----- ------ -----
SEGMENT TOTALS......................................... 2,019 57 1,830 23
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses................................. (67) (214)
Equity loss from affiliates........................ (28) (100)
Interest expense................................... (93) (73)
Loss on debt modification.......................... (15) --
Reorganization items, net.......................... (62) --
Other income, net.................................. (1) 7
CONSOLIDATED TOTALS:
------ ------
NET SALES.......................................... $2,019 $1,830
====== ----- ====== -----
LOSS BEFORE INCOME TAXES........................... $(209) $(357)
===== =====
13. SUBSEQUENT EVENT
On October 26, 2004 Solutia signed a definitive agreement to
sell its wholly-owned subsidiary, Axio Research Company, which is
included in the Performance Products and Services reportable
segment. The transaction is subject to bankruptcy court approval. A
hearing is currently scheduled to be held on November 17, 2004.
Solutia expects to record an approximate $2 loss in the fourth
quarter 2004 on the transaction if approved under the currently
agreed upon terms.
21
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
14. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
CPFilms, Inc., Monchem International, Inc., Monchem, Inc.,
Solutia Systems, Inc., Solutia Investments, LLC and Solutia Business
Enterprises, Inc., wholly-owned subsidiaries of the Company (the
"Guarantors"), are guarantors of the holders of Solutia's 11.25%
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 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 September 30, 2004 and
December 31, 2003, and for the three and nine months ended September
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 SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.............................. $506 $39 $225 $(93) $677
Cost of goods sold..................... 477 21 185 (97) 586
---- --- ---- ---- ----
GROSS PROFIT........................... 29 18 40 4 91
Marketing expenses..................... 18 5 8 -- 31
Administrative expenses................ 11 1 8 -- 20
Technological expenses................. 6 1 -- -- 7
---- --- ---- ---- ----
OPERATING INCOME (LOSS)................ (6) 11 24 4 33
Equity earnings (loss) from
affiliates........................... 26 8 (2) (48) (16)
Interest expense....................... (29) (1) (14) 23 (21)
Other income, net...................... 5 18 8 (30) 1
Reorganization items, net.............. (14) -- -- -- (14)
---- --- ---- ---- ----
INCOME (LOSS) BEFORE INCOME TAXES...... (18) 36 16 (51) (17)
Income tax expense..................... -- -- 1 -- 1
---- --- ---- ---- ----
NET INCOME (LOSS)...................... $(18) $36 $ 15 $(51) $(18)
==== === ==== ==== ====
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS)...................... $(18) $36 $15 $(51) $(18)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments....... 1 1 -- (1) 1
---- --- --- ---- ----
COMPREHENSIVE INCOME (LOSS)............ $(17) $37 $15 $(52) $(17)
==== === === ==== ====
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 SEPTEMBER 30, 2003
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.............................. $ 446 $41 $186 $(79) $ 594
Cost of goods sold..................... 555 20 153 (84) 644
----- --- ---- ---- -----
GROSS PROFIT........................... (109) 21 33 5 (50)
Marketing expenses..................... 26 5 7 -- 38
Administrative expenses................ 35 1 7 -- 43
Technological expenses................. 12 1 1 -- 14
Amortization expenses.................. -- -- 1 -- 1
----- --- ---- ---- -----
OPERATING INCOME (LOSS)................ (182) 14 17 5 (146)
Equity earnings (loss) from
affiliates........................... (55) 7 -- (45) (93)
Interest expense....................... (37) (1) (13) 26 (25)
Other income, net...................... 8 17 8 (32) 1
----- --- ---- ---- -----
INCOME (LOSS) BEFORE INCOME TAXES...... (266) 37 12 (46) (263)
Income tax expense (benefit)........... (93) -- 3 -- (90)
----- --- ---- ---- -----
INCOME (LOSS) FROM CONTINUING
OPERATIONS........................... (173) 37 9 (46) (173)
----- --- ---- ---- -----
Cumulative Effect of Change in
Accounting Principle, net of tax..... (5) -- -- -- (5)
----- --- ---- ---- -----
NET INCOME (LOSS)...................... $(178) $37 $ 9 $(46) $(178)
===== === ==== ==== =====
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED SEPTEMBER 30, 2003
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS)...................... $(178) $37 $ 9 $(46) $(178)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments....... 5 4 11 (15) 5
Minimum pension liability adjustments,
net of tax........................... 30 -- -- -- 30
----- --- --- ---- -----
COMPREHENSIVE INCOME (LOSS)............ $(143) $41 $20 $(61) $(143)
===== === === ==== =====
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
NINE MONTHS ENDED SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.............................. $1,506 $130 $662 $(279) $2,019
Cost of goods sold..................... 1,499 62 548 (296) 1,813
------ ---- ---- ----- ------
GROSS PROFIT........................... 7 68 114 17 206
Marketing expenses..................... 65 16 24 -- 105
Administrative expenses................ 50 5 23 -- 78
Technological expenses................. 30 2 1 -- 33
Amortization expense................... -- -- 1 -- 1
------ ---- ---- ----- ------
OPERATING INCOME (LOSS)................ (138) 45 65 17 (11)
Equity earnings (loss) from
affiliates........................... 94 19 (2) (139) (28)
Interest expense....................... (120) (2) (42) 71 (93)
Other income, net...................... 11 56 22 (88) 1
Loss on debt modification.............. -- -- (15) -- (15)
Reorganization items, net.............. (63) -- -- -- (63)
------ ---- ---- ----- ------
INCOME (LOSS) BEFORE INCOME TAXES...... (216) 118 28 (139) (209)
Income tax expense..................... -- -- 7 -- 7
------ ---- ---- ----- ------
NET INCOME (LOSS)...................... $ (216) $118 $ 21 $(139) $ (216)
====== ==== ==== ===== ======
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
NINE MONTHS ENDED SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS)...................... $(216) $118 $21 $(139) $(216)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments....... -- -- 8 (8) --
Minimum pension liability adjustments,
net of tax........................... 18 -- -- -- 18
----- ---- --- ----- -----
COMPREHENSIVE INCOME (LOSS)............ $(198) $118 $29 $(147) $(198)
===== ==== === ===== =====
25
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET SALES.............................. $1,388 $ 116 $ 571 $(245) $1,830
Cost of goods sold..................... 1,490 53 479 (260) 1,762
------ ----- ----- ----- ------
GROSS PROFIT........................... (102) 63 92 15 68
Marketing expenses..................... 80 15 22 -- 117
Administrative expenses................ 77 5 24 -- 106
Technological expenses................. 33 2 2 -- 37
Amortization expense................... -- -- 2 -- 2
------ ----- ----- ----- ------
OPERATING INCOME (LOSS)................ (292) 41 42 15 (194)
Equity earnings (loss) from
affiliates........................... 40 30 -- (169) (99)
Interest expense....................... (112) (5) (45) 89 (73)
Other income, net...................... 14 66 28 (99) 9
------ ----- ----- ----- ------
INCOME (LOSS) BEFORE INCOME TAXES...... (350) 132 25 (164) (357)
Income tax expense (benefit)........... (122) -- (9) 2 (129)
------ ----- ----- ----- ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS........................... (228) 132 34 (166) (228)
------ ----- ----- ----- ------
Loss from Discontinued Operations, net
of tax............................... (2) (103) (103) 206 (2)
Cumulative Effect of Change in
Accounting Principle, net of tax..... (5) -- -- -- (5)
------ ----- ----- ----- ------
NET INCOME (LOSS)...................... $ (235) $ 29 $ (69) $ 40 $ (235)
====== ===== ===== ===== ======
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
NINE MONTHS ENDED SEPTEMBER 30, 2003
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
NET LOSS............................... $(235) $29 $(69) $ 40 $(235)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments....... 48 48 30 (78) 48
Minimum pension liability adjustments,
net of tax........................... 30 -- -- -- 30
----- --- ---- ---- -----
COMPREHENSIVE INCOME (LOSS)............ $(157) $77 $(39) $(38) $(157)
===== === ==== ==== =====
26
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 20 $ 14 $ 58 $ -- $ 92
Trade receivables, net...................... 7 172 130 -- 309
Intercompany receivables.................... 134 736 68 (938) --
Miscellaneous receivables................... 67 -- 23 -- 90
Inventories................................. 126 27 109 (15) 247
Prepaid expenses and other current assets... 25 -- 10 3 38
------- ------ ------ ------- -------
TOTAL CURRENT ASSETS........................ 379 949 398 (950) 776
PROPERTY, PLANT AND EQUIPMENT, NET.......... 634 71 136 -- 841
INVESTMENTS IN AFFILIATES................... 2,268 211 31 (2,333) 177
GOODWILL.................................... -- 72 25 -- 97
IDENTIFIED INTANGIBLE ASSETS, NET........... 3 27 12 -- 42
INTERCOMPANY ADVANCES....................... 128 1,238 736 (2,102) --
OTHER ASSETS................................ 123 -- 52 -- 175
------- ------ ------ ------- -------
TOTAL ASSETS................................ $ 3,535 $2,568 $1,390 $(5,385) $ 2,108
======= ====== ====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 113 $ 7 $ 40 $ (2) $ 158
Intercompany payables....................... 101 10 101 (212) --
Accrued liabilities......................... 155 11 94 -- 260
Intercompany short-term debt................ -- -- 188 (188) --
------- ------ ------ ------- -------
TOTAL CURRENT LIABILITIES................... 369 28 423 (402) 418
LONG-TERM DEBT.............................. 300 -- 259 -- 559
INTERCOMPANY LONG-TERM DEBT................. -- -- 425 (425) --
OTHER LIABILITIES........................... 232 1 46 1 280
------- ------ ------ ------- -------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE................................ 901 29 1,153 (826) 1,257
LIABILITIES SUBJECT TO COMPROMISE........... 3,957 411 21 (2,215) 2,174
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) 2,128 216 (2,344) (113)
Accumulated other comprehensive loss........ (54) -- -- -- (54)
Accumulated deficit......................... (962) -- -- -- (962)
------- ------ ------ ------- -------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (1,323) 2,128 216 (2,344) (1,323)
------- ------ ------ ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................. $ 3,535 $2,568 $1,390 $(5,385) $ 2,108
======= ====== ====== ======= =======
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
NINE MONTHS ENDED SEPTEMBER 30, 2004
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS... $ (67) $ 72 $(14) $-- $ (9)
----- ---- ---- ---- -----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases............................. (16) (3) (13) -- (32)
Acquisition and investment payments, net (35) -- (1) -- (36)
Other investing activities.............. (1) -- -- -- (1)
----- ---- ---- ---- -----
CASH USED IN INVESTING ACTIVITIES....... (52) (3) (14) -- (69)
----- ---- ---- ---- -----
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..................... 85 -- -- -- 85
Changes in investments and advances from
(to) affiliates....................... 19 (75) 56 -- --
Deferred debt issuance costs............ (9) -- (4) -- (13)
----- ---- ---- ---- -----
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................ 34 (75) 52 -- 11
----- ---- ---- ---- -----
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (85) (6) 24 -- (67)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................... 105 20 34 -- 159
----- ---- ---- ---- -----
END OF PERIOD........................... $ 20 $ 14 $ 58 $-- $ 92
===== ==== ==== ==== =====
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
NINE MONTHS ENDED SEPTEMBER 30, 2003
PARENT ONLY NON- CONSOLIDATED
SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC.
------------ ---------- ---------- ------------ ------------
CASH PROVIDED BY (USED IN) OPERATIONS... $(165) $ 104 $ 54 $-- $ (7)
----- ----- ----- ---- -----
INVESTING ACTIVITIES:
Property, plant and equipment
purchases............................. (51) (1) (8) -- (60)
Acquisition and investment payments, net
of cash acquired...................... (48) -- -- -- (48)
Property disposals and investment
proceeds.............................. 172 -- 305 -- 477
----- ----- ----- ---- -----
CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES............................ 73 (1) 297 -- 369
----- ----- ----- ---- -----
FINANCING ACTIVITIES:
Net change in short-term debt
obligations........................... (146) -- (126) -- (272)
Net change in cash collateralized
letters of credit..................... (39) -- -- -- (39)
Changes in investments and advances from
(to) affiliates....................... 299 (101) (198) -- --
Other financing activities.............. (13) -- -- -- (13)
----- ----- ----- ---- -----
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................ 101 (101) (324) -- (324)
----- ----- ----- ---- -----
INCREASE IN CASH AND CASH EQUIVALENTS... 9 2 27 -- 38
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................... -- -- 17 -- 17
----- ----- ----- ---- -----
END OF PERIOD........................... $ 9 $ 2 $ 44 $-- $ 55
===== ===== ===== ==== =====
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 nine months ended September
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, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code ("SOP 90-7"), 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 Third Quarter Events
Changes to Postretirement Plans
- -------------------------------
Solutia enacted several changes to its U.S. postretirement
benefit plan for non-union, active participants during the third
quarter which helps the Company continue to reduce its cost position
to remain competitive in the markets in which it competes. These
changes, effective September 1, 2004, included discontinuation of
all postretirement benefits for a retiree or spouse after such
person attains age 65, changes to certain eligibility requirements
for pre-65 postretirement benefits with the eventual elimination of
these benefits by 2016, and the elimination of retiree life
insurance benefits to future retirees. In addition, Solutia made a
voluntary contribution of $11 million to its U.S. qualified pension
plan in the third quarter 2004. This contribution coupled with the
amendment in the second quarter 2004 of the U.S. pension plan to
cease future benefit accruals will result in a significant reduction
in the required future contributions to the pension plan, as well as
deferring the timing of these contributions.
Impact from Hurricane Ivan
- --------------------------
The devastating hurricanes experienced in the U.S. in the third
quarter resulted in the disruption of operations and property damage
at Solutia's Integrated Nylon plants at Pensacola, Florida, and
Foley, Alabama, and its CPFilms plant at Martinsville, Virginia. At
the Pensacola and Foley plants, certain manufacturing units that
were shut down in an orderly manner just prior to the hurricane are
now fully operational. Shipments of raw materials and products at
these plants have returned to normal, following a brief delay due to
issues with the regional transportation infrastructure. The
Martinsville plant, which experienced a tornado spawned by the
remnants of one of the hurricanes, suffered significant damage to an
administrative building as well as minor damage to certain
manufacturing operations. However, the manufacturing operations were
only temporarily
31
affected and are now essentially fully operational. The financial
impact of these events resulted in charges of approximately $7
million in the third quarter involving asset write-offs and repairs
and maintenance costs. In addition to the $7 million, the third
quarter financial results were also negatively affected by
unabsorbed fixed costs and lost sales resulting from the hurricane.
Based on current projections of remaining repair and maintenance
costs, the Company believes it is unlikely that it will be able to
recover material amounts through commercial insurance policies.
Results of Operations--Third Quarter 2004 Compared with Third
Quarter 2003
Net sales and operating income (loss) of Solutia for the three
months ended September 30, 2004 and 2003 are as follows:
2004 2003
(dollars in millions) ---- -----
Net Sales................................................... $677 $ 594
==== =====
Operating Income (Loss):
Performance Products and Services Segment Profit........ $ 27 $ 30
Integrated Nylon Segment Loss........................... (15) (19)
Less: Corporate Gain (Expenses)..................... 22 (158)
Less: Other (Income) Expense and Reorganization
items included in Segment Profit (Loss)........... (1) 1
---- -----
Operating Income (Loss)..................................... $ 33 $(146)
==== =====
Net Gains (Charges) included in Operating Income (Loss)..... $ 25 $(130)
==== =====
The $83 million, or 14 percent, increase in net sales as
compared to the third quarter 2003 was primarily a result of higher
average selling prices of approximately 9 percent, increased sales
volumes of approximately 4 percent, and favorable currency exchange
rate fluctuations of approximately 1 percent. The $179 million,
improvement in operating income as compared to the third quarter
2003 resulted primarily from lower charges in 2004 as compared to
2003, which are described in greater detail in the Results of
Operations section below, as well as higher net sales, lower
postretirement expenses and favorable manufacturing variances, which
were principally due to cost containment activities and higher
capacity utilization levels. Partially offsetting the improvements
in operating losses were higher raw material and energy costs of
approximately $85 million in comparison to 2003.
Results of Operations--Nine Months Ended September 30, 2004 Compared
with Nine Months Ended September 30, 2003
Net sales and operating loss of Solutia for the nine months
ended September 30, 2004 and 2003 are as follows:
2004 2003
(dollars in millions) ------ ------
Net Sales................................................... $2,019 $1,830
====== ======
Operating Loss:
Performance Products and Services Segment Profit........ $ 79 $ 73
Integrated Nylon Segment Loss........................... (22) (50)
Less: Corporate Expenses............................ (67) (214)
Less: Equity Earnings from Affiliates............... -- (1)
Less: Other Income and Reorganization items included
in Segment Profit (Loss).......................... (1) (2)
------ ------
Operating Loss.............................................. $ (11) $ (194)
====== ======
Charges included in Operating Loss.......................... $ (54) $ (177)
====== ======
The $189 million, or 10 percent, increase in net sales as
compared to the nine months ended September 30, 2003 was primarily a
result of increased sales volumes of approximately 4 percent, higher
average selling prices of approximately 4 percent, and favorable
currency exchange rate fluctuations of approximately 2 percent. The
$183 million improvement in operating losses as compared to the nine
months ended September 30, 2003 resulted
32
primarily from lower charges in 2004 as compared to 2003, which are
described in greater detail in the Results of Operations section
below, as well as higher net sales, lower postretirement expenses,
controlled spending and favorable manufacturing variances, which
were principally due to cost containment activities and higher
capacity utilization levels. Partially offsetting the improvements
in operating losses were higher raw material and energy costs of
approximately $145 million in comparison to 2003.
BANKRUPTCY PROCEEDINGS
On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries
("Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court
for the Southern District of New York. The cases were consolidated
for the purpose of joint administration and were assigned case
number 03-17949 (PCB). Solutia's subsidiaries outside the United
States were not included in the Chapter 11 filing. The filing was
made to restructure Solutia's balance sheet by reducing indebtedness
to appropriate levels, to streamline operations and reduce costs, in
order to allow the Company to emerge 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
obstacles 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.
On September 28, 2004, the bankruptcy court set November 30,
2004 as the bar date for all pre-petition claims against the
Debtors. Differences between claim amounts identified by the Debtors
and claims filed by claimants will be investigated and resolved in
connection with the Debtors' claims resolution process. Considering
the potential number of claimants, this process may take
considerable time to finalize. The number and amount of allowed
claims is not presently known and, since the settlement terms of
such allowed claims are subject to a confirmed plan of
reorganization, the ultimate distribution with respect to allowed
claims is not presently ascertainable. Additional 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.
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 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 nine months ended September 30, 2004 is presented as follows:
SOLUTIA AND SOLUTIA AND
SUBSIDIARIES IN SUBSIDIARIES NOT IN SUBSIDIARIES
REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED
(dollars in millions) --------------- ------------------- ------------ ------------
Three Months Ended September 30, 2004:
- --------------------------------------
Net Sales............................. $ 546 $224 $ (93) $ 677
Operating Income...................... 6 23 4 33
Net Income (Loss)..................... (18) 13 (13) (18)
Nine Months Ended September 30, 2004:
- -------------------------------------
Net Sales............................. $ 1,642 $656 $(279) $ 2,019
Operating Income (Loss)............... (93) 65 17 (11)
Net Income (Loss)..................... (216) 19 (19) (216)
As of September 30, 2004:
- -------------------------
Total Assets.......................... $ 1,788 $807 $(487) $ 2,108
Liabilities not Subject to
Compromise.......................... 937 492 (172) 1,257
Liabilities Subject to Compromise..... 2,174 -- -- 2,174
Total Shareholders' Equity
(Deficit)........................... (1,323) 315 (315) (1,323)
RESULTS OF OPERATIONS--THIRD QUARTER 2004 COMPARED WITH THIRD QUARTER 2003
Performance Products and Services
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Net Sales............................................... $274 $261
==== ====
Segment Profit.......................................... $ 27 $ 30
==== ====
Charges included in Segment Profit.................. $ (1) $ (1)
==== ====
The $13 million, or 5 percent, increase in net sales as compared
to the third quarter 2003 resulted primarily from higher sales
volumes of approximately 3 percent and favorable currency exchange
rate fluctuations of approximately 3 percent, partially offset by
lower average selling prices of approximately 1 percent. Higher
volumes were experienced in SAFLEX(R) and VANCEVA(TM) plastic
interlayer products, 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 third quarter 2003.
The $3 million, or 10 percent, decrease in segment profit in
comparison to the third quarter 2003 resulted primarily from higher
raw material and energy costs partially offset by higher net sales
and favorable manufacturing variances resulting from cost
containment activities and increased capacity utilization. In
addition, segment profit in the third quarter 2004 was affected by
$1 million of net charges including $2 million of asset write-offs
and repairs and maintenance charges resulting from the impact of
Hurricane Ivan at the CPFilms plant located in Martinsville,
Virginia, partially offset by $1 million of gain from the favorable
settlement of reserves established in 2003 related to the closure of
non-strategic facilities in the Company's Pharmaceutical Services
division. The third quarter 2003 results included restructuring
charges of $1 million related principally to severance and
retraining costs.
34
Integrated Nylon
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Net Sales............................................ $403 $333
==== ====
Segment Loss......................................... $(15) $(19)
==== ====
Charges included in Segment Loss................. $ (5) $--
==== ====
The $70 million, or 21 percent, increase in net sales as
compared to the third quarter 2003 resulted primarily from higher
average selling prices of approximately 18 percent and increased
sales volumes of 3 percent. Higher average selling prices were
experienced principally in the carpet fibers and intermediates
businesses. Carpet fiber increases resulted from price increases
implemented across several segments, and the intermediate chemicals
business benefited from an overall increase in market prices for key
products as well as formula-based sales contracts tied to raw
material costs. Increased sales volumes were experienced principally
in nylon plastics and polymers. Volume declines resulting from
restructuring actions taken in the acrylic fibers business in 2003
and contract terminations in the intermediate chemicals business in
2004 were partially offset by increased volumes in certain other
intermediate chemicals.
The $4 million, or 21 percent, improvement in the segment loss
in comparison to the third 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 $75 million. In addition, segment
profit in the third quarter 2004 was affected by $5 million of
charges resulting from the impact of Hurricane Ivan at the
Pensacola, Florida and Foley, Alabama plants involving primarily
repairs and maintenance costs, as well as asset write-offs. In
addition to the aforementioned charges, segment profit in 2004 was
affected by unabsorbed fixed costs and lost sales volumes as a
result of temporarily shutting down certain manufacturing operations
at the Pensacola and Foley plants during the third quarter 2004 due
to Hurricane Ivan.
Late in the third quarter 2004 Solutia's Chocolate Bayou
facility was negatively impacted by the inability of a raw material
transportation supplier to deliver key raw materials necessary to
efficiently operate the facility. The resulting interruption to the
business is expected to have an approximate $5 million negative
impact on segment profit in the fourth quarter 2004. In addition,
raw material and energy costs have continued to escalate during
October 2004. The Company has been successful in recovering a
significant portion of the increased raw material and energy costs
through selling price increases during the nine months ended
September 30, 2004. However, if this trend does not continue and raw
material and energy costs continue to escalate through the remainder
of the fourth quarter, it could have a significant impact on segment
profit.
Corporate Expenses
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
(dollars in millions) ---- -----
Corporate Expenses (Gain)............................ $(22) $ 158
==== =====
Gains (Charges) included in Corporate Expenses... $ 31 $(129)
==== =====
The $180 million change in corporate expenses in comparison to
the third quarter 2003 was primarily a result of lower charges in
2004. Included in the third quarter 2004 corporate expenses was a
$31 million net gain involving curtailment and settlement activity
resulting principally from amendments to the Company's various
postretirement plans (as more fully described in Note 10 to the
accompanying condensed consolidated financial statements). Charges
included in the third quarter 2003 consisted primarily of a $99
million charge related to the Company's share of the Anniston PCB
litigation settlement and a $30 million pension settlement charge.
In addition, the third quarter 2004 included lower litigation,
postretirement and environmental remediation expenses, as well as
lower headcount.
35
Equity Loss from Affiliates
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Equity Loss from Affiliates not included in Reportable
Segment Profit (Loss)................................. $(16) $(93)
---- ----
Equity Earnings from Affiliates included in Reportable
Segment Profit (Loss)................................. $-- $--
---- ----
Equity Loss from Affiliates............................. $(16) $(93)
==== ====
Charges included in Equity Loss from Affiliates..... $(27) $(90)
==== ====
Equity loss from affiliates in the three months ended September
30, 2004 was adversely affected by $27 million of charges including
$24 million in litigation related charges and $2 million in asset
impairment and severance charges at the Flexsys joint venture and $1
million of severance and contract cancellation charges at the
Astaris joint venture. These charges in the third quarter 2004 are
in comparison to $90 million of charges in the third quarter 2003
principally related to the Astaris restructuring of certain
production assets, including the Conda, Idaho, purified wet acid
facility and selective product rationalizations. In addition to
these charges in the third quarter 2004, Astaris experienced reduced
interest expense resulting from lower outstanding debt levels and
higher average selling prices while both Astaris and Flexsys
benefited from the shutdown of certain unprofitable businesses in
comparison to the third quarter 2003.
Interest Expense
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Interest Expense...................................... $ 21 $ 25
==== ====
Charges included in Interest Expense.............. $-- $--
==== ====
The $4 million, or 16 percent, decrease in interest expense in
the third quarter 2004 in comparison to the third 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 in Chapter 11 bankruptcy. This $8
million of unrecorded interest was partially offset by the increased
interest expense on the Company's Euronotes, which were refinanced
in the first quarter 2004.
Reorganization Items, net
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Reorganization Items, net............................. $(14) $--
==== ====
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 third quarter
2004 included $13 million of professional fees for services provided
by debtor and creditor professionals directly related to Solutia's
reorganization proceedings and $1 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.
Income Tax Expense (Benefit)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Income Tax Expense (Benefit).......................... $1 $(90)
== ====
36
The $91 million change in income tax expense (benefit) in the
third 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 third 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 third quarter 2004 were offset by
corresponding increases in valuation allowances. The $1 million of
income tax expense in the third quarter 2004 represents principally
taxes on foreign earnings.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED
WITH NINE MONTHS ENDED SEPTEMBER 30, 2003
Performance Products and Services
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Net Sales............................................. $830 $779
==== ====
Segment Profit........................................ $ 79 $ 73
==== ====
Charges included in Segment Profit................ $(18) $(12)
==== ====
The $51 million, or 7 percent, increase in net sales as compared
to the nine months ended September 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 and in CPFilms window film
and precision coated products, 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 nine months ended September 30,
2003. Lower average selling prices were experienced primarily in the
SAFLEX(R) plastic interlayer products in comparison to the nine
months ended September 30, 2003, resulting principally from the
completion of new sales contracts in a competitive pricing
environment.
The $6 million, or 8 percent, increase in segment profit in
comparison to the nine months ended September 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. Segment profit in 2004 was also affected by $17
million of charges involving plant closure costs for 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.
In addition, segment profit in 2004 was affected by $2 million of
asset write-offs and repairs and maintenance charges resulting from
the impact of Hurricane Ivan at the CPFilms plant located in
Martinsville, Virginia, partially offset by $1 million of gain from
the favorable settlement of reserves established in 2003 related to
the closure of non-strategic facilities in the Company's
Pharmaceutical Services division. Charges in 2003 included
restructuring charges of $12 million related to severance and
retraining costs, as well as contract termination costs.
Integrated Nylon
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2004 2003
(dollars in millions) ------ ------
Net Sales.......................................... $1,189 $1,051
====== ======
Segment Loss....................................... $ (22) $ (50)
====== ======
Charges included in Segment Loss............... $ (5) $ (5)
====== ======
The $138 million, or 13 percent, increase in net sales as
compared to the nine months ended September 30, 2003 resulted
primarily from higher average selling prices of approximately 9
percent and increased sales volume of approximately 4 percent.
Higher average selling prices were experienced principally in the
carpet fibers and
37
intermediates businesses. Carpet fiber increases resulted from price
increases implemented across several segments, and the intermediate
chemicals business benefited from an overall increase in market
prices for key products as well as formula-based sales contracts
tied to raw material costs. Increased sales volumes were experienced
principally in carpet fibers and nylon plastics and polymers. Volume
declines resulting from restructuring actions taken in the acrylic
fibers business in 2003 and contract terminations in the
intermediate chemicals business in 2004 were partially offset by
increased volumes in certain other intermediate chemicals.
The $28 million, or 56 percent, improvement in the segment loss
in comparison to the nine months ended September 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 $135 million. In
addition, segment profit in 2004 was affected by $5 million of
charges resulting from the impact of Hurricane Ivan at the
Pensacola, Florida and Foley, Alabama plants involving primarily
repairs and maintenance costs, as well as asset write-offs. Segment
loss in 2003 included severance charges of $5 million associated
with workforce reductions. In addition to these aforementioned
charges, segment profit in 2004 was affected by unabsorbed fixed
costs and lost sales volumes as a result of temporarily shutting
down certain manufacturing operations at the Pensacola and Foley
plants during the third quarter 2004 due to Hurricane Ivan.
Late in the third quarter 2004 Solutia's Chocolate Bayou
facility was negatively impacted by the inability of a raw material
transportation supplier to deliver key raw materials necessary to
efficiently operate the facility. The resulting interruption to the
business is expected to have an approximate $5 million negative
impact on segment profit in the fourth quarter 2004. In addition,
raw material and energy costs have continued to escalate during
October 2004. The Company has been successful in recovering a
significant portion of the increased raw material and energy costs
through selling price increases during the nine months ended
September 30, 2004. However, if this trend does not continue and raw
material and energy costs continue to escalate through the remainder
of the fourth quarter, it could have a significant impact on segment
profit.
Corporate Expenses
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
(dollars in millions) ---- -----
Corporate Expenses.................................... $ 67 $ 214
==== =====
Charges included in Corporate Expenses............ $(31) $(160)
==== =====
The $147 million, or 69 percent, decrease in corporate expenses
in comparison to the nine months ended September 30, 2003 was
primarily a result of lower charges included in corporate expenses
in 2004. Included in the nine months ended September 30, 2004 were
$31 million of net curtailment and settlement charges principally
with respect to amendments to the Company's various postretirement
plans (as more fully described in Note 10 to the accompanying
condensed consolidated financial statements). Charges included in
the comparable period of 2003 consisted of a $99 million charge
related to the Company's share of the Anniston PCB litigation
settlement, a $30 million pension settlement charge, a $27 million
charge related to the Anniston Consent Decree and $4 million of
severance costs related to workforce reductions. In addition, the
nine months ended September 30, 2004 included lower litigation,
postretirement and environmental remediation expenses, as well as
lower headcount.
Equity Loss from Affiliates
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
(dollars in millions) ---- -----
Equity Loss from Affiliates not included in Reportable
Segment Profit (Loss)................................ $(28) $(100)
---- -----
Equity Earnings from Affiliates included in Reportable
Segment Profit (Loss)................................ $-- $ 1
---- -----
Equity Loss from Affiliates............................ $(28) $ (99)
==== =====
Charges included in Equity Loss from Affiliates.... $(45) $ (99)
==== =====
38
Equity loss from affiliates in the nine months ended September
30, 2004 was adversely affected by $45 million of charges including
$24 million in litigation related charges and $9 million of asset
impairment and severance charges at the Flexsys joint venture, as
well as $6 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. These charges in
the nine months ended September 30, 2004 are in comparison to $99
million of restructuring charges in the comparable period of 2003
including $90 million of charges related to the Astaris joint
venture restructuring of certain production assets, including the
Conda, Idaho purified wet acid facility and selective product
rationalizations and additional restructuring charges of $9 million
related to asset impairments at the Flexsys joint venture and
severance charges at both the Flexsys and Astaris joint ventures. In
addition to these charges in the nine months ended September 30,
2004, Astaris experienced lower interest expense resulting from
lower outstanding debt levels and higher average selling prices
while both Astaris and Flexsys benefited from the shutdown of
certain unprofitable businesses in comparison to the nine months
ended September 30, 2003.
Interest Expense
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Interest Expense...................................... $ 93 $ 73
==== ====
Charges included in Interest Expense.............. $(25) $--
==== ====
The $20 million, or 27 percent, increase in interest expense in
2004 in comparison to the nine months ended September 30, 2003
resulted principally from the write-off of unamortized debt issuance
costs of approximately $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. Furthermore, Solutia
experienced higher interest expense as a result of the increased
interest rate on the Company's Euronotes, which were refinanced in
the first quarter 2004. Partially offsetting these increases in
interest expense is the cessation of paying interest on its 6.72%
debentures puttable 2004, due 2037 and its 7.375% debentures due
2027 while operating as a debtor-in-possession during the Chapter 11
proceedings. The amount of contractual interest not recorded in the
first nine months of 2004 was $24 million.
Reorganization Items, net
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Reorganization Items, net............................. $(63) $--
==== ====
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 nine months
ended September 30, 2004 included $37 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; $8 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.
Other Income, net
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
(dollars in millions) ---- ----
Other Income, net..................................... $ 1 $9
==== ==
Other Income, net included in Reportable Segment
Profit............................................ $ 2 $2
==== ==
Gain included in Other Income, net.................... $-- $4
==== ==
During the nine months ended September 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.
39
Income Tax Expense (Benefit)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
(dollars in millions) ---- -----
Income Tax Expense (Benefit).......................... $7 $(129)
== =====
The $136 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 nine months ended September 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 nine months ended September 30, 2004
were offset by corresponding increases in valuation allowances. The
$7 million of income tax expense in the nine months ended September
30, 2004 represents principally taxes on foreign earnings.
Summary of Events Affecting Comparability
Charges and gains recorded in the nine months ended September
30, 2004 and 2003, and other events affecting comparability have
been summarized in the tables below (dollars in millions):
2004
-----------------------------------------------------------------
PERFORMANCE
PRODUCTS INTEGRATED CORPORATE/
INCREASE/(DECREASE) AND SERVICES NYLON OTHER CONSOLIDATED
- ---------------------------------------- ------------ ---------- ---------- ------------
IMPACT ON:
Cost of goods sold...................... $ 16 $-- $ -- $ 16 (a)
-- 24 24 (b)
2 5 -- 7 (c)
---- ---- ----- -----
Total cost of goods sold.............. 18 5 24 47
Marketing............................... -- -- 2 2 (b)
Administrative.......................... -- -- 3 3 (b)
Technological........................... -- -- 2 2 (b)
---- ---- ----- -----
OPERATING LOSS IMPACT............... (18) (5) (31) (54)
Equity loss from affiliates............. (45) (45) (d)
Interest expense........................ (25) (25) (e)
Loss on debt modification............... (15) (15) (f)
---- ---- ----- -----
PRE-TAX INCOME STATEMENT IMPACT..... $(18) $ (5) $(116) (139)
==== ==== =====
Income tax benefit impact............... (6) (g)
-----
AFTER-TAX INCOME STATEMENT IMPACT... $(133)
=====
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 ($16 million
pre-tax and after-tax--see note (g) below).
(b) Net pension and other postretirement benefit plan curtailments and settlements, as more fully described in
Note 10 to the accompanying consolidated financial statements ($31 million pre-tax and after-tax--see note
(g) below).
(c) Losses incurred directly related to the hurricanes experienced in the U.S. in the third quarter 2004
resulting in the disruption of operations and property damage at the Company's operations in the Integrated
Nylon chain located principally in the Southeastern part of the U.S., and the CPFilms location in
Martinsville, Virginia. These costs included primarily asset write-offs and repairs and maintenance costs
($7 million pre-tax and after-tax--see note (g) below).
(d) The Flexsys and Astaris joint ventures, in each of which the Company has a fifty percent interest, incurred
charges related to litigation matters and restructuring activities involving contract terminations,
dismantling costs, asset impairments and severance charges ($45 million pre-tax and after-tax--see note (g)
below).
40
(e) 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 (g) below).
(f) Loss due to the modification of the Company's Euronotes in January 2004 ($15 million pre-tax and $9 million
after-tax).
(g) With the exception of item (f) 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.
2003
-----------------------------------------------------------------
PERFORMANCE
PRODUCTS INTEGRATED CORPORATE/
INCREASE/(DECREASE) AND SERVICES NYLON OTHER CONSOLIDATED
- --------------------------------------- ------------ ---------- ---------- ------------
IMPACT ON:
Cost of goods sold..................... $ 7 $ 5 $ -- $ 12 (h)
-- -- 27 27 (i)
-- -- 22 22 (j)
-- -- 99 99 (k)
---- ---- ----- -----
Total cost of goods sold............... 7 5 148 160
Marketing.............................. 2 -- -- 2 (h)
-- -- 2 2 (j)
Administrative......................... 2 -- 4 6 (h)
-- -- 3 3 (j)
Technological.......................... 1 -- -- 1 (h)
-- -- 3 3 (j)
---- ---- ----- -----
OPERATING LOSS IMPACT.............. (12) (5) (160) (177)
Equity earnings (loss) from
affiliates........................... -- -- (99) (99) (l)
Other income (expense)................. -- -- 4 4 (m)
---- ---- ----- -----
PRE-TAX INCOME STATEMENT IMPACT.... $(12) $ (5) $(255) (272)
==== ==== =====
Income tax benefit impact.............. (87)
-----
AFTER-TAX INCOME STATEMENT
IMPACT........................... $(185)
=====
2003 EVENTS
- -------
(h) Restructuring charges for workforce reductions and contract termination costs ($21 million pre-tax and
$13 million after-tax).
(i) Environmental charges for the partial consent decree approved on August 4, 2003 related to remediation at
Anniston, Alabama ($27 million pre-tax and $17 million after-tax).
(j) Pension settlement loss as required by SFAS No. 88 ($30 million pre-tax and $19 million after-tax).
(k) Charge related to Company's share of the Anniston PCB litigation settlement and to increase certain other
litigation accruals ($99 million pre-tax and $75 million after-tax).
(l) The Flexsys and Astaris joint ventures incurred restructuring charges during the first nine months of 2003
related to asset impairments and severance charges ($99 million pre-tax and $64 million after-tax).
(m) The Company recovered certain receivables, established prior to 1997, which had previously been written off
($4 million pre-tax and $3 million after-tax).
FINANCIAL CONDITION AND LIQUIDITY
As discussed 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 during the Chapter 11
proceedings will likely be very limited.
41
Financial Analysis
Solutia utilized its existing cash on-hand to finance operating
needs and capital expenditures during the first nine months of 2004.
Cash used in continuing operations was $9 million in the first nine
months of 2004, a change of $13 million from $4 million provided by
continuing operations for the comparable period of 2003. This change
was primarily attributable to higher accounts receivable, a $11
million pension contribution and payments for reorganization related
items, partially offset by the continued increase in post-petition
accounts payable balances due to improved vendor terms. Higher
accounts receivable was a result of higher net sales in the nine
months ended September 30, 2004 relative to the comparable period of
2003. In addition, Solutia made the first scheduled $5 million
payment in August 2004 with respect to the Anniston litigation
settlement reached in 2003.
FMC and Solutia have agreed to allow Astaris to defer up to $27
million of payment obligations to each of FMC and Solutia under
existing operating agreements and certain other agreements over the
next 12 months to provide liquidity assistance to Astaris as it
implements its business restructuring. Repayment in full of the
deferred amounts to FMC and Solutia is required by September 30,
2005. The amount deferred and resulting negative impact on cash from
operations was $12 million in the nine months ended September 30,
2004.
Capital spending decreased $27 million to $32 million in the
first nine months of 2004, compared to $59 million in the comparable
period of 2003. This decrease in capital spending in the first nine
months of 2004 in comparison to the comparable period in 2003 was
primarily due to the mandatory purchase of the co-generation
facility in Pensacola, Florida in 2003, for approximately $32
million, whereas the expenditures in the first nine months of 2004
were used primarily to fund various minor capital improvements, as
well as certain cost reduction projects.
During the first nine 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 $1,227 million as of September 30, 2004, including
$559 million not subject to compromise and $668 million subject to
compromise, decreased by $53 million as compared to $1,280 million
at December 31, 2003, including $655 million not subject to
compromise and $625 million subject to compromise. The composition
of Solutia's debt changed during the first nine 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 September 30,
2004. In addition, the Euronotes were increased by $15 million
during the first nine months of 2004 due to the January 2004
modification. The $43 million change in debt subject to compromise
resulted from the reclassification of the debt obligation for the
Company's headquarters building to liabilities subject to compromise
in the third quarter 2004 as Solutia believes it is unable to
continue to perform on the debt obligation.
As a result of the Chapter 11 filing, Solutia was in default on
all its debt agreements as of September 30, 2004, with the exception
of its DIP credit facility and Euronotes.
Solutia's working capital increased by $297 million to $358
million at September 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 in January 2004 and the seasonal
increase in working capital, partially offset by lower cash on-hand
as of September 30, 2004.
Solutia had a shareholders' deficit of $1,323 million at
September 30, 2004 compared to a deficit of $1,125 million at
December 31, 2003. The $198 million increase in shareholders'
deficit principally resulted from the $216 million net loss in the
first nine 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).
The weighted average interest rate on Solutia's total debt
outstanding at September 30, 2004 was approximately 8.8 percent
compared to 7.8 percent at September 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.
42
At September 30, 2004, Solutia's total liquidity was $227
million in the form of $135 million of availability under the final
DIP credit facility and approximately $92 million of cash on-hand,
of which $58 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.
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 made a voluntary contribution of
$11 million 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 (as discussed in
Note 10 to the accompanying condensed consolidated financial
statements), resulted in the reduction of 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.
Euronotes
On October 7, 2004, the Company and its wholly owned subsidiary,
Solutia Europe SA/NA ("SESA"), commenced the notification process
for convening a meeting pursuant to Article 568 of the Belgian
Companies Code of the holders of (euro)200 million 10 percent notes
due 2008 issued by SESA (the "Euronotes"). At the bondholders'
meeting, which is scheduled to take place on November 8, 2004,
Solutia and SESA will request that the bondholders approve
amendments to the Euronotes including the authorization of the
potential sale of the Company's pharmaceutical services business.
The proposed amendments will require SESA to use 95 percent of the
net cash proceeds from the sale to redeem a portion of the
Euronotes. In order for the proposed amendments to be approved, at
least fifty percent of the bondholders (by value) must be validly
present at the meeting or be represented by proxy and at least
seventy-five percent of the bondholders (by value) validly present
or represented must vote in favor of the proposed amendments.
CONTINGENCIES
See Note 9 to the accompanying condensed consolidated financial
statements for a summary of the Company's contingencies as of
September 30, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
There have been no material changes in market risk exposures
during the nine months ended September 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 September 30, 2004, that have
materially affected, or are reasonably likely to materially affect,
the Company's internal controls over financial reporting.
43
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-Qs for the quarters
ended March 31, 2004 and June 30, 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 the Company's second quarter
2004 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.
A purported class action on behalf of indirect consumers of rubber
chemicals from numerous states has also been filed in Florida state
court by the same Massachusetts law firm with similar allegations
being made and similar relief being sought against Flexsys and other
past and present rubber chemical producers. In addition to the
Massachusetts and Florida cases, ten 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 will be 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-Qs for the quarters ended March 31, 2004 and June 30, 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 granted plaintiffs the right to file an amended
complaint. Plaintiffs have filed an amended complaint and defendants
have again petitioned the court to dismiss as against the individual
defendants for failure to state a cause of action and plaintiffs
have opposed the motion which remains pending.
44
Anniston Partial Consent Decree
Solutia's 2003 Form 10-K/A and its Form 10-Qs for the quarters
ended March 31, 2004 and June 30, 2004 describe the ongoing process
to determine whether the automatic stay provisions of the United
States Bankruptcy Code are applicable to the Company's obligations
under the Partial Consent Decree. Set forth below is a description
of the material developments in this matter that have occurred since
the Company's second quarter 2004 Form 10-Q filing.
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 filed a motion asking 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. The District Court held a hearing on this
motion on August 24, 2004. The District Court took the matter under
advisement and issued its ruling on September 9, 2004, denying
Solutia's motion and declaring that the automatic stay is
inapplicable to Solutia's obligations under the Consent Decree to
perform site work. Solutia has appealed this ruling to the 11th
Circuit Court of Appeals.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides information with respect to purchases by
Solutia of shares of its common stock during the third quarter of
2004:
ISSUER'S PURCHASES OF EQUITY SECURITIES*
TOTAL NUMBER OF APPROXIMATE DOLLAR
SHARES PURCHASED VALUE OF SHARES
TOTAL NUMBER AVERAGE PRICE AS PART OF THAT MAY YET
OF SHARES PAID PER PUBLICLY ANNOUNCED BE PURCHASED
PERIOD PURCHASED** SHARE** PLAN UNDER THE PLAN*
- -------------------------------- ------------ ------------- ------------------ ------------------
July 1, 2004 through July 31,
2004.......................... 11,945 $0.235 -- N/A
August 1, 2004 through
August 31, 2004............... -- N/A -- N/A
September 1, 2004 through
September 30, 2004............ -- N/A -- N/A
------ ------ -- ---
TOTAL....................... 11,945 $0.235 -- 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 third
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.
ITEM 6. EXHIBITS
(a) Exhibits--See the Exhibit Index at page 48 of this report.
45
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: November 5, 2004
46
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10 Retention Agreement by and between Solutia Inc. and Max W.
McCombs dated as of June 21, 2004
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
47