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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES X NO .
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT
CLASS MARCH 31, 2005
----- --------------
COMMON STOCK, $0.01 PAR VALUE 104,459,578 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
MARCH 31,
---------
2005 2004
---- ----
NET SALES...................................................... $ 733 $ 644
Cost of goods sold............................................. 626 573
------ -------
GROSS PROFIT................................................... 107 71
Marketing expenses............................................. 33 34
Administrative expenses........................................ 24 25
Technological expenses......................................... 11 10
------ -------
OPERATING INCOME .............................................. 39 2
Equity earnings (loss) from affiliates......................... 14 (9)
Interest expense (a)........................................... (22) (49)
Other income, net ............................................. 2 --
Loss on debt modification ..................................... -- (15)
Reorganization items, net ..................................... (5) (25)
------ -------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE........................ 28 (96)
Income tax expense............................................. 7 4
------ -------
NET INCOME (LOSS).............................................. $ 21 $ (100)
====== =======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE.................... $ 0.20 $ (0.96)
====== =======
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING.......... 104.5 104.6
===== =====
(a) Excludes unrecorded contractual interest expense of $8 in 2005 and 2004.
See accompanying Notes to Condensed Consolidated Financial Statements.
1
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2005 2004
---- ----
NET INCOME (LOSS).................................................... $ 21 $ (100)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments..................................... (5) (2)
----- -------
COMPREHENSIVE INCOME (LOSS).......................................... $ 16 $ (102)
===== =======
See accompanying Notes to Condensed Consolidated Financial Statements.
2
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, December 31,
2005 2004
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 66 $ 115
Trade receivables, net of allowances of $9 in 2005 and $11 in 2004........ 297 286
Miscellaneous receivables ................................................ 80 93
Inventories............................................................... 263 239
Prepaid expenses and other assets......................................... 34 45
--------- ----------
TOTAL CURRENT ASSETS...................................................... 740 778
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$2,515 in 2005 and $2,511 in 2004....................................... 822 841
INVESTMENTS IN AFFILIATES................................................. 180 177
GOODWILL.................................................................. 76 76
IDENTIFIED INTANGIBLE ASSETS, net ........................................ 37 38
OTHER ASSETS.............................................................. 144 166
--------- ----------
TOTAL ASSETS.............................................................. $ 1,999 $ 2,076
========= ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 193 $ 198
Accrued liabilities ...................................................... 209 283
Short-term debt .......................................................... 320 300
--------- ----------
TOTAL CURRENT LIABILITIES ................................................ 722 781
LONG-TERM DEBT ........................................................... 270 285
OTHER LIABILITIES ........................................................ 262 267
--------- ----------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,254 1,333
LIABILITIES SUBJECT TO COMPROMISE ........................................ 2,173 2,187
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
Issued: 118,400,635 shares in 2005 and 2004 ............................ 1 1
Additional contributed capital ......................................... 56 56
Treasury stock, at cost (13,941,057 shares in 2005 and 2004) ........... (251) (251)
Net deficiency of assets at spin-off...................................... (113) (113)
Accumulated other comprehensive loss...................................... (80) (75)
Accumulated deficit....................................................... (1,041) (1,062)
--------- ----------
TOTAL SHAREHOLDERS' DEFICIT............................................... (1,428) (1,444)
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $ 1,999 $ 2,076
========= ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2005 2004
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss)............................................................ $ 21 $ (100)
Adjustments to reconcile to Cash From Operations:
Depreciation and amortization......................................... 30 32
Restructuring expenses and other charges.............................. -- 56
Amortization of deferred credits...................................... (2) (9)
Other, net............................................................ -- 2
Changes in assets and liabilities:
Income and deferred taxes........................................ (13) 2
Trade receivables................................................ (11) (40)
Inventories...................................................... (24) (14)
Accounts payable................................................. (5) 79
Liabilities subject to compromise................................ (14) 7
Other assets and liabilities..................................... (52) (26)
-------- --------
CASH USED IN OPERATIONS........................................................ (70) (11)
-------- --------
INVESTING ACTIVITIES:
Property, plant and equipment purchases........................................ (14) (11)
Other investing activities..................................................... -- (1)
-------- --------
CASH USED IN INVESTING ACTIVITIES.............................................. (14) (12)
-------- --------
FINANCING ACTIVITIES:
Net change in short-term debt obligations...................................... 20 (361)
Proceeds from long-term debt obligations....................................... -- 300
Net change in cash collateralized letters of credit............................ 15 61
Other financing activities..................................................... -- (12)
-------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................ 35 (12)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS.......................................... (49) (35)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.............................................................. 115 159
-------- --------
END OF PERIOD.................................................................. $ 66 $ 124
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for reorganization items......................................... $ (12) $ (4)
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS
Nature of Operations
Solutia Inc., together with its subsidiaries (referred to herein as
"Solutia" or the "Company"), is a global manufacturer and marketer of a
variety of high-performance chemical-based materials. Solutia is a world
leader in performance films for laminated safety glass and after-market
applications; specialty products 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 Solutia as a
dividend to Pharmacia stockholders (the "spinoff"). As a result of the
spinoff, 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 spinoff.
Bankruptcy Proceedings
Overview
- --------
On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries
(collectively, "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 Solutia to emerge from Chapter 11 as a
viable going concern, and to obtain relief from the negative financial
impact of liabilities for litigation, environmental remediation and certain
postretirement benefits and liabilities under operating contracts, all of
which were assumed by Solutia at the time of the spinoff (collectively,
"legacy liabilities"). These factors, combined with the weakened state of
the chemical manufacturing sector, general economic conditions and
continuing high, volatile energy and crude oil costs have been an obstacle
to Solutia's financial stability and success. While Solutia believes it will
be able to significantly reduce the legacy liabilities through the
bankruptcy process, there can be no certainty that it will be successful in
doing so.
Under Chapter 11, Solutia is operating its businesses as a
debtor-in-possession ("DIP") under bankruptcy court protection from
creditors and claimants. Since the Chapter 11 filing, all orders sufficient
to enable Solutia to conduct normal business activities, including the
approval of Solutia's DIP financing, have been entered by the bankruptcy
court. While Solutia is subject to Chapter 11, all transactions not in the
ordinary course of business 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. November 30, 2004 was the last date by which holders of
pre-filing date claims against the Debtors could file proofs of claim with
respect to such claims. Any holder of a claim that was required to file a
proof of claim by November 30, 2004, and did not do so, may be barred from
asserting such claim against the Debtors and, accordingly, may not be able
to participate in any distribution with respect to such claim. Differences
between claim amounts identified by the Debtors and proofs of claim filed by
claimants will be investigated and resolved in connection with the Debtors'
claims resolution process, and only holders of claims that are ultimately
allowed for purposes of the Chapter 11 case will be entitled to
distributions. Solutia has not yet completed its analysis of all the proofs
of claim.
5
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Because the settlement terms of allowed claims are subject to a confirmed
plan of reorganization, the ultimate distribution with respect to allowed
claims is not presently ascertainable.
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. As provided by the
U.S. Bankruptcy Code, Solutia had the exclusive right to propose a plan of
reorganization for 120 days following the Chapter 11 filing date. The
bankruptcy court has subsequently approved several extensions of the
exclusivity period, the most recent of which is set to expire on July 11,
2005. No assurance can be given that any future extension requests will be
granted by the bankruptcy court. Moreover, although Solutia expects to file
a plan of reorganization that provides for Solutia's emergence from
bankruptcy as a going concern, there can be no assurance that a plan of
reorganization will be confirmed by the bankruptcy court or that any such
plan will be implemented successfully.
Solutia believes that its plan of reorganization will result in
cancellation of its existing shares of common stock, as well as options and
warrants to purchase its common stock, and that it is unlikely that holders
of Solutia's common stock, including options and warrants to purchase
Solutia's common stock, will receive any consideration for that stock or
those options and warrants in such a plan of reorganization. Solutia is
unable to estimate what recovery such a plan of reorganization will provide
to holders of Solutia's outstanding debt securities. While Solutia filed for
Chapter 11 in part to gain relief from the legacy liabilities it was
required to assume when it was spun off from Pharmacia, the extent to which
such relief will be achieved is uncertain at this time. It is also possible
that Solutia will agree to retain a portion of the legacy liabilities as
part of its plan of reorganization.
Basis of Presentation
- ---------------------
These financial statements should be read in conjunction with the
audited consolidated financial statements and notes to consolidated
financial statements included in Solutia's 2004 Annual Report on Form 10-K
("2004 Form 10-K"), filed with the Securities and Exchange Commission
("SEC") on March 10, 2005.
The condensed consolidated financial statements have been prepared
in accordance with Statement of Position 90-7 ("SOP 90-7"), Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code, and on a
going concern basis, which assumes the continuity of operations and reflects
the realization of assets and satisfaction of liabilities in the ordinary
course of business. Continuation of the Company as a going concern is
contingent upon, among other things, Solutia's ability (i) to comply with
the terms and conditions of its DIP financing; (ii) to obtain confirmation
of a plan of reorganization under the U.S. Bankruptcy Code; (iii) to return
to profitability; (iv) to generate sufficient cash flow from operations; and
(v) to obtain financing sources to meet the Company's future obligations.
These matters create substantial doubt about Solutia'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 income (loss), and cash flows for the interim periods
reported. Such adjustments are of a normal, recurring nature. In addition,
footnote disclosures which would substantially duplicate the disclosures in
the audited consolidated financial statements have been omitted in the
accompanying unaudited condensed consolidated financial statements. The
results of operations for the three month period ended March 31, 2005 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 2005 presentation.
6
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Condensed Consolidating Financial Statements
- --------------------------------------------
Condensed consolidating financial statements for Solutia and
subsidiaries in reorganization and subsidiaries not in reorganization as of
March 31, 2005 and December 31, 2004, and for the three months ended March
31, 2005 and March 31, 2004 are presented below. These condensed
consolidating financial statements include investments in subsidiaries
carried under the equity method.
CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2005
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
ASSETS
Current assets............................ $ 461 $ 371 $ (92) $ 740
Property, plant and equipment, net........ 690 132 -- 822
Investment in subsidiaries and affiliates. 339 227 (386) 180
Goodwill and identified intangible assets,
net..................................... 101 12 -- 113
Other assets.............................. 93 51 -- 144
------------------------------------------------------------
TOTAL ASSETS........................... $ 1,684 $ 793 $ (478) $ 1,999
============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities....................... $ 730 $ 175 $ (183) $ 722
Long-term debt............................ -- 270 -- 270
Other liabilities......................... 209 53 -- 262
------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE............................... 939 498 (183) 1,254
LIABILITIES SUBJECT TO COMPROMISE......... 2,173 -- -- 2,173
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,428) 295 (295) (1,428)
------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................ $ 1,684 $ 793 $ (478) $ 1,999
============================================================
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2004
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
ASSETS
Current assets............................ $ 476 $ 390 $ (88) $ 778
Property, plant and equipment, net........ 701 140 -- 841
Investment in subsidiaries and affiliates. 324 232 (379) 177
Goodwill and identified intangible assets,
net..................................... 102 12 -- 114
Other assets.............................. 110 56 -- 166
------------------------------------------------------------
TOTAL ASSETS........................... $ 1,713 $ 830 $ (467) $ 2,076
============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities....................... $ 758 $ 202 $ (179) $ 781
Long-term debt............................ -- 285 -- 285
Other liabilities......................... 212 55 -- 267
------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE............................... 970 542 (179) 1,333
LIABILITIES SUBJECT TO COMPROMISE......... 2,187 -- -- 2,187
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,444) 288 (288) (1,444)
------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................ $ 1,713 $ 830 $ (467) $ 2,076
============================================================
7
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET SALES................................. $ 593 $ 243 $ (103) $ 733
Cost of goods sold........................ 536 202 (112) 626
------------------------------------------------------------
GROSS PROFIT.............................. 57 41 9 107
Marketing, administrative and
technological expenses................... 52 16 -- 68
------------------------------------------------------------
OPERATING INCOME.......................... 5 25 9 39
Equity earnings (loss) from affiliates.... 32 (1) (17) 14
Interest expense.......................... (16) (6) -- (22)
Other income, net......................... 6 2 (6) 2
Reorganization items, net................. (5) -- -- (5)
------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE.......... 22 20 (14) 28
Income tax expense........................ 1 6 -- 7
------------------------------------------------------------
NET INCOME................................ $ 21 $ 14 $ (14) $ 21
============================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
NET SALES................................. $ 524 $ 209 $ (89) $ 644
Cost of goods sold........................ 493 176 (96) 573
------------------------------------------------------------
GROSS PROFIT.............................. 31 33 7 71
Marketing, administrative and
technological expenses................... 54 15 -- 69
------------------------------------------------------------
OPERATING INCOME (LOSS)................... (23) 18 7 2
Equity earnings (loss) from affiliates.... (17) 2 6 (9)
Interest expense.......................... (42) (7) -- (49)
Other income (expense), net............... 7 (2) (5) --
Loss on debt modification................. -- (15) -- (15)
Reorganization items, net................. (25) -- -- (25)
-------------- ----------------- ------------- -------------
LOSS BEFORE INCOME TAX EXPENSE ........... (100) (4) 8 (96)
Income tax expense ....................... -- 4 -- 4
------------------------------------------------------------
NET LOSS ................................. $ (100) $ (8) $ 8 $ (100)
============================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities................................. $ (75) $ 5 $ -- $ (70)
Net Cash Used in Investing Activities....... (11) (3) -- (14)
Net Cash Provided by (Used in) Financing
Activities................................ 43 (8) -- 35
------------------------------- ----------------------------
Net Decrease in Cash and Cash Equivalents... (43) (6) -- (49)
Cash and Cash Equivalents:
Beginning of year......................... 50 65 -- 115
------------------------------------------------------------
End of period............................. $ 7 $ 59 $ -- $ 66
============================================================
8
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2004
Solutia and
Subsidiaries Subsidiaries Solutia and
in not in Subsidiaries
Reorganization Reorganization Eliminations Consolidated
-------------- -------------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities................................. $ (24) $ 13 $ -- $ (11)
Net Cash Used in Investing Activities....... (7) (5) -- (12)
Net Cash Provided by (Used in) Financing
Activities................................. (18) 6 -- (12)
------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents................................ (49) 14 -- (35)
Cash and Cash Equivalents:
Beginning of year......................... 125 34 -- 159
------------------------------------------------------------
End of period............................. $ 76 $ 48 $ -- $ 124
============================================================
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R replaced SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), and superseded
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in
the consolidated financial statements based on their fair values and
eliminates the alternative method of accounting for employee share-based
payments previously available under APB 25. Historically Solutia has elected
to follow the guidance of APB 25 which allowed Solutia to use the intrinsic
value method of accounting to value its share-based payment transactions
with employees. Based on this method, Solutia did not recognize compensation
expense in its consolidated financial statements as the stock options
granted had an exercise price equal to the fair market value of the
underlying common stock on the date of the grant. SFAS 123R requires
measurement of the cost of share-based payment transactions to employees at
the fair value of the award on the grant date and recognition of expense
over the required service or vesting period. Solutia is required to adopt
SFAS 123R by January 1, 2006. The impact on Solutia's net income (loss) will
include the remaining amortization of the fair value of existing options
currently disclosed as pro-forma expense in Note 3 and is contingent upon
the number of future options granted, the selected transition method and the
selection among acceptable valuation methodologies for valuing options.
2. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET
Liabilities Subject to Compromise
Under Chapter 11 of the U.S. Bankruptcy Code, certain claims
against Solutia in existence prior to the filing of the petitions for relief
under the federal bankruptcy laws are stayed while Solutia 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 March 31, 2005 and December 31, 2004
and are summarized in the table below. Such claims remain subject to future
adjustments. Adjustments may result from actions of the bankruptcy court,
negotiations with claimants, rejection or assumption of executory contracts,
determination of value of any collateral securing claims, reconciliation of
proofs of claim or other events.
Solutia has received approval from the bankruptcy court to pay or
otherwise honor certain of its pre-petition obligations, including (i)
certain pre-petition compensation to employees and employee-equivalent
independent contractors; (ii) business expenses of employees; (iii)
obligations under employee benefit plans; (iv) employee payroll deductions
and withholdings; (v) costs and expenses incident to the foregoing payments
(including payroll-related taxes and processing costs); (vi) certain
pre-petition workers' compensation claims, premiums and related expenses;
(vii) certain pre-petition trust fund and franchise taxes; (viii)
pre-petition claims of certain contractors, freight carriers, processors,
customs brokers and related parties; (ix) customer accommodation programs;
and (x) pre-petition claims of critical vendors in the ordinary course of
business. Accordingly, these pre-petition items have been excluded from
Liabilities Subject to Compromise as of March 31, 2005 and December 31,
2004, as applicable.
9
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The amounts subject to compromise consisted of the following items:
MARCH 31, DECEMBER 31,
2005 2004
---- ----
Postretirement benefits (a)............................... $1,085 $1,090
Litigation reserves (b)................................... 141 141
Accounts payable (c)...................................... 121 130
Environmental reserves (d)................................ 82 82
Other miscellaneous liabilities........................... 76 76
6.72% debentures due 2037(e).............................. 150 150
7.375% debentures due 2027(e)............................. 300 300
11.25% notes due 2009 (f)................................. 223 223
Other (g)................................................. 43 43
------ ------
716 716
Unamortized debt discount and debt issuance costs......... (48) (48)
------ ------
TOTAL DEBT SUBJECT TO COMPROMISE..................... 668 668
------ ------
TOTAL LIABILITIES SUBJECT TO COMPROMISE................... $2,173 $2,187
====== ======
(a) Postretirement benefits include Solutia's domestic (i) qualified
pension plan liabilities of $450 and $445 as of March 31, 2005 and
December 31, 2004, respectively; (ii) non-qualified pension plan
liabilities of $18 as of March 31, 2005 and December 31, 2004,
respectively; and (iii) other postretirement benefits liabilities
of $617 and $627 as of March 31, 2005 and December 31, 2004,
respectively. Pursuant to a bankruptcy court order, Solutia made
payments with respect to other postretirement obligations of
approximately $21 in the three months ended March 31, 2005.
(b) An automatic stay has been imposed against the commencement or
continuation of legal proceedings against Solutia outside of the
bankruptcy court process. Consequently, Solutia's accrued liability
with respect to pre-petition legal proceedings has been classified
as subject to compromise as of March 31, 2005 and December 31,
2004.
(c) Pursuant to bankruptcy court orders, Solutia settled certain
accounts payable liabilities subject to compromise in the first
quarter 2005.
(d) Represents remediation obligations related primarily to properties
that are not owned or operated by Solutia, including non-owned
properties adjacent to plant sites and certain owned offsite
disposal locations. See Note 7 for further disclosure with respect
to ongoing legal proceedings concerning environmental liabilities
subject to compromise.
(e) While operating during the Chapter 11 bankruptcy proceedings,
Solutia has ceased recording interest on its 6.72% debentures due
2037 and its 7.375% debentures due 2027. The amount of contractual
interest expense not recorded in the three months ended March 31,
2005 was approximately $8.
(f) Pursuant to a bankruptcy court order, Solutia is required to
continue payments of the contractual interest on its 11.25% notes
due 2009 as a form of adequate protection under the U.S. Bankruptcy
Code; provided, however, that Solutia's official committee of
unsecured creditors (the "Creditors' Committee") has the right at
any time, and Solutia has the right at any time after the payment
of the contractual interest due in July 2005, to seek to terminate
Solutia's obligation to continue making the interest payments.
Solutia or the Creditors' Committee could successfully terminate
all or part of Solutia's interest payment obligations only after a
showing that the noteholders are not entitled to adequate
protection, which would depend, among other things, on the value of
the collateral securing the notes as of December 17, 2003, and
whether that value is decreasing during the course of Solutia's
bankruptcy case. The amount of contractual interest paid with
respect to these notes was approximately $13 in the three months
ended March 31, 2005, and the accrued interest related to these
notes was included in Accrued Liabilities classified as not subject
to compromise as of March 31, 2005 and December 31, 2004.
(g) Represents the debt obligation incurred upon the consolidation of
the assets and liabilities of a synthetic lease structure
consolidated as part of the adoption of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities. The obligation,
representing the synthetic lease arrangement with respect to
Solutia's headquarters building, was reclassified to liabilities
subject to compromise in 2004 as Solutia believes it is unable to
continue to perform on this debt obligation.
10
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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
MARCH 31,
---------
2005 2004
---- ----
Professional fees (a)..................................... $ (11) $ (13)
Contract termination costs (b)............................ -- (9)
Severance and employee retention costs (c)................ (6) (3)
Adjustments to allowed claim amounts (d).................. (11) --
Settlements of pre-petition claims (e).................... 29 --
Other .................................................... (6) --
------ ------
TOTAL REORGANIZATION ITEMS, NET........................... $ (5) $ (25)
====== ======
(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 Solutia's existing
contracts.
(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) Adjustments to record certain pre-petition claims at estimated
amounts of the allowed claims.
(e) Represents the difference between the settlement amount of certain
pre-petition obligations and the corresponding amounts previously
recorded.
3. STOCK OPTION PLANS
Solutia applies APB No. 25 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. However, see Note 1 for a summary of expected future changes
in accounting practices with respect to Solutia's stock option plans based
upon Solutia's required adoption of SFAS No. 123R no later than January 1,
2006. The following table illustrates the effect on net income (loss) and
income (loss) per share if the fair value based method had been applied to
all outstanding and unvested awards:
11
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2005 2004
---- ----
NET INCOME (LOSS):
As reported............................................. $ 21 $ (100)
Deduct: Total stock-based employee compensation
expense determined using the Black-Scholes
option-pricing model for all awards, net of
tax................................................... -- (1)
-------- -------
Pro forma............................................... $ 21 $ (101)
======== =======
INCOME (LOSS) PER SHARE:
Basic and diluted - as reported......................... $ 0.20 $ (0.96)
Basic and diluted - pro forma........................... $ 0.20 $ (0.97)
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 provide for
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.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and trademarks are allocated to the Performance Products
and Services segment, which includes the CPFilms and Pharmaceutical Services
reporting units. Trademarks are included within Identified Intangible
Assets, net in the Condensed Consolidated Statement of Financial Position.
The allocation of these items is as follows:
TOTAL
PERFORMANCE
PHARMACEUTICAL PRODUCTS AND
CPFILMS SERVICES SERVICES
--------------------------------------------------
Goodwill, December 31, 2004...................... $ 76 $ -- $ 76
Translation...................................... -- -- --
--------------- ------------------ ---------------
GOODWILL, MARCH 31, 2005......................... $ 76 $ -- $ 76
==================================================
Trademarks, December 31, 2004.................... $ 26 $ 1 $ 27
Translation...................................... -- -- --
--------------------------------------------------
TRADEMARKS, MARCH 31, 2005....................... $ 26 $ 1 $ 27
==================================================
12
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Amortized identified intangible assets generally are comprised of
contract-based intangible assets and are summarized in aggregate as follows:
GROSS ACCUMULATED NET CARRYING
CARRYING VALUE AMORTIZATION VALUE
------------------------------------------------
Amortized Intangible Assets, December 31, 2004........ $ 31 $ (20) $ 11
Translation........................................... (1) -- (1)
Amortization.......................................... -- -- --
------------------------------------------------
AMORTIZED INTANGIBLE ASSETS, MARCH 31, 2005........... $ 30 $ (20) $ 10
================================================
There were no material acquisitions of intangible assets and there
have been no changes to amortizable lives or methods during the first
quarter 2005. In addition, amortization expense for the net carrying amount
of finite-lived intangible assets is estimated to be $1 annually from 2005
through 2009. 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 period between annual impairment
tests.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
INVENTORIES MARCH 31, DECEMBER 31,
2005 2004
---- ----
Finished goods................................................ $ 217 $ 223
Goods in process.............................................. 129 99
Raw materials and supplies.................................... 95 92
-------- -------
Inventories, at FIFO cost..................................... 441 414
Excess of FIFO over LIFO cost................................. (178) (175)
-------- -------
TOTAL INVENTORIES............................................. $ 263 $ 239
======== =======
Inventories at FIFO approximate current cost.
MARCH 31, DECEMBER 31,
ACCRUED LIABILITIES 2005 2004
---- ----
Wages and benefits............................................ $ 32 $ 55
Accrued rebates and sales returns/allowances.................. 26 31
Accrued interest.............................................. 11 25
Other......................................................... 140 172
-------- --------
TOTAL ACCRUED LIABILITIES..................................... $ 209 $ 283
======== ========
6. RESTRUCTURING RESERVES
During the first quarter 2005, Solutia announced that it will exit
its acrylic fibers business during the second quarter 2005. As a result in
the first quarter 2005, Solutia recorded restructuring charges of $10 in
Reorganization Items, net including $6 of various asset write-downs and $4
of severance and retraining costs. This action resulted from Solutia's
continued strategic evaluation of its businesses and the resulting charges
were recorded in the Integrated Nylon segment. Solutia is currently
forecasting an additional $1 of net charges as a result of this action,
which will be recorded during the remainder of 2005. However, Solutia cannot
forecast the level of future restructuring charges beyond this specifically
identified action due to the inherent uncertainty involved in operating
13
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
as a debtor-in-possession under Chapter 11 bankruptcy protection. In
addition, Solutia recorded $1 of severance and retraining costs in the first
quarter 2005 in reorganization items involving headcount reductions
primarily in its Integrated Nylon segment and corporate function.
During the first quarter 2004, Solutia recorded restructuring
charges of $5 to cost of goods sold, including $2 related to non-cancelable
operating leases, $1 of severance and retraining costs associated with
workforce reduction initiatives, and $2 of other various restructuring
charges. These restructuring charges resulted from Solutia's continued
strategic evaluation of its businesses and were recorded in the Performance
Products and Services segment.
A summary of restructuring activity during the first quarter 2005
is presented as follows:
FUTURE ASSET
DECOMMISSIONING/ LEASE EMPLOYMENT WRITE-
DISMANTLING PAYMENTS REDUCTIONS DOWNS TOTAL
-------------------------------------------------------------------------
Balance at December 31, 2004............ $ 5 $ 12 $ -- $ -- $ 17
Charges taken......................... -- -- 5 6 11
Amounts utilized...................... -- (12) (1) (6) (19)
-------------------------------------------------------------------------
BALANCE AT MARCH 31, 2005............... $ 5 $ -- $ 4 $ -- $ 9
=========================================================================
7. 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 spinoff 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 bankruptcy case. This estimated unsecured claim amount
of $141 was classified as a liability subject to compromise as of March 31,
2005 and December 31, 2004.
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. Solutia 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 legal proceedings. The
legal proceedings which are in this category are (i) Owens v. Monsanto; (ii)
Payton v. Monsanto; (iii) other Anniston cases not described in this report;
(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 consolidated financial statements.
Anniston Partial Consent Decree
- -------------------------------
On August 4, 2003, the U.S. District Court for the Northern
District of Alabama approved a Partial Consent Decree in an action captioned
United States of America v. Pharmacia Corporation (p/k/a Monsanto Company)
and Solutia. This Partial Consent Decree provides for Pharmacia and Solutia
to sample certain residential properties and remove soils found on those
properties if polychlorinated biphenyls ("PCBs") are at a level of 1 part
per million
14
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
("ppm") or above, to conduct a Remedial Investigation and Feasibility Study
to provide information for the selection by the EPA of a cleanup remedy for
the Anniston PCB site, and to pay EPA's past response costs and future
oversight costs related to this work. The decree also provided for the
creation of an educational trust fund of approximately $3 to be funded over
a 12-year period to provide supplemental educational services for school
children in west Anniston. A dispute arose between the EPA and Solutia
regarding the scope and application of the automatic stay arising as a
result of Solutia's Chapter 11 filing to the remaining obligations under the
Partial Consent Decree. On April 19, 2004, the district court held that the
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 U.S.
Bankruptcy Code are inapplicable to Solutia'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 Solutia stipulate that the automatic stay is applicable to
certain of the Partial Consent Decree's requirements. Solutia 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 bankruptcy court. On September 9, 2004, the district court
denied Solutia's motion and declared that the automatic stay is inapplicable
to Solutia's obligations under the Partial Consent Decree to perform site
work. Solutia appealed this ruling to the Eleventh U.S. Circuit Court of
Appeals, which dismissed the appeal for lack of jurisdiction. Solutia did
not appeal this ruling.
Flexsys Related Litigation
- --------------------------
Antitrust authorities in the United States, Europe and Canada are
investigating past commercial practices in the rubber chemicals industry.
Flexsys, Solutia's 50/50 joint venture with Akzo Nobel N.V., is a subject of
such an investigation and has been fully cooperating with the authorities
and will continue to do so in the ongoing investigation. In addition, a
number of purported class actions have been filed against Flexsys and other
producers of rubber chemicals.
State court actions against Flexsys. Although not named as a
defendant, Solutia is aware of 22 purported class actions filed in various
state courts against Flexsys and other producers of rubber chemicals. In 20
of these cases, plaintiffs seek actual and treble damages under state law on
behalf of all retail purchasers of tires in that state since as early as
1994. In the other two cases, plaintiffs make similar allegations and seek
similar relief on behalf of all consumers of products containing rubber,
including tires. Twelve of these cases remain pending at the trial level in
procedural stages or are pending on appeal following dismissal as to Flexsys
on procedural grounds. In another case, defendants have appealed following
the denial of their motion to dismiss for lack of standing. On March 1,
2005, Solutia became aware of a new state court action filed in Tennessee on
behalf of consumers who allegedly purchased any product containing rubber
chemicals in Tennessee or a number of other states. The case was filed
against Flexsys and other rubber chemical producers and also names Solutia.
The allegations in the case are similar to the two cases described above
which were previously filed in other states on behalf of all consumers of
products containing rubber chemicals, including tires and requests the same
form of relief. The case is automatically stayed against Solutia.
Canadian actions against Flexsys. 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. Plaintiffs seek statutory damages of (CAD)
$14.6 along with exemplary damages of (CAD) $0.000025 per person. A hearing
will be scheduled to determine which case will be allowed to go forward.
Solutia is not a defendant in either of these class actions.
Federal court actions by purchasers of rubber chemicals. Eight
purported class actions filed in the U.S. District Court for the Northern
District of California on behalf of all individuals and entities that had
purchased rubber chemicals in the United States during the period January 1,
1995 until October 10, 2002, against Solutia, Flexsys and a number of other
companies producing rubber chemicals have been consolidated into a single
action called In Re Rubber Chemicals Antitrust Litigation. The consolidated
action alleges price-fixing and seeks treble
15
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
damages and injunctive relief under U.S. antitrust laws on behalf of all the
plaintiffs. Solutia filed a Suggestion of Bankruptcy in this consolidated
action staying the litigation against it. A settlement agreement was filed
with the district court on February 18, 2005. If approved by the district
court, the agreement would release Flexsys, Solutia, Akzo and their
predecessors in interest from any further liability to the members of the
class with respect to the allegations in the action. RBX Industries, Inc. v.
Bayer Corp., Flexsys, et.al., originally filed in federal court in
Pennsylvania in July 2004, was removed to the U.S. District Court for the
Northern District of California. This case alleges that during the period
1995 through 2001 the defendants, which do not include Solutia, conspired
through common marketing and sales practices to cause plaintiffs to pay
supra-competitive prices for rubber chemicals and seeks treble damages. In
March 2005, PolyOne Corporation and Parker Hannifin Corporation filed a new
action in the U.S. District Court for the Northern District of Ohio alleging
the same claims and requesting essentially the same relief as the plaintiffs
in RBX Industries, Inc. v. Bayer Corp., Flexsys, et al. The new action named
a number of corporations, included Solutia and Flexsys, as defendants.
However, PolyOne asserted no claims against Solutia or Flexsys as part of
the new action. This new case is automatically stayed with respect to
Solutia and Parker Hannifin has filed a motion to voluntarily dismiss
Solutia from the case without prejudice.
Federal court actions alleging violations of federal securities
laws. Six purported shareholder class actions were filed in the U.S.
District Court for the Northern District of California against Solutia, its
then and former chief executive officers and its then chief financial
officer. The complaints were consolidated into a single action called In Re
Solutia Securities Litigation, and a consolidated complaint which named two
additional defendants, Solutia's then current and past controllers, was
filed. The consolidated complaint alleges that, from December 16, 1998 to
October 10, 2002, Solutia's accounting practices regarding incorporation of
Flexsys' results into Solutia's financial reports violated federal
securities laws by misleading investors as to Solutia's actual results and
causing inflated prices to be paid by purchasers of Solutia's publicly
traded securities during the period. The plaintiffs seek damages and any
equitable relief that the court deems proper. The consolidated action is
automatically stayed with respect to Solutia by virtue of Section 362(a) of
the U.S. Bankruptcy Code. The consolidated complaint was dismissed as
against the individual defendants for failure to state a claim, but
plaintiffs were granted the right to file an amended complaint, which they
did. The second amended complaint against the individual defendants was
dismissed with prejudice on January 4, 2005. On March 24, 2005 the court
issued an order of finality with respect to the dismissal of the complaint
against the individual defendants. The plaintiffs have thirty days from the
date such order is entered to appeal the dismissal.
Shareholder Derivative Suits. Two purported shareholder derivative
suits were filed in the Missouri Circuit Court for the Twenty-First Judicial
Circuit of St. Louis County against certain of Solutia's current and past
directors, chief executive officers, chief financial officer and former vice
chairman. Solutia is included as a nominal defendant. The plaintiffs seek
damages on behalf of Solutia for the individual defendants' alleged breaches
of fiduciary duty, abuse of control, gross mismanagement, waste of corporate
assets and unjust enrichment, arising out of Flexsys's alleged participation
in the price-fixing of rubber chemicals and Solutia's incorporation of
Flexsys's purportedly inflated financial results arising from the alleged
price-fixing into Solutia's financial statements. These two shareholder
derivative suits were consolidated into a single action, In re Solutia Inc.
Derivative Litigation. On December 29, 2003, the court entered an Order in
the consolidated action staying the litigation with respect to all
defendants, including Solutia. In August 2004, the court involuntarily
dismissed the cases for lack of prosecution. Plaintiffs' motion to reinstate
the actions is pending.
Other Legal Proceedings
- -----------------------
On October 7, 2004, a purported class action captioned Dickerson v.
Feldman, et al. was filed in the United States District Court for the
Southern District of New York against a number of defendants, including
former officers and employees of Solutia and Solutia's Employee Benefits
Plans Committee and Pension and Savings Funds Committee. Solutia was not
named as a defendant. The action alleges breach of fiduciary duty under the
Employee Retirement Income Security Act of 1974 ("ERISA") and seeks to
recover alleged losses in the Solutia Inc. Savings and Investment Plan ("SIP
Plan") arising from the alleged imprudent investment of SIP Plan assets in
Solutia's common stock during the period from December 16, 1998 through the
date the action was filed. The investment is
16
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
alleged to have been imprudent because of Solutia's legacy environmental and
litigation liabilities and because of Flexsys' alleged involvement in the
matters described above under "Flexsys Related Litigation". The action seeks
monetary payment to the SIP Plan to compensate for the losses resulting from
the alleged breach of fiduciary duties, as well as injunctive and other
appropriate equitable relief, reasonable attorney's fees and expenses, costs
and interest. In addition, the plaintiff in this action filed a proof of
claim for $269 against Solutia in the U.S. Bankruptcy Court for the Southern
District of New York. The plaintiff then sought to withdraw the reference of
his ERISA claim from the bankruptcy court to the district court so that the
proof of claim and the class action could be considered together by the
district court. On March 11, 2005 the district court denied without
prejudice plaintiff's motion to withdraw the reference.
On October 14, 2003, Solutia filed an action captioned Solutia Inc.
v. FMC Corporation in Circuit Court in St. Louis County, Missouri, against
FMC over the failure of purified phosphoric acid technology contributed by
FMC to Astaris, the 50/50 joint venture between Solutia and FMC. On February
20, 2004, Solutia voluntarily dismissed the state court action and filed an
adversary proceeding against FMC in the U.S. Bankruptcy Court for the
Southern District of New York. FMC filed a motion with the bankruptcy court
to withdraw the reference. The motion was granted, and, as a result, the
matter is now pending in the U.S. District Court for the Southern District
of New York. FMC filed a motion to dismiss Solutia's action based upon an
alleged lack of standing. On March 29, 2005 the court granted in part and
denied in part FMC's motion to dismiss. Specifically, the court dismissed
with prejudice two of Solutia's claims for breach of contract. The court
denied FMC's motion to dismiss Solutia's other claim for breach of contract
and its claims for breach of fiduciary duty, negligent misrepresentation and
fraud and fraud in the inducement. Solutia is vigorously pursuing this
action.
Environmental Liabilities
Environmental compliance and remediation costs and other
environmental liabilities incurred by Solutia generally fall into two broad
categories: (a) those related to properties currently owned or operated by
Solutia and (b) those related to properties that are not owned by Solutia,
including non-owned properties adjacent to plant sites and certain owned
offsite disposal locations. For the owned and operated sites, Solutia had an
accrued liability of $77 and $78 as of March 31, 2005 and December 31, 2004,
respectively, for solid and hazardous waste remediation, which represents
Solutia's best estimate of the underlying obligation. In addition, this
balance also includes post-closure costs at certain of Solutia's operating
locations. This liability is not classified as subject to compromise in the
Condensed Consolidated Statement of Financial Position because, irrespective
of the bankruptcy proceedings, Solutia will be required to comply with
environmental requirements in the conduct of its business, regardless of
when the underlying environmental contamination occurred. However, Solutia
ultimately expects to seek recovery against other potentially responsible
parties at certain of these locations.
Solutia had an accrued liability of $82 as of March 31, 2005 and
December 31, 2004 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 March 31, 2005 and
December 31, 2004, as Solutia currently believes it constitutes a
pre-petition claim that will be discharged in the bankruptcy process.
Remediation activities are currently being funded by Monsanto for certain of
these properties not owned or operated by Solutia. Monsanto's funding of
these remediation activities may give rise to a claim against Solutia which
Monsanto may assert in Solutia's Chapter 11 bankruptcy 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 Solutia.
17
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Astaris Joint Venture
On October 8, 2003 Solutia and Astaris, a 50/50 joint venture with
FMC Corporation ("FMC"), amended Astaris' 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. Solutia
used approximately $36 in 2004 for investment payments ("keepwell payments")
to keep the Astaris joint venture in compliance with its financial
covenants. There were no keepwell payments made in 2005. The remaining
commitment to Astaris was $10 as of December 31, 2004, which was
subsequently terminated as part of Astaris' refinancing of its credit
facility on February 8, 2005 (as further described below).
Solutia and FMC had also agreed to allow Astaris to defer up to $27
of payment obligations to each of Solutia and FMC under existing operating
agreements and certain other agreements. The deferral amount outstanding
from Astaris to Solutia was $16 as of December 31, 2004. In February 2005,
this deferral agreement was terminated and all amounts outstanding were paid
in full in conjunction with the Astaris refinancing (as further described
below).
On February 8, 2005 Astaris refinanced its existing $20 credit
facility that was scheduled to expire in September 2005 with a new
three-year, $75 revolving credit facility. Among other items, the new credit
facility allowed Astaris to repay Solutia and FMC approximately $16 each
that had been deferred under existing operating agreements and certain other
agreements. Completion of the new facility also resulted in the release of a
$10 letter of credit back to Solutia that was previously established to
support prior keepwell arrangements that have now been terminated as part of
the new credit facility. Under the new credit facility Astaris is required
to delay certain payments to Solutia and FMC if it does not achieve certain
financial metrics, with repayment of such deferred amounts required once
Astaris achieves the required financial metrics. Solutia does not believe
the amount of any potential deferred payments or the deferral period will be
significant.
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. ("UCB") for $500 in cash, plus an upfront payment of
$10 for a period of exclusivity. On January 31, 2003 the sale was completed.
In connection with the closing of the transactions contemplated under the
SAPA, Solutia and UCB entered into contracts for the provision of certain
goods and services to UCB following closing. After the closing, disputes
arose between the parties under these contracts and the SAPA, with each
party asserting that the other owed it certain sums. These disputes were
unresolved as of Solutia's Chapter 11 filing date. Solutia had approximately
$30 recorded for this liability as of December 31, 2004. As a result of
Solutia's Chapter 11 bankruptcy filing, this liability was classified as
subject to compromise in the Condensed Consolidated Statement of Financial
Position. On December 30, 2004 Solutia, UCB and Cytec Industries ("Cytec")
entered into an agreement to settle most of the contract disputes, subject
to bankruptcy court approval and closing of the stock and asset purchase
agreement between UCB and Cytec dated October 1, 2004. Pursuant to the
settlement agreement, among other things, UCB waived certain tax indemnity
and purchase price adjustment claims against Solutia arising under the SAPA.
The transactions contemplated under the stock and asset purchase agreement
between UCB and Cytec closed on March 1, 2005 and the bankruptcy court
entered an order approving the terms of the settlement agreement on March 2,
2005.
The settlement agreement (i) resolved issues arising out of various
contracts entered into by Solutia in connection with the sale of Solutia's
resins, additives and adhesives business to UCB pursuant to the SAPA, and
(ii) required Solutia to assume certain of the foregoing contracts as
amended under the settlement agreement and to consent to the assignment to
Cytec of such contracts in connection with the sale of certain of UCB's
assets to Cytec pursuant to a stock and asset purchase agreement between UCB
and Cytec dated October 1, 2004. In exchange for Solutia's assumption of
certain contracts and consent to UCB's assignment thereof to Cytec, UCB
waived (i) certain tax indemnity and purchase price adjustment claims
against Solutia arising under the SAPA, and (ii) all pre-petition
18
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
claims against Solutia for amounts allegedly due UCB for accounts receivable
collected by Solutia on behalf of UCB. Also, certain monetary disputes
arising under the SAPA and certain other contracts between Solutia and UCB
were resolved. In addition, UCB retained its unliquidated tax indemnity
claim against Solutia, and Solutia reserved any and all of its rights to
object to or otherwise dispute such claim as part of the claims resolution
process in its bankruptcy case. Overall, the net impact of this settlement
agreement resulted in an approximate $28 gain in the first quarter 2005
recorded within Reorganization Items, net in the Condensed Consolidated
Statement of Operations.
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
with claimants, assumption or rejection of executory contracts,
determination as to the value of any collateral securing claims,
reconciliation of proofs of claim or other events. Additional pre-filing
claims not currently reflected in the consolidated financial statements may
be identified through the proof of claim reconciliation process. The amount
of pre-filing claims ultimately allowed by the bankruptcy court 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 opposed to court proceedings, with the result being that
Solutia may retain certain obligations currently classified as subject to
compromise in the Condensed Consolidated Statement of Financial Position.
8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
For the quarterly periods ended March 31, 2005 and 2004, Solutia's
pension and healthcare and other benefit costs were as follows:
PENSION BENEFITS HEALTHCARE AND OTHER BENEFITS
---------------- -----------------------------
2005 2004 2005 2004
---- ---- ---- ----
Service costs for benefits earned............. $ 2 $ 7 $ 1 $ 3
Interest costs on benefit obligation.......... 18 21 9 11
Assumed return on plan assets................. (17) (20) -- --
Prior service costs .......................... -- 4 (3) (4)
Recognized net loss........................... 3 2 4 3
----- ----- ----- -----
TOTAL......................................... $ 6 $ 14 $ 11 $ 13
===== ===== ===== =====
Changes in Solutia's Pension and Other Postretirement Benefit Plans
Solutia amended its U.S. qualified and non-qualified pension plans
in 2004 to cease future benefit accruals effective July 1, 2004 for
non-union participants in these plans. Solutia also amended its U.S.
postretirement plan for non-union, active employees effective September 1,
2004. These changes included discontinuation of all postretirement benefits
after attaining age 65, changes to certain eligibility requirements for
pre-65 postretirement benefits and the eventual elimination of these
benefits by 2016, and elimination of retiree life insurance benefits for
future retirees. See Note 16 in Solutia's 2004 Form 10-K for further
information with respect to these actions.
19
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Employer Contributions
According to current IRS funding rules, Solutia does not expect to
be required to make pension contributions to its U.S. qualified pension plan
in 2005. However, Solutia may elect to make voluntary contributions to the
pension trust in 2005 in order to minimize future required contributions. No
contributions were made to the U.S. qualified pension plan in the first
quarter 2005.
9. SEGMENT DATA
Solutia's management is organized around two strategic business
platforms: Performance Products and Services and Integrated Nylon. Solutia's
reportable segments and their major products are as follows:
PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON
--------------------------------- ----------------
SAFLEX(R) and VANCEVA(R) plastic interlayer Nylon intermediate "building block" chemicals
Polyvinyl butyral for KEEPSAFE(R) and KEEPSAFE Merchant polymer and nylon extrusion polymers,
MAXIMUM(R) laminated window glass including VYDYNE(R) and ASCEND(R)
LLUMAR(R), VISTA(R) and GILA(R) professional and Carpet fibers, including the WEAR-DATED(R) and
retail window films ULTRON(R) brands
THERMINOL(R) heat transfer fluids Industrial nylon fibers
DEQUEST(R) water treatment chemicals
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,
gains and losses from asset dispositions and restructuring 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, 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 (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Segment data for the quarterly periods ended March 31, 2005 and
2004 are as follows:
2005 2004
---------------------- -----------------------
NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS)
----- ------ ----- ------
SEGMENT:
Performance Products and Services............ $ 287 $ 35 $ 271 $ 25
Integrated Nylon............................. 446 (1) 373 (12)
----- ----- ----- ------
SEGMENT TOTALS............................... 733 34 644 13
RECONCILIATION TO CONSOLIDATED TOTALS:
Corporate expenses....................... (11) (11)
Equity earnings (loss) from affiliates... 13 (9)
Interest expense......................... (22) (49)
Other income, net........................ 1 --
Loss on debt modification................ -- (15)
Reorganization items, net................ 13 (25)
CONSOLIDATED TOTALS: ----- -----
NET SALES................................. $ 733 ----- $ 644 ------
===== =====
INCOME (LOSS) BEFORE INCOME TAXES......... $ 28 $ (96)
===== ======
10. 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 Solutia (the "Guarantors"), are
guarantors 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. Solutia's
obligations under the October 2003 facility were paid in full with the
proceeds of a final DIP facility dated January 16, 2004, which payment did
not affect the Guarantors' obligations in respect of the Notes. Certain
other wholly-owned subsidiaries of Solutia (the "DIP Guarantors") guaranteed
the final DIP facility (as well as a smaller, interim DIP facility put in
place as of December 19, 2003), but the DIP Guarantors were not required by
the cross-guarantor provisions to guarantee the Notes.
The Guarantors fully and unconditionally guarantee the Notes on a
joint and several basis. The following consolidating condensed financial
statements present, in separate columns, financial information for: Solutia
Inc. on a parent only basis carrying its investment in subsidiaries under
the equity method; Guarantors on a combined, or where appropriate,
consolidated basis, carrying investments in subsidiaries which do not
guarantee the debt (the "Non-Guarantors") under the equity method;
Non-Guarantors on a combined, or where appropriate, consolidated basis;
eliminating adjustments; and consolidated totals as of March 31, 2005 and
December 31, 2004, and for the three months ended March 31, 2005 and 2004.
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.
21
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES.................................. $551 $40 $244 $(102) $733
Cost of goods sold......................... 518 16 203 (111) 626
----------------------------------------------------------------------------
GROSS PROFIT............................... 33 24 41 9 107
Marketing expenses......................... 19 6 8 -- 33
Administrative expenses.................... 14 2 8 -- 24
Technological expenses..................... 10 -- 1 -- 11
----------------------------------------------------------------------------
OPERATING INCOME (LOSS).................... (10) 16 24 9 39
Equity earnings (loss) from affiliates..... 68 13 (1) (66) 14
Interest expense........................... (32) -- (13) 23 (22)
Other income, net.......................... 1 20 10 (29) 2
Reorganization items, net.................. (5) -- -- -- (5)
----------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE........... 22 49 20 (63) 28
Income tax expense......................... 1 -- 6 -- 7
----------------------------------------------------------------------------
NET INCOME................................. $ 21 $49 $ 14 $ (63) $ 21
============================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2005
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME................................. $ 21 $ 49 $ 14 $ (63) $ 21
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments........... (5) (4) (7) 11 (5)
----------------------------------------------------------------------------
COMPREHENSIVE INCOME....................... $ 16 $ 45 $ 7 $ (52) $ 16
============================================================================
22
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET SALES.................................. $ 483 $39 $211 $(89) $ 644
Cost of goods sold......................... 473 18 178 (96) 573
---------------------------------------------------------------------------
GROSS PROFIT............................... 10 21 33 7 71
Marketing expenses......................... 21 5 8 -- 34
Administrative expenses.................... 16 2 7 -- 25
Technological expenses..................... 9 1 -- -- 10
---------------------------------------------------------------------------
OPERATING INCOME (LOSS).................... (36) 13 18 7 2
Equity earnings (loss) from affiliates..... 15 (8) 2 (18) (9)
Interest expense........................... (58) -- (15) 24 (49)
Other income, net.......................... 4 19 6 (29) --
Loss on debt modification.................. -- -- (15) -- (15)
Reorganization Items, net.................. (25) -- -- -- (25)
---------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE.... (100) 24 (4) (16) (96)
Income tax expense......................... -- -- 4 -- 4
---------------------------------------------------------------------------
NET INCOME (LOSS).......................... $(100) $24 $ (8) $(16) $(100)
===========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS).......................... $(100) $24 $(8) $(16) $(100)
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments........... (2) (1) 3 (2) (2)
---------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)................ $(102) $23 $(5) $(18) $(102)
===========================================================================
23
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2005
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 2 $ 5 $ 59 $ -- $ 66
Trade receivables, net......................... 4 161 132 -- 297
Intercompany receivables....................... 115 746 86 (947) --
Miscellaneous receivables...................... 54 1 25 -- 80
Inventories.................................... 130 33 115 (15) 263
Prepaid expenses and other current assets...... 16 -- 15 3 34
--------------------------------------------------------------------------
TOTAL CURRENT ASSETS........................... 321 946 432 (959) 740
PROPERTY, PLANT AND EQUIPMENT, NET............. 612 78 132 -- 822
INVESTMENTS IN AFFILIATES...................... 2,272 196 20 (2,308) 180
GOODWILL....................................... -- 72 4 -- 76
IDENTIFIED INTANGIBLE ASSETS, NET.............. 2 27 8 -- 37
INTERCOMPANY ADVANCES.......................... 128 1,238 772 (2,138) --
OTHER ASSETS................................... 93 -- 51 -- 144
--------------------------------------------------------------------------
TOTAL ASSETS................. $ 3,428 $ 2,557 $ 1,419 $ (5,405) $ 1,999
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................... $ 142 $ 8 $ 43 $ -- $ 193
Intercompany payables.......................... 106 3 112 (221) --
Accrued liabilities............................ 120 11 80 (2) 209
Short-term debt................................ 320 -- -- -- 320
Intercompany short-term debt................... -- -- 208 (208) --
--------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES...................... 688 22 443 (431) 722
LONG-TERM DEBT................................. -- -- 270 -- 270
INTERCOMPANY LONG-TERM DEBT.................... -- -- 437 (437) --
OTHER LIABILITIES.............................. 209 -- 53 -- 262
--------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE.... 897 22 1,203 (868) 1,254
LIABILITIES SUBJECT TO COMPROMISE.............. 3,959 412 21 (2,219) 2,173
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) 2,123 195 (2,318) (113)
Accumulated other comprehensive loss........... (80) -- -- -- (80)
Accumulated deficit............................ (1,041) -- -- -- (1,041)
--------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........... (1,428) 2,123 195 (2,318) (1,428)
--------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)..................................... $ 3,428 $ 2,557 $ 1,419 $ (5,405) $ 1,999
=========================================================================
24
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 43 $ 7 $ 65 $ -- $ 115
Trade receivables, net.................... 7 131 148 -- 286
Intercompany receivables.................. 130 759 77 (966) --
Miscellaneous receivables................. 65 1 27 -- 93
Inventories............................... 112 28 116 (17) 239
Prepaid expenses and other assets......... 27 -- 15 3 45
--------------------------------------------------------------------------
TOTAL CURRENT ASSETS...................... 384 926 448 (980) 778
PROPERTY, PLANT AND EQUIPMENT, NET........ 623 78 140 -- 841
INVESTMENTS IN AFFILIATES................. 2,220 189 22 (2,254) 177
GOODWILL.................................. -- 71 5 -- 76
IDENTIFIED INTANGIBLE ASSETS, net......... 2 27 9 -- 38
INTERCOMPANY ADVANCES..................... 128 1,238 806 (2,172) --
OTHER ASSETS.............................. 111 -- 55 -- 166
--------------------------------------------------------------------------
TOTAL ASSETS.............................. $ 3,468 $ 2,529 $ 1,485 $ (5,406) $ 2,076
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................... $ 138 $ 8 $ 53 $ (1) $ 198
Intercompany payables..................... 113 17 109 (239) --
Accrued liabilities....................... 176 11 96 -- 283
Short-term debt........................... 300 -- -- -- 300
Intercompany short-term debt.............. -- -- 214 (214) --
--------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES................. 727 36 472 (454) 781
LONG-TERM DEBT............................ -- -- 285 -- 285
INTERCOMPANY LONG-TERM DEBT............... -- -- 463 (463) --
OTHER LIABILITIES......................... 212 -- 56 (1) 267
--------------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE............................... 939 36 1,276 (918) 1,333
LIABILITIES SUBJECT TO COMPROMISE......... 3,973 415 22 (2,223) 2,187
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) 2,078 187 (2,265) (113)
Accumulated other comprehensive loss...... (75) -- -- -- (75)
Accumulated deficit....................... (1,062) -- -- -- (1,062)
--------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,444) 2,078 187 (2,265) (1,444)
--------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................ $ 3,468 $ 2,529 $ 1,485 $ (5,406) $ 2,076
==========================================================================
25
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS................. $ (74) $ -- $ 4 $ -- $ (70)
---------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases........ (9) (2) (3) -- (14)
---------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES.............. (9) (2) (3) -- (14)
---------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations...... 20 -- -- -- 20
Net change in cash collateralized letters of
credit........................................ 15 -- -- -- 15
Changes in investments and advances from
(to) affiliates............................... 7 -- (7) -- --
---------------------------------------------------------------------------
CASH FROM (USED IN) FINANCING ACTIVITIES....... 42 -- (7) -- 35
---------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS.......... (41) (2) (6) -- (49)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.............................. 43 7 65 -- 115
---------------------------------------------------------------------------
END OF PERIOD.................................. $ 2 $ 5 $ 59 $ -- $ 66
===========================================================================
26
SOLUTIA INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
Parent Only Non- Consolidated
Solutia Inc. Guarantors Guarantors Eliminations Solutia Inc.
------------ ---------- ---------- ------------ ------------
CASH FROM (USED IN) OPERATIONS................. $ 6 $ (36) $ 19 $ -- $ (11)
---------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment purchases........ (6) (1) (4) -- (11)
Other investing activities..................... -- -- (1) -- (1)
---------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES.............. (6) (1) (5) -- (12)
---------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term debt obligations...... (361) -- -- -- (361)
Proceeds from long-term debt obligations....... 300 -- -- -- 300
Net change in cash collateralized letters of
credit........................................ 61 -- -- -- 61
Changes in investments and advances from
(to) affiliates............................... (51) 47 4 -- --
Deferred debt issuance costs................... (8) -- (4) -- (12)
---------------------------------------------------------------------------
CASH FROM (USED IN) FINANCING ACTIVITIES....... (59) 47 -- -- (12)
---------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (59) 10 14 -- (35)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.............................. 105 20 34 -- 159
---------------------------------------------------------------------------
END OF PERIOD.................................. $ 46 $ 30 $ 48 $ -- $ 124
===========================================================================
27
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 its overall leveraged position;
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; changes in cost of environmental remediation
obligations and other environmental liabilities; 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 and other postretirement assumptions.
OVERVIEW
Summary of Significant First Quarter 2005 Events
Senior Management Changes
- -------------------------
Jonathon Wright joined Solutia in the first quarter 2005 as a
senior vice president of Solutia and president of Integrated Nylon,
succeeding John Saucier, formerly president of Integrated Nylon. In this
role, Mr. Wright will lead Solutia's Integrated Nylon business, with
responsibility for all commercial, operational and strategic aspects of the
business. James Voss also joined Solutia in the first quarter 2005 as senior
vice president of business operations. In this role, Mr. Voss will have
responsibility on an enterprise-wide basis for human resources, procurement,
information technology, governmental affairs, communications and public
affairs.
Reorganization Strategy
- -----------------------
Solutia continued to take positive actions in the first quarter
2005 to achieve its reorganization strategy, which involves the principal
objectives of (i) managing the businesses to enhance Solutia's performance;
(ii) making changes to Solutia's asset portfolio to maximize the value of
the estate; (iii) achieving reallocation of "legacy liabilities"; and (iv)
negotiating an appropriate capital structure. Recent actions regarding
financial performance enhancement and changes to its asset portfolio are
explained further below. In addition, Solutia continues to pursue a
reallocation of legacy liabilities as part of reaching a consensual
agreement on the plan of reorganization through negotiations with the other
constituents in the bankruptcy case. However, as a result of the numerous
uncertainties and complexities inherent in Solutia's bankruptcy proceedings,
its ability to emerge and timing of emergence from bankruptcy are subject to
significant uncertainty.
PERFORMANCE ENHANCEMENT
Solutia benefited in the first quarter 2005 from several actions
implemented during 2004 designed to enhance its performance. These included
implementing significant general and administrative expense reductions;
using more performance-based compensation and benefits programs; initiating
a cost reduction program at Solutia's operating sites focused on actions
such as lean manufacturing techniques, yield improvement, maintenance
savings and utilities optimization; and implementing an enterprise-wide
procurement effort. In addition, Solutia continued to use the tools of
bankruptcy to renegotiate or reject numerous contracts in the first quarter
2005 which will provide future savings to Solutia. Solutia also settled
several significant pre-petition claims during the first quarter 2005 (as
more fully described in Note 2 to the accompanying condensed consolidated
financial statements).
28
PORTFOLIO EVALUATION
Solutia's stated strategy is to build a portfolio of high-potential
businesses that can consistently deliver returns in excess of Solutia's cost
of capital. Solutia made several changes to re-shape its asset portfolio in
2004 as part of this strategy and continued these efforts in the first
quarter 2005 by announcing in January 2005 that it will exit the acrylic
fibers business in April 2005 due to continued losses resulting primarily
from significant foreign competition. In addition, Solutia announced in the
first quarter 2005 that it will focus the production of nylon industrial
fibers at its Greenwood, South Carolina plant. As a result of this decision,
Solutia will shut down its nylon industrial fiber manufacturing unit at its
plant in Pensacola, Florida in May 2005.
Bankruptcy Developments
- -----------------------
See Note 1 to the accompanying condensed consolidated financial
statements for a summary of developments in Solutia's Chapter 11 bankruptcy
case.
Summary Results of Operations
The discussions below and the accompanying 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 bankruptcy proceedings, such realization of assets and
liquidation of liabilities are subject to a significant number of
uncertainties.
- --------------------------------------------------------------------------------------------------------
(dollars in millions) 2005 2004
---- ----
Net Sales.................................................................... $ 733 $ 644
===== =====
Operating Income (Loss):
Performance Products and Services Segment Profit......................... $ 35 $ 25
Integrated Nylon Segment Loss............................................ (1) (12)
Less: Corporate Expenses............................................ (11) (11)
Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense
and Reorganization Items included in Segment Profit (Loss).......... 16 --
----- -----
Operating Income ............................................................ $ 39 $ 2
===== =====
Charges included in Operating Income ........................................ $ -- $ (5)
===== =====
- ------------------------------------------------------------------------------------------------------
The $89 million, or 14 percent, increase in net sales as compared
to the first quarter 2004 was primarily a result of higher average selling
prices of approximately 14 percent and favorable currency exchange rate
fluctuations of approximately 1 percent, partially offset by lower sales
volumes of approximately 1 percent. The $37 million increase in operating
income as compared to the first quarter 2004 resulted from higher net sales,
controlled spending, favorable manufacturing variances and lower charges,
which are described in greater detail in the Results of Operations section
below. Partially offsetting these items were higher raw material and energy
costs experienced in the first quarter 2005 as compared to the first quarter
2004.
Outlook
Solutia's financial performance in the first quarter 2005 was
significantly improved in comparison to 2004 due to enacting its previously
announced price increases and benefiting from higher capacity utilization,
cost reduction actions and portfolio changes. Solutia expects to experience
throughout 2005 the benefit of the cost reduction measures taken in the
second half of 2004 and believes these actions will allow Solutia to improve
its financial performance. Furthermore, Solutia will continue to strive to
minimize the impact of escalating raw material and energy costs on its
performance through price increases and other business optimization
practices. However, it is uncertain that the same level of financial
performance experienced in the first quarter can be sustained for the
remainder of 2005 as a result of expected significant volatility of raw
material and energy costs for the duration of 2005.
As a result of the numerous uncertainties and complexities inherent
in Solutia's bankruptcy proceedings, Solutia's ability to emerge and timing
of emergence from bankruptcy are subject to significant uncertainty.
29
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the first quarter 2005 with respect
to Solutia's critical accounting policies, as presented on pages 17 through
20 of Solutia's 2004 Form 10-K.
RESULTS OF OPERATIONS--FIRST QUARTER 2005 COMPARED WITH FIRST QUARTER 2004
Performance Products and Services
--------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2005 2004
---- ----
Net Sales.............................................................. $287 $271
==== ====
Segment Profit ........................................................ $ 35 $ 25
==== ====
Charges and Reorganization Items included in Segment Profit........ $ (7) $ (5)
==== ====
--------------------------------------------------------------------------------------------------
The $16 million, or 6 percent, increase in net sales as compared to
the first quarter 2004 resulted primarily from higher average selling prices
of approximately 3 percent and favorable currency exchange rate fluctuations
of approximately 3 percent. Higher average selling prices were experienced
in SAFLEX(R) plastic interlayer products, THERMINOL(R) heat transfer fluids
and DEQUEST(R) water treatment chemicals as a result of favorable market
conditions and in response to the escalating cost of raw materials. The
favorable exchange rate fluctuations occurred primarily as a result of the
strengthening euro in relation to the U.S. dollar in comparison to the first
quarter 2004. Higher sales volumes experienced in SAFLEX(R) plastic
interlayer products and pharmaceutical services were nearly entirely offset
by lower volumes due to the shut-down of Solutia's chlorobenzenes operations
in the second quarter 2004.
The $10 million, or 40 percent, increase in segment profit in
comparison to the first quarter 2004 resulted primarily from higher net
sales and favorable manufacturing variances resulting from cost containment
activities and increased capacity utilization, partially offset by higher
raw material costs. In addition, segment profit in 2005 was affected by $7
million of reorganization items which consisted primarily of adjustments to
record certain pre-petition claims at estimated amounts of the allowed
claims. Segment profit in 2004 was impacted by losses from the shut-down of
Solutia's cholorbenzenes operations in the second quarter 2004, as well as
$5 million of charges including severance charges for workforce reductions,
costs for non-cancelable operating leases, and various other restructuring
charges.
30
Integrated Nylon
--------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2005 2004
---- ----
Net Sales.............................................................. $ 446 $ 373
===== =====
Segment Loss........................................................... $ (1) $ (12)
===== =====
Charges and Reorganization Items included in Segment Profit........ $ (11) $ --
===== =====
--------------------------------------------------------------------------------------------------
The $73 million, or 20 percent, increase in net sales as compared
to the first quarter 2004 resulted primarily from higher average selling
prices of approximately 23 percent, partially offset by lower sales volumes
of approximately 3 percent. Average selling prices increased in all
businesses as a result of favorable market conditions and in response to the
escalating cost of raw materials. The decline in sales volumes resulted from
restructuring actions taken in the acrylic fibers business and contract
terminations in the intermediate chemicals business in 2004, partially
offset by modestly higher sales volumes in the other nylon businesses.
The $11 million improvement in segment loss in comparison to the
first quarter 2004 resulted primarily from higher net sales, controlled
spending and favorable manufacturing variances resulting from cost
containment activities and increased capacity utilization, offset primarily
by higher raw material and energy costs of approximately $70 million.
Solutia also experienced approximately $3 million of one-time business exit
benefits in its acrylic fibers business and its nylon industrial fibers
business at its Pensacola plant in advance of the shut-down of these
businesses in the second quarter 2005. In addition, segment loss in the
first quarter 2005 included reorganization items of $11 million comprised of
$10 million to shut-down the acrylic fibers business and $1 million of other
restructuring charges. The shut-down costs included $6 million of asset
write-downs and $4 million of severance and retraining costs.
Corporate Expenses
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2005 2004
---- ----
Corporate Expenses........................................................... $ 11 $ 11
===== =====
Charges included in Corporate Expenses................................... $ -- $ --
===== =====
- -----------------------------------------------------------------------------------------------------------
Corporate expenses in total remained relatively consistent in
comparing the first quarter 2005 to the first quarter 2004. The first
quarter 2005 included the full quarter benefit of cost reduction measures
taken in the second half of 2004, partially offset by modest increases in
legal and environmental costs in the first quarter 2005.
31
Equity Earnings (Loss) from Affiliates
- -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2005 2004
---- ----
Equity Earnings (Loss) from Affiliates not included in Reportable Segment
Profit (Loss)............................................................... $ 13 $ (9)
------ --------
Equity Earnings from Affiliates included in Reportable Segment
Profit (Loss)............................................................... $ 1 $ --
------ --------
Equity Earnings (Loss) from Affiliates....................................... $ 14 $ (9)
====== ========
Charges included in Equity Earnings (Loss) from Affiliates.............. $ -- $ (11)
====== ========
- ------------------------------------------------------------------------------------------------------------
Equity earnings (loss) from affiliates improved by $23 million in
the first quarter 2005 as compared to the first quarter 2004. This
improvement was primarily a result of higher net selling prices, favorable
product mix and improved manufacturing performance at the Astaris joint
venture and higher sales volumes, improved net selling prices and favorable
manufacturing performance at the Flexsys joint venture. In addition, the
first quarter 2004 results were adversely affected by $11 million of charges
including $5 million in contract termination costs, $3 million in
dismantling charges and $1 million of asset impairments at the Astaris joint
venture, as well as $2 million of severance charges at the Flexsys joint
venture.
Interest Expense
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2005 2004
---- ----
Interest Expense............................................................. $ 22 $ 49
===== =====
Charges included in Interest Expense.................................... $ -- $ (25)
===== =====
- ----------------------------------------------------------------------------------------------------------
The $27 million, or 55 percent, decrease in interest expense in the
first quarter 2005 in comparison to the first quarter 2004 resulted
principally from the write-off of unamortized debt issuance costs of $25
million in 2004 related to the October 2003 credit facility and interim DIP
facility; which were retired in January 2004 with proceeds from the final
DIP facility.
Reorganization Items, net
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2005 2004
---- ----
Reorganization Items, net.................................................... $ 5 $ 25
===== =====
Reorganization Items, net included in Reportable Segment Profit (Loss).. $ 18 $ --
===== =====
- ----------------------------------------------------------------------------------------------------------
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 first quarter 2005 included a $29 million net gain
representing the difference between the settlement amount of certain
pre-petition obligations and the corresponding amounts previously recorded;
$11 million of professional fees for services provided by debtor and
creditor professionals directly related to Solutia's reorganization
proceedings; $11 million of net charges for adjustments to record certain
pre-petition claims at estimated amounts of the allowed claims; $6 million
of expense provisions related to (i) employee severance costs incurred
directly as part of the Chapter 11
32
reorganization process and (ii) a retention plan for certain Solutia
employees approved by the bankruptcy court; and $6 million of other
reorganization charges primarily involving costs incurred with the shut-down
of Solutia's acrylic fibers business.
Reorganization items incurred in the first quarter 2004 included
$13 million of professional fees for services provided by debtor and
creditor professionals directly related to Solutia's reorganization
proceedings; $9 million of asset write-offs associated with the termination
of a contract with a third-party vendor resulting from the on-going
reorganization-related evaluation of the financial viability of Solutia's
existing contracts; and $3 million of 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.
Income Tax Expense
- ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
(dollars in millions) 2005 2004
---- ----
Income Tax Expense ......................................................... $ 7 $ 4
===== =====
- ---------------------------------------------------------------------------------------------------------
Solutia's income tax expense in the first quarter 2005 and 2004 was
primarily a result of foreign income taxes. As a result of Solutia's Chapter
11 filing, Solutia did not record any U.S. income tax expense or benefit for
domestic operations (including temporary differences) during the quarters
ended March 31, 2005 and 2004. Consequently, the changes in federal and
state deferred tax assets were offset by corresponding changes in valuation
allowances. See Note 13 of Solutia's 2004 Form 10-K for additional
information concerning the Company's deferred tax assets and changes in
valuation allowances due to Solutia's Chapter 11 filing. The $3 million
increase in income tax expense in the first quarter 2005 as compared to the
first quarter 2004 was primarily a result of an increase in foreign income.
Summary of Events Affecting Comparability
In the first quarter 2005, all events affecting comparability were
recorded in Reorganization Items, net in the Condensed Consolidated
Statement of Operations. A comparison of reorganization items for the
quarters ended March 31, 2005 and 2004, respectively, is provided in the
above Results of Operations section, as well as Note 2 to the accompanying
condensed consolidated financial statements. Charges and gains recorded in
the quarterly period ended March 31, 2004 and other events affecting
comparability recorded outside of reorganization items have been summarized
in the table below (dollars in millions):
2004
---------------------------------------------------------------
PERFORMANCE
PRODUCTS AND INTEGRATED CORPORATE/
INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED
- --------------------------------------- ------------ ---------- ---------- ------------
IMPACT ON:
- ---------------------------------------
Cost of goods sold.................... $ 5 $-- $ -- $ 5 (a)
-------------------------------------------------------------
OPERATING INCOME IMPACT.......... (5) -- -- (5)
Equity loss from affiliates........... (11) (11) (b)
Interest expense...................... (25) (25) (c)
Loss on debt modification............. (15) (15) (d)
-------------------------------------------------------------
PRE-TAX INCOME STATEMENT
IMPACT.......................... (5) -- (51) (56)
==============================================
Income tax benefit impact............. (6) (e)
--------------
AFTER-TAX INCOME STATEMENT
IMPACT.......................... $ (50)
==============
33
2004 CHARGES AND OTHER EVENTS
- -----------------------------
a) Restructuring charges including severance and retraining costs;
costs for non-cancelable operating leases; and various other
restructuring charges ($5 million pre-tax and after-tax - see note
(e) below).
b) Restructuring charges at Solutia's joint ventures, Flexsys and
Astaris, involving contract terminations, dismantling costs, asset
impairments and severance charges ($11 million pre-tax and
after-tax - see note (e) below).
c) Write-off of unamortized debt issuance costs related to the October
2003 and interim DIP credit facilities; both retired in January
2004 with proceeds from the final DIP facility ($25 million pre-tax
and after-tax - see note (e) below).
d) Loss due to the modification of Solutia's Euro Notes ("Euronotes"),
issued by Solutia Europe S.A./N.V. ($15 million pre-tax and $9
million after-tax).
e) With the exception of item (d) above, which relates to non-U.S.
operations, the above items are considered to have the same pre-tax
and after-tax impact, as the tax benefit realized from the charges
are offset by the increase in valuation allowance for U.S. deferred
tax assets resulting from uncertainty as to their recovery as a
result of the Chapter 11 filing.
FINANCIAL CONDITION AND LIQUIDITY
As discussed in Note 1 to the accompanying condensed consolidated
financial statements, Solutia is operating as a debtor-in-possession under
Chapter 11 of the U.S. Bankruptcy Code. As a result of the uncertainty
surrounding Solutia's current circumstances, it is difficult to predict the
Company's actual liquidity needs and sources at this time. However, based
upon current and anticipated levels of operations during the continuation of
the bankruptcy proceedings, Solutia believes that its liquidity and capital
resources will be sufficient to maintain its normal operations at current
levels. Solutia's access to additional financing while under Chapter 11
protection will likely be very limited.
Financial Analysis
Solutia used its existing cash on-hand to finance operating needs
and capital expenditures during the first quarter 2005. Cash used in
operations was $70 million in the first quarter 2005, a change of $59
million from $11 million used in operations for the comparable period of
2004. This change in cash used in operations was primarily attributable to
the build-up of post-petition accounts payable balances in the first quarter
2004 due to the timing of Solutia's Chapter 11 filing in late 2003 and
improved vendor terms, resulting in an $84 million swing in the change in
accounts payable in comparing the first quarter 2005 and 2004.
Capital spending increased $3 million to $14 million in the first
quarter 2005, compared to $11 million in the first quarter 2004. The
expenditures in the first quarter 2005 were used primarily to fund certain
growth initiatives, as well as various capital improvements and certain cost
reduction projects.
Total debt of $1,258 million as of March 31, 2005, including $668
million subject to compromise and $590 million not subject to compromise,
increased by $5 million as compared to $1,253 million at December 31, 2004,
including $668 million subject to compromise and $585 million not subject to
compromise. This increase in total debt resulted from approximately $20
million of borrowings from Solutia's DIP revolving credit facility in the
first quarter 2005, partially offset by a $15 million decrease in the
recorded amount of Solutia's Euronotes due to foreign currency translation
changes in the first quarter 2005. In addition, as a result of the Chapter
11 filing, Solutia was in default on all its debt agreements as of March 31,
2005, with the exception of its DIP credit facility and Euronotes.
Solutia's working capital increased by $21 million to $18 million
at March 31, 2005, compared to ($3) million at December 31, 2004. The change
was a result of the seasonal increase in working capital, partially offset
by lower cash on-hand as of March 31, 2005.
Solutia had a shareholders' deficit of $1,428 million at March 31,
2005 compared to $1,444 million at December 31, 2004. The $16 million
decrease in shareholders' deficit principally resulted from the $21 million
first
34
quarter 2005 net income; partially offset by the $5 million increase in
accumulated other comprehensive losses due to currency translation
adjustments.
The weighted average interest rate on Solutia's total debt
outstanding was approximately 9.0 percent both at March 31, 2005 and
December 31, 2004. While operating as a debtor-in-possession during the
Chapter 11 proceedings, Solutia has ceased paying interest on its 6.72%
debentures due 2037 and its 7.375% debentures due 2027. The amount of
contractual interest expense not recorded in the first quarter 2005 and
2004, respectively, was approximately $8 million.
At March 31, 2005, Solutia's total liquidity was $179 million in
the form of $113 million of availability under the final DIP credit facility
and approximately $66 million of cash on-hand, of which $59 million was cash
of Solutia's subsidiaries that are not parties to the Chapter 11
proceedings.
CONTINGENCIES
See Note 7 to the accompanying condensed consolidated financial
statements for a summary of Solutia's contingencies as of March 31, 2005.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
There have been no material changes in market risk exposures during
the first quarter 2005 that affect the disclosures presented in the
information appearing under "Derivative Financial Instruments" on page 30 of
Solutia's Form 10-K for the year-ended December 31, 2004.
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 ("Exchange Act")).
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 changes in Solutia's internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the quarterly period
ended March 31, 2005 that have materially affected, or are reasonably likely
to materially affect, the Company's internal controls over financial
reporting.
36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Solutia's 2004 Form 10-K described federal court actions by
purchasers of rubber chemicals against Solutia, Flexsys, a 50/50 joint
venture between Solutia and Akzo Nobel N.V. and a number of other companies
producing rubber chemicals. In March 2005, PolyOne Corporation and Parker
Hannifin Corporation filed a new action in the U.S. District Court for the
Northern District of Ohio alleging the same claims and requesting
essentially the same relief as the plaintiffs in RBX Industries, Inc. v.
Bayer Corp., Flexsys, et al. The new action named a number of corporations,
included Solutia and Flexsys, as defendants. However, PolyOne asserted no
claims against Solutia or Flexsys as part of the new action. This new case
is automatically stayed with respect to Solutia, and Parker Hannifin has
filed a motion to voluntarily dismiss Solutia from the case without
prejudice.
Solutia's 2004 Form 10-K described a consolidated shareholder class
action against Solutia and certain former officers of Solutia filed in the
U.S. District Court for the Northern District of California under the
caption In Re Solutia Securities Litigation alleging violations of federal
securities laws resulting from Solutia's accounting practices regarding
incorporation of Flexsys' results into Solutia's financial reports. On
January 4, 2005 the consolidated complaint against the individual defendants
was dismissed with prejudice. On March 24, 2005 the court issued an order
of finality with respect to the dismissal of the complaint against the
individual defendants. The plaintiffs have thirty days from the date such
order is entered to appeal the dismissal.
Solutia's 2004 Form 10-K described a purported class action
captioned Dickerson v. Feldman, et al., which was filed in the U.S. District
Court for the Southern District of New York against a number of defendants,
including former officers and employees of Solutia and Solutia's Employee
Benefits Plans Committee and Pension and Savings Funds Committee, alleging
breach of fiduciary duty under the Employee Retirement Income Security Act
of 1974 ("ERISA") and seeking to recover alleged losses in the Solutia Inc.
Savings and Investment Plan ("SIP") arising from the alleged imprudent
investment of SIP assets in Solutia's common stock during the period from
December 16, 1998 through the date the action was filed. Solutia was not
named as a defendant, but the plaintiff in Dickerson filed a proof of claim
for $269 million against Solutia in the U.S. Bankruptcy Court for the
Southern District of New York. The plaintiff then sought to withdraw the
reference of his ERISA claim from the bankruptcy court to the district court
so that the proof of claim and the class action could be considered together
by the district court. On March 11, 2005 the district court denied without
prejudice plaintiff's motion to withdraw the reference.
Solutia's 2004 Form 10-K described an action filed by Solutia in
Circuit Court in St. Louis County, Missouri, captioned Solutia Inc. v. FMC
Corporation, relating to the failure of purified phosphoric acid technology
contributed by FMC to Astaris, the 50/50 joint venture between Solutia and
FMC. On March 29, 2005 the court granted in part and denied in part FMC's
motion to dismiss. Specifically, the court dismissed with prejudice two of
Solutia's claims for breach of contract. The court denied FMC's motion to
dismiss Solutia's other claim for breach of contract and its claims for
breach of fiduciary duty, negligent misrepresentation and fraud and fraud in
the inducement.
ITEM 6. EXHIBITS
See the Exhibit Index at page 39, of this report.
37
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: April 29, 2005
38
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
11 Omitted--Inapplicable; see "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
39