-----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, KGrhKM2ULD29QdfSFLSw+pzGVERPRcPP0nYKbEIndMqn56AV2ZRNBVreZLyHWd1B /yDIYbJ3CHKXVhI5wLli0Q== 0001068800-06-000455.txt : 20060530 0001068800-06-000455.hdr.sgml : 20060529 20060530152138 ACCESSION NUMBER: 0001068800-06-000455 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060530 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060530 DATE AS OF CHANGE: 20060530 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13255 FILM NUMBER: 06873747 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 8-K 1 sol8k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 30, 2006 SOLUTIA INC. ------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE -------- (STATE OF INCORPORATION) 001-13255 43-1781797 --------- ---------- (COMMISSION (IRS EMPLOYER FILE NUMBER) IDENTIFICATION NO.) 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 Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION See Item 7.01. "Regulation FD Disclosure" below. ITEM 7.01. REGULATION FD DISCLOSURE The following information is being furnished under Item 7.01. "Regulation FD Disclosure." On January 30, 2004, Solutia Inc.'s wholly owned subsidiary, Solutia Europe S.A./N.V. ("SESA"), restructured its then (euro) 200 million, 10.00 percent Euro Notes ("Euronotes"), due in 2008. Pursuant to Section 9(m) of the amended and restated Terms and Conditions of the Euronotes, contained in Schedule 1 to the Fiscal Agency Agreement, as further amended by Amendment No. 1 to the Fiscal Agency Agreement and Terms and Conditions of Notes (dated as of November 9, 2004), SESA agreed to certain financial reporting requirements including, among other things, filing quarterly consolidating and consolidated financial statements, absent footnotes, of SESA and its subsidiaries with the Securities and Exchange Commission ("SEC") on Form 8-K within 60 days after each quarter end, or 110 days after the fourth fiscal quarter, commencing with the quarter ended March 31, 2004 (referred to hereafter as "Financial Statements") and to include in each such Form 8-K a narrative discussion and analysis in reasonable detail of the business, financial condition, results of operations and liquidity of SESA and its subsidiaries as of the end of such fiscal quarter (and, in the case of the fourth quarter, for the fiscal year), together with a brief description of the material developments in the business of SESA and its subsidiaries over such fiscal period. The unaudited Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Exhibits 99.1 and 99.2, respectively, satisfy these reporting requirements for the quarter ended March 31, 2006. The Financial Statements include consolidated and consolidating balance sheets, consolidated and consolidating statements of operations and consolidated and consolidating statements of cash flows for SESA and its subsidiaries, each as of and for the quarters ended March 31, 2006 and March 31, 2005, respectively. The Financial Statements include the accounts of SESA and its subsidiaries and all significant intercompany transactions, and balances have been eliminated in consolidation. These Financial Statements should be read in conjunction with the audited financial statements and notes to consolidated financial statements included in the Solutia Inc. 2005 Annual Report on Form 10-K, filed with the SEC on March 15, 2006. Management's Discussion and Analysis of Financial Condition and Results of Operations includes a comparison of the first quarter 2006 with the first quarter 2005. This Management's Discussion and Analysis of Financial Condition and Results of Operations disclosure is being provided solely to satisfy SESA's contractual obligation noted above and is not intended to, nor does the disclosure fully satisfy all the requirements of a Management's Discussion and Analysis of Financial Condition and Results of Operations disclosure under U.S. securities law. The unaudited Financial Statements included in Exhibit 99.1 to this Form 8-K have been prepared in accordance with accounting principles generally accepted in the United States of America and are presented in U.S. dollars. In addition, the Financial Statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. Such adjustments are of a normal, recurring nature. The results of operations for the quarter ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year. 2 ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS (c) The following exhibits are included in this Report: Exhibit Number Description - -------------- ----------- 99.1 Unaudited consolidated and consolidating financial statements of SESA and its subsidiaries 99.2 Management's Discussion and Analysis of Financial Condition and Results of Operations 3 SIGNATURES 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/ Rosemary L. Klein ----------------------------- Senior Vice President, General Counsel and Secretary DATE: May 30, 2006 4 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 99.1 Unaudited consolidated and consolidating financial statements of SESA and its subsidiaries 99.2 Management's Discussion and Analysis of Financial Condition and Results of Operations 5 EX-99.1 2 ex99p1.txt Exhibit 99.1 SESA and Subsidiaries Statement of Operations Three-Months Ended March 31, 2006 (in Millions and USD)
Consolidated Entity 1 Entity 2 Entity 3 Entity 4 Entity 5 Eliminations SESA ----------------------------------------------------------------------------------------------------- Net sales $ 105 $ 3 $ 16 $ 7 $ - $ - $ 131 Cost of goods sold 83 2 11 6 - - 102 ----------------------------------------------------------------------------------------------------- Gross Profit 22 1 5 1 - - 29 MAT expense 10 1 1 - - - 12 ----------------------------------------------------------------------------------------------------- Operating Income 12 - 4 1 - - 17 Interest income - - - - 1 - 1 Other income (Expense) (1) - - - 1 - - ----------------------------------------------------------------------------------------------------- EBIT 11 - 4 1 2 - 18 Interest expense 5 - - - - - 5 ----------------------------------------------------------------------------------------------------- Income Before Taxes 6 - 4 1 2 - 13 Income tax expense 2 - 1 - - - 3 ----------------------------------------------------------------------------------------------------- Net Income $ 4 $ - $ 3 $ 1 $ 2 $ - $ 10 =====================================================================================================
SESA and Subsidiaries Statement of Operations Three-Months Ended March 31, 2005 (in Millions and USD)
Consolidated Entity 1 Entity 2 Entity 3 Entity 4 Entity 5 Eliminations SESA -------------------------------------------------------------------------------------------- Net sales $ 113 $ 3 $ 11 $ 8 $ - $ - $ 135 Cost of goods sold 90 2 8 6 - - 106 -------------------------------------------------------------------------------------------- Gross Profit 23 1 3 2 - - 29 MAT expense 9 1 2 1 - - 13 -------------------------------------------------------------------------------------------- Operating Income 14 - 1 1 - - 16 Interest income - - - - 1 - 1 Other income 1 - - - 1 - 2 -------------------------------------------------------------------------------------------- EBIT 15 - 1 1 2 - 19 Interest expense 6 - - - - - 6 -------------------------------------------------------------------------------------------- Income Before Taxes 9 - 1 1 2 - 13 Income tax expense 4 - - - - - 4 -------------------------------------------------------------------------------------------- Net Income $ 5 $ - $ 1 $ 1 $ 2 $ - $ 9 ============================================================================================
2 SESA and Subsidiaries Statement of Financial Position As of March 31, 2006 (in Millions and USD)
Consolidated Entity 1 Entity 2 Entity 3 Entity 4 Entity 5 Eliminations SESA -------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $ 41 $ 1 $ 4 $ 1 $ 1 $ - $ 48 Trade and notes receivable, net 64 2 8 3 - - 77 Miscellaneous receivables 16 - - 2 11 (1) 28 Inventories 37 2 3 12 - - 54 Prepaid expenses 1 - 2 - - - 3 Current deferred taxes 1 - - - - - 1 -------------------------------------------------------------------------------------------- Total Current Assets 160 5 17 18 12 (1) 211 Investments in affiliates 263 - 3 - 135 (179) 222 Property, plant and equipment, net 46 - 31 3 - - 80 Intangible assets, net - 4 5 1 - - 10 Other assets 15 - - 5 1 - 21 -------------------------------------------------------------------------------------------- Total Assets $ 484 $ 9 $ 56 $ 27 $ 148 $(180) $544 ============================================================================================ Current Liabilities: Accounts payable $ 16 $ - $ 2 $ 1 $ - $ - $ 19 Accrued liabilities 57 3 6 11 3 (1) 79 Short-term debt 3 - - 8 - (11) - -------------------------------------------------------------------------------------------- Total Current Liabilities 76 3 8 20 3 (12) 98 Long-term debt 251 - - - - - 251 Non-current deferred taxes 6 - 1 1 - - 8 Postretirement liabilities 1 - - - - - 1 Other liabilities - - 2 1 - - 3 -------------------------------------------------------------------------------------------- Total Liabilities 334 3 11 22 3 (12) 361 Shareholders' Equity 150 6 45 5 145 (168) 183 -------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 484 $ 9 $ 56 $ 27 $ 148 $(180) $544 ============================================================================================
3 SESA and Subsidiaries Statement of Financial Position As of March 31, 2005 (in Millions and USD)
Consolidated Entity 1 Entity 2 Entity 3 Entity 4 Entity 5 Eliminations SESA -------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $ 13 $ - $ 4 $ 2 $ - $ - $ 19 Trade and notes receivable, net 64 2 2 3 - - 71 Miscellaneous receivables 20 - - 1 9 (1) 29 Inventories 36 3 3 9 - - 51 Prepaid expenses 2 - 1 - - - 3 Current deferred taxes 1 - - - - - 1 -------------------------------------------------------------------------------------------- Total Current Assets 136 5 10 15 9 (1) 174 Investments in affiliates 276 - - - 145 (185) 236 Property, plant and equipment, net 50 - 36 2 - - 88 Intangible assets, net - 4 7 1 - - 12 Other assets 19 - - 5 1 - 25 -------------------------------------------------------------------------------------------- Total Assets $481 $ 9 $ 53 $23 $155 $(186) $ 535 ============================================================================================ Current Liabilities: Accounts payable $ 15 $ - $ 1 $ 2 $ - $ - $ 18 Accrued liabilities 56 3 6 7 2 (2) 72 Short-term debt - - 2 8 6 (16) - -------------------------------------------------------------------------------------------- Total Current Liabilities 71 3 9 17 8 (18) 90 Long-term debt 270 - - 1 - - 271 Non-current deferred taxes - - 2 - - - 2 Postretirement liabilities 2 - - - - - 2 Other liabilities - - 1 - - - 1 -------------------------------------------------------------------------------------------- Total Liabilities 343 3 12 18 8 (18) 366 Shareholders' Equity 138 6 41 5 147 (168) 169 -------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $481 $ 9 $ 53 $23 $155 $(186) $ 535 ============================================================================================
4 SESA and Subsidiaries Statement of Cash Flows Three-Months Ended March 31, 2006 (in Millions and USD)
Consolidated Entity 1 Entity 2 Entity 3 Entity 4 Entity 5 Eliminations SESA -------------------------------------------------------------------------------------------- Operating Activities: Net income $ 4 $ - $ 3 $ 1 $ 2 $ - $ 10 Income and deferred taxes 2 - - - - - 2 Depreciation and amortization 3 - 1 - - - 4 Accounts receivable 5 (1) (4) 1 - - 1 Inventories (3) - 2 (4) - - (5) Accounts payable 2 - (1) - - - 1 Other assets and liabilities (6) - (1) 1 - - (6) ------------------------------------------------------------------------------------------- Cash Provided by (Used in) Operations 7 (1) - (1) 2 - 7 Investing Activities: Property, plant and equipment purchases (2) - (1) (1) - - (4) ------------------------------------------------------------------------------------------- Cash Used in Investing Activities (2) - (1) (1) - - (4) Financing Activities: Net intercompany transactions 5 1 - - (2) - 4 ------------------------------------------------------------------------------------------- Cash Provided by (Used in) Financing Activities 5 1 - - (2) - 4 ------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 10 - (1) (2) - - 7 Cash and Cash Equivalents: Beginning of period 31 1 5 3 1 - 41 ------------------------------------------------------------------------------------------- End of period $ 41 $ 1 $ 4 $ 1 $ 1 $ - $ 48 ===========================================================================================
5 SESA and Subsidiaries Statement of Cash Flows Three-Months Ended March 31, 2005 (in Millions and USD)
Consolidated Entity 1 Entity 2 Entity 3 Entity 4 Entity 5 Eliminations SESA -------------------------------------------------------------------------------------------- Operating Activities: Net income $ 5 $ - $ 1 $ 1 $ 2 $ - $ 9 Income and deferred taxes 4 - - - - - 4 Depreciation and amortization 3 - 1 - - - 4 Accounts receivable 16 (1) (1) 3 - - 17 Inventories 2 - 2 2 - - 6 Accounts payable (4) - (1) (1) (1) - (7) Other assets and liabilities (20) - - (4) - - (24) -------------------------------------------------------------------------------------------- Cash Provided by (Used in) Operations 6 (1) 2 1 1 - 9 Investing Activities: Property, plant and equipment purchases (1) - (1) - - - (2) -------------------------------------------------------------------------------------------- Cash Used in Investing Activities (1) - (1) - - - (2) Financing Activities: Net intercompany transactions - 1 1 - (2) - - -------------------------------------------------------------------------------------------- Cash Provided by (Used in) Financing Activities - 1 1 - (2) - - -------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 5 - 2 1 (1) - 7 Cash and Cash Equivalents: Beginning of period 8 - 2 1 1 - 12 -------------------------------------------------------------------------------------------- End of period $ 13 $ - $ 4 $ 2 $ - $ - $ 19 ============================================================================================
6 EX-99.2 3 ex99p2.txt Exhibit 99.2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW Nature of Operations Solutia Europe S.A./N.V. ("SESA") is a wholly-owned subsidiary of Solutia Inc. ("Solutia"). SESA and its subsidiaries make and sell a variety of high-performance chemical-based materials including performance films for laminated safety glass and after-market applications; process development and scale-up services for pharmaceutical fine chemicals; and resale of high performance polymers and fibers for Solutia's Integrated Nylon segment. Prior to September 1, 1997, Solutia was a wholly-owned subsidiary of the former Monsanto Company (now known as Pharmacia Corporation, a wholly-owned subsidiary of Pfizer, Inc. ("Pharmacia")). On September 1, 1997, Pharmacia distributed all of the outstanding shares of common stock of Solutia as a dividend to Pharmacia stockholders (the "Solutia Spinoff"). As a result of the Solutia Spinoff, on September 1, 1997, Solutia became an independent publicly held company and its operations ceased to be owned by Pharmacia. A net deficiency of assets of $113 million resulted from the spinoff. Solutia's Bankruptcy Proceedings On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries (the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Chapter 11 Cases") in the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The cases were consolidated for the purpose of joint administration and were assigned case number 03-17949 (PCB). Solutia's subsidiaries outside the United States were not included in the Chapter 11 filing. The filing was made to restructure Solutia's balance sheet by reducing indebtedness to appropriate levels, to streamline operations and to reduce costs, in order to allow Solutia to emerge from Chapter 11 as a viable going concern, and to obtain relief from the negative financial impact of liabilities for litigation, environmental remediation and certain post-retirement benefits (the "Legacy Liabilities") and liabilities under operating contracts, all of which were assumed at the time of the Solutia Spinoff. These factors, combined with the weakened state of the chemical manufacturing sector, general economic conditions and continuing high, volatile energy and crude oil costs have been an obstacle to Solutia's financial stability and success. Under Chapter 11, Solutia is operating its businesses as a debtor-in-possession ("DIP") under court protection from creditors and claimants. Since the Chapter 11 filing, orders sufficient to enable Solutia to conduct normal business activities, including the approval of Solutia's DIP financing, have been entered by the Bankruptcy Court. While Solutia is subject to Chapter 11, all transactions not in the ordinary course of business require the prior approval of the Bankruptcy Court. On January 16, 2004, pursuant to authorization from the Bankruptcy Court, Solutia entered into a $525 million DIP credit facility. This DIP facility consists of (i) a $50 million multiple draw term loan; (ii) a $300 million single draw term loan, which was drawn in full on the effective date of the facility; and (iii) a $175 million borrowing-based revolving credit facility, which includes a $150 million letter of credit subfacility. The DIP credit facility was subsequently amended on March 1, 2004, July 20, 2004 and June 1, 2005. A fourth amendment was entered into on March 17, 2006, with Bankruptcy Court approval. The fourth amendment, among other things, (i) increased the DIP facility from $525 million to $825 million; (ii) extended the term of the DIP facility from June 19, 2006 to March 31, 2007; (iii) decreased the interest rate on the term loan component of the DIP facility from LIBOR plus 425 basis points to LIBOR plus 350 basis points; (iv) increased certain thresholds allowing the Debtors to retain more of the proceeds from certain dispositions and other extraordinary receipts; (v) approved the disposition of certain assets of the Debtors; (vi) allowed refinancing of, and certain amendments to, Solutia Europe S.A./N.V.'s outstanding Euronotes; and (vii) amended certain financial and other covenants. The fourth amendment also contains a number of other modifications required to make the remaining terms of the DIP facility consistent with the amendments set forth above. As a consequence of the Chapter 11 filing, pending litigation against Solutia is generally stayed, and no party may take any action to collect its pre-petition claims except pursuant to an order of the Bankruptcy Court. November 30, 2004 was the last date by which holders of pre-filing date claims against the Debtors could file such claims. Any holder of a claim that was required to file such claim by November 30, 2004, and did not do so may be barred from asserting such claim against the Debtors and, accordingly, may not be able to participate in any distribution on account of such claim. Differences between claim amounts identified by the Debtors and claims filed by claimants will be investigated and resolved in connection with the Debtors' claims resolution process, and only holders of claims that are ultimately allowed for purposes of the Chapter 11 Cases will be entitled to distributions. Solutia has not yet fully completed its analysis of all the proofs of claim. Since the settlement terms of allowed claims are subject to a confirmed plan of reorganization, the ultimate distribution with respect to allowed claims is not presently ascertainable. On February 14, 2006, the Debtors filed with the Bankruptcy Court their Joint Plan of Reorganization (the "Plan") and Disclosure Statement (the "Disclosure Statement"). The Plan and Disclosure Statement along with the Relationship Agreement (as defined below) and the Retiree Settlement Agreement, entered into among Solutia, the Official Committee of Unsecured Creditors (the "Unsecured Creditors' Committee") and Official Committee of Retirees appointed in the Debtors' Chapter 11 Cases (the "Retirees' Committee"), Monsanto, certain retirees and the other parties thereto (the "Retiree Settlement"), set forth the terms of a global settlement (the "Global Settlement") between Solutia, the Unsecured Creditors' Committee, the Retirees' Committee, Monsanto Company ("Monsanto") and Pharmacia. The Global Settlement provides for, among other things, the reallocation of certain Legacy Liabilities among Solutia, Monsanto and Pharmacia and the treatment various constituencies in the Chapter 11 Cases will receive under the Plan. The Disclosure Statement contains a description of the events that led up to the Debtors' bankruptcy filings, the actions the Debtors' have taken to improve their financial situation while in bankruptcy and a current description of the Debtors' businesses. The reallocation of liabilities between Solutia and Monsanto is set forth in a Relationship Agreement (the "Relationship Agreement") to be entered into between Solutia and Monsanto upon confirmation of the Plan. The Relationship Agreement was filed with the Bankruptcy Court on February 14, 2006 as an exhibit to the Plan. Solutia also issued a press release on February 14, 2006 announcing the filing of the Plan and Disclosure Statement with the Bankruptcy Court. The press release was furnished to the Securities and Exchange Commission in a Form 8-K filing on February 14, 2006. The Plan, including the Relationship Agreement and Retiree Settlement Agreement, and the Disclosure Statement were furnished as exhibits to a Form 8-K filed on February 21, 2006. The Plan, which incorporates the Relationship Agreement and Retiree Settlement, is subject to approval by the Bankruptcy Court in accordance with the Bankruptcy Code as well as various other conditions and contingencies, some of which are not within the control of Solutia, and therefore are subject to change and are not binding upon any party. The Disclosure Statement remains subject to change pending a hearing in the Bankruptcy Court to consider the legal adequacy of the Disclosure Statement. Once the Disclosure Statement is approved by the Bankruptcy Court, it will be distributed to all constituencies entitled to vote on the Plan. Solutia cannot provide any assurance that any plan of reorganization ultimately confirmed by the Bankruptcy Court, or any disclosure statement ultimately approved by the Bankruptcy Court, will be consistent with the terms of the Plan and Disclosure Statement. A hearing to approve the Disclosure Statement is expected to be held before the Honorable Prudence Carter Beatty, United States Bankruptcy Judge, in Room 701 of the Bankruptcy Court, Alexander Hamilton Custom House, One Bowling Green, New York, New York, 10004-1408, on June 20, 2006, or as soon thereafter as the Debtors may be heard. If confirmed, the Plan will provide Solutia with significant relief from the Legacy Liabilities Solutia was required to assume in the Solutia Spinoff. These Legacy Liabilities included: (1) retiree medical, retiree life insurance and retiree disability benefits ("Retiree Welfare Benefits") for those individuals who retired or became disabled prior to the Solutia Spinoff ("Pre-Spin Retirees"); (2) environmental remediation costs related to activities of the chemicals business of Pharmacia that occurred prior to the Solutia Spinoff; and (3) toxic tort litigation costs relating to chemical exposure associated with the activities of Pharmacia that occurred prior to the Solutia Spinoff. 2 Under the Plan, Solutia would emerge from bankruptcy as an independent publicly held company ("reorganized Solutia"). The Plan provides for $250 million of new investment in reorganized Solutia. This new investment will be in the form of a rights offering to certain unsecured creditors, who will be given the opportunity to purchase 22.7 percent of the common stock in reorganized Solutia. Monsanto will backstop the rights offering, meaning it will commit to purchase up to the entire $250 million of stock, to the extent the stock is not purchased by eligible unsecured creditors in the rights offering. Of this $250 million new investment, $175 million would be set aside in a Voluntary Employees' Beneficiary Association ("VEBA") Retiree Trust to fund the Retiree Welfare Benefits for those Pre-Spin Retirees who receive these benefits from Solutia, and $50 million would be used to fund reorganized Solutia's environmental remediation commitments in Anniston, Alabama and Sauget, Illinois, as described below. The remaining $25 million would be available for reorganized Solutia to pay any of the Legacy Liabilities that it is retaining. Under the Plan and Relationship Agreement, as between Monsanto and Solutia, Monsanto would be responsible, with certain exceptions, for all current and future tort litigation costs arising from the conduct of Pharmacia's chemical business prior to the Solutia Spinoff, including litigation arising from exposure to polychlorinated biphenyls ("PCBs") and other chemicals. In addition, Monsanto would accept financial responsibility for environmental remediation obligations at all sites for which Solutia was required to assume responsibility as part of the Solutia Spinoff but which were never owned or operated by Solutia. These include more than 50 sites with active remediation projects and approximately 200 additional known sites and off-site disposal facilities, as well as sites that have not yet been identified. Finally, Monsanto would share financial responsibility with Solutia for off-site remediation costs in Anniston, Alabama and Sauget, Illinois. Under this cost-sharing mechanism, the first $50 million would be paid from the proceeds of the rights offering (as described above), Monsanto would pay the next $50 million (less amounts it has paid for remediation at these sites during the Chapter 11 Cases, which totaled over $30 million as of January 31, 2006), Solutia would be responsible for the next $325 million in costs, and any further costs would be shared equally between Solutia and Monsanto. Under certain circumstances, Solutia would be able to defer paying a portion of its shared responsibility with respect to the Anniston and Sauget sites in excess of $30 million in any calendar year, up to $25 million in the aggregate. Any deferred amounts would be paid by Monsanto, but subject to repayment by Solutia at a later date. The Plan and Relationship Agreement provide that Solutia will continue to pay its annual installment and education fund obligations relating to the August 2003 Anniston PCBs settlement and education fund obligations relating to the Anniston Partial Consent Decree, described in Solutia's Annual Report on Form 10-K for the year ended December 31, 2005. The Plan incorporates the terms of the Retiree Settlement Agreement, which was negotiated with the Retirees' Committee, which represents more than 23,000 former employees of Pharmacia and Solutia and their dependents. Although the Retiree Settlement Agreement includes benefit modifications, the Plan, through the $175 million from the rights offering that will be allocated to the VEBA Trust, provides significant current funding which will greatly improve Solutia's ability to meet these benefit obligations going forward. Under the Retiree Settlement Agreement, retirees will retain certain company-provided medical benefits, although the cost to retirees for such benefits will increase. Many retirees will retain their company-provided life insurance benefits, although some will experience a reduction in the benefit provided. The Retiree Settlement Agreement also maintains Solutia's rights according to a separate 2001 settlement and a post-settlement retiree medical plan, under which Solutia intends to make certain changes on or after the effective date of the Plan, including the elimination of company-provided medical benefits for certain groups of retirees that also are eligible for Medicare coverage. In consideration of the benefit modifications being accepted by retirees pursuant to the Retiree Settlement Agreement, the Plan contemplates that the retirees would receive an allowed unsecured claim in the aggregate amount of $35 million in Solutia's bankruptcy case. The common stock in reorganized Solutia received on account of this claim would be deposited in the VEBA Trust and used to pay Retiree Welfare Benefits. This deposit would be in addition to the $175 million that would be contributed to the VEBA Trust from the proceeds of the rights offering. The VEBA Trust would be a bankruptcy-remote entity and would be managed by an independent trustee. 3 The Plan does not provide for distributions to the holders of Solutia's existing equity. Under the Plan, Solutia's existing shares of common stock, as well as options and warrants to purchase its common stock, would be cancelled and holders of Solutia's common stock, including options and warrants to purchase Solutia's common stock, would receive no consideration for that stock or those options and warrants. Although the Plan does not provide for any distributions to holders of Solutia's existing equity, the Official Committee of Equity Security Holders in Solutia's bankruptcy case has filed a complaint against Pharmacia and Monsanto, and an objection to the proofs of claim filed by Monsanto and Pharmacia in Solutia's bankruptcy, arguing that holders of Solutia's existing equity are entitled to distribution on the basis of several legal theories. In order to exit Chapter 11, Solutia must propose and confirm a plan of reorganization that satisfies the requirements of the U.S. Bankruptcy Code. As provided by the U.S. Bankruptcy Code, Solutia had the exclusive right to propose a plan of reorganization for 120 days following the Chapter 11 filing date. The Bankruptcy Court has subsequently approved several extensions of the exclusivity period, the most recent of which is set to expire on October 10, 2006. Although Solutia expects to receive further extensions of the exclusivity period, no assurance can be given that any such future extension requests will be granted by the Bankruptcy Court. Moreover, although Solutia has filed the Plan which provides for Solutia's emergence from bankruptcy as a going concern, there can be no assurance that the Plan, or any other plan of reorganization, will be confirmed by the Bankruptcy Court or that any such plan will be implemented successfully. Basis of Presentation The accompanying unaudited consolidated financial statements include consolidated and consolidating balance sheets, consolidated and consolidating statements of operations and consolidated and consolidating statements of cash flows for SESA and its subsidiaries, each as of and for the three months ended March 31, 2006 and 2005, respectively. The information contained in the consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations is unaudited and is presented in a format prescribed by Section 9(m) of the amended and restated terms and conditions of SESA's (euro) 200 million, 10.00% Euro Notes ("Euronotes"). All significant intercompany transactions and balances between SESA's subsidiaries have been eliminated in consolidation. However, intercompany transactions and balances between SESA's subsidiaries and Solutia's other subsidiaries outside of the consolidated SESA entity have not been eliminated in consolidation. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes to consolidated financial statements included in the Solutia 2005 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 15, 2006. The unaudited consolidated financial statements included in Exhibit 99.1 to this Form 8-K have been prepared in accordance with accounting principles generally accepted in the United States of America and are presented in U.S. dollars. In addition, the unaudited consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. Such adjustments are of a normal, recurring nature. 4 RESULTS OF OPERATIONS-- FIRST QUARTER 2006 COMPARED WITH FIRST QUARTER 2005 Net Sales and Earnings Before Interest Expense and Income Taxes ("EBIT")
---------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, --------- (dollars in millions) 2006 2005 ---- ---- Net Sales................................................................. $131 $ 135 ==== ===== EBIT...................................................................... $ 18 $ 19 ==== ===== Charges included in EBIT.............................................. $ -- $ -- ==== ===== ----------------------------------------------------------------------------------------------------
The $4 million, or 3 percent, decrease in net sales as compared to the three months ended March 31, 2005 resulted primarily from unfavorable currency fluctuations of approximately 9 percent, partially offset by higher sales volumes of approximately 3 percent and higher average selling prices of approximately 3 percent. The unfavorable currency impact on net sales was primarily a result of the weakening euro in relation to the U.S. dollar in comparison to the three months ended March 31, 2005. Higher sales volumes were experienced primarily in SAFLEX(R) and VANCEVA(R) plastic interlayer products and pharmaceutical services, partially offset by lower volumes in the resale of products for Solutia's Integrated Nylon segment. Higher average selling prices were experienced primarily in SAFLEX(R) and VANCEVA(R) plastic interlayer products and for the resale of Therminol (R) heat transfer fluids. The $1 million decrease in EBIT in comparison to the three months ended March 31, 2005 resulted primarily from lower net sales and the weakening euro in relation to the U.S. dollar in comparison to the three months ended March 31, 2005, partly offset by favorable currency hedging contracts.
-------------------------------------------------------------------------------------------------- THREE MONTHS ENDED Interest Expense MARCH 31, --------- (dollars in millions) 2006 2005 ---- ---- Interest Expense....................................................... $ 5 $ 6 === === --------------------------------------------------------------------------------------------------
Interest expense decreased by $1 million principally as a result of the weakening euro in relation to the U.S. dollar in comparison to the three months ended March 31, 2005. FINANCIAL CONDITION AND LIQUIDITY Financial Analysis Total debt of $251 million as of March 31, 2006 decreased by $20 million as compared to $271 million as of March 31, 2005. This decrease was principally a result of the weakened Euro as of March 31, 2006 as compared to March 31, 2005, as well as the continued amortization of the $15 million premium recorded in conjunction with the modification of SESA's Euronotes. This premium resulting from the modification in January 2004 is being amortized over the remaining term of the Euronotes, which mature in 2008. SESA's working capital increased by $29 million to $113 million at March 31, 2006, compared to $84 million at March 31, 2005. This increase in the working capital position resulted primarily from 5 increased cash on-hand at March 31, 2006. Fluctuations in trade receivables and accrued liabilities resulted from timing differences in 2006 versus 2005. SESA had shareholders' equity of $183 million at March 31, 2006 compared to $169 million at March 31, 2005. This $14 million increase in shareholders' equity resulted principally from the $26 million cumulative net income recorded from March 31, 2005 to March 31, 2006, partially offset by a $12 million decrease due to unfavorable currency exchange rate fluctuations resulting from the weakening euro in relation to the US dollar. At March 31, 2006 and 2005, SESA's liquidity was in the form of cash in the amount of $48 million and $19 million, respectively. Contingencies Competition authorities in Belgium and several other European countries are investigating past commercial practices of certain companies engaged in the production and sale of butyl benzyl phthalates ("BBP"). One of the BBP producers under investigation by the Belgian Competition Authority ("BCA") is Ferro Belgium sprl, a European subsidiary of Ferro Corporation ("Ferro"). Ferro's BBP business in Europe was purchased from Solutia in 2000. Solutia received an indemnification notice from Ferro and has exercised its right, pursuant to the purchase agreement relating to Ferro's acquisition of the BBP business from Solutia, to assume and control the defense of Ferro in proceedings relating to these investigations. On July 7, 2005, the BCA Examiner issued a Statement of Objections regarding its BBP investigation in which Solutia Europe S.A/N.V. ("Solutia Europe"), a European non-Debtor subsidiary of Solutia, along with Ferro Belgium sprl and two other producers of BBP, is identified as a party under investigation with respect to its ownership of the BBP business from 1997 until the business was sold to Ferro in 2000. Solutia Europe's written comments to the Statement of Objections were submitted on August 31, 2005 and presented at an oral hearing before the BCA on September 6, 2005. The Examiner submitted its Reasoned Report to the BCA on December 22, 2005. Solutia is not named as a party under investigation in the Reasoned Report. Solutia Europe will have an opportunity to submit comments to the BCA on the Reasoned Report in writing and at a subsequent oral hearing on a date that has not yet been determined by the BCA. Solutia and Solutia Europe are fully cooperating with the BCA in this investigation. 6 -----END PRIVACY-ENHANCED MESSAGE-----