-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eoksk5uLW0S0YhS0GnaJ19rA98D8dfnKolIHSmPF+LpxlBMFHkJ/sQ3lSf7HoE6b 1lEtEFFIyNJ58KEyURE4tQ== 0001068800-02-000339.txt : 20021114 0001068800-02-000339.hdr.sgml : 20021114 20021114171352 ACCESSION NUMBER: 0001068800-02-000339 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLUTIA INC CENTRAL INDEX KEY: 0001043382 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 431781797 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13255 FILM NUMBER: 02826227 BUSINESS ADDRESS: STREET 1: 575 MARYVILLE CENTRE DRIVE STREET 2: P O BOX 66760 CITY: ST. LOUIS STATE: MO ZIP: 63166-6760 BUSINESS PHONE: 3146741000 MAIL ADDRESS: STREET 1: P O BOX 66760 CITY: ST. LOUIS STATE: MO ZIP: 63166-6760 FORMER COMPANY: FORMER CONFORMED NAME: QUEENY CHEMICAL CO DATE OF NAME CHANGE: 19970804 10-Q 1 soltenq.txt ====================================================================== FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-13255 --------- SOLUTIA INC. ------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 43-1781797 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ------------------------------------------- ST. LOUIS, MISSOURI 63166-6760 ------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (314) 674-1000 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. OUTSTANDING AT CLASS SEPTEMBER 30, 2002 ----- ------------------ COMMON STOCK, $0.01 PAR VALUE 104,777,018 SHARES ----------------------------- ------------------ ====================================================================== PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOLUTIA INC. STATEMENT OF CONSOLIDATED INCOME (LOSS) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- --------------------- 2002 2001 2002 2001 ----- ----- ------ ------ NET SALES.......................................... $ 718 $ 690 $2,108 $2,174 Cost of goods sold................................. 598 561 1,729 1,789 ----- ----- ------ ------ GROSS PROFIT....................................... 120 129 379 385 Marketing expenses................................. 48 40 137 131 Administrative expenses............................ 38 40 109 114 Technological expenses............................. 17 16 48 48 Amortization expense............................... -- 9 2 25 ----- ----- ------ ------ OPERATING INCOME................................... 17 24 83 67 Equity earnings from affiliates--net of tax........ 5 9 17 21 Interest expense................................... (32) (22) (76) (66) Other income (expense)--net........................ 3 (3) 12 34 ----- ----- ------ ------ INCOME (LOSS) BEFORE INCOME TAXES.................. (7) 8 36 56 Income taxes (benefit)............................. (7) 1 (1) 14 ----- ----- ------ ------ INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................. $ -- $ 7 $ 37 $ 42 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........................................ -- -- (167) -- ----- ----- ------ ------ NET INCOME (LOSS).................................. $ -- $ 7 $ (130) $ 42 ===== ===== ====== ====== BASIC EARNINGS (LOSS) PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................. $ -- $0.07 $ 0.35 $ 0.41 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........................................ -- -- (1.59) -- ----- ----- ------ ------ BASIC EARNINGS (LOSS) PER SHARE.................... $ -- $0.07 $(1.24) $ 0.41 ===== ===== ====== ====== DILUTED EARNINGS (LOSS) PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................. $ -- $0.07 $ 0.35 $ 0.40 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........................................ -- -- (1.59) -- ----- ----- ------ ------ DILUTED EARNINGS (LOSS) PER SHARE.................. $ -- $0.07 $(1.24) $ 0.40 ===== ===== ====== ====== Weighted average equivalent shares (in millions): Basic.......................................... 104.8 104.0 104.7 103.7 Effect of dilutive securities: Common share equivalents--common shares issuable upon exercise of outstanding stock options and warrants............... -- 1.2 0.3 1.3 ----- ----- ------ ------ Diluted........................................ 104.8 105.2 105.0 105.0 ===== ===== ====== ====== STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (DOLLARS IN MILLIONS) THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- --------------------- 2002 2001 2002 2001 ----- ----- ------ ------ NET INCOME (LOSS).................................. $ -- $ 7 $ (130) $ 42 OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments................... (8) 48 74 (12) Minimum pension liability adjustments, net of tax.............................................. (123) -- (123) -- Net unrealized gain (loss) on derivative instruments, net of tax.......................... 1 -- 1 (2) Net realized (gain) loss on derivative instruments, net of tax....................................... -- 1 1 (1) ----- ----- ------ ------ COMPREHENSIVE INCOME (LOSS)........................ $(130) $ 56 $ (177) $ 27 ===== ===== ====== ====== See accompanying Notes to Consolidated Financial Statements.
1 SOLUTIA INC. STATEMENT OF CONSOLIDATED FINANCIAL POSITION (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 19 $ 23 Restricted cash............................................. 155 -- Trade receivables, net of allowance of $18 in 2002 and $22 in 2001................................................... 395 352 Miscellaneous receivables................................... 109 105 Prepaid expenses............................................ 17 15 Deferred income tax benefit................................. 123 123 Inventories................................................. 323 303 ------ ------ TOTAL CURRENT ASSETS........................................ 1,141 921 PROPERTY, PLANT AND EQUIPMENT: Land........................................................ 62 58 Buildings................................................... 437 425 Machinery and equipment..................................... 3,077 3,006 Construction in progress.................................... 48 51 ------ ------ Total property, plant and equipment......................... 3,624 3,540 Less accumulated depreciation............................... 2,493 2,397 ------ ------ NET PROPERTY, PLANT AND EQUIPMENT........................... 1,131 1,143 INVESTMENTS IN AFFILIATES................................... 241 313 GOODWILL, net............................................... 321 386 IDENTIFIED INTANGIBLE ASSETS, net........................... 73 194 LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 301 254 OTHER ASSETS................................................ 305 197 ------ ------ TOTAL ASSETS................................................ $3,513 $3,408 ====== ====== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable............................................ $ 248 $ 233 Wages and benefits.......................................... 54 56 Postretirement liabilities.................................. 94 82 Miscellaneous liabilities................................... 348 362 Short-term debt............................................. 303 683 ------ ------ TOTAL CURRENT LIABILITIES................................... 1,047 1,416 LONG-TERM DEBT.............................................. 1,102 627 POSTRETIREMENT LIABILITIES.................................. 1,203 947 OTHER LIABILITIES........................................... 430 531 SHAREHOLDERS' DEFICIT: Common stock (authorized, 600,000,000 shares, par value $0.01) Issued: 118,400,635 shares in 2002 and 2001............... 1 1 Additional contributed capital............................ 19 -- Treasury stock, at cost (13,623,617 shares in 2002 and 13,921,604 shares in 2001).............................. (250) (257) Net deficiency of assets at spinoff......................... (113) (113) Unearned ESOP shares........................................ -- (1) Accumulated other comprehensive loss........................ (191) (144) Reinvested earnings......................................... 265 401 ------ ------ SHAREHOLDERS' DEFICIT....................................... (269) (113) ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $3,513 $3,408 ====== ====== See accompanying Notes to Consolidated Financial Statements.
2 SOLUTIA INC. STATEMENT OF CONSOLIDATED CASH FLOW (DOLLARS IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------ 2002 2001 ----- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss)........................................... $(130) $ 42 Adjustments to reconcile to Cash From Operations: Cumulative effect of change in accounting principle..... 167 -- Depreciation and amortization........................... 114 136 Amortization of deferred credits........................ (11) (10) Amortization of deferred debt issuance costs and debt discount.............................................. 9 1 Restructuring expenses and other unusual items.......... 18 -- Net pretax gains from asset disposals................... (6) (34) Changes in assets and liabilities: Income and deferred taxes........................... 46 (3) Trade receivables................................... (43) (6) Inventories......................................... (20) 18 Accounts payable.................................... 17 (106) Other assets and liabilities........................ (74) (84) ----- ----- CASH FROM OPERATIONS........................................ 87 (46) ----- ----- INVESTING ACTIVITIES: Property, plant and equipment purchases..................... (51) (65) Acquisition and investment payments, net of cash acquired... (32) (32) Property disposals and investment proceeds, net............. 107 36 ----- ----- CASH FROM INVESTING ACTIVITIES.............................. 24 (61) ----- ----- FINANCING ACTIVITIES: Net change in short-term debt obligations................... (107) 94 Proceeds from issuance of long-term debt obligations........ 182 -- Restricted cash for repayment of October 2002 maturities.... (150) -- Issuance of stock warrants.................................. 19 -- Common stock issued under employee stock plans.............. 2 11 Deferred debt issuance costs................................ (46) (2) Other financing activities.................................. (15) -- ----- ----- CASH FROM FINANCING ACTIVITIES.............................. (115) 103 ----- ----- DECREASE IN CASH AND CASH EQUIVALENTS....................... (4) (4) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR........................................... 23 19 ----- ----- END OF PERIOD............................................... $ 19 $ 15 ===== ===== See accompanying Notes to Consolidated Financial Statements.
3 SOLUTIA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS) 1. BASIS OF PRESENTATION Solutia Inc. and its subsidiaries make and sell a variety of high-performance chemical-based materials. Solutia is a world leader in performance films for laminated safety glass and after-market applications; resins and additives for high-value coatings; process development and scale-up services for pharmaceutical fine chemicals; specialties such as water treatment chemicals, heat transfer fluids and aviation hydraulic fluid and an integrated family of nylon products including high-performance polymers and fibers. These financial statements should be read in conjunction with the audited financial statements and notes to consolidated financial statements included in Solutia's 2001 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 7, 2002. A summary of our critical accounting policies is presented on page 13 of our most recent Form 10-K. There have been no material changes in the accounting policies followed by Solutia during fiscal year 2002 except for those changes described in Note 6. The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods reported. Such adjustments are of a normal, recurring nature. The results of operations for the three-month and nine-month periods ended September 30, 2002, are not necessarily indicative of the results to be expected for the full year. Certain reclassifications to prior year's financial information have been made to conform to the 2002 presentation. 2. ACQUISITIONS On May 31, 2002, Solutia acquired Axio Research Corporation (Axio) for approximately $5 million, which was financed with cash from operations. Axio is a contract research organization providing clinical trial design and data management to a wide range of clients including pharmaceutical, biotechnology and medical device companies as well as academic and government research groups. Axio will complement the Pharmaceutical service offering within the Specialty Products segment. The allocation of the purchase price to assets and liabilities acquired resulted in current assets of $1 million, non-current assets of $1 million, goodwill of $4 million and current liabilities of $1 million. Axio's results of operations were included in Solutia's results of operations from the acquisition date and were not material to Solutia's consolidated results of operations for the nine month period ended September 30, 2002. 3. RESTRUCTURING RESERVES As part of the integration of Vianova Resins with Solutia's resins businesses, Solutia identified excess production capacity for certain Solutia resins products that allowed for the consolidation of production facilities. As a result, Solutia decided to exit its operations at the Port Plastics site in Addyston, Ohio. An $8 million ($5 million aftertax) charge to cost of goods sold was recorded in the second quarter of 2000 to carry out the exit plan. The charge included $2 million to write down plant assets to their fair value of approximately $1 million, $2 million of dismantling costs and $4 million of estimated costs for which Solutia is contractually obligated under an operating agreement. Fair value of plant assets was determined by discounting future cash flows using an appropriate discount rate based on the Company's cost of capital. Under the operating agreement, Solutia was required to provide 24 months notice of intent to exit and to pay contractually obligated costs for an additional 18 months thereafter to a third-party operator. Solutia provided notice of intent to exit on June 30, 2000, and exited the site in June of 2002. The contractually obligated costs represent direct manufacturing, overhead, utilities and severance. The financial impact was not material to Solutia as production was shifted to other production facilities. 4 The following table summarizes the second quarter 2000 restructuring charge and amounts utilized to carry out those plans:
SHUTDOWN OF ASSET WRITE- OTHER FACILITIES DOWNS COSTS TOTAL ----------- ------------ ----- ----- Balance at January 1, 2000................... $-- $-- $-- $-- Charges taken........................... 2 2 4 8 Amounts utilized........................ -- (2) -- (2) ---- ---- ---- ---- Balance at December 31, 2000.................. 2 -- 4 6 Amounts utilized.......................... -- -- -- -- ---- ---- ---- ---- Balance at December 31, 2001.................. 2 -- 4 6 Amounts utilized.......................... -- -- -- -- ---- ---- ---- ---- Balance at March 31, 2002..................... 2 -- 4 6 Amounts utilized.......................... -- -- -- -- ---- ---- ---- ---- Balance at June 30, 2002...................... 2 -- 4 6 Amounts utilized.......................... (1) -- -- (1) ---- ---- ---- ---- BALANCE AT SEPTEMBER 30, 2002................. $ 1 $-- $ 4 $ 5 ==== ==== ==== ====
4. INVENTORY VALUATION The components of inventories as of September 30, 2002, and December 31, 2001, were as follows:
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ------------ Finished goods............................. $ 225 $ 209 Goods in process........................... 108 107 Raw materials and supplies................. 102 100 ----- ----- Inventories, at FIFO cost.................. 435 416 Excess of FIFO over LIFO cost.............. (112) (113) ----- ----- TOTAL...................................... $ 323 $ 303 ===== =====
5. CONTINGENCIES 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 the spinoff, Solutia assumed from the former Monsanto Company (now known as Pharmacia Corporation), under a distribution agreement, liabilities related to specified legal proceedings. As a result, although Pharmacia remains a defendant, Solutia is required to manage the litigation and indemnify Pharmacia for costs, expenses and judgments arising from the litigation. Such matters arise out of the normal course of business and relate to product liability, government regulation, including environmental issues, employee relations and other issues. Certain of the lawsuits and claims seek damages in significant amounts. Although the results of litigation cannot be predicted with certainty, management's belief is that the final outcome of such litigation, except as noted below, will not have a material adverse effect on Solutia's consolidated financial position, liquidity or profitability in any one year. Solutia's Annual Report on Form 10-K for the year ended December 31, 2001, describes four consolidated cases, sometimes referred to as Abernathy v. Monsanto or Bowie v. Monsanto, which have been in trial in Circuit Court for Etowah County, Alabama. The trial court departed from its announced schedule and did not submit the issue of compensatory damages for the 17 Phase I trial plaintiffs to the jury for determination. If damages are awarded against Solutia in these cases, it would appeal on all available grounds. Solutia believes that it has meritorious grounds for appeal; however, there can be no guarantee any such appeal would be successful. Also, in order to appeal any lower court judgment, Solutia would be required to post a surety bond. Such a bond is often required to be collateralized. 5 Pharmacia is our co-defendant in the Abernathy or Bowie cases. Pharmacia has agreed to obtain a surety bond if it is able to do so on commercially reasonable terms if needed and if Solutia does not obtain the bond. If Pharmacia obtains an appeal bond without providing collateral, any decisions regarding management or settlement of this litigation would be jointly controlled by Solutia, Pharmacia, and Monsanto (the new company which Pharmacia spun off on August 13, 2002) with each company having an equal vote. If such a bond is required to be secured by collateral, Solutia would have the right to provide the collateral and control any settlement decisions regarding these cases. If Solutia does not provide the required collateral, then Monsanto would have the option to provide the collateral and would then control any settlement decisions regarding these cases. If Monsanto does not provide the required collateral, then Pharmacia would provide the necessary collateral and would assume control of any settlement decisions in these cases. Management does not believe that the ultimate resolution of the matters related to Anniston, Alabama will have a material adverse impact on its consolidated financial position or liquidity. However, it is possible that a resolution of these cases may have a material adverse impact on Solutia's net income in a given year, although it is impossible at this time to estimate the range or amount of any such liability. In connection with the agreement described above relating to obtaining an appeal bond in the Abernathy v. Monsanto litigation, if one is necessary, Solutia has agreed to an amendment, dated as of July 1, 2002, to the distribution agreement with Pharmacia. The amendment provides that Solutia accepts the substitution of Monsanto in place of Pharmacia as the entity that will, generally, in the first instance, perform many of the obligations of Pharmacia under the distribution agreement. Pharmacia, however, has agreed to remain primarily liable under the distribution agreement for the performance of those obligations. The amendment to the distribution agreement also provides that Solutia will indemnify Monsanto with respect to the liabilities assumed by Solutia under the distribution agreement. 6. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, Solutia adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, Solutia discontinued the amortization of goodwill and identifiable intangible assets that have indefinite useful lives. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Goodwill will be assessed annually for impairment. This statement also required certain intangible assets that did not meet the criteria for recognition apart from goodwill, to be subsumed into goodwill. During the quarter ended March 31, 2002, Solutia subsumed into goodwill $74 million of intangible assets net of related deferred tax liabilities representing assembled workforce and noncontractual customer relationships that did not meet the separability criteria under SFAS No. 141, "Business Combinations." Net income (loss) and earnings (loss) per share for the three and nine months ended September 30, 2002 and 2001, adjusted to exclude the non-amortization provisions of SFAS No. 142, net of tax, are as follows:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Net income (loss): Income before cumulative effect of change in accounting principle............................................ $ -- $ 7 $ 37 $ 42 Goodwill amortization.................................. -- 6 -- 16 Subsumed intangible assets amortization................ -- 2 -- 5 Equity method goodwill amortization.................... -- -- -- 1 Trademark amortization................................. -- 1 -- 2 Cumulative effect of change in accounting principle.... -- -- (167) -- ----- ---- ----- ---- ADJUSTED NET INCOME (LOSS).................................. $ -- $ 16 $(130) $ 66 ===== ==== ===== ====
6
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Basic earnings (loss) per share: Income before cumulative effect of change in accounting principle............................................. $ -- $0.07 $ 0.35 $0.41 Goodwill amortization................................... -- 0.06 -- 0.16 Subsumed intangible assets amortization................. -- 0.02 -- 0.05 Equity method goodwill amortization..................... -- -- -- 0.01 Trademark amortization.................................. -- 0.01 -- 0.02 Cumulative effect of change in accounting principle..... -- -- (1.59) -- ----- ----- ------ ----- ADJUSTED BASIC EARNINGS (LOSS) PER SHARE.................... $ -- $0.16 $(1.24) $0.65 ===== ===== ====== ===== THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ------------------ 2002 2001 2002 2001 ----- ----- ------ ----- Diluted earnings (loss) per share: Income before cumulative effect of change in accounting principle............................................. $ -- $0.07 $ 0.35 $0.40 Goodwill amortization................................... -- 0.06 -- 0.16 Subsumed intangible assets amortization................. -- 0.02 -- 0.05 Equity method goodwill amortization..................... -- -- -- 0.01 Trademark amortization.................................. -- 0.01 -- 0.02 Cumulative effect of change in accounting principle..... -- -- (1.59) -- ----- ----- ------ ----- ADJUSTED DILUTED EARNINGS (LOSS) PER SHARE.................. $ -- $0.16 $(1.24) $0.64 ===== ===== ====== =====
Identified intangible assets are as follows:
GROSS SEPTEMBER 30, 2002 NET CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE -------- ------------------ -------- Amortized intangible assets: Contractual customer relationships............... $26 $ (4) $22 Patents.......................................... 7 (2) 5 Employment agreements............................ 5 (2) 3 Other............................................ 6 (4) 2 --- ---- --- TOTAL AMORTIZED INTANGIBLE ASSETS..................... $44 $(12) $32 --- ---- --- Unamortized intangible assets: Trademarks........................................ $47 $ (6) $41 --- ---- --- TOTAL UNAMORTIZED INTANGIBLE ASSETS................... $47 $ (6) $41 --- ---- --- TOTAL IDENTIFIED INTANGIBLE ASSETS.................... $91 $(18) $73 === ==== ===
7
GROSS DECEMBER 31, 2001 NET CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE -------- ----------------- -------- Intangible assets: Customer relationships............................ $149 $(14) $135 Trademarks........................................ 45 (6) 39 Assembled workforce............................... 10 (2) 8 Patents........................................... 7 (2) 5 Employment agreements............................. 5 -- 5 Other............................................. 6 (4) 2 ---- ---- ---- TOTAL INTANGIBLE ASSETS............................... $222 $(28) $194 ==== ==== ====
The Company's second quarter acquisition of Axio (see Note 2), resulted in goodwill of approximately $4 million. Intangible asset amortization expense was less than $1 million for the quarter ended September 30, 2002, and $2 million for the nine months ended September 30, 2002. As a result of adoption of SFAS No. 142, there have been no changes to amortizable lives or methods, except for trademarks, which have indefinite lives as defined under the new standard. Trademarks are associated with products and tradenames of the Company and are expected to provide benefits beyond the foreseeable future. Amortization expense for the net carrying amount of intangible assets is estimated to be $3 million in 2002, $3 million in 2003, $3 million in 2004, $3 million in 2005 and $3 million in 2006. Goodwill as allocated by reportable segment is as follows:
PERFORMANCE SPECIALTY INTEGRATED FILMS PRODUCTS NYLON TOTAL ----------- --------- ---------- ----- Gross goodwill, December 31, 2001................ $ 84 $ 347 $-- $ 431 Accumulated amortization......................... (11) (34) -- (45) ---- ----- ---- ----- Net goodwill, December 31, 2001.................. $ 73 $ 313 $-- $ 386 Intangible assets and related accounts subsumed: Noncontractual customer relationships........ -- 114 -- 114 Assembled workforce.......................... -- 8 -- 8 Deferred tax liabilities..................... -- (48) -- (48) Goodwill acquired................................ -- 4 -- 4 Impairment loss.................................. -- (167) -- (167) Translation...................................... -- 24 -- 24 ---- ----- ---- ----- Goodwill, September 30, 2002..................... $ 73 $ 248 $-- $ 321 ==== ===== ==== =====
Fair value measurements of the reporting units were estimated by a third-party specialist utilizing both an income and market multiple approach. Based on this analysis, Solutia recorded an impairment loss of $167 million during the first quarter of 2002 for the Resins and Additives business in the Specialty Products segment due to declining estimates of future results given current economic and market conditions. The goodwill impairment charge is non-deductible for tax purposes and is reflected as the cumulative effect of change in accounting principle in the accompanying statement of consolidated income (loss). 7. INVESTMENTS IN AFFILIATES During the first quarter of 2002, Solutia sold its 50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a division of Exxon Mobil Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of Exxon Mobil Corporation for approximately $102 million. The sale resulted in a gain of $5 million ($3 million aftertax). 8 8. DEBT OBLIGATIONS Amended Credit Facility On July 25, 2002, Solutia and its bank syndicate amended Solutia's revolving credit facility. The amendment extends the maturity of the facility until August 2004. It also reduces the facility from $800 million to $600 million and separates the facility into a $300 million term loan and a $300 million revolving credit facility. The term loan has scheduled payment obligations as follows: $25 million at December 31, 2002; $50 million at December 31, 2003; $25 million at June 30, 2004; and the remainder at maturity. Borrowings under the amended credit facility bear interest at a floating rate based on LIBOR, plus an applicable margin. The margin for LIBOR loans is 5.75 percent and will increase by 50 basis points in July 2003 and an additional 50 basis points in January 2004. A premium in the amount of 2 percent of the principal repaid on the term loan will apply until July 25, 2003, and a premium of 1 percent will apply to such principal payments thereafter. At September 30, 2002, Solutia had borrowings outstanding under the amended credit facility of $127 million. In addition, the Company had $56 million of letters of credit outstanding under this facility at September 30, 2002. In September 2002, Solutia negotiated an amendment to its amended credit facility which reduced the amount of debt outstanding as defined in the credit agreement for purposes of the leverage covenant ratio. Solutia deposited approximately $155 million from the proceeds of the Senior Secured Notes offering which occurred in July 2002 with the trustee for the $150 million of 6.5 percent notes due October 15, 2002, to pay the principal and interest at maturity. However, the principal amount of the 6.5 percent notes due October 15, 2002, was still considered outstanding debt under the amended credit facility. The amendment eliminated the $150 million of 6.5 percent notes due October 15, 2002, from consideration in the leverage covenant ratio. Without the amendment, Solutia would not have been in compliance with the leverage coverage ratio. Senior Secured Notes On July 9, 2002, SOI Funding Corp. ("SOI Funding"), a special purpose entity, offered 223,000 units (the "Units"), comprising $223 million aggregate principal amount of its 11.25 percent Senior Secured Notes (the "Notes") due 2009 and warrants to purchase a total of 5,533,522 shares of Solutia's common stock. The Units were offered and sold only to "Qualified Institutional Buyers" as defined under Rule 144A under the Securities Act of 1933 (the "Act"), and outside the United States in accordance with Regulation S under the Act. Cash proceeds from the sale of the Units net of estimated fees were approximately $193 million. These net offering proceeds were placed in escrow pending Solutia's amendment of its credit facilities, as described under "Amended Credit Facility" above, and assumption of SOI Funding's obligations under the Notes. Both of these events occurred on July 25, 2002, at which time the net offering proceeds were released to Solutia. Solutia deposited approximately $155 million of the proceeds with the trustee for the $150 million of 6.5 percent notes due October 15, 2002 to pay the principal and interest at maturity, which is reflected as restricted cash in the statement of consolidated financial position at September 30, 2002. The remaining proceeds were used to pay fees, expenses and other costs related to the amended credit facility, cash collateralize existing letters of credit and repay a portion of borrowings under Solutia's amended credit facility. Each warrant entitles the holder to purchase 24.814 shares of Solutia's common stock at an exercise price of $7.59 per share, subject to adjustment under certain circumstances. The warrants will be exercisable at any time after their separation from the Notes and before their expiration on July 15, 2009. Solutia recorded the Notes and warrants based on their estimated relative fair value at the time of their issuance. Accordingly, Solutia recorded $182 million for the value of the Notes and $19 million for the value of the warrants. The discount associated with this offering, which includes the value given to the warrants, will be non-deductible for income tax purposes. Solutia has filed a registration statement with the Securities and Exchange Commission for the purposes of exchanging the Notes issued under Rule 144A under the Act for notes which will be available to be traded freely. 9 Solutia's obligations and the obligations of its subsidiary borrowers under the amended credit facility and the Notes are guaranteed by CPFilms Inc., Monchem International, Inc., Monchem, Inc., Solutia Systems, Inc. and each of Solutia's subsequently acquired or organized domestic subsidiaries, subject to certain exceptions. In addition, Solutia Inc. guarantees the payment of amounts due from subsidiary borrowers under the amended credit facility. The Notes and the guarantees are secured by either first or second priority liens on all of the domestic collateral securing Solutia's bank obligations. 9. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS CPFilms, Inc., Monchem International, Inc., Monchem, Inc., and Solutia Systems, Inc., wholly-owned subsidiaries of the Company (the "Guarantors"), are guarantors of the amended credit facility and the Notes (see Note 8). The Guarantors fully and unconditionally guarantee the Notes on a joint and several basis. The following consolidating condensed financial statements present, in separate columns, financial information for: Solutia Inc. on a parent only basis carrying its investment in subsidiaries under the equity method; Guarantors on a combined, or where appropriate, consolidated basis, carrying investments in subsidiaries who do not guarantee the debt (the "Non-Guarantors") under the equity method; Non-Guarantors on a combined, or where appropriate, consolidated basis; eliminating adjustments; and consolidated totals as of September 30, 2002 and December 31, 2001, and for the three and nine months ended September 30, 2002 and 2001. The eliminating adjustments primarily reflect intercompany transactions, such as interest income and expense, accounts receivable and payable, advances, short and long-term debt, royalties and profit in inventory eliminations. The Company has not presented separate financial statements and other disclosures concerning the Guarantors as such information is not material and would substantially duplicate disclosures included elsewhere in this report. 10 SOLUTIA INC. CONSOLIDATING STATEMENT OF INCOME THREE MONTHS ENDED SEPTEMBER 30, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................... $ 470 $40 $331 $(123) $ 718 Cost of goods sold........... 446 14 266 (128) 598 ----- --- ---- ----- ----- GROSS PROFIT................. 24 26 65 5 120 Marketing expenses........... 30 5 13 -- 48 Administrative expenses...... 24 1 11 2 38 Technological expenses....... 14 1 2 -- 17 Amortization expense......... -- -- -- -- -- ----- --- ---- ----- ----- OPERATING INCOME (LOSS)...... (44) 19 39 3 17 Equity earnings from affiliates--net of tax..... 77 23 1 (96) 5 Interest expense............. (48) (2) (33) 51 (32) Other income--net............ (1) 31 26 (53) 3 ----- --- ---- ----- ----- INCOME BEFORE INCOME TAXES... (16) 71 33 (95) (7) Income taxes (benefit)....... (16) -- 9 -- (7) ----- --- ---- ----- ----- NET INCOME................... $ -- $71 $ 24 $ (95) $ -- ===== === ==== ===== ===== CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) THREE MONTHS ENDED SEPTEMBER 30, 2002 (DOLLARS IN MILLIONS) PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME................... $ -- $71 $ 24 $ (95) $ -- OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments................ (8) (7) -- 7 (8) Minimum pension liability adjustments, net of tax.... (123) -- -- -- (123) Net unrealized gain on derivative instruments, net of tax..................... 1 -- -- -- 1 ----- --- ---- ----- ----- COMPREHENSIVE INCOME (LOSS).. $(130) $64 $ 24 $ (88) $(130) ===== === ==== ===== =====
11 SOLUTIA INC. CONSOLIDATING STATEMENT OF INCOME THREE MONTHS ENDED SEPTEMBER 30, 2001 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................... $469 $ 34 $305 $(118) $690 Cost of goods sold........... 416 13 252 (120) 561 ---- ---- ---- ----- ---- GROSS PROFIT................. 53 21 53 2 129 Marketing expenses........... 36 4 -- -- 40 Administrative expenses...... 26 1 13 -- 40 Technological expenses....... 12 1 3 -- 16 Amortization expense......... 1 1 7 -- 9 ---- ---- ---- ----- ---- OPERATING INCOME (LOSS)...... (22) 14 30 2 24 Equity earnings from affiliates--net of tax..... 66 14 -- (71) 9 Interest expense............. (39) (1) (35) 53 (22) Other income--net............ 2 29 22 (56) (3) ---- ---- ---- ----- ---- INCOME BEFORE INCOME TAXES... 7 56 17 (72) 8 Income taxes (benefit)....... -- -- 1 -- 1 ---- ---- ---- ----- ---- NET INCOME................... $ 7 $ 56 $ 16 $ (72) $ 7 ==== ==== ==== ===== ==== CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME THREE MONTHS ENDED SEPTEMBER 30, 2001 (DOLLARS IN MILLIONS) PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME................... $ 7 $ 56 $ 16 $ (72) $ 7 OTHER COMPREHENSIVE INCOME: Currency translation adjustments................ 48 44 10 (54) 48 Net realized (gain) loss on derivative instruments, net of tax..................... 1 -- -- -- 1 ---- ---- ---- ----- ---- COMPREHENSIVE INCOME......... $ 56 $100 $ 26 $(126) $ 56 ==== ==== ==== ===== ====
12 SOLUTIA INC. CONSOLIDATING STATEMENT OF INCOME (LOSS) NINE MONTHS ENDED SEPTEMBER 30, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................... $1,397 $123 $ 965 $(377) $2,108 Cost of goods sold........... 1,277 51 788 (387) 1,729 ------ ---- ----- ----- ------ GROSS PROFIT................. 120 72 177 10 379 Marketing expenses........... 87 14 36 -- 137 Administrative expenses...... 68 5 36 -- 109 Technological expenses....... 39 2 7 -- 48 Amortization expense......... -- -- 2 -- 2 ------ ---- ----- ----- ------ OPERATING INCOME (LOSS)...... (74) 51 96 10 83 Equity earnings (loss) from affiliates--net of tax..... 32 (116) 1 100 17 Interest expense............. (123) (5) (90) 142 (76) Other income--net............ 13 83 70 (154) 12 ------ ---- ----- ----- ------ INCOME (LOSS) BEFORE INCOME TAXES...................... (152) 13 77 98 36 Income taxes (benefit)....... (23) -- 23 (1) (1) ------ ---- ----- ----- ------ Income (Loss) Before Cumulative Effect of Change in Accounting Principle.... (129) 13 54 99 37 Cumulative Effect of Change in Accounting Principle.... (1) -- (166) -- (167) ------ ---- ----- ----- ------ NET INCOME (LOSS)............ $ (130) $ 13 $(112) $ 99 $ (130) ====== ==== ===== ===== ====== CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) NINE MONTHS ENDED SEPTEMBER 30, 2002 (DOLLARS IN MILLIONS) PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME (LOSS)............ $ (130) $ 13 $(112) $ 99 $ (130) OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments................ 74 74 13 (87) 74 Minimum pension liability adjustments, net of tax.... (123) -- -- -- (123) Net unrealized gain on derivative instruments, net of tax..................... 1 -- -- -- 1 Net realized loss on derivative instruments, net of tax..................... 1 -- -- -- 1 ------ ---- ----- ----- ------ COMPREHENSIVE INCOME (LOSS).. $ (177) $ 87 $ (99) $ 12 $ (177) ====== ==== ===== ===== ======
13 SOLUTIA INC. CONSOLIDATING STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2001 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................... $1,475 $114 $963 $(378) $2,174 Cost of goods sold........... 1,334 47 796 (388) 1,789 ------ ---- ---- ----- ------ GROSS PROFIT................. 141 67 167 10 385 Marketing expenses........... 109 13 9 -- 131 Administrative expenses...... 72 5 37 -- 114 Technological expenses....... 39 2 7 -- 48 Amortization expense......... (5) 4 26 -- 25 ------ ---- ---- ----- ------ OPERATING INCOME (LOSS)...... (74) 43 88 10 67 Equity earnings from affiliates--net of tax..... 222 61 -- (262) 21 Interest expense............. (113) (5) (104) 156 (66) Other income (expense)--net............. (8) 96 113 (167) 34 ------ ---- ---- ----- ------ INCOME BEFORE INCOME TAXES... 27 195 97 (263) 56 Income taxes (benefit)....... (15) -- 29 -- 14 ------ ---- ---- ----- ------ NET INCOME................... $ 42 $195 $ 68 $(263) $ 42 ====== ==== ==== ===== ====== CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30, 2001 (DOLLARS IN MILLIONS) PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME................... $ 42 $195 $ 68 $(263) $ 42 OTHER COMPREHENSIVE INCOME: Currency translation adjustments................ (12) (18) (7) 25 (12) Net unrealized (loss) on derivative instruments, net of tax..................... (2) -- -- -- (2) Net realized (gain) loss on derivative instruments, net of tax..................... (1) -- -- -- (1) ------ ---- ---- ----- ------ COMPREHENSIVE INCOME......... $ 27 $177 $ 61 $(238) $ 27 ====== ==== ==== ===== ======
14 SOLUTIA INC. CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ 3 $ -- $ 16 $ -- $ 19 Restricted cash............................. 155 -- -- -- 155 Trade receivables, net...................... 12 180 203 -- 395 Intercompany receivables.................... (49) 602 174 (727) -- Miscellaneous receivables................... 83 1 25 -- 109 Prepaid expenses............................ 14 -- 3 -- 17 Deferred income tax benefit................. 98 (1) 19 7 123 Inventories................................. 162 22 159 (20) 323 ------ ------ ------ ------- ------ TOTAL CURRENT ASSETS.................... 478 804 599 (740) 1,141 PROPERTY, PLANT AND EQUIPMENT: Land........................................ 17 -- 45 -- 62 Buildings................................... 272 24 141 -- 437 Machinery and equipment..................... 2,534 65 478 -- 3,077 Construction in progress.................... 22 9 17 -- 48 ------ ------ ------ ------- ------ Total property, plant and equipment......... 2,845 98 681 -- 3,624 Less accumulated depreciation............... 2,114 18 361 -- 2,493 ------ ------ ------ ------- ------ NET PROPERTY, PLANT AND EQUIPMENT........... 731 80 320 -- 1,131 INVESTMENTS IN AFFILIATES................... 3,159 98 29 (3,045) 241 GOODWILL.................................... -- 72 249 -- 321 IDENTIFIED INTANGIBLE ASSETS, NET........... 2 26 45 -- 73 LONG-TERM DEFERRED INCOME TAX BENEFIT....... 284 -- 17 -- 301 INTERCOMPANY ADVANCES....................... 128 2,158 2,157 (4,443) -- OTHER ASSETS................................ 272 -- 33 -- 305 ------ ------ ------ ------- ------ TOTAL ASSETS............................ $5,054 $3,238 $3,449 $(8,228) $3,513 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable............................ $ 171 $ 10 $ 67 $ -- $ 248 Intercompany payables....................... 405 145 177 (727) -- Wages and benefits.......................... 24 -- 30 -- 54 Postretirement liabilities.................. 93 -- 1 -- 94 Miscellaneous accruals...................... 188 12 148 -- 348 Short-term debt............................. 302 -- 1 -- 303 Intercompany short-term debt................ 270 25 298 (593) -- ------ ------ ------ ------- ------ TOTAL CURRENT LIABILITIES................... 1,453 192 722 (1,320) 1,047 LONG-TERM DEBT.............................. 781 -- 321 -- 1,102 INTERCOMPANY LONG-TERM DEBT................. 1,630 103 2,117 (3,850) -- POSTRETIREMENT LIABILITIES.................. 1,173 -- 30 -- 1,203 OTHER LIABILITIES........................... 286 1 143 -- 430 SHAREHOLDERS' EQUITY (DEFICIT): Common stock................................ 1 -- -- -- 1 Net (deficiency) excess of assets at spinoff and subsidiary capital........ (113) 2,942 116 (3,058) (113) Additional contributed capital.......... 19 -- -- -- 19 Treasury stock.......................... (250) -- -- -- (250) Accumulated other comprehensive loss........ (191) -- -- -- (191) Reinvested earnings......................... 265 -- -- -- 265 ------ ------ ------ ------- ------ TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (269) 2,942 116 (3,058) (269) ------ ------ ------ ------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)................................. $5,054 $3,238 $3,449 $(8,228) $3,513 ====== ====== ====== ======= ======
15 SOLUTIA INC. CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ 3 $ 1 $ 19 $ -- $ 23 Trade receivables, net...................... (5) 178 179 -- 352 Intercompany receivables.................... 2,899 3,354 133 (6,386) -- Miscellaneous receivables................... 77 -- 28 -- 105 Prepaid expenses............................ 12 -- 3 -- 15 Deferred income tax benefit................. 95 -- 21 7 123 Inventories................................. 160 23 138 (18) 303 ------ ------ ------ -------- ------ TOTAL CURRENT ASSETS.................... 3,241 3,556 521 (6,397) 921 PROPERTY, PLANT AND EQUIPMENT: Land........................................ 18 -- 40 -- 58 Buildings................................... 274 22 129 -- 425 Machinery and equipment..................... 2,527 51 428 -- 3,006 Construction in progress.................... 18 20 13 -- 51 ------ ------ ------ -------- ------ Total property, plant and equipment......... 2,837 93 610 -- 3,540 Less accumulated depreciation............... 2,070 14 313 -- 2,397 ------ ------ ------ -------- ------ NET PROPERTY, PLANT AND EQUIPMENT........... 767 79 297 -- 1,143 INVESTMENTS IN AFFILIATES................... 3,139 206 26 (3,058) 313 GOODWILL, NET............................... 2 72 312 -- 386 IDENTIFIED INTANGIBLE ASSETS, NET........... 3 26 165 -- 194 LONG-TERM DEFERRED INCOME TAX BENEFIT....... 242 -- 12 -- 254 INTERCOMPANY ADVANCES....................... 128 2,010 1,812 (3,950) -- OTHER ASSETS................................ 166 -- 31 -- 197 ------ ------ ------ -------- ------ TOTAL ASSETS............................ $7,688 $5,949 $3,176 $(13,405) $3,408 ====== ====== ====== ======== ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable............................ $ 160 $ 8 $ 65 $ -- $ 233 Intercompany payables....................... 3,271 2,995 120 (6,386) -- Wages and benefits.......................... 26 -- 30 -- 56 Postretirement liabilities.................. 81 -- 1 -- 82 Miscellaneous accruals...................... 210 11 141 -- 362 Short-term debt............................. 683 -- -- -- 683 Intercompany short-term debt................ 189 31 112 (332) -- ------ ------ ------ -------- ------ TOTAL CURRENT LIABILITIES................... 4,620 3,045 469 (6,718) 1,416 LONG-TERM DEBT.............................. 448 -- 179 -- 627 INTERCOMPANY LONG-TERM DEBT................. 1,494 45 2,080 (3,619) -- POSTRETIREMENT LIABILITIES.................. 921 -- 26 -- 947 OTHER LIABILITIES........................... 318 6 207 -- 531 SHAREHOLDERS' EQUITY (DEFICIT): Common stock................................ 1 -- -- -- 1 Net (deficiency) excess of assets at spinoff and subsidiary capital........ (113) 2,853 215 (3,068) (113) Treasury stock.......................... (257) -- -- -- (257) Unearned ESOP shares........................ (1) -- -- -- (1) Accumulated other comprehensive loss........ (144) -- -- -- (144) Reinvested earnings......................... 401 -- -- -- 401 ------ ------ ------ -------- ------ TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (113) 2,853 215 (3,068) (113) ------ ------ ------ -------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)................................. $7,688 $5,949 $3,176 $(13,405) $3,408 ====== ====== ====== ======== ======
16 SOLUTIA INC. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW NINE MONTHS ENDED SEPTEMBER 30, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH FROM OPERATIONS.................... $(109) $ 131 $ 65 $-- $ 87 ----- ----- ----- ---- ----- INVESTING ACTIVITIES: Property, plant and equipment purchases............................. (27) (5) (19) -- (51) Acquisition and investment payments, net of cash acquired...................... (32) -- -- -- (32) Property disposals and investment proceeds.............................. 108 -- (1) -- 107 ----- ----- ----- ---- ----- CASH FROM INVESTING ACTIVITIES.......... 49 (5) (20) -- 24 ----- ----- ----- ---- ----- FINANCING ACTIVITIES: Net change in short-term debt obligations........................... (106) -- (1) -- (107) Proceeds from issuance of long-term debt obligations........................... 57 -- 125 -- 182 Restricted cash for repayment of October 2002 maturities....................... (150) -- -- -- (150) Issuance of stock warrants.............. 19 -- -- -- 19 Common stock issued under employee stock plans................................. 2 -- -- -- 2 Deferred debt issuance costs............ (46) -- -- -- (46) Other financing activities.............. (15) -- -- -- (15) Changes in investments and advances from (to) affiliates....................... 299 (127) (172) -- -- ----- ----- ----- ---- ----- CASH FROM FINANCING ACTIVITIES.......... 60 (127) (48) -- (115) ----- ----- ----- ---- ----- DECREASE IN CASH AND CASH EQUIVALENTS... -- (1) (3) -- (4) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR....................... 3 1 19 -- 23 ----- ----- ----- ---- ----- END OF PERIOD........................... $ 3 $ -- $ 16 $-- $ 19 ===== ===== ===== ==== =====
17 SOLUTIA INC. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW NINE MONTHS ENDED SEPTEMBER 30, 2001 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH FROM OPERATIONS.................... $(206) $140 $ 20 $-- $(46) ----- ---- ---- ---- ---- INVESTING ACTIVITIES: Property, plant and equipment purchases............................. (26) (9) (30) -- (65) Acquisition and investment payments, net of cash acquired...................... (32) -- -- -- (32) Property disposals and investment proceeds.............................. 1 -- 35 -- 36 ----- ---- ---- ---- ---- CASH FROM INVESTING ACTIVITIES.......... (57) (9) 5 -- (61) ----- ---- ---- ---- ---- FINANCING ACTIVITIES: Net change in short-term debt obligations........................... 99 -- (5) -- 94 Common stock issued under employee stock plans................................. 11 -- -- -- 11 Deferred debt issuance costs............ (2) -- -- -- (2) Changes in investments and advances from (to) affiliates....................... 147 (131) (16) -- -- ----- ---- ---- ---- ---- CASH FROM FINANCING ACTIVITIES.......... 255 (131) (21) -- 103 ----- ---- ---- ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... (8) -- 4 -- (4) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR....................... 11 -- 8 -- 19 ----- ---- ---- ---- ---- END OF PERIOD........................... $ 3 $-- $ 12 $-- $ 15 ===== ==== ==== ==== ====
10. PENSION During the third quarter of 2002, Solutia recorded a $13 million ($8 million aftertax) non-cash pension settlement loss as required by SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," because of the significant amount of lump sum distributions from the qualified pension plan in 2002. In order to account for the settlement, Solutia was required to remeasure its benefit obligations and fair value of plan assets as of the interim date of September 30, 2002. The Company's annual measurement date is December 31. As a result of the decline in the fair value of our plan assets, and, to a lesser extent, higher benefit obligations, the amount of pension plan underfunding in the qualified pension plan increased to $475 million as of September 30, 2002. In accordance with SFAS No. 87, "Employers Accounting for Pension," Solutia recorded a non-cash minimum pension liability of $272 million, an increase in intangible assets of $75 million, an aftertax charge to shareholders' deficit of $123 million and a related deferred tax asset as of September 30, 2002. 11. SUBSEQUENT EVENTS Solutia's Report on Form 10-K for the year ended December 31, 2001, described a judicial proceeding, Fluor Daniel Corporation v. Solutia Inc. This case involved a construction dispute between Solutia and Fluor Daniel Corporation, the main contractor for construction of an acrylonitrile manufacturing facility located at our Chocolate Bayou plant in Alvin, Texas. On September 13, 2002, a jury awarded a verdict against Solutia. The case was settled October 11, 2002, with Solutia agreeing to pay Fluor $20 million over a three-year period, of which 18 $15 million was recognized as property, plant and equipment in the statement of consolidated financial position and $5 million ($3 million aftertax) was recognized as a charge in the statement of consolidated net income (loss) as of September 30, 2002, and for the three and nine months ended September 30, 2002. Solutia's Report on Form 10-K for the year ended December 31, 2001, described a judicial proceeding, Commonwealth of Pennsylvania Department of General Services, et al. v. United States Mineral Products Company, et al., a case pending in the Commonwealth Court of the Commonwealth of Pennsylvania against Pharmacia (the former Monsanto Company). The Commonwealth is seeking recovery of costs it allegedly incurred for testing, monitoring, cleanup, demolition and relocation caused by alleged presence of low levels of polychlorinated biphenyls (PCB's) in the Transportation and Safety Building in Harrisburg, Pennsylvania as well as the cost of constructing a new building on the site. On October 17, 2002, the trial judge entered orders denying Solutia's motions seeking entry of a verdict in Pharmacia's favor or a new trial and entered a monetary judgment of $59.5 million including prejudgment interest of $14.5 million. Solutia intends to appeal this judgment as a matter of right to the Pennsylvania Supreme Court, and has 30 days from entry of the orders to file its notice of appeal. Solutia believes that the defenses in this case are meritorious and will continue to defend this action vigorously. While posting a bond is not required to prosecute an appeal, under Pennsylvania law, a bond in the amount of 120% of the judgment, or $71.4 million in this case, must be posted in order to stay execution of the judgment against Pharmacia while an appeal is pending. Solutia has informed Pharmacia and Monsanto Company that it will not post an appeal bond, but has agreed to provide to Monsanto collateral having a present cash value of $20 million to secure a portion of Monsanto's obligations with respect to the bond. In addition, Solutia has agreed to reimburse or pay directly all of Monsanto's out-of-pocket expenses incurred in connection with obtaining the bond. Although arrangements have not yet been finalized. Monsanto has informed Solutia that it intends to post the bond and contribute any additional collateral required in order to secure the bond. As a result of Monsanto providing collateral required to secure the appeal bond, we anticipate that Monsanto would assume control of any settlement decisions. While the outcome of litigation cannot be predicted with certainty, management does not believe that the final outcome of this matter will have a material adverse impact on Solutia's consolidated financial position or liquidity. However, it is possible that a resolution of this matter may have a material adverse impact on Solutia's net income in a given year, although it is impossible at this time to estimate the range or amount of any such impact. 12. SEGMENT DATA Solutia's management is organized around four strategic business platforms: Performance Films, Resins and Additives, Specialties and Integrated Nylon. Resins and Additives and Specialties have been aggregated into the Specialty Products reportable segment because of their similar economic characteristics, as well as their similar products and services, production processes, types of customers and methods of distribution. Solutia's reportable segments and their major products are as follows:
PERFORMANCE FILMS SPECIALTY PRODUCTS INTEGRATED NYLON ----------------- ------------------ ---------------- SAFLEX(R) plastic interlayer Resins and additives, Nylon intermediate "building including ALFTALAT(R) block" chemicals KEEPSAFE(R), SAFLEX polyester resins, INSIDE(R) (in Europe only) RESIMENE(R) and MAPRENAL(R) Merchant polymer and nylon and KEEPSAFE MAXIMUM(R) crosslinkers, SYNTHACRYL(R) extrusion polymers, glass for residential acrylic resins and GELVA(R) including VYDYNE(R) and security and hurricane pressure-sensitive adhesives ASCEND(R) protection windows LLUMAR(R), VISTA(R) and Industrial products, including Carpet fibers, including the GILA(R) professional and THERMINOL(R) heat transfer WEAR-DATED(R) and after-market window films fluids, DEQUEST(R) water ULTRON VIP(R) brands treatment chemicals, VANCEVA(TM) design, enhanced SKYDROL(R) hydraulic fluids Industrial nylon fibers security and sound and SKYKLEEN(R) cleaning attenuation films fluids for aviation and chlorobenzenes Conductive and anti-reflective Pharmaceutical services, ACRILAN(R) acrylic fibers for coated films and deep-dyed including process research, apparel, upholstery fabrics, films process development craft yarns and other services, scale-up applications capabilities and small scale manufacturing for the pharmaceutical industry
Accounting policies of the segments are the same as those used in the preparation of Solutia's consolidated financial statements. Solutia evaluates the performance of its operating segments based on segment earnings before interest expense and income taxes (EBIT), which includes marketing, administrative, technological, and amortization expenses and other non-recurring charges such as restructuring and asset impairment charges that 19 can be directly attributable to the operating segment. Certain expenses and other items that are managed outside of the segments are excluded. These unallocated items consist primarily of corporate expenses, equity earnings (loss) from affiliates, interest expense, other income--net and expense items, and certain non-recurring items such as gains and losses on asset dispositions and restructuring charges that are not directly attributable to the operating segment. Solutia accounts for intersegment sales at agreed upon transfer prices. Intersegment sales are eliminated in consolidation. Segment assets consist primarily of customer receivables, raw materials and finished goods inventories, fixed assets, goodwill and identified intangible assets directly associated with the production processes of the segment (direct fixed assets). Segment depreciation and amortization are based upon direct tangible and intangible assets. Unallocated assets consist primarily of deferred taxes, certain investments in equity affiliates and indirect fixed assets. Segment data for the three and nine months ended September 30, 2002, and 2001, were as follows:
THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------------- 2002 2001 ------------------------------------ ------------------------------------ NET INTERSEGMENT PROFIT NET INTERSEGMENT SALES SALES (LOSS) SALES SALES PROFIT ----- ------------ ------ ----- ------------ ------ SEGMENT: Performance Films................ $ 151 $-- $ 24 $ 144 $-- $ 18 Specialty Products............... 239 -- 17 218 -- 7 Integrated Nylon (a)............. 328 -- (2) 328 -- 20 ------ ---- ---- ------ ---- ---- SEGMENT TOTALS..................... 718 -- 39 690 -- 45 RECONCILIATION TO CONSOLIDATED TOTALS: Corporate expenses (b)........... (21) (21) Equity earnings from affiliates..................... 5 9 Interest expense................. (32) (22) Other income (expense)--net...... 2 (3) CONSOLIDATED TOTALS: ------ ---- ------ ---- NET SALES........................ $ 718 $-- $ 690 $-- ====== ==== ---- ====== ==== ---- INCOME BEFORE INCOME TAXES....... $ (7) $ 8 ==== ==== NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------------- 2002 2001 ------------------------------------ ------------------------------------ NET INTERSEGMENT NET INTERSEGMENT SALES SALES PROFIT SALES SALES PROFIT ----- ------------ ------ ----- ------------ ------ SEGMENT: Performance Films................ $ 448 $-- $ 64 $ 454 $-- $ 54 Specialty Products (c)........... 697 1 58 703 -- 70 Integrated Nylon (a)............. 964 -- 17 1,017 -- 24 ------ ---- ---- ------ ---- ---- SEGMENT TOTALS..................... 2,109 -- 139 2,174 -- 148 RECONCILIATION TO CONSOLIDATED TOTALS: Sales eliminations............... (1) (1) -- -- Corporate expenses (b)........... (53) (47) Equity earnings from affiliates..................... 16 21 Interest expense................. (76) (66) Other income--net (d)............ 10 -- CONSOLIDATED TOTALS: ------ ---- ------ ---- NET SALES........................ $2,108 $-- $2,174 $-- ====== ==== ---- ====== ==== ---- INCOME BEFORE INCOME TAXES....... $ 36 $ 56 ==== ==== (a) Integrated Nylon's profit (loss) for the three and nine months ended September 30, 2002, includes a charge resulting from the resolution of a construction dispute with the contractor of its acrylonitrile plant in Alvin, Texas ($5 million pretax, $3 million aftertax). (b) Corporate expenses for the three and nine months ended September 30, 2002, include a pension settlement loss as required by SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" ($13 million pretax, $8 million aftertax). 20 (c) Specialty Products profit for the nine months ended September 30, 2001, includes a gain from an insurance settlement associated with the explosion and fire that destroyed the Vianova printing inks and phenolics production facility in Wiesbaden, Germany ($28 million pretax, $17 million aftertax). (d) Other income--net for the nine months ended September 30, 2002, includes a gain from the sale of Solutia's 50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a division of Exxon Mobil Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of Exxon Mobil Corporation ($5 million pretax, $3 million aftertax).
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, general economic, business and market conditions, raw material and energy pricing, currency fluctuations, interest rate fluctuations, increased competitive and/or customer pressure, ability to divest existing businesses, exposure to product liability and other litigation and cost of environmental remediation, gain or loss of significant customers, labor relations, disruption of operations, customer acceptance of new products, posting an appeal bond, changes in accounting principles generally accepted in the United States of America and ability to implement cost reduction initiatives in a timely manner. CRITICAL ACCOUNTING POLICIES A summary of our critical accounting policies is presented on page 13 of our 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2002. RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001 Net sales for the third quarter of 2002 increased by 4 percent as compared with the third quarter of 2001. Sales increases reflect favorable currency exchange rate fluctuations and modestly higher volumes and average selling prices. Performance Films Net sales for the third quarter of 2002 in the Performance Films segment increased by 5 percent over the same period of the prior year. Net sales increased primarily because of favorable currency exchange rate fluctuations and higher sales volumes. Net sales were positively affected by the strengthening euro and Australian dollar in relation to the U.S. dollar. Higher CPFilms' window film sales were partially offset by decreased demand for SAFLEX(R) plastic interlayer products. Sales volumes for SAFLEX(R) plastic interlayer products were down primarily due to lower sales to a large customer, partially offset by increased volumes in the Asia Pacific and North America markets. Saflex sales volumes will be negatively impacted by lower sales to this customer for the remainder of 2002. Performance Films' segment profit for the three-month period ended September 30, 2002, increased 33 percent over the three-month period ended September 30, 2001, primarily because of lower raw material costs, lower amortization expense due to the adoption of SFAS No. 142 and lower personnel expense associated with restructuring activities carried out during 2001. The impact of significantly lower sales volumes to the large Saflex customer on segment profitability was and is expected to continue to be mostly offset by higher sales of SAFLEX(R) plastic interlayer products to other glass laminators, improved product mix and cost reductions. Specialty Products Net sales in the Specialty Products segment for the third quarter of 2002 increased 10 percent over the comparable quarter of 2001. The increase in net sales was primarily caused by the favorable impact of currency 21 exchange rate fluctuations due to the strengthening euro in relation to the U.S. dollar. To a lesser extent, net sales were positively impacted by increased sales of DEQUEST(R) water treatment chemicals over the prior year period. Segment profit for the quarter ended September 30, 2002, increased more than 100 percent over the year-ago quarter. Profit increased primarily from lower amortization expense due to the adoption of SFAS No. 142, lower raw material costs and lower personnel expense associated with restructuring activities carried out during 2001. Integrated Nylon The Integrated Nylon segment's net sales for the three-month period ended September 30, 2002, were even with the third quarter of 2001. Increased selling prices experienced during the quarter were offset by decreased sales volumes. Carpet fiber and intermediate chemicals experienced increased selling prices partially offset by decreased selling prices in nylon plastics and polymers and nylon industrial. Increased sales volumes in nylon plastics and polymers and ACRILAN(R) acrylic fibers were more than offset by decreased volumes in intermediate chemicals, nylon industrial products and nylon carpet fiber. Segment profit for Integrated Nylon segment for the quarter ended September 30, 2002, decreased more than 100 percent from the third quarter of 2001. Excluding a charge of $5 million ($3 million aftertax) resulting from the resolution of a construction dispute with the contractor for the acrylonitrile plant in Alvin, Texas, segment profit decreased 85 percent. The decrease in segment profitability resulted primarily from higher raw material costs of propylene and cyclohexane, the loss of approximately $8 million from the temporary shutdown of the Chocolate Bayou Intermediates facility during the third quarter of 2002 because of flooding, partially offset by lower personnel expense associated with restructuring activities carried out during 2001. Operating Income Operating income for the third quarter of 2002 decreased to $17 million from $24 million in the third quarter of 2001. Excluding a charge of $5 million ($3 million aftertax) recorded in the Integrated Nylon segment for the three months ended September 30, 2002, resulting from the resolution of a construction dispute with the contractor for the acrylonitrile plant in Alvin, Texas, a $13 million ($8 million aftertax) pension settlement loss as required by SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," recorded in corporate expenses for the three months ended September 30, 2002, and the effects of amortization expense from operating results in the third quarter of 2001 associated with the adoption of SFAS No. 142 (see Note 6), operating income in the third quarter of 2002 increased $2 million from the prior year. The increase in operating income was primarily driven by favorable currency exchange rate fluctuations and lower personnel costs resulting from restructuring activities carried out during 2001, partially offset by the aforementioned manufacturing outage, higher raw material costs and higher marketing and technological spending. Equity Earnings from Affiliates--net of tax Equity earnings from affiliates were $5 million in the third quarter of 2002 compared to $9 million in the comparable quarter in 2001. Excluding the loss of income from the sale of Solutia's 50 percent interest in the Advanced Elastomer Systems joint venture which occurred in the first quarter of 2002, equity earnings decreased approximately $1 million from the prior year. RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 Net sales for the nine-month period ended September 30, 2002, decreased by 3 percent as compared with the nine-month period ended September 30, 2001. Sales decreases reflect lower average selling prices and lower volumes partially offset by favorable currency exchange rate fluctuations. 22 Performance Films Performance Films' net sales for the first nine months of 2002 decreased 1 percent in comparison to the first nine months of 2001. Net sales decreased primarily because of lower average selling prices than those of the year-ago period due to competitive pricing pressures, partially offset by higher sales volumes and favorable currency exchange rate fluctuations primarily due to the strengthening euro and Australian dollar in relation to the U.S. dollar. Higher CPFilms' window film sales were partially offset by decreased demand for SAFLEX(R) plastic interlayer products due to significantly lower sales to a large customer and lower specialty films sales into the electronic display market. Sales volumes will be negatively impacted by lower sales to this customer for the remainder of 2002. Performance Films' segment profit for the nine months ended September 30, 2002, increased 19 percent from the comparable year-ago period because of lower raw material costs, lower amortization expense due to the adoption of SFAS No. 142, lower marketing, administrative and technological spending and lower personnel expense associated with restructuring activities carried out during 2001. The impact of significantly lower sales volumes to the large Saflex customer on segment profitability was mostly offset by higher sales of SAFLEX(R) plastic interlayer products to other glass laminators, improved product mix and cost reductions. Specialty Products Net sales in the Specialty Products segment decreased 1 percent for the nine months ended September 30, 2002, over the comparable period of the prior year. The decrease in net sales was primarily caused by lower average selling prices than those of the year-ago period because of pricing pressures, partially offset by favorable currency exchange rate fluctuations primarily due to the strengthening euro in relation to the U.S. dollar. Segment profit for the nine-month period ended September 30, 2002, decreased 17 percent as compared to the nine-month period ended June 30, 2001. Excluding a gain of $28 million ($17 million aftertax) recorded in the first quarter of 2001 from an insurance settlement, segment profit increased 38 percent primarily due to lower amortization expense due to the adoption of SFAS No. 142, lower raw material costs and lower personnel expense associated with restructuring activities carried out during 2001. Integrated Nylon The Integrated Nylon segment's net sales for the nine months ended September 30, 2002, decreased 5 percent as compared with the nine months ended September 30, 2001, primarily due to declines in average selling prices in almost all businesses in this segment and moderate declines in sales volumes from the comparable prior-year period. The effects of a weak U.S. economy continue to unfavorably impact average selling prices and volumes in comparison with 2001. In addition, price decreases in intermediate chemicals also resulted from contracts with formula pricing tied to raw material costs. Further, an unfavorable product mix was experienced in carpet fiber. Integrated Nylon's segment profit for the nine months ended September 30, 2002, decreased 29 percent from the comparable period of 2001. Excluding a charge of $5 million ($3 million aftertax) resulting from the resolution of a construction dispute with the contractor of the acrylonitrile plant in Alvin, Texas, segment profit decreased 8 percent. The decrease resulted primarily from the effects of lower net sales in the segment partially offset by lower raw material and energy prices and lower personnel expense associated with restructuring activities carried out during 2001. Also, segment profitability was negatively affected by approximately $14 million due to unscheduled outages at the Chocolate Bayou Intermediates facility during the second and third quarters of 2002. Operating Income Operating income for the first nine months of 2002 increased to $83 million from $67 million in the first nine months of 2001. Excluding a charge of $5 million ($3 million aftertax) recorded in the Integrated Nylon segment for the nine months ended September 30, 2002, resulting from the resolution of a construction dispute with the contractor for the acrylonitrile plant in Alvin, Texas, a $13 million ($8 million aftertax) pension settlement loss as required by SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," recorded in corporate expenses for the nine months ended September 30, 23 2002, and the effects of amortization expense from operating results for the nine months ended September 30, 2001, associated with the adoption of SFAS No. 142 (see Note 6), operating income for the nine months ended September 30, 2002, increased $11 million from the prior year. The increase in operating income was primarily driven by the lower raw material and energy costs, favorable currency exchange rate fluctuations and lower personnel costs resulting from restructuring activities carried out during 2001, partially offset by the aforementioned manufacturing outages. Equity Earnings from Affiliates--net of tax Equity earnings from affiliates were $17 million in the nine months ended September 30, 2002, compared to $21 million from the same period of 2001. Excluding the loss of income from the sale of Solutia's 50 percent interest in the Advanced Elastomer Systems joint venture during the first quarter of 2002, equity earnings increased by $4 million. The increase is primarily due to higher earnings from the Astaris joint venture. Other Income--Net Other income--net for the nine months ended September 30, 2002, was $12 million compared to $34 million for the same period in 2001. The nine months ended September 30, 2002, includes a $5 million ($3 million aftertax) gain from the sale of Solutia's 50 percent interest in the Advanced Elastomer Systems joint venture. The nine months ended September 30, 2001, includes a $28 million gain ($17 million aftertax) from an insurance settlement. Excluding these gains from both periods, other income for the nine months ended September 30, 2002, was $7 million compared to $6 million for the same period in 2001. Cumulative Effect of Change in Accounting Principle Effective January 1, 2002, Solutia adopted SFAS No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, Solutia discontinued the amortization of goodwill and identifiable intangible assets that have indefinite useful lives. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Goodwill will be assessed annually for impairment. This statement also required certain intangible assets that did not meet the criteria for recognition apart from goodwill, to be subsumed into goodwill. During the quarter ended March 31, 2002, Solutia subsumed into goodwill $74 million of intangible assets net of related deferred tax liabilities representing assembled workforce and noncontractual customer relationships that did not meet the separability criteria under SFAS No. 141, "Business Combinations." Fair value measurements of the reporting units were estimated by a third-party specialist utilizing both an income and market multiple approach. Based on this analysis, Solutia recorded an impairment loss of $167 million for the Resins and Additives business in the Specialty Products segment due to declining estimates of future results given current economic and market conditions. The goodwill impairment charge is non-deductible for tax purposes and is reflected as the cumulative effect of change in accounting principle in the accompanying statement of consolidated income (loss). FINANCIAL CONDITION AND LIQUIDITY Cash generated from operations was $87 million for the nine months ended September 30, 2002, compared to cash used in operations of $46 million for the nine months ended September 30, 2001. The improvement was primarily attributable to a $60 million income tax refund received during the first quarter of 2002, a $21 million dividend received during the second quarter of 2002 from the Flexsys joint venture, stronger operating earnings and lower severance payments. Solutia's working capital at September 30, 2002, increased to $94 million from negative $495 million at December 31, 2001. Excluding restricted cash, working capital was negative $61 million at September 30, 2002. The increase in the working capital position primarily resulted from the Company's refinancing activities completed during the third quarter of 2002, which moved approximately $275 million from short-term debt to long-term debt and reduced borrowings under the revolving credit facility by $107 million. On September 30, 2002, Solutia's debt obligations totaled $1,405 million, including the $150 million of 6.5 percent notes due in October of 2002, borrowings under the amended credit facility with a syndicate of 24 commercial banks, notes, indenture and debentures. The weighted average interest rate on Solutia's total debt outstanding at September 30, 2002, was approximately 7.7 percent. In addition, the Company had $56 million of letters of credit outstanding under the amended credit facility at September 30, 2002. At September 30, 2002, debt classified as short term debt totaled $303 million, consisting primarily of borrowings of $127 million from the $300 million revolving credit facility, a $25 million amortization payment from the $300 million term loan and $150 million of 6.5 percent notes due in October of 2002. AMENDED CREDIT FACILITY On July 25, 2002, Solutia and its bank syndicate amended Solutia's revolving credit facility. The amendment extends the maturity of the facility until August 2004. It also reduces the facility from $800 million to $600 million and separates the facility into a $300 million term loan and a $300 million revolving credit facility. The term loan has scheduled payment obligations as follows: $25 million at December 31, 2002; $50 million at December 31, 2003; $25 million at June 30, 2004; and the remainder at maturity. The amended credit facility requires the Company to cash collateralize certain outstanding letters of credit. Fees, expenses and other costs associated with the amended credit facility and cash collateralization of letters of credit totaled $61 million. The amended credit facility is available for working capital and other general corporate purposes. In September 2002, Solutia negotiated an amendment to its amended credit facility which reduced the amount of debt outstanding as defined in the credit agreement for purposes of the leverage covenant ratio. Solutia deposited approximately $155 million from the proceeds of the Senior Secured Notes offering which occurred in July 2002 with the trustee for the $150 million of 6.5 percent notes due October 15, 2002, to pay the principal and interest at maturity. However, the principal amount of the 6.5 percent notes due October 15, 2002, was still considered outstanding debt under the amended credit facility. The amendment eliminated the $150 million of 6.5 percent notes due October 15, 2002, from consideration in the leverage covenant ratio. Without the amendment, Solutia would not have been in compliance with the leverage coverage ratio. Guarantees Solutia's obligations and the obligations of its subsidiary borrowers under the amended credit facility are guaranteed by CPFilms Inc., Monchem International, Inc., Monchem, Inc., Solutia Systems, Inc. (the "Subsidiary Guarantors") and each of Solutia's subsequently acquired or organized domestic subsidiaries, subject to certain exceptions. In addition, Solutia Inc. guarantees the payment of amounts due from subsidiary borrowers under the amended credit facility. Collateral Borrowings under the amended credit facility as well as the beneficiaries of the Astaris support agreement, the lessee under the co-generation facility at Pensacola, Florida and holders of certain designated letters of credit are secured by (1) liens on all of Solutia Inc.'s inventory and receivables and those of the Subsidiary Guarantors, (2) pledges of 100 percent of the stock of Monchem, Inc. and Solutia Systems, Inc. and 65 percent of the voting stock and 100 percent of all other stock of Monchem International, Inc., (3) liens on intercompany debt of and held by Monchem, Inc., Monchem International, Inc. and Solutia Systems, Inc., (4) pledges of 65 percent of the voting stock (and 100 percent of all other stock) of Solutia Europe, S.A./N.V. and Solutia U. K. Holdings Limited, (5) a lien on certain principal properties, (6) a lien on certain intellectual property; and (7) liens on property, plant and equipment, inventory, receivables and certain intellectual property of four European subsidiaries. The aggregate amount of Solutia's obligations entitled to the benefit of the lien on such principal properties is limited to 15 percent of its net tangible assets, as determined at the date that the lien was granted. In addition, borrowings under the amended credit facility are secured by liens shared equally and ratably with the holders of Solutia's outstanding publicly traded notes and senior secured notes described below. These include a lien on (1) certain other principal properties, (2) 100 percent of the stock of CPFilms Inc., and (3) pledges of intercompany debt of CPFilms Inc; and a second-priority lien shared equally and ratably on the principal properties on which the banks have a first priority lien. The amended credit facility also contains customary representations and warranties and affirmative and negative covenants. 25 Interest Borrowings under the amended credit facility bear interest at a floating rate based on LIBOR, plus an applicable margin. The margin for LIBOR loans is 5.75 percent and will increase by 50 basis points in July 2003 and an additional 50 basis points in January 2004. A premium in the amount of 2 percent of the principal repaid on the term loan will apply until July 25, 2003, and a premium of 1 percent will apply to such principal payments thereafter. Covenants The amended credit facility requires Solutia to meet certain financial tests, including, but not limited to, maximum leverage and minimum interest coverage ratios. In addition, the amended credit facility contains certain covenants which, among other things, limit the incurrence of additional debt, aggregate capital expenditures, guarantees, liens, investments, asset sales, dividends, restricted payments, acquisitions, mergers and consolidations, change of business, transactions with affiliates, prepayments of debt, repurchases of stock and redemptions of certain other indebtedness and other matters customarily restricted in such agreements. SENIOR SECURED NOTES On July 9, 2002, Solutia completed a private placement of 223,000 units consisting of $223 million of senior secured 7-year notes and warrants to purchase 5,533,522 shares of common stock at an exercise price of $7.59 per share. The 7-year notes were issued by SOI Funding Corp., a special purpose entity, and the offering resulted in cash proceeds, net of estimated fees, of $193 million, which were placed in escrow pending amendment of Solutia's credit facility, as described under "Amended Credit Facility" above and assumption of SOI Funding Corp.'s obligations under the notes. Both of these events occurred on July 25, 2002, at which time the net offering proceeds were released from escrow. Solutia deposited approximately $155 million of the proceeds with the trustee for the $150 million of 6.5 percent notes due October 15, 2002, to pay the principal and interest at maturity, which is reflected as restricted cash in the statement of consolidated financial position at September 30, 2002. The remaining proceeds were used to pay fees, expenses and other costs related to the amended credit facility, cash collateralize existing letters of credit and repay a portion of borrowings under Solutia's amended credit facility. The discount associated with this offering, which includes the value given to the warrants, will be non-deductible for income tax purposes. Guarantees All of the subsidiaries that guarantee the obligations under Solutia's amended credit facility will fully and unconditionally guarantee the notes on a senior joint and several basis. Certain of Solutia's future domestic subsidiaries will be required to execute similar guarantees. The subsidiary guarantees will each rank in right of payment equal to each subsidiary guarantor's existing and future senior debt. Collateral The notes and guarantees will be secured by a first-priority lien (shared with (A) holders of our bank obligations, (B) the beneficiaries of the Astaris support agreement, (C) the lessee under the co-generation facility at Pensacola, Florida and (D) holders of certain designated letters of credit) on the following assets: (1) certain principal properties, (2) pledges of 100 percent of the stock of CPFilms Inc., and (3) intercompany debt of CPFilms Inc.; and a second-priority lien on the following assets: (1) 65 percent of the voting stock (100 percent of all other stock) of Monchem International, Inc. and 100 percent of the stock of the remaining Subsidiary Guarantors, Monchem, Inc. and Solutia Systems, Inc., (2) intercompany debt of and held by the Subsidiary Guarantors (other than CPFilms Inc.), (3) substantially all of Solutia's and the Subsidiary Guarantors' accounts receivable and inventory and certain intellectual property, (4) 65 percent of the voting stock (and 100 percent of all other stock) of two foreign subsidiaries, and (5) certain other production facilities. Interest expense, giving effect to the new facilities, is expected to be approximately $110 million for 2002. Assuming a constant debt level and current LIBOR rates, interest expense is expected to be approximately $125 million for 2003. Included in the 2003 estimate for interest expense is approximately $25 million of amortization of debt discount and issuance costs primarily for the amended credit facility and the senior secured notes. 26 PENSION PLAN FUNDED STATUS The majority of Solutia's employees are covered under noncontributory defined benefit pension plans. The qualified pension plan is funded in accordance with Solutia's long-range projections of the plan's financial conditions. These projections take into account benefits earned and expected to be earned, anticipated returns on pension plan assets and income tax and other regulations. During the third quarter of 2002, Solutia recorded a $13 million ($8 million aftertax) non-cash pension settlement loss as required by SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," because of the significant amount of lump sum distributions from the qualified pension plan in 2002. In order to account for the settlement, Solutia was required to remeasure its benefit obligations and fair value of plan assets as of the interim date of September 30, 2002. The Company's annual measurement date is December 31. As a result of the decline in the fair value of our plan assets, and, to a lesser extent, higher benefit obligations, the amount of pension plan underfunding in the qualified pension plan increased to $475 million as of September 30, 2002. As a result of the underfunded status of the qualified pension plan and in accordance with SFAS No. 87, "Employers Accounting for Pension," Solutia recorded a non-cash minimum pension liability of $272 million, an increase in intangible assets of $75 million, an aftertax charge to shareholders' deficit of $123 million and a related deferred tax asset as of September 30, 2002. Solutia is actively managing the funding and accounting of the pension plan in order to meet the requirements of the IRS, the Pension Benefits Guarantee Corporation (a U.S. federal agency), the SEC and other interested parties. In the third quarter of 2002, Solutia made discretionary contributions of $17 million to reduce the probability of larger contribution requirements in the future and to utilize available tax benefits. According to IRS funding rules, Solutia does not expect to be required to make a pension contribution in 2003. However, future discretionary contributions will be considered based on actual market returns, pension cost projections and tax and other financial considerations. Solutia will measure the benefit obligations and fair value of plan assets at its annual measurement date of December 31, 2002. Changes in interest rates and capital market returns will change the pension plan's funded status and could be significant, depending upon the volatility of capital markets. OTHER Solutia's Report on Form 10-K for the year ended December 31, 2001, described a judicial proceeding, Commonwealth of Pennsylvania Department of General Services, et al. v. United States Mineral Products Company, et al., a case pending in the Commonwealth Court of the Commonwealth of Pennsylvania against Pharmacia (the former Monsanto Company). The Commonwealth is seeking recovery of costs it allegedly incurred for testing, monitoring, cleanup, demolition and relocation caused by alleged presence of low levels of PCB's in the Transportation and Safety Building in Harrisburg, Pennsylvania as well as the cost of constructing a new building on the site. On October 17, 2002, the trial judge entered orders denying Solutia's motions seeking entry of a verdict in Pharmacia's favor or a new trial and entered a monetary judgment of $59.5 million including prejudgment interest of $14.5 million. Solutia intends to appeal this judgment as a matter of right to the Pennsylvania Supreme Court, and has 30 days from entry of the orders to file its notice of appeal. Solutia believes that the defenses in this case are meritorious and will continue to defend this action vigorously. While posting a bond is not required to prosecute an appeal, under Pennsylvania law, a bond in the amount of 120% of the judgment, or $71.4 million in this case, must be posted in order to stay execution of the judgment against Pharmacia while an appeal is pending. Solutia has informed Pharmacia and Monsanto Company that it will not post an appeal bond, but has agreed to provide to Monsanto collateral having a present cash value of $20 million to secure a portion of Monsanto's obligations with respect to the bond. In addition, Solutia has agreed to reimburse or pay directly all of Monsanto's out-of-pocket expenses incurred in connection with obtaining the bond. Although arrangements have not yet been finalized, Monsanto has informed Solutia that it intends to post the bond and contribute any additional collateral required in order to secure the bond. As a result of Monsanto providing collateral required to secure the appeal bond, we anticipate that Monsanto would assume control of any settlement decisions. During the first quarter of 2002, Solutia sold its 50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a division of Exxon Mobil Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of Exxon Mobil Corporation for approximately $102 million. The sale resulted in a gain of $5 million ($3 million aftertax). In 1993, a co-generation facility was constructed at the Pensacola, Florida manufacturing site to provide the plant with electricity and steam. Solutia financed the construction by placing the co-generation facility in a trust that was funded by a syndicate of commercial banks. Solutia makes monthly operating lease payments and the lease term is co-terminous with the amended credit facility. 27 In connection with the completion of the external financing agreement for Astaris which expires in September of 2005, Solutia contractually agreed to provide Astaris with funding in the event the joint venture fails to meet certain financial benchmarks. The financial benchmarks included forecasted earnings that were developed when the joint venture was formed in April 2000. While the financial performance of Astaris has improved in the current year, the financial performance has not met the initial forecasted earnings because of the weak U.S. economy and higher than expected raw material and electricity costs. As a result of these earnings shortfalls, the Company has been required to make additional investments to the joint venture. In 2001, Solutia contributed $31 million to the joint venture. During the nine months ended September 30, 2002, Solutia has contributed $27 million to the joint venture under this agreement and anticipates an additional $2 million contribution during the fourth quarter of 2002. Solutia and its partner FMC Corporation are evaluating other financing alternatives for the joint venture. However, if no new financing arrangements are in place for 2003, Solutia anticipates that required contributions will be moderately higher for 2003. Solutia believes that its cash flow from operations and available borrowing capacity under the amended credit facility provide sufficient resources to finance its operations and planned capital needs for the next 12 months. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement addresses accounting and reporting requirements for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement obligations. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Solutia is evaluating SFAS No. 143 to determine the effects, if any, on its consolidated financial statements. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, which is effective for fiscal years beginning after May 15, 2002. SFAS 145 addresses the financial accounting and reporting for a number of areas, including gains and losses derived from the extinguishment of debt and the treatment of sale-leaseback transactions. Solutia is evaluating SFAS No. 145 to determine the effects, if any, on its consolidated financial statements. In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. Solutia is evaluating SFAS No. 146 to determine the effects, if any, on its consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS There have been no material changes in market risk exposures during the first nine months of 2002 that affect the disclosures presented in the information appearing under "Derivative Financial Instruments" on pages 26 and 27 of Solutia's Annual Report on Form 10-K for the year ended December 31, 2001. ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, 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. 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. Additionally, there were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 28 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Solutia's Report on Form 10-K for the year ended December 31, 2001, described a judicial proceeding, Fluor Daniel Corporation v. Solutia Inc. This case involved a construction dispute between Solutia and Fluor Daniel Corporation, the main contractor for construction of an acrylonitrile manufacturing facility located at our Chocolate Bayou plant in Alvin, Texas. Fluor sought damages of approximately $70 million based on allegations of delays and disruption in the construction schedule, change orders, and entitlement to a bonus under contract provisions. On September 13, 2002, a jury awarded a verdict against Solutia. The case was settled October 11, 2002, with Solutia agreeing to pay Fluor $20 million over a three-year period. Solutia's Report on Form 10-K for the year ended December 31, 2001, and its Report on Form 10-Q for the quarter ended March 31, 2002, described administrative and judicial proceedings brought by the U.S. Environmental Protection Agency against Solutia, the former Monsanto Company (now known as Pharmacia Corporation), and P4 Production L.L.C. that arose out of alleged environmental violations at a coal coking facility in Rock Springs, Wyoming, currently owned by P4 Production. The EPA is seeking $2.5 million and injunctive relief. On July 22, 2002, the United States District Court for the District of Wyoming denied the companies' petition for certification of their interlocutory appeal of the denial of their motion for summary judgment. On August 9, 2002, the United States filed a motion for summary judgment on the issue of liability. A hearing is scheduled for November 14, 2002. Solutia's Report on Form 10-K for the year ended December 31, 2001, described a judicial proceeding, Commonwealth of Pennsylvania Department of General Services, et al. v. United States Mineral Products Company, et al., a case pending in the Commonwealth Court of the Commonwealth of Pennsylvania against Pharmacia (the former Monsanto Company). The Commonwealth is seeking recovery of costs it allegedly incurred for testing, monitoring, cleanup, demolition and relocation caused by alleged presence of low levels of PCB's in the Transportation and Safety Building in Harrisburg, Pennsylvania as well as the cost of constructing a new building on the site. On October 17, 2002, the trial judge entered orders denying Solutia's motions seeking entry of a verdict in Pharmacia's favor or a new trial and entered a monetary judgment of $59.5 million including prejudgment interest of $14.5 million. Solutia intends to appeal this judgment as a matter of right to the Pennsylvania Supreme Court, and has 30 days from entry of the orders to file its notice of appeal. Solutia believes that the defenses in this case are meritorious and will continue to defend this action vigorously. While posting a bond is not required to prosecute an appeal, under Pennsylvania law, a bond in the amount of 120% of the judgment, or $71.4 million in this case, must be posted in order to stay execution of the judgment against Pharmacia while an appeal is pending. Solutia has informed Pharmacia and Monsanto Company that it will not post an appeal bond, but has agreed to provide to Monsanto collateral having a present cash value of $20 million to secure a portion of Monsanto's obligations with respect to the bond. In addition, Solutia has agreed to reimburse or pay directly all of Monsanto's out-of-pocket expenses incurred in connection with obtaining the bond. Although arrangements have not yet been finalized, Monsanto has informed Solutia that it intends to post the bond and contribute any additional collateral required in order to secure the bond. As a result of Monsanto providing collateral required to secure the appeal bond, we anticipate that Monsanto would assume control of any settlement decisions. ITEM 5. OTHER INFORMATION Solutia is aware that authorities in the United States, Europe and Canada are undertaking investigations of past commercial practices in the rubber chemicals industry. Flexsys, L.P., a 50/50 rubber chemicals joint venture between Solutia and Akzo Nobel N.V., has been fully cooperating with the authorities and will continue to do so. In addition, Solutia is aware of four purported class actions that have now been filed against Flexsys and other producers of rubber chemicals: Bruce v. Crompton Corporation, et al. and, Homes v. Crompton Corporation et al. in Superior Court of the State of California in the County of Los Angeles, Myers v. Crompton Corporation et al. in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida and Carr v. Crompton Corporation et al. in the District Court of Lancaster County, Nebraska. Each seeks actual and treble damages under state law on behalf of all retail purchasers in that state of tires manufactured using rubber-processing chemicals sold by defendants, including Flexsys, since 1994. 29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits--See the Exhibit Index at page 34 of this report. (b) Reports filed on Form 8-K during the quarter ended September 30, 2002: On September 17, 2002, Solutia filed a Form 8-K, containing a press to announce the jury's verdict in Fluor Daniel Corporation v. Solutia Inc. 30 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOLUTIA INC. ----------------------------------- (Registrant) /s/ JAMES M. SULLIVAN ----------------------------------- (Vice President and Controller) (On behalf of the Registrant and as Principal Accounting Officer) Date: November 14, 2002 31 CERTIFICATIONS I, John C. Hunter III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Solutia Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ JOHN C. HUNTER III ----------------------------------------------- John C. Hunter III Chairman, President and Chief Executive Officer 32 I, Robert A. Clausen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Solutia Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ ROBERT A. CLAUSEN ------------------------------------------------- Robert A. Clausen Senior Vice President and Chief Financial Officer 33 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4 Second Supplemental Indenture, dated as of October 24, 2002, among Solutia Inc., the subsidiary guarantors named therein and HSBC Bank USA 10 Amendment No. 1, dated as of September 26, 2002, to Second Amended and Restated Credit Agreement dated as of July 25, 2002, between Solutia Inc., as Borrower, the initial lenders named therein, Bank of America, N.A. as Syndication Agent and Citibank, N.A., as Administrative Agent 11 Omitted--Inapplicable; see "Statement of Consolidated Income (Loss)" on page 1 99 Computation of the Ratio of Earnings to Fixed Charges 34 EX-4 3 exh4.txt EXHIBIT 4 EXECUTION COPY SECOND SUPPLEMENTAL INDENTURE SECOND SUPPLEMENTAL INDENTURE, dated as of October 24, 2002, among Solutia Inc., a Delaware corporation ("Solutia"), the Subsidiary ------- Guarantors signatory hereto (the "Subsidiary Guarantors") and HSBC Bank USA, --------------------- as trustee under the Indenture referred to below (the "Trustee"). ------- W I T N E S S E T H : - - - - - - - - - - WHEREAS, SOI Funding Corp., a Delaware corporation ("SOI --- Funding"), and the Trustee heretofore executed and delivered an Indenture, - ------- dated as of July 9, 2002 (the "Original Indenture"), providing for the ------------------ issuance of the 11.25% Senior Secured Notes due 2009 of SOI Funding (the "Securities") (capitalized terms used herein but not otherwise defined have ---------- the meanings ascribed thereto in the Indenture); WHEREAS, upon the execution and delivery by Solutia to the Trustee of the Supplemental Indenture, dated July 25, 2002, among Solutia, SOI Funding, the Subsidiary Guarantors and the Trustee (the "First ----- Supplemental Indenture" and, together with the Original Indenture, the - ---------------------- "Indenture"), Solutia became the successor Company under the Indenture and --------- the Securities and succeeded to, and was substituted for, and may exercise every right and power of, SOI Funding under the Indenture and the Securities and SOI Funding was discharged from all obligations and covenants under the Indenture and the Securities; WHEREAS, Solutia desires to amend certain provisions of the Indenture, as set forth in Article I hereof; WHEREAS, Section 8.01(a)(vii) of the Indenture provides that Solutia and the Trustee may amend the Indenture and the Securities without notice to or consent of any Holders of the Securities by entering into a supplemental indenture in order to amend the Indenture in a manner that does not adversely affect the rights of any Holders; and WHEREAS, this Second Supplemental Indenture has been duly authorized by all necessary corporate action on the part of each of Solutia and the Subsidiary Guarantors. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, Solutia, the Subsidiary Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders as follows: ARTICLE I Amendment --------- Section 1.1. Amendment to Section 1.01. Section 1.01 of ------------------------- the Original Indenture is hereby amended by deleting clause (i) of the first paragraph of the definition of "Unrestricted Subsidiary" and by substituting therefor a new clause (i), which reads as follows: "(i) each of Solutia Chemical Co., Ltd., Suzhou, Solutia Hellas EPE, Solutia Management Company, Inc., Solutia Kimyasal Pazarlama Ve Ticaret Limited Sirketi, Solutia Therminal Co., Ltd., Suzhou, Solutia UK Capital Ltd., Solutia GOM India Coatings Materials Private Limited, Vianova Resins, Inc., Vianova Resins N.V./S.A., Vianova Resins Canada Inc., Vianova Resins Resinas Quimicas, Lda., Viking Finance III B.V. and Viking Resins Group Holdings B.V.," Section 1.2. Trustee's Acceptance. The Trustee hereby --------------------- accepts this Second Supplemental Indenture and agrees to perform the same under the terms and conditions set forth in the Indenture. ARTICLE II Miscellaneous ------------- Section 2.1. Effect of Second Supplemental Indenture. Upon --------------------------------------- the execution and delivery of this Second Supplemental Indenture by Solutia, the Subsidiary Guarantors and the Trustee, the Indenture shall be supplemented in accordance herewith, and this Second Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered under the Indenture shall be bound thereby. Notwithstanding any other provision of this Second Supplemental Indenture, this Second Supplemental Indenture shall be deemed to be effective as of July 9, 2002. Section 2.2. Indenture Remains in Full Force and Effect. ------------------------------------------- Except as supplemented hereby, all provisions in the Indenture shall remain in full force and effect. Section 2.3. Indenture and Second Supplemental Indenture ------------------------------------------- Construed Together. This Second Supplemental Indenture is an indenture - ------------------ supplemental to and in implementation of the Indenture, and the Indenture and this Second Supplemental Indenture shall henceforth be read and construed together. Section 2.4. Confirmation and Preservation of Indenture. ------------------------------------------ The Indenture as supplemented by this Second Supplemental Indenture is in all respects confirmed and preserved. Section 2.5. Conflict with Trust Indenture Act. If any --------------------------------- provision of this Second Supplemental Indenture limits, qualifies or conflicts with any provision of the TIA that is required or deemed under the TIA to be part of and govern any provision of this Second 2 Supplemental Indenture, such provision of the TIA shall control. If any provision of this Second Supplemental Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the provision of the TIA shall be deemed to apply to the Indenture as so modified or to be excluded by this Second Supplemental Indenture, as the case may be. Section 2.6. Severability. In case any provision in this ------------ Second Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 2.7. Benefits of Supplemental Indenture. Nothing ---------------------------------- in this Second Supplemental Indenture or the Securities, express or implied, shall give to any Person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the Indenture, the Supplemental Indenture, this Second Supplemental Indenture or the Securities. Section 2.8. Successors. All agreements of Solutia in this ---------- Second Supplemental Indenture shall bind its successors. All agreements of the Trustee in this Second Supplemental Indenture shall bind its successors. Section 2.9. Certain Duties and Responsibilities of the ------------------------------------------ Trustee. In entering into this Second Supplemental Indenture, the Trustee - ------- shall be entitled to the benefit of every provision of the Indenture and the Securities relating to the conduct or affecting the liability or affording protection to the Trustee, whether or not elsewhere herein so provided. Section 2.10. Governing Law. This Second Supplemental ------------- Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. Section 2.11. Multiple Originals. The parties may sign any ------------------ number of copies of this Second Supplemental Indenture, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 2.12. Headings. The Article and Section headings -------- herein are inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. Section 2.13. The Trustee. The Trustee shall not be ----------- responsible in any manner for or in respect of the validity or sufficiency of this Second Supplemental Indenture or for or in respect of the recitals contained herein, all of which are made by Solutia. [signature pages follow] 3 IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed as of the date first written above. SOLUTIA INC. By: /s/ Kevin Wilson ---------------- Name: C. K. Wilson Title: Vice President and Treasurer CPFILMS INC. By: /s/ Richard A. Ringhofer ------------------------ Name: R. A. Ringhofer Title: Secretary MONCHEM, INC. By: /s/ Kevin Wilson ---------------- Name: C. K. Wilson Title: President MONCHEM INTERNATIONAL, INC. By: /s/ Kevin Wilson ---------------- Name: C. K. Wilson Title: President SOLUTIA SYSTEMS, INC. By: /s/ Kevin Wilson ---------------- Name: C. K. Wilson Title: President HSBC BANK USA, as Trustee By: /s/ Harriet Drandoff ------------------------------ Name: Harriet Drandoff Title: Vice President EX-10 4 ex10.txt Exhibit 10 ---------- EXECUTION COPY AMENDMENT NO. 1 AMENDMENT NO. 1 (this "Amendment No. 1") dated as of September 26, --------------- 2002 between: SOLUTIA INC., a Delaware corporation (the "Company"); and ------- CITIBANK, N.A., as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the "Administrative Agent"). -------------------- The Company, certain lenders (the "Lenders"), Bank of America, ------- N.A., as syndication agent (the "Syndication Agent"), and the Administrative ----------------- Agent are parties to a Second Amended and Restated Credit Agreement dated as of July 25, 2002 (the "Credit Agreement"). The parties hereto desire to ---------------- amend the Credit Agreement to effectuate better the intent of the parties in respect of the calculation of the Debt to Adjusted EBITDA Ratio set forth therein and to amend the Credit Agreement in certain other respects and, in that connection, the Administrative Agent has been granted authority by the Majority Lenders (as defined in the Credit Agreement) to execute and deliver this Amendment No. 1. Accordingly, the Company, and the Administrative Agent on behalf of the Majority Lenders, hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this ----------- Amendment No. 1, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendment. Subject to the conditions specified in --------- Section 3 hereof, but effective as of the date hereof: 2.01. Debt to Adjusted EBITDA Ratio Definition. The definition of ---------------------------------------- "Debt to Adjusted EBITDA Ratio" in Section 1.01 of the Credit Agreement is amended in its entirety to read as follows: "Debt to Adjusted EBITDA Ratio" means, at any date, the ratio of: ----------------------------- (a) (i) Debt of the Company and its Consolidated Subsidiaries on a Consolidated basis as of such date minus (ii) the sum of (x) the amount of cash cover on such date for Letters of Credit and Designated Letters of Credit pursuant to Section 2.10(h) or 2.10(i) and (y) for any period on or before October 15, 2002, the lesser of the outstanding principal amount of the 2002 Notes and the amount held in escrow with the trustee for the 2002 Notes for application to the payment at maturity of the 2002 Notes as contemplated by Section 4.01(k) to (b) Adjusted EBITDA for the Rolling Period ending on or most recently ended prior to such date. Amendment No. 1 --------------- - 2 - 2.02. Foreign Intellectual Property. Section 6.01(p) of the Credit ----------------------------- Agreement is hereby amended to read in its entirety as follows: "(p) Foreign Intellectual Property Security Documents. The Company ------------------------------------------------ will take, and cause CPFilms Inc. to take, such action to deliver the documents, agreements and other instruments contemplated in the definition of the term "Intellectual Property Security Documents" in Section 1.01, covering the intellectual property listed on Schedule 6 hereto filed or registered in Europe, not later than November 15, 2002 (or such later date as shall be agreed to by the Administrative Agent, but in any event no later than December 31, 2002), each of which shall have been executed (and, where appropriate, acknowledged) by Persons satisfactory to the Administrative Agent and, to the extent requested by the Administrative Agent, accompanied by one or more opinions of local counsel covering such matters as the Administrative Agent may reasonably request (and the Company hereby instructs such counsel to deliver such opinions to the Lenders and the Administrative Agent)." Section 3. Representations and Warranties. The Company hereby ------------------------------ represents and warrants to the Administrative Agent and the Lenders that: (a) the representations and warranties contained in the Credit Agreement (giving effect to all amendments thereto contemplated hereunder) are correct on and as of the date hereof, as though made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); (b) after giving effect to this Amendment No. 1, no event has occurred and is continuing that constitutes a Default or an Event of Default. Section 4. Conditions Precedent. As provided in Section 2, the -------------------- amendments to the Credit Agreement set forth in Section 2 are subject to, and will become effective upon, the satisfaction on or before September 26, 2002 of the following conditions precedent (including, with respect to each document required below to be delivered, that the Administrative Agent shall have received each such document, which shall be satisfactory in form and substance to the Administrative Agent): (a) Execution. This Amendment No. 1 shall have been duly executed --------- and delivered by the Company and the Administrative Agent as provided on the signature pages hereof. (b) Certain Consents and Authorizations. The requisite lenders ----------------------------------- under the Astaris Credit Agreement, to the extent necessary under the Astaris Guaranty Agreement, shall have executed and delivered a consent to the transactions contemplated hereby pursuant to an instrument in form and substance satisfactory to the Administrative Agent. In addition, a majority in interest of the purchasers under the Co-gen Participation Agreement, to the extent necessary under the Co-gen Guaranty Agreement and the Co-gen Lease, shall have consented to the transactions contemplated hereby pursuant to an instrument in form and substance satisfactory to the Administrative Agent. Amendment No. 1 --------------- - 3 - (c) Fees and Expenses. The Administrative Agent shall have ----------------- received, for the account of each Lender that has authorized the Administrative Agent to execute and deliver this Agreement on its behalf not later than 5 p.m. New York City time on September 26, 2002, an amendment fee in an amount equal to 0.15% of the sum of such Lender's Revolving Credit Commitments and Term Advances. (d) Other Documents. The Administrative Agent shall have received --------------- such other documents as the Administrative Agent or Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to the Administrative Agent, may reasonably request. Section 5. Miscellaneous. Except as herein provided, the Credit ------------- Agreement shall remain unchanged and in full force and effect. This Amendment No. 1 may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall be governed by, and construed in accordance with, the law of the State of New York. Amendment No. 1 --------------- - 4 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be executed by their respective officers thereunto duly authorized, as of the date first above written. SOLUTIA INC. By: /s/ Kevin Wilson ------------------------------------- Name: C. K. Wilson Title: Vice President and Treasurer CITIBANK, N.A., as Administrative Agent and on behalf of the Majority Lenders By: /s/ James N. Simpson ------------------------------------- Name: James N. Simpson Title: Vice President Citibank, N.A. Amendment No. 1 --------------- EX-99 5 exh99.txt EXHIBIT 99 SOLUTIA INC. COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
FOUR MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, 1997(1) 1998 1999 2000 2001 SEPTEMBER 30, 2002 -------------------- ----- ----- ----- ----- ------------------ Income (loss) from continuing operations, before income taxes and equity earnings (loss) from affiliates(2).............. $ 37 $ 350 $ 267 $ 6 $ (64) $ 19 Add: Fixed charges................ 22 58 62 114 104 86 Amortization of capitalized interest................... 2 7 7 7 7 5 Dividends from affiliated companies.................. 14 37 60 45 30 21 Less: Interest capitalized......... (4) (6) (13) (18) (2) (1) ----- ----- ----- ----- ----- ----- Income as adjusted........ $ 71 $ 446 $ 383 $ 154 $ 75 $ 130 ===== ===== ===== ===== ===== ===== Fixed charges: Interest expensed and capitalized................. 19 49 53 101 92 77 Estimate of interest within rental expense.............. 3 9 9 13 12 9 ----- ----- ----- ----- ----- ----- Fixed charges............. $ 22 $ 58 $ 62 $ 114 $ 104 $ 86 ===== ===== ===== ===== ===== ===== Ratio of Earnings to Fixed Charges(3)................ 3.23 7.69 6.18 1.35 0.72 1.51 ===== ===== ===== ===== ===== ===== - ------- (1) We have not calculated the ratio of earnings to fixed charges for the periods before September 1, 1997. Historical computation of earnings to fixed charges is not considered meaningful before that date because we were not an independent company and Monsanto Company did not allocate debt to us. (2) Includes restructuring and other items of $58 million for the year ended December 31, 2001, $107 million for the year ended December 31, 2000, $61 million for the year ended December 31, 1999, and $72 million for the four months ended December 31, 1997. (3) Earnings for the year ended December 31, 2001, would have to be $29 million higher in order to achieve a one-to-one ratio.
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