-----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, RF4+mP+3BDzM1gP3AhAMqGZj39Xw0NTqiYH5qZVcoxvRtzpg2UVY102YWwUMV0ov FfnN8LOLxRCDVBoceW1FgA== 0001068800-03-000301.txt : 20030428 0001068800-03-000301.hdr.sgml : 20030428 20030428134602 ACCESSION NUMBER: 0001068800-03-000301 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030428 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: 03666361 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 sol10q.txt SOLUTIA INC. FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-13255 --------- SOLUTIA INC. ------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 43-1781797 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760 - --------------------------------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (314) 674-1000 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES X NO --- --- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. OUTSTANDING AT CLASS MARCH 31, 2003 ----- -------------- COMMON STOCK, $0.01 PAR VALUE 104,699,333 SHARES ----------------------------- ------------------ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOLUTIA INC. STATEMENT OF CONSOLIDATED LOSS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, --------------------- 2003 2002 ------ ------ NET SALES................................................... $ 596 $ 520 Cost of goods sold.......................................... 527 433 ------ ------ GROSS PROFIT................................................ 69 87 Marketing expenses.......................................... 39 35 Administrative expenses..................................... 30 32 Technological expenses...................................... 12 11 Amortization expense........................................ 1 1 ------ ------ OPERATING INCOME (LOSS)..................................... (13) 8 Equity earnings (loss) from affiliates--net of tax.......... (2) 8 Interest expense............................................ (23) (19) Other income--net........................................... 7 7 ------ ------ INCOME (LOSS) BEFORE INCOME TAXES........................... (31) 4 Income taxes (benefit)...................................... (14) -- ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................................................. (17) 4 INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX...... (2) 10 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... -- (167) ------ ------ NET LOSS.................................................... $ (19) $ (153) ====== ====== BASIC EARNINGS (LOSS) PER SHARE: Income (Loss) from Continuing Operations Before Discontinued Operations and Cumulative Effect of Change in Accounting Principle................................................. $(0.16) $ 0.04 Net Loss per Share.......................................... $(0.18) $(1.46) DILUTED EARNINGS (LOSS) PER SHARE: Income (Loss) from Continuing Operations Before Discontinued Operations and Cumulative Effect of Change in Accounting Principle................................................. $(0.16) $ 0.04 Net Loss per Share.......................................... $(0.18) $(1.46) WEIGHTED AVERAGE EQUIVALENT SHARES (IN MILLIONS): Basic................................................... 104.7 104.7 Effect of dilutive securities: Common share equivalents--common shares issuable upon exercise of outstanding stock options........ -- 0.4 ----- ----- Diluted................................................. 104.7 105.1 ===== ===== STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (DOLLARS IN MILLIONS) THREE MONTHS ENDED MARCH 31, --------------------- 2003 2002 ------ ------ NET LOSS (19) (153) OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments............................ 37 (5) Unrealized investment gain, net of tax...................... -- 1 Net realized loss on derivative instruments, net of tax..... -- 1 ------ ------ COMPREHENSIVE INCOME (LOSS)................................. $ 18 $ (156) ====== ====== See accompanying Notes to Consolidated Financial Statements.
1 SOLUTIA INC. STATEMENT OF CONSOLIDATED FINANCIAL POSITION (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 2003 2002 --------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 17 $ 17 Trade receivables, net of allowance of $17 in 2003 and $16 in 2002................................................... 311 270 Miscellaneous receivables................................... 97 97 Prepaid expenses............................................ 15 17 Deferred income tax benefit................................. 131 108 Inventories................................................. 270 262 Assets of Discontinued Operations........................... -- 636 ------ ------ TOTAL CURRENT ASSETS........................................ 841 1,407 PROPERTY, PLANT AND EQUIPMENT: Land........................................................ 19 19 Buildings................................................... 376 375 Machinery and equipment..................................... 2,975 2,946 Construction in progress.................................... 26 26 ------ ------ Total property, plant and equipment......................... 3,396 3,366 Less accumulated depreciation............................... 2,452 2,436 ------ ------ NET PROPERTY, PLANT AND EQUIPMENT........................... 944 930 INVESTMENTS IN AFFILIATES................................... 234 232 GOODWILL.................................................... 146 144 IDENTIFIED INTANGIBLE ASSETS, NET........................... 66 66 LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 229 290 OTHER ASSETS................................................ 301 273 ------ ------ TOTAL ASSETS................................................ $2,761 $3,342 ====== ====== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable............................................ $ 241 $ 234 Wages and benefits.......................................... 26 42 Postretirement liabilities.................................. 106 93 Miscellaneous accruals...................................... 246 314 Short-term debt............................................. 6 358 Liabilities of Discontinued Operations...................... -- 165 ------ ------ TOTAL CURRENT LIABILITIES................................... 625 1,206 LONG-TERM DEBT.............................................. 850 839 POSTRETIREMENT LIABILITIES.................................. 1,157 1,164 OTHER LIABILITIES........................................... 361 382 SHAREHOLDERS' DEFICIT: Common stock (authorized, 600,000,000 shares, par value $0.01) Issued: 118,400,635 shares in 2003 and 2002............... 1 1 Additional contributed capital............................ 19 19 Treasury stock, at cost (13,701,302 shares in 2003 and 13,659,351 shares in 2002, respectively)................ (251) (251) Net deficiency of assets at spinoff......................... (113) (113) Accumulated other comprehensive loss........................ (109) (146) Reinvested earnings......................................... 221 241 ------ ------ TOTAL SHAREHOLDERS' DEFICIT................................. (232) (249) ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $2,761 $3,342 ====== ====== See accompanying Notes to Consolidated Financial Statements.
2 SOLUTIA INC. STATEMENT OF CONSOLIDATED CASH FLOWS (DOLLARS IN MILLIONS)
THREE MONTHS ENDED MARCH 31, ------------------- 2003 2002 ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net loss.................................................... $ (19) $(153) Adjustments to reconcile to Cash From Operations: Cumulative effect of change in accounting principle..... -- 167 Depreciation and amortization........................... 34 34 (Income) loss from discontinued operations, net of tax................................................... 2 (10) Amortization of deferred credits........................ (3) (3) Amortization of deferred debt issuance costs and debt discount.............................................. 4 3 Restructuring expenses and other special items.......... 12 -- Net pretax gains from asset disposals................... -- (5) Changes in assets and liabilities: Income and deferred taxes........................... (15) 63 Trade receivables................................... (41) (28) Inventories......................................... (8) (9) Accounts payable.................................... 7 (1) Other assets and liabilities........................ (8) (72) ----- ----- CASH USED IN OPERATIONS--CONTINUING OPERATIONS.............. (35) (14) CASH PROVIDED BY (USED IN) OPERATIONS--DISCONTINUED OPERATIONS................................................ (11) 5 ----- ----- CASH USED IN OPERATIONS..................................... (46) (9) ----- ----- INVESTING ACTIVITIES: Property, plant and equipment purchases..................... (40) (11) Property disposals and investment proceeds.................. -- 98 ----- ----- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES--CONTINUING OPERATIONS................................................ (40) 87 CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES--DISCONTINUED OPERATIONS....................... 482 (2) ----- ----- CASH PROVIDED BY INVESTING ACTIVITIES....................... 442 85 ----- ----- FINANCING ACTIVITIES: Net change in short-term debt obligations................... (352) (81) Common stock issued under employee stock plans.............. -- 1 Other financing activities.................................. (39) -- ----- ----- CASH USED IN FINANCING ACTIVITIES--CONTINUING OPERATIONS.... (391) (80) CASH USED IN FINANCING ACTIVITIES--DISCONTINUED OPERATIONS................................................ (5) -- ----- ----- CASH USED IN FINANCING ACTIVITIES........................... (396) (80) ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ -- (4) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR........................................... 17 23 ----- ----- END OF PERIOD............................................... $ 17 $ 19 ===== ===== 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; 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 2002 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 6, 2003. 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 period ended March 31, 2003, 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 2003 presentation. 2. DISCONTINUED OPERATIONS On December 2, 2002, Solutia signed a definitive agreement to sell its resins, additives and adhesives businesses to UCB S.A. for $500 million in cash, plus an upfront payment of $10 million for a period of exclusivity. On January 31, 2003, the sale was completed resulting in a pretax gain of $24 million. Total proceeds, including the $10 million exclusivity fee received in 2002, net of transaction costs were $494 million. The assets and liabilities of the discontinued operations have been classified as current in the Statement of Consolidated Financial Position at December 31, 2002. In addition, proceeds from this divestiture were used to pay down $405 million of borrowings under the amended credit facility in accordance with bank agreements. As a result, all borrowings under this facility have been classified as short-term at December 31, 2002. The Company retained certain tax liabilities of approximately $40 million related to the divested businesses and has excluded them from the liabilities identified below. The carrying amounts of assets and liabilities from discontinued operations at December 31, 2002, consisted of the following:
DECEMBER 31, 2002 ------------ ASSETS: Receivables and prepaids.................................... $100 Inventories................................................. 68 Other current assets........................................ 36 ---- Total Current Assets.................................... 204 ---- Property, plant and equipment, net.......................... 199 Intangible assets........................................... 205 Other long-term assets...................................... 28 ---- Total Assets............................................ $636 ==== LIABILITIES: Accounts payable............................................ $ 42 Miscellaneous accruals...................................... 51 ---- Total Current Liabilities............................... 93 ---- Postretirement liabilities.................................. 21 Non-current deferred tax liability.......................... 33 Other long-term liabilities................................. 18 ---- Total Liabilities....................................... $165 ====
4 The operating results of the resins, additives and adhesives businesses have been reported separately as discontinued operations in the Consolidated Financial Statements for periods presented. The operating results for the quarter ended March 31, 2002, exclude certain corporate expenses of $1 million which had previously been allocated to the resins, additives and adhesives businesses. In addition, interest expense of $24 million in 2003 and $6 million in 2002 associated with debt that was repaid with the sales proceeds was allocated to discontinued operations. The operating results for 2003 include results of operations for the month of January of 2003. Net sales and income from discontinued operations are as follows:
THREE MONTHS ENDED MARCH 31, ------------------- 2003 2002 ---- ---- Net sales............................................ $53 $134 Income before income tax expense (including gain on disposal of $24)................................... 7 14 Income tax expense................................... (9) (4) --- ---- Income (loss) from discontinued operations........... $(2) $ 10 === ====
3. EARNINGS (LOSS) PER SHARE
THREE MONTHS ENDED MARCH 31, --------------------- 2003 2002 ------ ------ Income (Loss) from Continuing Operations Before Discontinued Operations and Cumulative Effect of Change in Accounting Principle................................................. (17) 4 Income (Loss) from Discontinued Operations, net of taxes.... (2) 10 Cumulative Effect of Change in Accounting Principle......... -- (167) ------ ------ Net Loss.................................................... $ (19) $ (153) ====== ====== Basic Earnings (Loss) per Share: Income (Loss) from Continuing Operations Before Discontinued Operations and Cumulative Effect of Change in Accounting Principle................................................. $(0.16) $ 0.04 Income (Loss) from Discontinued Operations, net of taxes.... (0.02) 0.09 Cumulative Effect of Change in Accounting Principle......... -- (1.59) ------ ------ Basic Loss per Share........................................ $(0.18) $(1.46) ====== ====== Diluted Earnings (Loss) per Share: Income (Loss) from Continuing Operations Before Discontinued Operations and Cumulative Effect of Change in Accounting Principle................................................. $(0.16) $ 0.04 Income (Loss) from Discontinued Operations, net of taxes.... (0.02) 0.09 Cumulative Effect of Change in Accounting Principle......... -- (1.59) ------ ------ Diluted Loss per Share...................................... $(0.18) $(1.46) ====== ====== Weighted average equivalent shares (in millions): Basic................................................... 104.7 104.7 Effect of dilutive securities: Common share equivalents--common shares issuable upon exercise of outstanding stock options and warrants.......................................... -- 0.4 ------ ------ Diluted................................................. 104.7 105.1 ====== ======
4. STOCK OPTION PLANS Effective January 1, 2003, Solutia adopted SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure," which allowed Solutia to continue following the guidance of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. Accordingly, no compensation cost has been recognized for Solutia's option plans in the Statement of Consolidated Loss, as all options granted under the plans had an exercise price equal to the market value of the Company's stock on the date of the grant. Had the determination of 5 compensation cost for these plans been based on the fair value at the grant dates for awards under these plans, Solutia's net loss would have been increased to the pro forma amounts indicated below:
THREE MONTHS ENDED MARCH 31, ----------------------- 2003 2002 ------ ------ NET LOSS: As reported................................... $ (19) $ (153) Deduct: Total stock-based employee compensation expense determined using the Black-Scholes option-pricing model for all awards, net of tax.......................... (2) (2) ------ ------ Pro forma..................................... $ (21) $ (155) ====== ====== LOSS PER SHARE: Basic--as reported............................ $(0.18) $(1.46) Basic--pro forma.............................. $(0.20) $(1.48) Diluted--as reported.......................... $(0.18) $(1.46) Diluted--pro forma............................ $(0.20) $(1.47)
Compensation expense resulting from the fair value method may not be representative of compensation expense to be incurred on a pro forma basis in future years. The fair value of each option grant is estimated on the date of grant by use of the Black-Scholes option-pricing model. 5. RESTRUCTURING RESERVES During the first quarter of 2003, Solutia recorded restructuring charges of $6 million to cost of goods sold and $5 million to marketing, administrative and technological expenses for costs associated with workforce reductions. The restructuring was part of an enterprise-wide cost reduction initiative associated with the sale of the resins, additives and adhesives businesses and other cost reduction initiatives. As a result of these actions, Solutia reduced its workforce by approximately 170 positions. Cash outlays associated with the restructuring actions were funded from divestiture proceeds and operations. Approximately 90 percent of the workforce reductions affected North American business and manufacturing operations, and approximately 10 percent affected European, Asian and Latin American operations. Management positions represented approximately 40 percent of the workforce reductions.
EMPLOYMENT REDUCTIONS TOTAL ---------- ----- Balance at January 1, 2003......................... $-- $-- Charges taken................................. 11 11 Amounts utilized.............................. (7) (7) ---- ---- BALANCE AT MARCH 31, 2003.......................... $ 4 $ 4 ==== ====
During 2000, Solutia decided to exit its resins facility at the Port Plastics site in Addyston, Ohio. An $8 million charge to cost of goods sold was recorded to carry out the exit plan. The charge included $2 million to write down plant assets to their fair value, $2 million of dismantling costs and $4 million of direct manufacturing, overhead, utilities and severance costs for which Solutia was contractually obligated under an operating agreement. Solutia was required to provide 24 months notice of intent to exit and was required 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. Solutia retained the reserve pursuant to the sales agreement for the resins, additives and adhesives divestiture. 6 The following table summarizes the restructuring charge, amounts utilized to carry out those plans and amount remaining at March 31, 2003:
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.......................... (2) -- -- (2) ---- ---- ---- ---- Balance at December 31, 2002.................. -- -- 4 4 Amounts utilized.......................... -- -- -- -- ---- ---- ---- ---- BALANCE AT MARCH 31, 2003..................... $-- $-- $ 4 $ 4 ==== ==== ==== ====
6. INVENTORY VALUATION The components of inventories as of March 31, 2003, and December 31, 2002, were as follows:
MARCH 31, DECEMBER 31, 2003 2002 --------- ------------ Finished goods................................ $ 194 $ 179 Goods in process.............................. 102 101 Raw materials and supplies.................... 93 83 ----- ----- Inventories, at FIFO cost..................... 389 363 Excess of FIFO over LIFO cost................. (119) (101) ----- ----- TOTAL......................................... $ 270 $ 262 ===== =====
7. 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 we became an independent company, we assumed liabilities related to specified legal proceedings from the former Monsanto Company (now known as Pharmacia Corporation, a wholly owned subsidiary of Pfizer Inc.), under an agreement known as the Distribution Agreement. As a result, although Monsanto remains the named defendant, the Company is required to manage the litigation and indemnify Pharmacia for costs, expenses and judgments arising from the litigation. While the results of litigation cannot be predicted with certainty, the Company does not believe, based on currently available facts, that the ultimate resolution of any of these preceding matters will have a material adverse effect on our consolidated financial position or liquidity in any one year. However, resolution in those cases involving the alleged discharge of polychlorinated biphenyls ("PCBs") from the Anniston, Alabama plant site and the Penndot case, may have a material adverse effect on net income in a given year, although it is impossible at this time to estimate the range or amount of any such liability. In addition, there cannot be any assurance that any final judgment against the Company in the Anniston, Alabama cases, if upheld on appeal, will not have a material adverse effect on consolidated financial position and liquidity. Solutia has contractually agreed to provide the Astaris joint venture with funding in the event the joint venture fails to meet certain benchmarks. Solutia anticipates required contributions of approximately $50 million for 2003. Solutia is defending a number of lawsuits pending in state and federal court relating to the alleged release of PCBs and other materials from our Anniston, Alabama plant site. (1) Abernathy v. Monsanto: This matter involves four consolidated cases brought on behalf of approximately 3,500 plaintiffs and is currently pending in Circuit Court for Etowah County, Alabama. Trial in this 7 action recommenced on March 17, 2003, with arguments to the jury regarding compensatory damages for plaintiffs making property damage and exposure claims. As of April 8, 2003 the jury had returned compensatory damages verdicts for the original 17 trial plaintiffs. We asked the trial court to sever these claims and certify them for appeal to the Alabama Supreme Court. The trial court denied our request. As of April 22, 2003, the jury had returned compensatory damage verdicts totaling approximately $11.8 million to 51 plaintiffs who have made property damage and exposure claims, but no final appealable judgment has been entered with respect to these verdicts. No claims of personal injury have been tried or presented to the jury. Trial of this action continues. (2) Tolbert v. Monsanto: There are currently approximately 15,300 plaintiffs in this action brought in U.S. District Court for the Northern District of Alabama. The parties had selected eight plaintiffs from two "disease categories" for a phase I trial. On February 25, 2003, the court allowed plaintiffs to dismiss with prejudice the claims of two phase I plaintiffs selected by Solutia and indicated that plaintiffs should withdraw two of their phase I selections. The court has set a phase I trial date of October 14, 2003. (3) Payton v. Monsanto: This action was brought in Circuit Court for Shelby County, Alabama on behalf of a purported class of owners, lessees and licensees of property around Lay Lake. On March 19, 2003, the trial court entered an order certifying a plaintiff class. We intend to appeal this order, and our notice of appeal is due to be filed by April 30, 2003. 8. 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. 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 $1 million of intangible assets net of related deferred tax liabilities representing assembled workforce that did not meet the separability criteria under SFAS No. 141, "Business Combinations." Identified intangible assets are as follows:
GROSS MARCH 31, 2003 NET CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE -------- -------------- -------- Amortized intangible assets: Contractual customer relationships............... $23 $ (6) $17 Employment agreements............................ 5 (3) 2 Other............................................ 8 (5) 3 Translation...................................... 7 -- 7 --- ---- --- TOTAL AMORTIZED INTANGIBLE ASSETS..................... $43 $(14) $29 --- ---- --- Unamortized intangible assets: Trademarks........................................ $39 $ (4) $35 Translation....................................... 2 -- 2 --- ---- --- TOTAL UNAMORTIZED INTANGIBLE ASSETS................... $41 $ (4) $37 --- ---- --- TOTAL IDENTIFIED INTANGIBLE ASSETS.................... $84 $(18) $66 === ==== === 8 GROSS DECEMBER 31, 2002 NET CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE -------- ----------------- -------- Amortized intangible assets: Contractual customer relationships................ $23 $ (5) $18 Employment agreements............................. 5 (3) 2 Other............................................. 8 (5) 3 Translation....................................... 6 -- 6 --- ---- --- TOTAL AMORTIZED INTANGIBLE ASSETS..................... $42 $(13) $29 --- ---- --- Unamortized intangible assets: Trademarks........................................ $39 $ (4) $35 Translation....................................... 2 -- 2 --- ---- --- TOTAL UNAMORTIZED INTANGIBLE ASSETS................... $41 $ (4) $37 --- ---- --- TOTAL IDENTIFIED INTANGIBLE ASSETS.................... $83 $(17) $66 === ==== ===
There were no acquisitions of intangible assets and there have been no changes to amortizable lives or methods during the first quarter of 2003. Intangible asset amortization expense was $1 million for the first quarter of 2003. Amortization expense for the net carrying amount of intangible assets is estimated to be $3 million in 2003, $3 million in 2004, $3 million in 2005, $3 million in 2006 and $3 million in 2007. Goodwill as allocated by reportable segment is as follows:
PERFORMANCE PRODUCTS AND SERVICES TOTAL -------------------- ----- Goodwill, December 31, 2002................ $144 $144 Translation................................ 2 2 ---- ---- Goodwill, March 31, 2003................... $146 $146 ==== ====
9. SEGMENT DATA Solutia's management is organized around two strategic business platforms: Performance Products and Services and Integrated Nylon. Solutia's reportable segments and their major products are as follows:
PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON --------------------------------- ---------------- SAFLEX(R) plastic interlayer Nylon intermediate "building block" chemicals Polyvinyl butyral for KEEPSAFE(R), SAFLEX Merchant polymer and nylon extrusion INSIDE(R) (in Europe only) and KEEPSAFE polymers, including VYDYNE(R) and ASCEND(R) MAXIMUM(R) laminated window glass LLUMAR(R), VISTA(R) and GILA(R) professional Carpet fibers, including the WEAR-DATED(R) and and retail window films ULTRON(R) brands VANCEVA(TM) films Industrial nylon fibers Conductive and anti-reflective coated films and ACRILAN(R) acrylic fibers for apparel, upholstery deep-dyed films fabrics, craft yarns and other applications Industrial products, including THERMINOL(R) heat transfer fluids, DEQUEST(R) water treatment chemicals, SKYDROL(R) aviation hydraulic fluids, SKYKLEEN(R) aviation solvents, and chlorobenzenes Services for process research and development, scale-up manufacturing and small volume licensed production 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 9 amortization expenses and other non-recurring charges such as restructuring and asset impairment charges that 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 months ended March 31, 2003, and 2002 are as follows:
2003 2002 ----------------- ------------------ NET NET SALES PROFIT SALES PROFIT ----- ------ ----- ------ SEGMENT: Performance Products and Services....................... $243 $ 17 $224 $ 21 Integrated Nylon........................................ 353 (11) 296 7 ---- ---- ---- ---- SEGMENT TOTALS.............................................. 596 6 520 28 RECONCILIATION TO CONSOLIDATED TOTALS: Corporate expenses........................................ (15) (17) Equity earnings (loss) from affiliates, net of tax........ (3) 8 Interest expense.......................................... (23) (19) Other income--net......................................... 4 4 CONSOLIDATED TOTALS: ---- ---- NET SALES................................................. $596 $520 ==== ---- ==== ---- INCOME (LOSS) BEFORE INCOME TAXES......................... $(31) $ 4 ==== ====
10. 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 senior secured notes (the "Notes"). The Guarantors fully and unconditionally guarantee the Notes on a joint and several basis. The following consolidating condensed financial statements present, in separate columns, financial information for: Solutia Inc. on a parent only basis carrying its investment in subsidiaries under the equity method; Guarantors on a combined, or where appropriate, consolidated basis, carrying investments in subsidiaries 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 March 31, 2003 and December 31, 2002, and for the periods ended March 31, 2003 and 2002. 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 LOSS THREE MONTHS ENDED MARCH 31, 2003 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES......................... $464 $ 33 $ 181 $(82) $596 Cost of goods sold................ 444 14 156 (87) 527 ---- ----- ----- ---- ---- GROSS PROFIT...................... 20 19 25 5 69 Marketing expenses................ 27 5 7 -- 39 Administrative expenses........... 21 2 7 -- 30 Technological expenses............ 11 1 0 -- 12 Amortization expense.............. -- -- 1 -- 1 ---- ----- ----- ---- ---- OPERATING INCOME (LOSS)........... (39) 11 10 5 (13) Equity earnings (loss) from affiliates--net of tax.......... 54 22 1 (79) (2) Interest expense.................. (36) (3) (19) 35 (23) Other income--net................. 3 23 16 (35) 7 ---- ----- ----- ---- ---- INCOME (LOSS) BEFORE INCOME TAXES........................... (18) 53 8 (74) (31) Income benefit.................... (1) (1) (14) 2 (14) ---- ----- ----- ---- ---- INCOME (LOSS) FROM CONTINUING OPERATIONS...................... (17) 54 22 (76) (17) Loss from Discontinued Operations, net of taxes.................... (2) (103) (103) 206 (2) ---- ----- ----- ---- ---- NET LOSS.......................... $(19) $ (49) $ (81) $130 $(19) ==== ===== ===== ==== ====
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) THREE MONTHS ENDED MARCH 31, 2003 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET LOSS.......................... $(19) $ (49) $ (81) $130 $(19) OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments..................... 37 38 35 (73) 37 ---- ----- ----- ---- ---- COMPREHENSIVE INCOME (LOSS)....... $ 18 $ (11) $ (46) $ 57 $ 18 ==== ===== ===== ==== ====
11 SOLUTIA INC. CONSOLIDATING STATEMENT OF LOSS THREE MONTHS ENDED MARCH 31, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES......................... $ 404 $ 36 $ 156 $(76) $ 520 Cost of goods sold................ 365 17 128 (77) 433 ----- ----- ----- ---- ----- GROSS PROFIT...................... 39 19 28 1 87 Marketing expenses................ 26 5 4 -- 35 Administrative expenses........... 24 2 6 -- 32 Technological expenses............ 10 -- 1 -- 11 Amortization expense.............. -- -- 1 -- 1 ----- ----- ----- ---- ----- OPERATING INCOME (LOSS)........... (21) 12 16 1 8 Equity earnings (loss) from affiliates--net of tax.......... (124) (158) -- 290 8 Interest expense.................. (34) (2) (29) 46 (19) Other income--net................. 16 20 22 (51) 7 ----- ----- ----- ---- ----- INCOME (LOSS) BEFORE INCOME TAXES........................... (163) (128) 9 286 4 Income taxes (benefit)............ (1) -- 2 (1) -- ----- ----- ----- ---- ----- INCOME (LOSS) FROM CONTINUING OPERATIONS...................... (162) (128) 7 287 4 Income from Discontinued Operations, net of taxes........ 10 11 11 (22) 10 Cumulative Effect of Change in Accounting Principle, net of tax............................. (1) -- (166) -- (167) ----- ----- ----- ---- ----- NET LOSS.......................... $(153) $(117) $(148) $265 $(153) ===== ===== ===== ==== =====
CONSOLIDATING STATEMENT OF COMPREHENSIVE LOSS THREE MONTHS ENDED MARCH 31, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET LOSS.......................... $(153) $(117) $(148) $265 $(153) OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments..................... (5) (7) -- 7 (5) Unrealized investment gain, net of tax............................. 1 -- -- -- 1 Net realized loss on derivative instruments, net of tax......... 1 -- -- -- 1 ----- ----- ----- ---- ----- COMPREHENSIVE LOSS................ $(156) $(124) $(148) $272 $(156) ===== ===== ===== ==== =====
12 SOLUTIA INC. CONSOLIDATING BALANCE SHEET MARCH 31, 2003 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ 7 $ -- $ 10 $ -- $ 17 Trade receivables, net...................... 15 170 126 -- 311 Intercompany receivables.................... 27 592 112 (731) -- Miscellaneous receivables................... 71 (9) 35 -- 97 Prepaid expenses............................ 12 -- 3 -- 15 Deferred income tax benefit................. 104 -- 22 5 131 Inventories................................. 164 26 95 (15) 270 Current Assets--Discontinued Operations..... -- -- -- -- -- ------ ------ ------ ------- ------ TOTAL CURRENT ASSETS.................... 400 779 403 (741) 841 PROPERTY, PLANT AND EQUIPMENT: Land........................................ 17 -- 2 -- 19 Buildings................................... 265 25 86 -- 376 Machinery and equipment..................... 2,496 71 408 -- 2,975 Construction in progress.................... 16 1 9 -- 26 ------ ------ ------ ------- ------ Total property, plant and equipment......... 2,794 97 505 -- 3,396 Less accumulated depreciation............... 2,083 20 349 -- 2,452 ------ ------ ------ ------- ------ NET PROPERTY, PLANT AND EQUIPMENT........... 711 77 156 -- 944 INVESTMENTS IN AFFILIATES................... 2,565 (14) 32 (2,349) 234 GOODWILL.................................... -- 72 74 -- 146 IDENTIFIED INTANGIBLE ASSETS, NET........... 3 26 37 -- 66 LONG-TERM DEFERRED INCOME TAX BENEFIT....... 217 -- 12 -- 229 INTERCOMPANY ADVANCES....................... 128 1,661 725 (2,514) -- OTHER ASSETS................................ 273 1 27 -- 301 LONG-TERM ASSETS--DISCONTINUED OPERATIONS... -- -- -- -- -- ------ ------ ------ ------- ------ TOTAL ASSETS............................ $4,297 $2,602 $1,466 $(5,604) $2,761 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable............................ $ 191 $ 14 $ 37 $ (1) $ 241 Intercompany payables....................... 501 158 72 (731) -- Wages and benefits.......................... 15 -- 11 -- 26 Postretirement liabilities.................. 105 -- 1 -- 106 Miscellaneous accruals...................... 134 11 101 -- 246 Short-term debt............................. 5 -- 1 -- 6 Intercompany short-term debt................ 37 55 246 (338) -- Current Liabilities--Discontinued Operations................................ -- -- -- -- -- ------ ------ ------ ------- ------ TOTAL CURRENT LIABILITIES................... 988 238 469 (1,070) 625 LONG-TERM DEBT.............................. 632 -- 218 -- 850 INTERCOMPANY LONG-TERM DEBT................. 1,501 -- 675 (2,176) -- POSTRETIREMENT LIABILITIES.................. 1,129 -- 28 -- 1,157 OTHER LIABILITIES........................... 279 -- 83 (1) 361 SHAREHOLDERS' EQUITY (DEFICIT): Common stock................................ 1 -- -- -- 1 Additional contributed capital.......... 19 -- -- -- 19 Treasury stock.......................... (251) -- -- -- (251) Net (deficiency) excess of assets at spinoff and subsidiary capital........ (113) 2,364 (7) (2,357) (113) Accumulated other comprehensive loss........ (109) -- -- -- (109) Reinvested earnings......................... 221 -- -- -- 221 ------ ------ ------ ------- ------ TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (232) 2,364 (7) (2,357) (232) ------ ------ ------ ------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)................................. $4,297 $2,602 $1,466 $(5,604) $2,761 ====== ====== ====== ======= ======
13 SOLUTIA INC. CONSOLIDATING BALANCE SHEET DECEMBER 31, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ -- $ -- $ 17 $ -- $ 17 Trade receivables, net...................... 12 146 112 -- 270 Intercompany receivables.................... 28 567 357 (952) -- Miscellaneous receivables................... 69 -- 28 -- 97 Prepaid expenses............................ 14 1 2 -- 17 Deferred income tax benefit................. 82 -- 19 7 108 Inventories................................. 167 23 92 (20) 262 Current Assets--Discontinued Operations..... 85 10 541 -- 636 ------ ------ ------ ------- ------ TOTAL CURRENT ASSETS.................... 457 747 1,168 (965) 1,407 PROPERTY, PLANT AND EQUIPMENT: Land........................................ 17 -- 2 -- 19 Buildings................................... 266 25 84 -- 375 Machinery and equipment..................... 2,482 71 393 -- 2,946 Construction in progress.................... 15 1 10 -- 26 ------ ------ ------ ------- ------ Total property, plant and equipment......... 2,780 97 489 -- 3,366 Less accumulated depreciation............... 2,082 19 335 -- 2,436 ------ ------ ------ ------- ------ NET PROPERTY, PLANT AND EQUIPMENT........... 698 78 154 -- 930 INVESTMENTS IN AFFILIATES................... 2,990 33 30 (2,821) 232 GOODWILL.................................... -- 72 72 -- 144 IDENTIFIED INTANGIBLE ASSETS, NET........... 3 26 37 -- 66 LONG-TERM DEFERRED INCOME TAX BENEFIT....... 278 -- 12 -- 290 INTERCOMPANY ADVANCES....................... 128 2,126 1,461 (3,715) -- OTHER ASSETS................................ 241 1 31 -- 273 ------ ------ ------ ------- ------ TOTAL ASSETS............................ $4,795 $3,083 $2,965 $(7,501) $3,342 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable............................ $ 191 $ 8 $ 35 $ -- $ 234 Intercompany payables....................... 463 152 337 (952) -- Wages and benefits.......................... 20 -- 22 -- 42 Postretirement liabilities.................. 92 -- 1 -- 93 Miscellaneous accruals...................... 179 10 125 -- 314 Short-term debt............................. 233 -- 125 -- 358 Intercompany short-term debt................ 201 23 268 (492) -- Current Liabilities--Discontinued Operations................................ 33 -- 132 -- 165 ------ ------ ------ ------- ------ TOTAL CURRENT LIABILITIES................... 1,412 193 1,045 (1,444) 1,206 LONG-TERM DEBT.............................. 630 -- 209 -- 839 INTERCOMPANY LONG-TERM DEBT................. 1,586 98 1,539 (3,223) -- POSTRETIREMENT LIABILITIES.................. 1,137 -- 27 -- 1,164 OTHER LIABILITIES........................... 279 -- 104 (1) 382 SHAREHOLDERS' EQUITY (DEFICIT): Common stock................................ 1 -- -- -- 1 Additional contributed capital.......... 19 -- -- -- 19 Treasury stock.......................... (251) -- -- -- (251) Net (deficiency) excess of assets at spinoff and subsidiary capital........ (113) 2,792 41 (2,833) (113) Accumulated other comprehensive loss........ (146) -- -- -- (146) Reinvested earnings......................... 241 -- -- -- 241 ------ ------ ------ ------- ------ TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (249) 2,792 41 (2,833) (249) ------ ------ ------ ------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)................................. $4,795 $3,083 $2,965 $(7,501) $3,342 ====== ====== ====== ======= ======
14 SOLUTIA INC. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2003 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH PROVIDED BY (USED IN) OPERATIONS... $ (62) $ 20 $ (4) $-- $ (46) ----- ---- ----- ---- ----- INVESTING ACTIVITIES: Property, plant and equipment purchases............................. (37) -- (3) -- (40) Property disposals and investment proceeds.............................. 172 -- 310 -- 482 ----- ---- ----- ---- ----- CASH PROVIDED BY INVESTING ACTIVITIES... 135 -- 307 -- 442 ----- ---- ----- ---- ----- FINANCING ACTIVITIES: Net change in short-term debt obligations........................... (227) -- (125) -- (352) Other financing activities.............. (44) -- -- -- (44) Changes in investments and advances from (to) affiliates....................... 205 (20) (185) -- -- ----- ---- ----- ---- ----- CASH USED IN FINANCING ACTIVITIES....... (66) (20) (310) -- (396) ----- ---- ----- ---- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 7 -- (7) -- -- CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR....................... -- -- 17 -- 17 ----- ---- ----- ---- ----- END OF PERIOD........................... $ 7 $-- $ 10 $-- $ 17 ===== ==== ===== ==== =====
SOLUTIA INC. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH PROVIDED BY (USED IN) OPERATIONS... $ (30) $ 29 $ (8) $-- $ (9) ----- ---- ---- ---- ---- INVESTING ACTIVITIES: Property, plant and equipment purchases............................. (7) (1) (5) -- (13) Property disposals and investment proceeds.............................. 98 -- -- -- 98 ----- ---- ---- ---- ---- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............................ 91 (1) (5) -- 85 ----- ---- ---- ---- ---- FINANCING ACTIVITIES: Net change in short-term debt obligations........................... (133) -- 52 -- (81) Common stock issued under employee stock plans................................. 1 -- -- -- 1 Changes in investments and advances from (to) affiliates....................... 69 (28) (41) -- -- ----- ---- ---- ---- ---- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............................ (63) (28) 11 -- (80) ----- ---- ---- ---- ---- DECREASE IN CASH AND CASH EQUIVALENTS... (2) -- (2) -- (4) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR....................... 3 1 19 -- 23 ----- ---- ---- ---- ---- END OF PERIOD........................... $ 1 $ 1 $ 17 $-- $ 19 ===== ==== ==== ==== ====
15 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, customer acceptance of new products, raw material and energy pricing or shortages, currency fluctuations, increased competitive and/or customer pressure, gain or loss of significant customers, ability to divest existing businesses, exposure to product liability and other litigation and cost of environmental remediation, changes in accounting principles generally accepted in the United States of America, ability to implement cost reduction initiatives in a timely manner, geopolitical instability, and changes in pension assumptions. CRITICAL ACCOUNTING POLICIES AND ESTIMATES A summary of our critical accounting policies and estimates is presented on page 14 of our 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2003. RESULTS OF OPERATIONS--FIRST QUARTER 2003 COMPARED WITH FIRST QUARTER 2002 Net sales for the first quarter of 2003 were $596 million compared with net sales of $520 million for the first quarter of 2002. The net sales increase reflected higher average selling prices of approximately 9 percent, improved sales volumes of approximately 3 percent and favorable currency exchange rate fluctuations of approximately 3 percent. Performance Products and Services Performance Products and Services net sales for the first quarter of 2003 were $243 million compared with $224 million for the first quarter of 2002. The sales increase resulted from favorable currency exchange rate fluctuations of approximately 6 percent as well as net increases of approximately 1 percent in both average selling prices and volumes. Net sales were positively affected by the strengthening euro in relation to the U.S. dollar. Moderate increases of average selling prices experienced in Chlorobenzenes and moderate increases of volumes experienced in THERMINOL(R) heat transfer fluids and DEQUEST(R) water treatment chemicals, more than offset slight decreases in average selling prices experienced in SAFLEX(R) plastic interlayer products and slight decreases in volumes experienced in CPFilms window film and precision coated products. Segment profit was $17 million for the first quarter of 2003 versus $21 million for the prior year quarter. Segment profit decreased $4 million or 19 percent primarily due to severance charges associated with workforce reductions, unfavorable manufacturing variances and increased raw material costs, partially offset by higher net sales, lower marketing, administrative and technological expenses and lower incentive expenses. Integrated Nylon Integrated Nylon segment had net sales of $353 million for the first quarter of 2003 compared with $296 million for the same period of the prior year. The sales increase resulted from higher average selling prices of approximately 14 percent and sales volume improvements of approximately 5 percent. Price increases occurred principally in the intermediate chemicals segment as they benefited from formula-based sales contracts tied to raw material costs. In addition, modest price increases were recorded in select fiber products but did not include recently announced increases in carpet fibers which were implemented April 1, 2003. Sales volumes were up in most segments and include benefits of reintegrated marketing responsibilities for the nylon molding resins business previously performed under a marketing alliance with Dow Plastics, a business unit of Dow Chemical. The Integrated Nylon segment experienced a loss of $11 million in the first quarter of 2003 compared to a profit of $7 million in the prior year quarter. Segment profit declined because of higher raw material and energy costs of approximately $60 million and severance charges associated with workforce reductions, partially offset by higher net sales as well as favorable manufacturing operations. Raw material and energy costs were higher 16 because of uncertain geopolitical factors and the declaration of force majeure for supply of propylene, a key raw material. The sharp rise in raw material and energy costs had a significant impact on the profitability of carpet fiber, intermediates and nylon plastics and polymers. Corporate Expenses Corporate expenses were $15 million for the first quarter of 2003 compared to $17 million in the first quarter of 2002. The decline primarily resulted from lower litigation expenses partially offset by severance charges associated with workforce reductions. Operating Income
THREE MONTHS ENDED MARCH 31, --------------------- (DOLLARS IN MILLIONS) 2003 2002 ------ ------ Performance Products and Services Segment Profit....... $ 17 $ 21 Integrated Nylon Segment Profit/(Loss)................. (11) 7 Less: Corporate Expenses.......................... (15) (17) Less: Equity Earnings from Affiliates included in Segment Profit/(Loss)........................... (1) -- Less: Other Income items included in Segment Profit/(Loss)................................... (3) (3) ---- ---- Operating Income/(Loss)................................. $(13) $ 8 ==== ====
Solutia had an operating loss of $13 million in the first quarter of 2003 compared with operating income of $8 million in the first quarter of 2002. The decrease in operating income was primarily driven by higher raw material and energy costs and higher severance costs associated with workforce reductions, partially offset by improvements in average selling prices, sales volumes and favorable currency exchange rate fluctuations. Equity Earnings (Loss) from Affiliates
THREE MONTHS ENDED MARCH 31, --------------------- (DOLLARS IN MILLIONS) 2003 2002 ------ ------ Equity Earnings/(Loss) from Affiliates................ $(2) $ 8 === ==== Equity Earnings from Affiliates included in Reportable Segment Profit...................................... $ 1 $-- === ====
Solutia records the equity earnings (loss) from affiliates net of income taxes. Equity loss from affiliates of $2 million for the three months ended March 31, 2003, compared to equity earnings from affiliates of $8 million for the comparable quarter of 2002. Equity earnings from affiliates in 2003 were negatively affected by restructuring charges related to asset impairments at the Flexsys joint venture and severance charges at both the Flexsys and Astaris joint ventures. In addition, Astaris' earnings decreased as a result of lower sales volumes, lower selling prices and lower revenue from an electricity sales contract. During the first quarter of 2002, Solutia sold its 50 percent interest in Advanced Elastomer Systems joint venture. Equity earnings from affiliates for the three months ended March 31, 2002, included $2 million of earnings from the Advanced Elastomer Systems joint venture. Other Income--Net
THREE MONTHS ENDED MARCH 31, --------------------- (DOLLARS IN MILLIONS) 2003 2002 ------ ------ Other Income--Net...................................... $7 $7 == == Other Income--Net included in Reportable Segment Profit............................................... $3 $3 == ==
17 Other income--net for the three months ended March 31, 2003 and 2002, was $7 million. During the first quarter of 2003, Solutia realized a benefit of $4 million related to the recovery of certain receivables, established prior to 1997, which had previously been written off. During the first quarter 2002, Solutia sold its 50 percent interest in the Advanced Elastomer Systems joint venture resulting in a gain of $5 million. Income Tax Benefit Solutia's income tax benefit was $14 million for the first quarter of 2003 compared to $0 million for the first quarter of 2002. The significant increase in income tax benefit is due to the decrease in income on a year over year basis. The effective tax rate increased because of the utilization of deferred tax liabilities for the income taxes on distributed foreign earnings. 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. 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 $1 million of intangible assets net of related deferred tax liabilities representing assembled workforce 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 during the first quarter of 2002 for the resins and additives business (which is presented as discontinued operations) 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 loss. Restructuring Activities During the first quarter of 2003, Solutia recorded restructuring charges of $6 million to cost of goods sold and $5 million to marketing, administrative and technological expenses for costs associated with workforce reductions. The restructuring was part of an enterprise-wide cost reduction initiative associated with the sale of the resins, additives and adhesives businesses and other cost reduction initiatives. As a result of these actions, Solutia reduced its workforce by approximately 170 positions. Cash outlays associated with the restructuring actions were funded from divestiture proceeds and operations. Approximately 90 percent of the workforce reductions affected North American business and manufacturing operations, and approximately 10 percent affected European, Asian and Latin American operations. Management positions represented approximately 40 percent of the workforce reductions. Solutia anticipates additional severance charges of approximately $9 million for the remainder of 2003. 18 Summary of Events Affecting Comparability Charges and gains recorded in three months ended March 31, 2003 and 2002, and other events affecting comparability have been summarized in the tables below (dollars in millions).
2003 ----------------------------------------------------------------- PERFORMANCE PRODUCTS INTEGRATED CORPORATE/ INCREASE/(DECREASE) AND SERVICES NYLON OTHER CONSOLIDATED - ---------------------------------------- ------------ ---------- ---------- ------------ IMPACT ON: Cost of goods sold...................... $ 3 $ 3 $ $ 6 (a) --- --- ---- Total cost of goods sold................ 3 3 -- 6 Marketing............................... 1 1 (a) Administrative.......................... 1 2 3 (a) Technological........................... 1 1 (a) --- --- --- ---- OPERATING INCOME (LOSS) IMPACT...... (6) (3) (2) (11) Equity earnings (loss) from affiliates, net of tax............................ (5) (5) (b) Other income (expense).................. 4 4 (c) --- --- --- ---- PRETAX INCOME STATEMENT IMPACT...... $(6) $(3) $(3) (12) === === === Income tax benefit impact............... (3) ---- AFTERTAX INCOME STATEMENT IMPACT.... $ (9) ==== 2003 EVENTS ----------- (a) Restructuring charges for workforce reductions of approximately 170 people across all world areas and functions of the Company ($11 million). (b) The Flexsys and Astaris joint ventures, in which the Company has a fifty percent joint interest, incurred restructuring charges during the quarter related to asset impairments and severance charges ($5 million). (c) The Company recovered certain receivables, established prior to 1997, which had previously been written off ($4 million).
2002 ----------------------------------------------------------------- PERFORMANCE PRODUCTS INTEGRATED CORPORATE/ INCREASE/(DECREASE) AND SERVICES NYLON OTHER CONSOLIDATED - ---------------------------------------- ------------ ---------- ---------- ------------ IMPACT ON: Cost of goods sold...................... $ $ $ $-- Total cost of goods sold................ -- -- -- -- Marketing, administrative, technological and amortization expenses............. --- --- --- --- OPERATING INCOME (LOSS) IMPACT...... -- -- -- -- Equity earnings (loss) from affiliates, net of tax............................ Other income (expense).................. 5 5 (d) --- --- --- --- PRETAX INCOME STATEMENT IMPACT...... $-- $-- $ 5 5 === === === Income taxes impact..................... 2 --- AFTERTAX INCOME STATEMENT IMPACT.... $ 3 === 2002 EVENTS ----------- (d) Gain resulting from the sale of the Company's fifty percent interest in the Advanced Elastomer Systems joint venture ($5 million).
19 FINANCIAL CONDITION AND LIQUIDITY On December 2, 2002, Solutia signed a definitive agreement to sell its resins, additives and adhesives businesses to UCB S.A. for $500 million in cash, plus an upfront payment of $10 million for a period of exclusivity. On January 31, 2003, the sale was completed. Proceeds from the divestiture were used to pay down all of the borrowings under the amended credit facility, provide $39 million cash collateral for certain outstanding letters of credit and purchase the co-generation facility at Pensacola, Florida for $32 million in accordance with bank agreements. The Company retained certain tax liabilities related to the divested businesses and expects to pay approximately $29 million in 2003 related to these liabilities. Divestiture proceeds provided the primary source of funds to finance operating needs and capital expenditures during the first quarter of 2003. Cash used in continuing operations was $35 million during the first quarter of 2003, up $21 million from $14 million from the comparable period of 2002. The increase was primarily attributable to a $60 million income tax refund received during the first quarter of 2002, partially offset by improvements in working capital. Capital spending increased $29 million to $40 million in the first quarter of 2003, compared to $11 million in the first quarter of 2002. The increase resulted from the purchase of the co-generation facility in Pensacola, Florida, for approximately $32 million. The remaining expenditures were used to fund maintenance and cost reduction projects. During the first quarter of 2003, proceeds from the sale of the resins, additives and adhesives businesses were included in cash provided by discontinued operations. Proceeds generated in the first quarter of 2002 included the sale of the Company's 50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a subsidiary of Exxon Mobil Corporation for approximately $102 million. Total debt decreased by $341 million to $856 million at March 31, 2003, compared to $1,197 million at the end of 2002 and consisted of borrowings under the amended credit facility, notes, indenture and debentures. The decrease was driven by the use of divestiture proceeds to pay down debt. Solutia's working capital from continuing operations increased by $486 million to $216 million at March 31, 2003, compared to negative $270 million at December 31, 2002. The increase in the working capital position primarily resulted from lower short-term debt. Solutia had a shareholders' deficit of $232 million at March 31, 2003 compared to $249 million at December 31, 2002. The $17 million improvement was principally caused by favorable currency translation adjustments, principally related to the increase in value of the euro, partially offset by lower 2003 earnings. The Company's primary sources of liquidity have been and will continue to be cash from operations, divestiture proceeds, borrowings from its revolving credit facility and other external financing sources. At March 31, 2003, after consideration of $117 million of letters of credit outstanding under the credit facility, the Company had capacity to borrow up to $178 million. The weighted average interest rate on Solutia's total debt outstanding at March 31, 2003, was approximately 7.8 percent compared to 5.7 percent at March 31, 2002. Interest expense was $23 million in the first quarter of 2003 compared to $19 million in the comparable quarter of 2002. The increase resulted from amortization of deferred debt issuance costs incurred during the second half of 2002 for the refinancing of the credit facility and higher interest rates associated with the credit facility and the senior secured notes. Solutia believes that it has sufficient liquidity to finance its needs for the next 12 months. RECENTLY ISSUED ACCOUNTING STANDARDS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This Interpretation provides guidance related to identifying variable interest entities and determining whether such entities should be consolidated. This Interpretation also provides guidance related to the initial and subsequent measurement of assets, liabilities, and noncontrolling interests of newly consolidated variable interest entities and requires disclosures for both the primary beneficiary of a variable interest entity and other beneficiaries of the entity. In addition, this Interpretation requires certain disclosures if it is reasonably possible that a company will 20 consolidate or disclose information about a variable interest entity when it initially applies the guidance in this Interpretation. This Interpretation must be applied immediately to (a) variable interest entities created, or (b) interests in variable interest entities obtained, after January 31, 2003. For those variable interest entities created, or interests in variable interest entities obtained, on or before January 31, 2003, the guidance in this Interpretation must be applied in the first fiscal year or interim period beginning after June 15, 2003. Solutia is evaluating this Interpretation to determine the impact on its consolidated financial statements. However, the Company currently expects to consolidate the assets and liabilities associated with the leasing of the Company's corporate headquarters of approximately $40 million to $50 million in the third quarter of 2003. Solutia has not determined the value, if any, to be assigned to the residual value guaranty associated with this leasing arrangement. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS There have been no material changes in market risk exposures during the first three months of 2003 that affect the disclosures presented in the information appearing under "Derivative Financial Instruments" on pages 31 and 32 of Solutia's Annual Report on Form 10-K for the year ended December 31, 2002. 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. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Solutia's Annual Report on Form 10-K for the year ended December 31, 2002 ("2002 Form 10-K"), described a number of lawsuits pending in state and federal court relating to the alleged release of polychlorinated biphenyls ("PCBs") and other materials from our Anniston, Alabama plant site. (1) Abernathy v. Monsanto: This matter involves four consolidated cases brought on behalf of approximately 3,500 plaintiffs and is currently pending in Circuit Court for Etowah County, Alabama. Trial in this action recommenced on March 17, 2003, with arguments to the jury regarding compensatory damages for plaintiffs making property damage and exposure claims. As of April 8, 2003 the jury had returned compensatory damages verdicts for the original 17 trial plaintiffs. We asked the trial court to sever these claims and certify them for appeal to the Alabama Supreme Court. The trial court denied our request. As of April 22, 2003, the jury had returned compensatory damage verdicts totaling approximately $11.8 million to 51 plaintiffs who have made property damage and exposure claims, but no final appealable judgment has been entered with respect to these verdicts. No claims of personal injury have been tried or presented to the jury. Trial of this action continues. (2) Tolbert v. Monsanto: There are currently approximately 15,300 plaintiffs in this action brought in U.S. District Court for the Northern District of Alabama. The parties had selected eight plaintiffs from two "disease categories" for a phase I trial. On February 25, 2003, the court allowed plaintiffs to dismiss with prejudice the claims of two phase I plaintiffs selected by Solutia and indicated that plaintiffs should withdraw two of their phase I selections. The court has set a phase I trial date of October 14, 2003. (3) Payton v. Monsanto: This action was brought in Circuit Court for Shelby County, Alabama on behalf of a purported class of owners, lessees and licensees of property around Lay Lake. On March 19, 2003, the trial court entered an order certifying a plaintiff class. We intend to appeal this order, and our notice of appeal is due to be filed by April 30, 2003. Solutia's 2002 Form 10-K also described a number of cases in which plaintiffs allege injury from exposure to PCBs which occurred in the course of their employment or as a result of incidents involving equipment which used PCBs as a dielectric, hydraulic or heat transfer fluid. (1) Crystal Springs, Mississippi Litigation: This matter involves five cases, four brought in Circuit Court for the First Judicial District of Hinds County, Mississippi, and one in Circuit Court for Copiah County Mississippi, on behalf of a total of 170 individual plaintiffs who claim that exposure to PCBs at Kuhlman Electric Company's plant in Crystal Springs caused them unspecified injuries. The defendants had removed these cases to federal court. On March 14, 2003, the U.S. District Court for the Southern District of Mississippi remanded these cases to state court. (2) Other Pending PCB Case: Our former parent, Monsanto Company (now known as Pharmacia Corporation, a wholly owned subsidiary of Pfizer Inc.), was named as one of a number of defendants in a wrongful death action, Johnson et al. v. Ashland Inc. et al., filed in the Circuit Court of Hinds County, Mississippi on March 27, 2003, on behalf of the family of a deceased worker at a shipbuilding facility in Pascagoula, Mississippi. Plaintiffs seek compensatory and punitive damages in unspecified amounts. Solutia is vigorously defending this matter and believes that there are meritorious defenses, including lack of proximate cause and lack of negligence or other improper conduct on the part of our former parent company or Solutia. Solutia's 2002 Form 10-K described a Partial Consent Decree lodged with the United States District Court for the Northern District of Alabama in an action captioned United States of America v. Pharmacia Corporation and Solutia Inc. The District Court conducted hearings on January 21, 2003 and February 25, 2003, regarding objections to entry of the Partial Consent Decree made by plaintiffs in the Abernathy case. The objectors as well as Solutia and the United States have made filings subsequent to the hearing. The parties await a decision by the court on approval of the Partial Consent Decree. 22 Solutia's 2002 Form 10-K described a case pending in the Commonwealth Court of Pennsylvania seeking damages allegedly resulting from PCBs found in the Transportation and Safety Building in Harrisburg, Pennsylvania. The Commonwealth Court has certified the record on appeal to the Pennsylvania Supreme Court, and the Supreme Court has issued a briefing schedule to the parties. Solutia filed its record designations on April 21, 2003, and will file its brief on appeal by April 30, 2003. Solutia's 2002 Form 10-K described a legal proceeding arising from the alleged violations of the Wyoming Environmental Quality Act, the Wyoming Air Quality Standards & Regulations and a permit issued by the Wyoming Department of Environmental Quality for a coal coking facility in Rock Springs, Wyoming. The parties have now agreed to settle this matter and have filed a Stipulation and Order of Judgment with the United States District Court for the District of Wyoming. [We are awaiting approval of the settlement by the District Court.] Solutia's 2002 Form 10-K described (a) an investigation by authorities in the United States, Europe and Canada of past commercial practices in the rubber chemicals industry and (b) a number of purported class actions filed against producers of rubber chemicals including Flexsys, our 50/50 joint venture with Akzo Nobel N.V., each seeking actual and treble damages under state law on behalf of all retail purchasers of tires in the relevant state since 1994. On April 8, 2003, a purported class action, Rubber Engineering and Development Company v. Akzo Nobel, N.V., et al, was filed in United States District Court for the Northern District of California against a number of companies including Solutia and Flexsys. The plaintiff alleges price fixing and seeks treble damages and injunctive relief under U.S. antitrust laws on behalf of all individuals and entities that purchased rubber chemicals in the United States from the defendants, their predecessors, or their controlled subsidiaries from January 1, 1995 until October 10, 2002. On April 9, 2003, a second purported class action, Standard Rubber Products, Inc. v. Akzo Nobel N.V., et al, was filed in the same court. The second action names the same defendants, makes substantially the same allegations and seeks substantially the same relief as the first action. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits--See the Exhibit Index at page 27 of this report. (b) Reports on Form 8-K filed during the quarter ended March 31, 2003: On February 18, 2003, Solutia filed a Form 8-K announcing the sale of its resins, additives and adhesives businesses. On February 26, 2003, Solutia filed a Form 8-K containing three press releases; the first to announce the Alabama Supreme Court's decision on a motion of recusal in Abernathy vs. Monsanto, the second to announce the February 27 teleconference to review the decision, and the third to announce board action regarding the election of directors and officers and nominations of directors for re-election. 23 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/ J. M. SULLIVAN ------------------------------------------ (Vice President and Controller) (On behalf of the Registrant and as Principal Accounting Officer) Date: April 28, 2003 24 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 officer 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 officer 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 officer 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: April 28, 2003 /s/ JOHN C. HUNTER III ------------------------------------- John C. Hunter III Chairman, President and Chief Executive Officer 25 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 officer 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 officer 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 officer 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: April 28, 2003 /s/ ROBERT A. CLAUSEN ------------------------------------------- Robert A. Clausen Vice Chairman, Chief Financial Officer and Chief Administrative Officer 26 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10 Change of Control Agreement between Solutia Inc. and Jeffry N. Quinn dated as of February 26, 2003 11 See "Statement of Consolidated Loss" on page 1. 99 Computation of the Ratio of Earnings to Fixed Charges 27 EX-10 3 exh10.txt EMPLOYMENT AGREEMENT Exhibit 10 EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and between Solutia Inc., a Delaware corporation (the "Company"), and Jeffry N. Quinn (the "Executive"), dated as of the 26th day of February, 2003. The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean ------------------- the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated by the Company prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. (c) An "Alternative Change of Control" shall mean a Change of Control as defined in Section 2, except that the references in such definition to "20%" shall be deemed to be references to "50%." 2. Change of Control. For the purpose of this Agreement, a ----------------- "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all 2 or substantially all of the assets of the Company or the acquisition of assets or stock of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue ----------------- the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period (the "Employment Period") commencing on the Effective Date and ending on the earlier of the third anniversary of such date and the first day of the month following the month in which the executive attains age 65 (the Executive's "Normal Retirement Date"). 4. Terms of Employment. (a) Position and Duties. (i) During ------------------- ------------------- the Employment Period, (A) the Executive's position 3 (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned to the Executive at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location, unless the Executive is on international assignment on the Effective Date and is relocated as a result of the Executive's being repatriated pursuant to the terms of his international assignment agreement as in effect before the Effective Date. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment ------------ ----------- Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the 4 Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Bonuses. In addition to Annual Base Salary, the ------- Executive shall be awarded the following bonuses. For each fiscal year ending during the Employment Period, the Executive shall be awarded an annual bonus (the "Annual Bonus") in cash at least equal to the higher of (i) the average of the Executive's bonuses under the Company's Annual Incentive Program, or any comparable bonus under any predecessor or successor plan(s), for the last three full fiscal years prior to the Effective Date, or such shorter period as the Executive has been employed by the Company (and annualizing the amount of any such bonus for a fiscal year during which the Executive was employed by the Company for only a portion of such fiscal year) and (ii) the Executive's target bonus as most recently established before the Effective Date (such higher amount, the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. In addition, during the Employment Period, the Executive shall be entitled to participate in all long-term and other incentive plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable) less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iii) Savings and Retirement Plans. During the ---------------------------- Employment Period, the Executive shall be entitled to participate in all savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated 5 companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. Without limiting the generality of the foregoing, the Company and its affiliated companies shall continue to honor any individual agreements between any of them and the Executive regarding the provision of supplemental retirement benefits such as (but not limited to) post-retirement income and/or welfare benefits (each of which is hereafter referred to as an "Individual SERP"). (iv) Welfare Benefit Plans. During the Employment --------------------- Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the -------- Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the --------------- Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the 6 Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment ------------------------ Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the -------- Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The ------------------------- ------------------- Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the Executive's long-term disability for purposes of any reasonable occupation as determined under the Company's disability plan that is applicable to the Executive. (b) Cause. The Company may terminate the Executive's ----- employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such 7 failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be ----------- terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; 8 (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date, unless the Executive is on international assignment on the Effective Date and the relocation is as a result of the Executive's being repatriated pursuant to the terms of his international assignment agreement as in effect before the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of an Alternative Change of Control shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company --------------------- for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or 9 preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if ------------------- the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good ------------------------------------------- ---- Reason; Other Than for Cause, Death or Disability. If, during the Employment - ------------------------------------------------- Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, and (3) any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) the lesser of three and the number of years and fractions thereof remaining between the Date of Termination and the Executive's Normal Retirement Date (such lesser 10 number, the "Multiplier") and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and C. an amount equal to the difference between (a) the aggregate benefit under the Monsanto Pension Plan and any successor thereto, and any other qualified defined benefit retirement plans of the Company and its affiliated companies in which the Executive participates (collectively, the "Retirement Plan") and the Monsanto Company ERISA Parity Pension Plan, the Monsanto Company Supplemental Retirement Plan, and any successors thereto, any other "top hat," excess or supplemental defined benefit retirement plans of the Company and its affiliated companies in which the Executive participates, and any Individual SERP (collectively, the "SERP") which the Executive would have accrued (whether or not vested) if the Executive's employment had continued for a number of years after the Date of Termination equal to the Multiplier, and (b) the actual vested benefit, if any, of the Executive under the Retirement Plan and the SERP, determined as of the Date of Termination (with the foregoing amounts to be computed on an actuarial present value basis, based on the assumption that the Executive's compensation during such period of deemed continued employment after the Date of Termination was that required by Section 4(b)(i) and Section 4(b)(ii), and using actuarial assumptions no less favorable to the Executive than the most favorable of those in effect for purposes of computing benefit entitlements under the Retirement Plan and the SERP at any time from the day before the Effective Date) through the Date of Termination; (ii) for a number of years after the Executive's Date of Termination equal to the Multiplier, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein 11 shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of a number of years after the Date of Termination equal to the Multiplier and to have retired on the last day of such period; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by ---- reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated ---------- by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further 12 obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's --------------------------------- employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) the Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement ------------------------- shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. Notwithstanding the foregoing, from and after the Effective Time, the compensation and benefits provided for pursuant to Sections 13 6, 8 and 9 hereof shall be in lieu of any severance or separation pay or benefits to which the Executive might otherwise be entitled under any plan, program, policy or arrangement of the Company and its affiliates. 8. Full Settlement; Legal Fees. The Company's obligation to --------------------------- make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and except as specifically provided in Section 6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (whether such contest is between the Company and the Executive or between either of them and any third party, and including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f) (2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed 14 upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be 15 paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which 16 such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. As used herein, "Confidential ------------------------ Information" means all technical and business information of the Company and its Subsidiaries, whether patentable or not, which is of a confidential, trade secret and/or proprietary character and which is either developed by the Executive (alone or with others) or to which the Executive has had access during the Executive's employment. "Confidential Information" shall also include confidential evaluations of, and the confidential use or non-use by the Company or any Subsidiary of, technical or business information in the public domain. The Executive shall use the Executive's best efforts and diligence both during and after employment by the Company to protect the confidential, trade secret and/or proprietary character of all Confidential Information. The Executive shall not, directly or indirectly, use (for the Executive or another) or disclose any Confidential Information, for so long as it shall remain proprietary or protectible as confidential or trade secret information, except as may be necessary for the performance of the Executive's duties with the Company. The Executive shall deliver promptly to the Company, at the termination of the Executive's employment, or at any other time at the Company's request, without retaining any copies, all 17 documents and other material in the Executive's possession relating, directly or indirectly, to any Confidential Information. Each of the Executive's obligations in this Section shall also apply to the confidential, trade secret and proprietary information learned or acquired by the Executive during the Executive's employment from others with whom the Company or any Subsidiary has a business relationship. The Executive understands that the Executive is not to disclose to the Company or any Subsidiary, or use for its benefit, any of the confidential, trade secret or proprietary information of others, including any of the Executive's former employers. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the ---------- Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by ------------- and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the 18 other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: ------------------- Jeffry N. Quinn 245 Litcheford Court St. Louis, MO 63141 If to the Company: ----------------- 575 Maryville Centre Drive P. O. Box 66760 St. Louis, MO 63166-6760 Attention: Chief Executive Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under 19 this Agreement. From and after the Effective Date, this Agreement shall supersede any other prior employment agreement between the Company and the Executive; provided, that this Agreement shall have no effect on any -------- Individual SERP or on the Executive's rights under any plan, program, policy or practice provided by the Company or any of its affiliated companies except as specifically provided in Section 7 above. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Jeffry N. Quinn --------------------------------------- Jeffry N. Quinn SOLUTIA INC. By /s/ John C. Hunter III ------------------------------------- John C. Hunter III Chairman, President and Chief Executive Officer 20 EX-99 4 exh99.txt COMPUTATION OF RATIO OF EARNINGS EXHIBIT 99 SOLUTIA INC. COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
THREE MONTHS ENDED 1998 1999 2000 2001 2002 MARCH 31, 2003 ----- ----- ----- ----- ----- -------------- Income (loss) from continuing operations, before income taxes and equity earnings (loss) from affiliates(1)....................... $ 352 $ 262 $ (5) $(111) $ (32) $ (29) Add: Fixed charges.................... 58 62 85 83 98 26 Amortization of capitalized interest....................... 7 7 7 7 7 2 Dividends from affiliated companies...................... 37 60 45 30 25 -- Less: Interest capitalized............. (6) (13) (17) (2) (1) -- ----- ----- ----- ----- ----- ------ Income as adjusted............ $ 448 $ 378 $ 115 $ 7 $ 97 $ (1) ===== ===== ===== ===== ===== ====== Fixed charges: Interest expensed and capitalized..................... 49 53 73 72 85 23 Estimate of interest within rental expense......................... 9 9 12 11 13 3 ----- ----- ----- ----- ----- ------ Fixed charges................. $ 58 $ 62 $ 85 $ 83 $ 98 $ 26 ===== ===== ===== ===== ===== ====== Ratio of Earnings to Fixed Charges(2).......................... 7.72 6.10 1.35 0.08 0.99 (0.04) - ------- (1) Includes restructuring and other items of $7 million for the three months ended March 31, 2003, $17 million for the year ended December 31, 2002, $86 million for the year ended December 31, 2001, $107 million for the year ended December 31, 2000 and $61 million for the year ended December 31, 1999. (2) Earnings for the quarter ended March 31, 2003, and the years ended December 31, 2002, and 2001, would have to be $27 million, $1 million and $76 million higher, respectively, in order to achieve a one-to-one ratio.
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