-----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, W12pxBiYcIC8aeZJDW0klNPdXW+tatGSiOUw2iPDPxW28n3t4OHTR2+x7CgqAriL 3K5XHbAMhsb2YZwodFRDZg== 0001068800-06-000683.txt : 20060802 0001068800-06-000683.hdr.sgml : 20060802 20060802171315 ACCESSION NUMBER: 0001068800-06-000683 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060802 DATE AS OF CHANGE: 20060802 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: 06998930 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 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 JUNE 30, 2006 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 A LARGE ACCELERATED FILER, AN ACCELERATED FILER OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED FILER" AND "LARGE ACCELERATED FILER" IN RULE 12b-2 OF THE EXCHANGE ACT (CHECK ONE): LARGE ACCELERATED FILER ACCELERATED FILER X NON-ACCELERATED FILER . --- --- --- INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT. YES NO X --- --- 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 JUNE 30, 2006 ----- ------------- COMMON STOCK, $0.01 PAR VALUE 104,459,578 SHARES ----------------------------- ------------------ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2006 2005 2006 2005 ---- ---- ---- ---- NET SALES .......................................................... $ 765 $ 730 $ 1,443 $ 1,444 Cost of goods sold ................................................. 635 629 1,239 1,241 ----- ----- ------- ------- GROSS PROFIT ....................................................... 130 101 204 203 Marketing expenses ................................................. 35 34 68 66 Administrative expenses ............................................ 23 24 44 46 Technological expenses ............................................. 12 11 24 22 Amortization expense ............................................... 1 -- 1 -- ----- ----- ------- ------- OPERATING INCOME ................................................... 59 32 67 69 Equity earnings from affiliates .................................... 11 21 21 35 Interest expense (a) ............................................... (27) (22) (50) (44) Other income, net .................................................. 4 4 7 5 Loss on debt modification .......................................... -- -- (8) -- Reorganization items, net .......................................... (18) (15) (32) (20) ----- ----- ------- ------- INCOME BEFORE INCOME TAX EXPENSE ................................... 29 20 5 45 Income tax expense ................................................. 5 7 7 13 ----- ----- ------- ------- INCOME (LOSS) FROM CONTINUING OPERATIONS ........................... 24 13 (2) 32 Income from Discontinued Operations, net of tax .................... 4 1 8 3 ----- ----- ------- ------- NET INCOME ......................................................... $ 28 $ 14 $ 6 $ 35 ===== ===== ======= ======= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Income (Loss) from Continuing Operations ........................... $0.23 $0.12 ($ 0.02) $ 0.30 Income from Discontinued Operations ................................ 0.04 0.01 0.08 0.03 ----- ----- ------- ------- Net Income ......................................................... $0.27 $0.13 $ 0.06 $ 0.33 ===== ===== ======= ======= BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING .............. 104.5 104.5 104.5 104.5 ===== ===== ======= =======
(a) Interest expense excludes unrecorded contractual interest expense of $8 for the three months ended June 30, 2006 and 2005, and $16 for the six months ended June 30, 2006 and 2005. See accompanying Notes to Consolidated Financial Statements. 1 SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (DOLLARS IN MILLIONS) (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2006 2005 2006 2005 ---- ---- ---- ---- NET INCOME ................................................. $ 28 $ 14 $ 6 $ 35 OTHER COMPREHENSIVE INCOME (LOSS): Net unrealized loss on derivative instruments .............. -- -- (1) -- Currency translation adjustments ........................... 10 (2) 12 (7) ----- ----- ----- ----- COMPREHENSIVE INCOME ....................................... $ 38 $ 12 $ 17 $ 28 ===== ===== ===== =====
See accompanying Notes to Consolidated Financial Statements. 2 SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF FINANCIAL POSITION (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
JUNE 30, DECEMBER 31, 2006 2005 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................... $ 265 $ 107 Trade receivables, net of allowances of $8 and $7 in 2006 and 2005 ...... 347 246 Miscellaneous receivables ............................................... 90 95 Inventories ............................................................. 263 254 Prepaid expenses and other assets ....................................... 29 34 Assets of discontinued operations ....................................... 84 69 ------- ------- TOTAL CURRENT ASSETS .................................................... 1,078 805 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $2,545 in 2006 and $2,482 in 2005 .................................. 772 770 INVESTMENTS IN AFFILIATES ............................................... 213 205 GOODWILL ................................................................ 89 76 IDENTIFIED INTANGIBLE ASSETS, net ....................................... 32 28 OTHER ASSETS ............................................................ 105 100 ------- ------- TOTAL ASSETS ............................................................ $ 2,289 $ 1,984 ======= ======= LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable ........................................................ $ 197 $ 218 Accrued liabilities ..................................................... 245 223 Short-term debt ......................................................... 700 300 Liabilities of discontinued operations .................................. 30 26 ------- ------- TOTAL CURRENT LIABILITIES ............................................... 1,172 767 LONG-TERM DEBT .......................................................... 210 247 OTHER LIABILITIES ....................................................... 260 248 ------- ------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ............................. 1,642 1,262 LIABILITIES SUBJECT TO COMPROMISE ....................................... 2,084 2,176 SHAREHOLDERS' DEFICIT: Common stock (authorized, 600,000,000 shares, par value $0.01) Issued: 118,400,635 shares in 2006 and 2005 ......................... 1 1 Additional contributed capital ...................................... 56 56 Treasury stock, at cost (13,941,057 shares in 2006 and 2005) ........ (251) (251) Net deficiency of assets at spinoff ..................................... (113) (113) Accumulated other comprehensive loss .................................... (82) (93) Accumulated deficit ..................................................... (1,048) (1,054) ------- ------- TOTAL SHAREHOLDERS' DEFICIT ............................................. (1,437) (1,454) ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT ............................. $ 2,289 $ 1,984 ======= =======
See accompanying Notes to Consolidated Financial Statements. 3 SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------- 2006 2005 ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income ............................................................... 6 $ 35 Adjustments to reconcile net income to Cash From Operations: Income from discontinued operations, net of tax ..................... (8) (3) Depreciation and amortization ....................................... 57 56 Restructuring expenses and other charges (gains)..................... (1) -- Amortization of deferred credits .................................... (4) (4) Other, net .......................................................... -- (1) Deferred Income Taxes ............................................... 1 6 Equity earnings from affiliates ..................................... (21) (35) Changes in assets and liabilities: Income taxes payable ........................................... (1) (16) Trade receivables .............................................. (102) (10) Inventories .................................................... (3) (10) Accounts payable ............................................... (14) (18) Liabilities subject to compromise .............................. (72) (23) Other assets and liabilities ................................... 36 (7) ----- ----- CASH USED IN OPERATING ACTIVITIES - CONTINUING OPERATIONS ................ (126) (30) CASH PROVIDED BY OPERATING ACTIVITIES - DISCONTINUED OPERATIONS .......... 2 4 ----- ----- CASH USED IN OPERATING ACTIVITIES ........................................ (124) (26) ----- ----- INVESTING ACTIVITIES: Property, plant and equipment purchases .................................. (41) (27) Acquisition and investment payments ...................................... (16) -- Investment and property disposals ........................................ -- 2 ----- ----- CASH USED IN INVESTING ACTIVITIES - CONTINUING OPERATIONS ................ (57) (25) CASH USED IN INVESTING ACTIVITIES - DISCONTINUED OPERATIONS .............. (2) (2) ----- ----- CASH USED IN INVESTING ACTIVITIES ........................................ (59) (27) ----- ----- FINANCING ACTIVITIES: Net change in short-term debt obligations ................................ 350 -- Net change in cash collateralized letters of credit ...................... -- 17 Deferred debt issuance costs ............................................. (9) -- ----- ----- CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING OPERATIONS ............ 341 17 ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 158 (36) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR ........................................................ 107 115 ----- ----- END OF PERIOD ............................................................ $ 265 $ 79 ===== ===== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for reorganization items ................................... $ (31) $ (30) ===== =====
See accompanying Notes to Consolidated Financial Statements. 4 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1. NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS Nature of Operations Solutia Inc., together with its subsidiaries (referred to herein as "Solutia" or the "Company"), is a global manufacturer and marketer of a variety of high-performance chemical-based materials. Solutia is a world leader in performance films for laminated safety glass and after-market applications; specialties such as water treatment chemicals, heat transfer fluids and aviation hydraulic fluids; and an integrated family of nylon products including high-performance polymers and fibers. Prior to September 1, 1997, Solutia was a wholly-owned subsidiary of the former Monsanto Company (now known as Pharmacia Corporation, a wholly-owned subsidiary of Pfizer, Inc. ("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 resulted from the Solutia Spinoff. Bankruptcy Proceedings Overview 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 DIP credit facility. This DIP facility consisted of (i) a $50 multiple draw term loan; (ii) a $300 single draw term loan, which was drawn in full on the effective date of the facility; and (iii) a $175 borrowing-based revolving credit facility, which includes a $150 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, all with Bankruptcy Court approval. The fourth amendment, among other things, (i) increased the DIP facility from $525 to $825; (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 5 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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 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 case 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 Company ("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 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 filed 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. The previously scheduled Disclosure Statement hearing has been cancelled and, based on comments from the Bankruptcy Court, Solutia anticipates that a hearing on the Disclosure Statement will not take place until after the Bankruptcy Court makes a ruling in the JPM Proceeding (as described in Note 9). 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 6 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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. Under the Plan, Solutia would emerge from bankruptcy as an independent publicly held company ("reorganized Solutia"). The Plan provides for $250 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 of stock, to the extent the stock is not purchased by eligible unsecured creditors in the rights offering. Of this $250 new investment, $175 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 would be used to fund reorganized Solutia's environmental remediation commitments in Anniston, Alabama and Sauget, Illinois, as described below. The remaining $25 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 would be paid from the proceeds of the rights offering (as described above), Monsanto would pay the next $50 (less amounts it has paid for remediation at these sites during the Chapter 11 Cases, which totaled over $30 as of January 31, 2006), Solutia would be responsible for the next $325 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 in any calendar year, up to $25 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 (as described in Note 9). 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 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 in Solutia's bankruptcy case. The common stock in reorganized Solutia received on account of this 7 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) claim would be deposited in the VEBA Trust and used to pay Retiree Welfare Benefits. This deposit would be in addition to the $175 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. The Plan also provides for the assumption and extension of certain commercial and operating agreements between Solutia and Monsanto. The Plan seeks a release for Monsanto and Pharmacia from certain pre-Solutia Spinoff liabilities, including those related to Retiree Welfare Benefits. In the Disclosure Statement, Solutia estimated that the amount of allowed general unsecured claims in its Chapter 11 case will be approximately $800 to $1,000, the enterprise value of reorganized Solutia will be approximately $2,000 to $2,300 and the reorganization equity value of reorganized Solutia will be approximately $700 to $1,100. However, these amounts are estimates and it is possible that the actual general unsecured claims pool, enterprise value and equity value of reorganized Solutia will be outside of these estimated ranges. The Plan contains details regarding how the claims of each class of creditors and interest holders will be treated. The Plan provides for repayment of Solutia's secured debt and debtor-in-possession financing from an exit financing package to be arranged by Solutia and does not require termination of Solutia's pension plans. In consideration for its contributions under the Plan, resolution of its claim in the Chapter 11 Cases and the settlement of ongoing and potential litigation, among other things, Monsanto would receive common stock in reorganized Solutia. If Monsanto is required to make the full new money investment under the rights offering, Monsanto's equity interest in reorganized Solutia is expected to range from approximately 45 percent to 49 percent, depending on the actual amount of allowed general unsecured claims. The holders of allowed general unsecured claims would receive the remainder of the common stock in reorganized Solutia, as described below. Based on the mid-point of the equity value of reorganized Solutia described above, the Plan provides for distributions of common stock in reorganized Solutia to holders of allowed unsecured claims in an amount estimated at between 48 percent and 56 percent of their allowed claims. However, this is only an estimated range of recoveries. Solutia is unable to predict precisely what recovery the Plan will provide to these holders of unsecured claims or how any potential modifications to the Plan will impact these recoveries. Therefore, actual recoveries may be materially different from these estimates. Furthermore, the equity interests received by holders of allowed unsecured claims will be subject to dilution as a result of the incentive stock option plan that is expected to be adopted by Solutia pursuant to the Plan. The ultimate ownership interests in reorganized Solutia held by Monsanto and other holders of unsecured claims will depend on, among other factors, the amount of allowed unsecured claims in the bankruptcy case and the number of rights exercised by unsecured creditors in the rights offering. 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 8 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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 These financial statements should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in Solutia's 2005 Annual Report on Form 10-K ("2005 Form 10-K"), filed with the Securities and Exchange Commission ("SEC") on March 15, 2006. The consolidated financial statements have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and on a going concern basis, which assumes the continuity of operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business. Continuation of the Company as a going concern is contingent upon, among other things, Solutia's ability (i) to comply with the terms and conditions of its DIP financing; (ii) to obtain confirmation of a plan of reorganization under the U.S. Bankruptcy Code; (iii) to return to profitability; (iv) to generate sufficient cash flow from operations; and (v) to obtain financing sources to meet the Company's future obligations. These matters create uncertainty about the Company's ability to continue as a going concern. The consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. Additionally, a confirmed plan of reorganization could materially change amounts reported in the consolidated financial statements, which do not give effect to all adjustments of the carrying value of assets and liabilities that are necessary as a consequence of reorganization under Chapter 11. The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods reported. Such adjustments are of a normal, recurring nature. In addition, footnote disclosures which would substantially duplicate the disclosures in the audited consolidated financial statements have been omitted in the accompanying unaudited consolidated financial statements. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications of prior year's financial information have been made to conform to the 2006 presentation. Condensed Consolidating Financial Statements Condensed consolidating financial statements for Solutia and subsidiaries in reorganization and subsidiaries not in reorganization as of June 30, 2006 and December 31, 2005, and for the three and six months ended June 30, 2006 and June 30, 2005 are presented below. These condensed consolidating financial statements include investments in subsidiaries carried under the equity method. 9 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2006
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ ASSETS Current assets ............................................... $ 656 $ 512 $ (90) $ 1,078 Property, plant and equipment, net ........................... 658 114 -- 772 Investment in subsidiaries and affiliates .................... 465 216 (468) 213 Goodwill and identified intangible assets, net ............... 100 21 -- 121 Other assets ................................................. 59 46 -- 105 ------------------------------------------------------------ TOTAL ASSETS .............................................. $ 1,938 $ 909 $ (558) $ 2,289 ============================================================ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities .......................................... $ 1,098 $ 253 $ (179) $ 1,172 Long-term debt ............................................... -- 210 -- 210 Other liabilities ............................................ 193 67 -- 260 ------------------------------------------------------------ TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE .................. 1,291 530 (179) 1,642 LIABILITIES SUBJECT TO COMPROMISE ............................ 2,084 -- -- 2,084 TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ......................... (1,437) 379 (379) (1,437) ------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ......... $ 1,938 $ 909 $ (558) $ 2,289 ============================================================
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ ASSETS Current assets ............................................... $ 447 $ 430 $ (72) $ 805 Property, plant and equipment, net ........................... 674 96 -- 770 Investment in subsidiaries and affiliates .................... 388 213 (396) 205 Goodwill and identified intangible assets, net ............... 100 4 -- 104 Other assets ................................................. 62 38 -- 100 ------------------------------------------------------------ TOTAL ASSETS .............................................. $ 1,671 $ 781 $ (468) $ 1,984 ============================================================ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities .......................................... $ 748 $ 176 $ (157) $ 767 Long-term debt ............................................... -- 247 -- 247 Other liabilities ............................................ 201 47 -- 248 ------------------------------------------------------------ TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE .................. 949 470 (157) 1,262 LIABILITIES SUBJECT TO COMPROMISE ............................ 2,176 -- -- 2,176 TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ......................... (1,454) 311 (311) (1,454) ------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ............................................... $ 1,671 $ 781 $ (468) $ 1,984 ============================================================
10 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES ........................................ $ 633 $ 248 $(116) $ 765 Cost of goods sold ............................... 546 212 (123) 635 ----------------------------------------------------------- GROSS PROFIT ..................................... 87 36 7 130 Marketing, administrative and technological expenses ......................................... 56 14 -- 70 Amortization expense ............................. 1 -- -- 1 ----------------------------------------------------------- OPERATING INCOME ................................. 30 22 7 59 Equity earnings (loss) from affiliates ........... 27 (1) (15) 11 Interest expense ................................. (21) (6) -- (27) Other income, net ................................ 10 1 (7) 4 Reorganization items, net ........................ (18) -- -- (18) ----------------------------------------------------------- INCOME BEFORE INCOME TAXES ....................... 28 16 (15) 29 Income tax expense (benefit) ..................... (1) 5 1 5 ----------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS ................ 29 11 (16) 24 Income (loss) from discontinued operations, net of tax ........................... (1) 5 -- 4 ----------------------------------------------------------- NET INCOME ....................................... $ 28 $ 16 $ (16) $ 28 ===========================================================
11 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES ...................................... $ 1,190 $ 475 $(222) $ 1,443 Cost of goods sold ............................. 1,063 411 (235) 1,239 ------------------------------------------------------------ GROSS PROFIT ................................... 127 64 13 204 Marketing, administrative and technological expenses ....................................... 108 28 -- 136 Amortization expense ........................... 1 -- -- 1 ------------------------------------------------------------ OPERATING INCOME ............................... 18 36 13 67 Equity earnings (loss) from affiliates ......... 52 (2) (29) 21 Interest expense ............................... (39) (11) -- (50) Other income, net .............................. 17 3 (13) 7 Loss on debt modification ...................... (8) -- -- (8) Reorganization items, net ...................... (32) -- -- (32) ------------------------------------------------------------ INCOME BEFORE INCOME TAXES ..................... 8 26 (29) 5 Income tax expense ............................. 1 6 -- 7 ------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS ....... 7 20 (29) (2) Income (loss) from discontinued operations, net of tax ......................... (1) 9 -- 8 ------------------------------------------------------------ NET INCOME ..................................... $ 6 $ 29 $ (29) $ 6 ============================================================
12 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES ............................................... $ 603 $ 227 $(100) $ 730 Cost of goods sold ...................................... 541 193 (105) 629 ------------------------------------------------------------ GROSS PROFIT ............................................ 62 34 5 101 Marketing, administrative and technological expenses ................................................ 54 15 -- 69 ------------------------------------------------------------ OPERATING INCOME ........................................ 8 19 5 32 Equity earnings (loss) from affiliates .................. 32 (1) (10) 21 Interest expense ........................................ (16) (6) -- (22) Other income, net ....................................... 5 5 (6) 4 Reorganization items, net ............................... (12) (3) -- (15) ------------------------------------------------------------ INCOME BEFORE INCOME TAXES .............................. 17 14 (11) 20 Income tax expense ...................................... 2 5 -- 7 ------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS ....................... 15 9 (11) 13 Income (loss) from discontinued operations, net of tax .................................. (1) 2 -- 1 ------------------------------------------------------------ NET INCOME .............................................. 14 11 (11) 14 ============================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES ............................................... $ 1,195 $ 452 $(203) $ 1,444 Cost of goods sold ...................................... 1,077 381 (217) 1,241 ------------------------------------------------------------ GROSS PROFIT ............................................ 118 71 14 203 Marketing, administrative and technological expenses ................................................ 105 29 -- 134 ------------------------------------------------------------ OPERATING INCOME ........................................ 13 42 14 69 Equity earnings (loss) from affiliates .................. 64 (2) (27) 35 Interest expense ........................................ (32) (12) -- (44) Other income, net ....................................... 10 7 (12) 5 Reorganization items, net ............................... (17) (3) -- (20) ------------------------------------------------------------ INCOME BEFORE INCOME TAXES .............................. 38 32 (25) 45 Income tax expense ...................................... 2 11 -- 13 ------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS ....................... 36 21 (25) 32 Income (loss) from discontinued operations, net of tax .................................. (1) 4 -- 3 ------------------------------------------------------------ NET INCOME .............................................. 35 25 (25) 35 ============================================================
13 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ Net Cash Provided by (Used in) Operating Activities ...................................................... $ (143) $ 19 $ -- $ (124) Net Cash Used in Investing Activities ........................... (52) (7) -- (59) Net Cash Provided by Financing Activities ....................... 333 8 -- 341 --------------------------------------------------------- Net Increase in Cash and Cash Equivalents ....................... 138 20 -- 158 Cash and Cash Equivalents: Beginning of year ............................................ 18 89 -- 107 --------------------------------------------------------- End of period ................................................ $ 156 $ 109 $ -- $ 265 =========================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ Net Cash Provided by (Used in) Operating Activities ...................................................... $ (41) $ 15 $ -- $ (26) Net Cash Used in Investing Activities ........................... (21) (6) -- (27) Net Cash Provided by (Used in) Financing Activities ...................................................... 24 (7) -- 17 --------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents ..................................................... (38) 2 -- (36) Cash and Cash Equivalents: Beginning of year ............................................ 50 65 -- 115 --------------------------------------------------------- End of period ................................................ $ 12 $ 67 $ -- $ 79 =========================================================
Recently Issued Accounting Pronouncements In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, ("FIN 48"). FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 eliminates income taxes from the scope of Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006 (i.e., effective January 1, 2007 for Solutia). Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative effect adjustment recorded to the beginning balance of retained earnings. The cumulative effect adjustment would not apply to those items that would not have been recognized in earnings, such as the effect of adopting FIN 48 on tax positions related to business combinations. Solutia is currently evaluating the impact of FIN 48 on the consolidated financial statements. 14 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 2. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET Liabilities Subject to Compromise Under Chapter 11 of the U.S. Bankruptcy Code, certain claims against Solutia in existence prior to the filing of the petitions for relief under the federal bankruptcy laws are stayed while Solutia continues business operations as a debtor-in-possession. These estimated claims are reflected in the Consolidated Statement of Financial Position as Liabilities Subject to Compromise as of June 30, 2006 and December 31, 2005 and are summarized in the table below. Such claims remain subject to future adjustments. Adjustments may result from actions of the bankruptcy court, negotiations with claimants, rejection or assumption of executory contracts, determination of value of any collateral securing claims, reconciliation of proofs of claim or other events. Solutia has received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations, including (i) certain pre-petition compensation to employees and employee-equivalent independent contractors; (ii) business expenses of employees; (iii) obligations under employee benefit plans; (iv) employee payroll deductions and withholdings; (v) costs and expenses incident to the foregoing payments (including payroll-related taxes and processing costs); (vi) certain pre-petition workers' compensation claims, premiums and related expenses; (vii) certain pre-petition trust fund and franchise taxes; (viii) pre-petition claims of certain contractors, freight carriers, processors, customs brokers and related parties; (ix) customer accommodation programs; and (x) pre-petition claims of critical vendors in the ordinary course of business. Accordingly, these pre-petition items have been excluded from Liabilities Subject to Compromise as of June 30, 2006 and December 31, 2005, as applicable. The amounts subject to compromise consisted of the following items:
JUNE 30, DECEMBER 31, 2006 2005 ---- ---- Postretirement benefits (a) ................................. $ 1,028 $ 1,098 Litigation reserves (b) ..................................... 116 136 Accounts payable (c) ........................................ 116 118 Environmental reserves (d) .................................. 81 82 Other miscellaneous liabilities ............................. 75 74 6.72% debentures due 2037(e) ................................ 150 150 7.375% debentures due 2027(e) ............................... 300 300 11.25% notes due 2009 (f) ................................... 223 223 Other (g) ................................................... 43 43 ------- ------- 716 716 Unamortized debt discount and debt issuance costs ........... (48) (48) ------- ------- TOTAL DEBT SUBJECT TO COMPROMISE ....................... 668 668 ------- ------- TOTAL LIABILITIES SUBJECT TO COMPROMISE ..................... $ 2,084 $ 2,176 ======= =======
(a) Postretirement benefits include Solutia's domestic (i) qualified pension plan liabilities of $462 and $501 as of June 30, 2006 and December 31, 2005, respectively; (ii) non-qualified pension plan liabilities of $19 as of both June 30, 2006 and December 31, 2005; and (iii) other postretirement benefits liabilities of $547 and $578 as of June 30, 2006 and December 31, 2005, respectively. Pursuant to a bankruptcy court order, Solutia made payments with respect to other postretirement obligations of approximately $47 in the six months ended June 30, 2006. Solutia also made $43 of contributions to its qualified pension plan pursuant to IRS funding requirements in the six months ended June 30, 2006. (b) An automatic stay has been imposed against the commencement or continuation of legal proceedings against Solutia outside of the bankruptcy court process. Consequently, Solutia's accrued liability with respect to pre-petition legal proceedings has been classified as subject to compromise as of June 30, 2006 and December 31, 2005. During the second quarter 2006 Solutia transferred out of liabilities subject to compromise $20 of litigation reserves related to the PENNDOT litigation matter that were no longer deemed uncertain as a result of a favorable court ruling (as further described in Note 9). 15 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (c) Pursuant to bankruptcy court orders, Solutia settled certain accounts payable liabilities subject to compromise in the six months ended June 30, 2006. (d) Represents remediation obligations related primarily to properties that are not owned or operated by Solutia, including non-owned properties adjacent to plant sites and certain owned offsite disposal locations. See Note 9 for further disclosure with respect to ongoing legal proceedings concerning environmental liabilities subject to compromise. (e) While operating during the Chapter 11 bankruptcy proceedings, Solutia has ceased recording interest on its 6.72% debentures due 2037 and its 7.375% debentures due 2027. The amount of contractual interest expense not recorded in the six months ended June 30, 2006 was approximately $16. (f) Pursuant to a bankruptcy court order, Solutia is required to continue payments of the contractual interest on its 11.25% notes due 2009 as a form of adequate protection under the U.S. Bankruptcy Code; provided, however, that Solutia's official committee of unsecured creditors (the "Creditors' Committee") has the right at any time, and Solutia has the right at any time after the payment of the contractual interest made in July 2005, to seek to terminate Solutia's obligation to continue making the interest payments. Solutia or the Creditors' Committee could successfully terminate all or part of Solutia's interest payment obligations only after a showing that the noteholders are not entitled to adequate protection, which would depend, among other things, on the value of the collateral securing the notes as of December 17, 2003, and whether that value is decreasing during the course of Solutia's bankruptcy case. The amount of contractual interest paid with respect to these notes was approximately $13 in the six months ended June 30, 2006, and the accrued interest related to these notes was included in Accrued Liabilities classified as not subject to compromise as of June 30, 2006 and December 31, 2005. (g) Represents the debt obligation incurred upon the consolidation of the assets and liabilities of a synthetic lease structure consolidated as part of the adoption of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. The obligation represents the synthetic lease arrangement with respect to Solutia's headquarters building. Reorganization Items, Net Reorganization items, net are presented separately in the Condensed Consolidated Statement of Operations and represent items of income, expense, gain or loss that are realized or incurred by Solutia because it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items, net consisted of the following items:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2006 2005 2006 2005 ---- ---- ---- ---- Professional fees (a) ...................................... $(15) $(13) $(27) $(24) Severance and employee retention costs (b) ................. (1) (2) (3) (8) Adjustments to allowed claim amounts (c) ................... -- -- 2 (11) Settlements of pre-petition claims (d) ..................... -- -- -- 29 Other ...................................................... (2) -- (4) (6) ---- ---- ---- ---- TOTAL REORGANIZATION ITEMS, NET ............................ $(18) $(15) $(32) $(20) ==== ==== ==== ====
(a) Professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings. (b) Expense provisions related to (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court. (c) Adjustments to record certain pre-petition claims at estimated amounts of the allowed claims. (d) Represents the difference between the settlement amount of certain pre-petition obligations and the corresponding amounts previously recorded. 16 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 3. STOCK OPTION PLANS Solutia has two stock-based incentive plans under which awards are available for grants to officers and employees; the Solutia Inc. 2000 Stock-Based Incentive Plan ("2000 Plan") and the Solutia Inc. 1997 Stock-Based Incentive Plan ("1997 Plan"). The 2000 Plan authorizes up to 5,400,000 shares and the 1997 Plan up to 7,800,000 shares of Solutia common stock for grants of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards and bonus stock awards. The shares used may be newly issued shares, treasury shares or a combination. Under both plans, the exercise price of a stock option must be no less than the fair market value of Solutia's common stock on the option grant date. Additionally, the plans provide that the term of any stock option granted may not exceed 10 years. At June 30, 2006, approximately 2,108,795 shares from the 2000 Plan and 1,954,164 shares from the 1997 Plan remained available for grants. During the six months ended June 30, 2006, no options were granted to current executive officers and other senior executives as a group, or to other employees. Total shares covered by options granted under the plans to current executive officers and other senior executives as a group totaled 3,011,000, and those to other employees totaled 10,016,592, through June 30, 2006. The options granted to Solutia's executive officers and other senior executives are primarily performance options that become exercisable upon the earlier of achievement of specified share price targets or the ninth anniversary of the option grant. The options granted to the other management employees are time-based. They generally become exercisable in thirds, one-third on each of the first three anniversaries of the option grant date. The Solutia Inc. Non-Employee Director Compensation Plan provides incentives to non-employee members of Solutia's board of directors. This plan authorizes up to 400,000 shares for grants of non-qualified stock options and for grants of deferred shares in payment of all or a portion of the annual retainer for the non-employee directors. Only treasury shares may be used. Under this plan, the exercise price of a stock option must be no less than the fair market value of Solutia's common stock on the grant date and the term of any stock option granted under the plan may not exceed 10 years. At June 30, 2006, 25,174 shares of Solutia's common stock remained available for grants under the plan. There were no options or deferred shares granted in the six months ended June 30, 2006 as all non-employee director compensation is now paid in cash. As of January 1, 2006, Solutia adopted SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"), using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method under SFAS No. 123(R). The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. Additionally, Solutia believes that its plan of reorganization will provide for cancellation of its existing shares of common stock, as well as options and warrants to purchase its common stock, and that it is unlikely that holders of options to purchase Solutia's common stock will receive any consideration for those options in such a plan of reorganization. There were no options granted or exercised during the six months ended June 30, 2006. Accordingly, no compensation cost with respect to such activities was recognized in the Statement of Consolidated Operations in the six months ended June 30, 2006. However, to the extent that the remaining service periods of unvested options granted prior to January 1, 2006 extend past the adoption date of SFAS No. 123(R), the residual unamortized fair value originally calculated for footnote disclosures required under SFAS No. 123, net of estimated forfeitures, is now recognized on a straight-line basis over such remaining periods. Compensation cost and all related effects within the Statement of Consolidated Operations and Statement of Consolidated Cash Flows associated with these unvested 17 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) options was less than $1 during the six months ended June 30, 2006. Additionally, there was less than $1 of total unrecognized compensation cost related to these unvested options as of June 30, 2006 to be recognized over a weighted-average recognition period of less than one year. Prior to January 1, 2006, Solutia applied SFAS No. 123 as amended by SFAS No. 148, 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 was recognized for Solutia's option plans in the Statement of Consolidated Operations during such periods, as all options granted under the plans had an exercise price equal to the market value of Solutia's stock on the date of the grant. The effect would have been less than $1 on net income and no change on income per share had the determination of compensation cost for these plans been based on the fair value at the grant dates for awards under these plans, consistent with SFAS No. 123, for the six months ended June 30, 2005. A summary of Solutia's stock option plans for the six months ended June 30, 2006 is as follows:
WEIGHTED- WEIGHTED- AVERAGE AGGREGATE AVERAGE REMAINING INTRINSIC OPTIONS EXERCISE PRICE CONTRACTUAL LIFE VALUE (A) --------------------------------------------------------------- Outstanding at January 1, 2006 ................ 17,323,551 $ 15.80 -- -- Granted .................................... -- 0.00 -- -- Exercised .................................. -- 0.00 -- -- Expired .................................... (947,076) 15.33 -- -- --------------------------------------------------------------- Outstanding at March 31, 2006 ................ 16,376,475 $ 15.82 1.7 $ (253) Granted .................................... -- 0.00 -- -- Exercised .................................. -- 0.00 -- -- Expired .................................... (2,667,774) 16.49 -- -- --------------------------------------------------------------- Outstanding at June 30, 2006 .................. 13,708,701 $ 15.68 1.8 $ (209) =============================================================== Exercisable at June 30, 2006 .................. 13,415,802 $ 15.96 1.7 $ (208)
(a) Intrinsic value for stock options is calculated based on the difference between the exercise price of the underlying awards and the quoted market price of Solutia's common stock as of the reporting date. 4. ACQUISITION AND DIVESTITURE Discontinued Operations On May 23, 2006, Solutia's wholly-owned subsidiary, Solutia Europe S.A./N.V. ("SESA"), agreed to sell its pharmaceutical services business to Dishman Pharmaceuticals & Chemicals Ltd. ("Dishman") pursuant to a Stock and Asset Purchase Agreement dated as of May 23, 2006 between SESA and Dishman. Under the terms of the agreement, Dishman has agreed to purchase 100 percent of the stock of the pharmaceutical services business, as well as certain other assets used in the pharmaceutical services business, for approximately $75, subject to certain purchase price adjustments. Dishman has also agreed to assume substantially all of the liabilities relating to the pharmaceutical services business, other than certain liabilities that arise prior to the closing of the transaction and liabilities under certain employment agreements. SESA has agreed, subject to certain exceptions, that for a period of three years after the closing of the transaction neither it nor its affiliates will compete with the business of the pharmaceutical services business or solicit for employment certain employees of the pharmaceutical services business and their current affiliates. The transaction is anticipated to close in the third quarter 2006. 18 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The pharmaceutical services business is a component of the Performance Products segment. Based upon the current transaction terms, Solutia expects to record a gain on the sale of the pharmaceutical services business in the range of approximately $45 to $55. Further, approximately (euro) 40 million, or approximately $50, of the proceeds from the sale are required to pay down the (euro) 200 million facility entered into on July 26, 2006 and closed on August 1, 2006 (as described in Note 13). As the transaction is expected to close in the third quarter 2006, the assets and liabilities of the discontinued operations have been classified as current in the Consolidated Statement of Financial Position at June 30, 2006 and December 31, 2005. The carrying amounts of assets and liabilities from discontinued operations consisted of the following:
JUNE 30, DECEMBER 31, 2006 2005 ---- ---- ASSETS: Trade receivables .................................................... $ 8 $ 7 Miscellaneous receivables ............................................ 2 1 Inventories .......................................................... 20 13 Prepaid expenses and other assets .................................... 2 1 Property, plant and equipment, net ................................... 35 34 Identified intangible assets, net .................................... 7 7 Other assets ......................................................... 10 6 ----- ----- Assets of discontinued operations ........................... $ 84 $ 69 ===== ===== LIABILITIES: Accounts payable ..................................................... $ 3 $ 4 Accrued liabilities .................................................. 21 17 Other liabilities .................................................... 6 5 ----- ----- Liabilities of discontinued operations ...................... $ 30 $ 26 ===== =====
The operating results of the pharmaceutical services business have been reported separately as discontinued operations, net of tax, in the Consolidated Statement of Operations for each period presented. Net sales and income from discontinued operations are as follows:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2006 2005 2006 2005 ---- ---- ---- ---- Net sales .............................................. $ 15 $17 $ 37 $36 Income (loss) before income taxes ...................... (1) 1 3 4 Income tax expense (benefit) ........................... (5) -- (5) 1 ---- --- ---- --- INCOME FROM DISCONTINUED OPERATIONS .................... $ 4 $ 1 $ 8 $ 3 ==== === ==== ===
Acquisition On March 1, 2006, pursuant to a stock purchase agreement among Solutia, Vitro S.A. de C.V. ("Vitro") and Vitro Plan S.A. de C.V. ("Vitro Plan"), a wholly-owned subsidiary of Vitro, Solutia acquired Vitro Plan's 51 percent stake in Quimica M, S.A. de C.V. ("Quimica") (originally formed in 1996 as a joint venture between Vitro, Vitro Plan, and Monsanto) for approximately $20 in cash. As a result of this acquisition, Solutia became the sole owner of Quimica and its plastic interlayer plant located in Puebla, Mexico. Pursuant to the purchase agreement, Solutia also entered into supply agreements with Vitro Flex S.A. de C.V. and Vitro Automotriz S.A. de C.V. to provide their 19 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) requirements for most SAFLEX(R) plastic interlayer products for up to five years. This acquisition reflects Solutia's commitment to meet the growing global demand for its SAFLEX(R) and VANCEVA(R) plastic interlayer products. The allocation of purchase price to the assets and liabilities acquired or assumed resulted in Solutia's acquisition or assumption of total current assets of $18, non-current assets of $32, goodwill of $5, amortizable contract-based intangible assets of $4, current liabilities of $11 and non-current liabilities of $7. The contract-based intangible assets are being amortized over their estimated useful lives of 5 years. Results of operations for Quimica were included in Solutia's results of operations from the acquisition date in the Performance Products segment. The results of operations for the acquired business were not material to Solutia's consolidated results of operations. 5. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Goodwill of $89 and $76 at June 30, 2006 and December 31, 2005, respectively, was allocated to the Performance Products segment. This $13 increase in goodwill as of June 30, 2006 was a result of the Quimica acquisition (as further described in Note 4), of which $5 resulted from the 2006 acquisition and $8 resulted from the original acquisition in 1996 that was previously accounted for under the equity method of accounting. Identified Intangible Assets Identified intangible assets generally are comprised of (i) amortizable contract-based intangible assets with finite useful lives, and (ii) indefinite-lived trademarks not subject to amortization. These intangible assets are summarized in aggregate as follows:
JUNE 30, 2006 DECEMBER 31, 2005 ---------------------------------- -------------------------------- GROSS NET GROSS NET CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE ---------------------------------- -------------------------------- Amortized intangible assets .................. $ 12 $ (6) $ 6 $ 8 $ (6) $ 2 Trademarks ................................... 26 -- 26 26 -- 26 ---------------------------------- -------------------------------- TOTAL IDENTIFIED INTANGIBLE ASSETS ....................................... $ 38 $ (6) $ 32 $ 34 $ (6) $ 28 ================================== ================================
There were no changes to amortizable lives or methods during the six months ended June 30, 2006. In addition, amortization expense for the net carrying amount of finite-lived intangible assets is estimated to be $2 annually from 2006 through 2010. 6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
JUNE 30, DECEMBER 31, INVENTORIES 2006 2005 ---- ---- Finished goods ...................................... $ 219 $ 236 Goods in process .................................... 149 131 Raw materials and supplies .......................... 100 93 ----- ----- Inventories, at FIFO cost ........................... 468 460 Excess of FIFO over LIFO cost ....................... (205) (206) ----- ----- TOTAL INVENTORIES ................................... $ 263 $ 254 ===== =====
Inventories at FIFO approximate current cost. 20 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
JUNE 30, DECEMBER 31, ACCRUED LIABILITIES 2006 2005 ---- ---- Wages and benefits ...................................... $ 43 $ 54 Accrued rebates and sales returns/allowances ............ 18 22 Accrued interest ........................................ 26 23 Other ................................................... 158 124 ------ ------ TOTAL ACCRUED LIABILITIES ............................... $ 245 $ 223 ====== ======
7. INVESTMENT IN AFFILIATE At June 30, 2006, Solutia participated in one principal 50/50 joint venture, Flexsys Group, comprised of interests in Flexsys Holding B.V., Flexsys America L.P. and Flexsys Rubber Chemicals Ltd. (collectively "Flexsys"), for which Solutia applies the equity method of accounting. Summarized financial information for 100 percent of the Flexsys joint venture is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Net sales ............................. $ 161 $ 174 $ 316 $ 334 Gross profit .......................... 47 60 93 112 Operating income ...................... 32 30 60 61 Net income ............................ 21 22 40 46
8. RESTRUCTURING RESERVES Solutia recorded approximately $1 of asset write-downs recorded within Reorganization Items, net in the Performance Products segment during the three months ended June 30, 2006. In addition, Solutia recorded approximately $1 of severance and retraining costs in the three months ended June 30, 2006 principally in Marketing and Administrative expenses involving headcount reductions recorded primarily in the Performance Products segment. Solutia recorded approximately $2 of decommissioning and dismantling costs in the six months ended June 30, 2006 as a result of the shut-down of its acrylic fibers business in 2005, and approximately $2 of asset write-downs. These costs were all recorded within Reorganization Items, net with approximately $3 in the Integrated Nylon segment and approximately $1 in the Performance Products segment. In addition, Solutia recorded approximately $3 of severance and retraining costs in the six months ended June 30, 2006 with approximately $2 in Reorganization Items, net, and approximately $1 in Marketing and Administrative expenses involving headcount reductions recorded throughout the organization. 21 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) A summary of restructuring activity during the three and six months ended June 30, 2006 is as follows:
DECOMMISSIONING/ EMPLOYMENT ASSET WRITE- DISMANTLING REDUCTIONS DOWNS TOTAL ----------------------------------------------------------------- Balance at December 31, 2005 .............. $ 2 $ 2 $ -- $ 4 Charges taken ........................... 2 2 1 5 Amounts utilized ........................ (2) (3) (1) (6) ----------------------------------------------------------------- Balance at March 31, 2006 ................. $ 2 $ 1 $ -- $ 3 Charges taken ........................... -- 1 1 2 Amounts utilized ........................ (1) (1) (1) (3) ----------------------------------------------------------------- BALANCE AT JUNE 30, 2006 .................. $ 1 $ 1 $ -- $ 2 =================================================================
Solutia cannot forecast the level of future restructuring charges due to the inherent uncertainty involved in operating as a debtor-in-possession under Chapter 11 bankruptcy protection. 9. CONTINGENCIES Litigation Because of the size and nature of its business, Solutia is a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages. In addition, at the time of its spinoff from Pharmacia, Solutia assumed the defense of specified legal proceedings and agreed to indemnify Pharmacia for obligations arising in connection with those proceedings. Solutia has determined that these defense and indemnification obligations to Pharmacia are pre-petition obligations under the U.S. Bankruptcy Code that Solutia is prohibited from performing, except pursuant to a confirmed plan of reorganization. As a result, Solutia has ceased performance of these obligations. Solutia's cessation of performance may give rise to a pre-petition unsecured claim against Solutia which Pharmacia may assert in Solutia's Chapter 11 bankruptcy case. This estimated unsecured claim amount was classified as a liability subject to compromise as of June 30, 2006 and December 31, 2005 in the amount of $116 and $136, respectively. Solutia's 2003 Form 10-K/A described a number of legal proceedings in which Solutia was a named defendant or was defending solely due to its indemnification obligations referred to above. Solutia is prohibited from performing with respect to these obligations, and developments, if any, in these matters are currently managed by other named defendants. Accordingly, Solutia has ceased reporting on the status of those legal proceedings. The legal proceedings which are in this category are (i) Owens v. Monsanto; (ii) Payton v. Monsanto; (iii) other Anniston cases; and (iv) premises based asbestos litigation. Following is a summary of legal proceedings that Solutia or certain of its equity affiliates continue to manage that could result in an outcome that is material to the consolidated financial statements: LEGAL PROCEEDINGS IN SOLUTIA'S BANKRUPTCY CASE JPMORGAN ADVERSARY PROCEEDING On May 27, 2005, JPMorgan, as indenture trustee for Solutia's debentures due 2027 and 2037 (the "Prepetition Indenture"), filed an adversary proceeding (the "JPM Proceeding") against Solutia in Solutia's bankruptcy case. In its adversary proceeding, JPMorgan asserted five causes of action seeking declaratory judgments to establish the validity and priority of the purported security interest of the holders of the 2027 and 2037 debentures, and one cause of action pursuant to section 363 of the Bankruptcy Code asserting that the alleged 22 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) security interests lacked adequate protection. The JPM Proceeding relates to Solutia's 2002 and 2003 refinancings of its credit facilities. When Solutia refinanced its credit facilities in 2002, the 2027 and 2037 debentures obtained a pro rata secured interest in certain of Solutia's assets as a result of the application of the "equal and ratable" provisions of the Prepetition Indenture. On October 8, 2003, Solutia restructured its credit facilities, reduced its outstanding secured indebtedness below the threshold level that initially triggered the "equal and ratable" provisions of the Prepetition Indenture and, as a result, the 2027 and 2037 debentures returned to their original unsecured status. JPMorgan alleges that the October 8, 2003 refinancing had no effect on the security interests and liens that were created in 2002, and argues further that, even if it did, those liens should be reinstated as a matter of equity. The Unsecured Creditors' Committee and the Ad Hoc Solutia Trade Claims Committee have intervened in the JPM Proceeding in support of Solutia and the Ad Hoc Committee of Solutia Noteholders has intervened in the JPM Proceeding in support of JPMorgan. Trial of the JPM Proceeding concluded on July 10, 2006. Post-trial briefs are expected to be submitted by the parties by August 9, 2006. The Bankruptcy Court has indicated that it will take at least six weeks after submission of the post-trial briefs to make a ruling in the JPM Proceeding. EQUITY COMMITTEE ADVERSARY PROCEEDING AGAINST MONSANTO AND PHARMACIA On March 7, 2005, the Official Committee of Equity Security Holders ("Equity Committee") in Solutia's bankruptcy case filed a complaint against Pharmacia and Monsanto and objections to the proofs of claim filed by Pharmacia and Monsanto in Solutia's bankruptcy case (the "Equity Committee Complaint"). In the Equity Committee Complaint, the Equity Committee seeks to avoid certain obligations assumed by Solutia at the time of its spinoff from Pharmacia. The Equity Committee Complaint alleges, among other things, that the Solutia Spinoff was a fraudulent transfer under the Bankruptcy Code because Pharmacia forced Solutia to assume excessive liabilities and insufficient assets such that Solutia was destined to fail from its inception. Pharmacia and Monsanto filed a motion to dismiss the Equity Committee Complaint for, among other things, lack of standing or, in the alternative, to stay the adversary proceeding. On August 4, 2005, the Debtors filed with the Bankruptcy Court their Statement and Reservation of Rights in Response to Equity Committee's Complaint and Objection to Claims, in which the Debtors expressed their view that the issues and disputes raised in the Equity Committee Complaint would be resolved through the Plan confirmation process. During a hearing held on April 11, 2006 the Bankruptcy Court issued a bench ruling denying Pharmacia and Monsanto's motion to dismiss the Equity Committee Complaint. The Ad Hoc Committee of Solutia Noteholders and the Ad Hoc Solutia Trade Claims Committee have intervened in this adversary proceeding in support of the Equity Committee. The Unsecured Creditors' Committee has intervened, and Solutia intends to intervene, in this adversary proceeding as neutral parties due to the importance of this proceeding with respect to Solutia's bankruptcy case. The case is proceeding and the Bankruptcy Court has set this matter for trial to commence on September 11, 2006. LEGAL PROCEEDINGS OUTSIDE SOLUTIA'S BANKRUPTCY CASE ANNISTON PARTIAL CONSENT DECREE On August 4, 2003, the U.S. District Court for the Northern District of Alabama approved a Partial Consent Decree in an action captioned United States of America v. Pharmacia Corporation (p/k/a Monsanto Company) and Solutia. This Partial Consent Decree provides for Pharmacia and Solutia to sample certain residential properties and remove soils found on those properties if PCBs are at a level of 1 part per million ("ppm") or above, to conduct a Remedial Investigation and Feasibility Study to provide information for the selection by the EPA of a cleanup remedy for the Anniston, Alabama PCB site, and to pay EPA's past response costs and future oversight costs related to this work. The decree also provided for the creation of an educational trust fund of approximately $3 to be funded over a 12-year period to provide supplemental educational services for school children in west Anniston. A subsequent dispute arose between the EPA and Solutia regarding the scope and application of the automatic stay arising as a result of Solutia's Chapter 11 filing to the remaining obligations under the Partial Consent Decree. On April 19, 2004, the District Court held that the Partial Consent Decree enforces police and regulatory powers under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and, as a 23 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) result, the automatic stay provisions of the U.S. Bankruptcy Code are inapplicable to Solutia's obligations under the Partial Consent Decree. On April 30, 2004, the United States Bankruptcy Court for the Southern District of New York entered a Stipulation and Agreed Order in which the EPA and Solutia stipulated that the automatic stay is applicable to certain of the Partial Consent Decree's requirements. Solutia filed a motion asking the District Court to reconsider its order and to bring it into accord with the Stipulation and Agreed Order consented to by the EPA and entered by the Bankruptcy Court. On September 9, 2004, the District Court denied Solutia's motion and declared that the automatic stay is inapplicable to Solutia's obligations under the Consent Decree to perform site work. Solutia appealed this ruling to the Eleventh U.S. Circuit Court of Appeals, which dismissed the appeal for lack of jurisdiction. On June 30, 2005, the United States District Court for the Northern District of Alabama issued an order (the "PCB Order") authorizing co-defendants Pharmacia and Solutia to "suspend" performance of the PCB clean-up at the Anniston site under the Anniston Consent Decree, upon the filing of a motion by either defendant requesting that relief. The PCB Order found that Solutia and Pharmacia entered into the Anniston Consent Decree, and that the court approved that Anniston Consent Decree, based on the understanding that the defendants' rights to pursue other liable parties for contribution would not be impaired by the EPA. The PCB Order further found that the EPA's planned settlements with certain Anniston foundries would thus deprive the defendants of one of the material considerations for entering into the Anniston Consent Decree. In July 2006, Solutia and Pharmacia reached an agreement with EPA that clarifies the extent of remaining obligations under the Anniston Consent Decree and the coordination of that work with the Lead Site clean-up being performed by others, and by which Solutia and Pharmacia will forego the opportunity to suspend their obligations under the Anniston Consent Decree pursuant to the PCB Order. Solutia and Pharmacia preserved their rights under this agreement to continue to argue that the contribution protection afforded certain other potentially responsible parties performing Lead Site clean-up should not be effective as to Solutia and Pharmacia. PENNDOT CASE Solutia's Annual Report on Form 10-K (as amended) for the year ended December 31, 2003 described a case then pending in the Commonwealth Court of Pennsylvania by the Commonwealth of Pennsylvania against Pharmacia seeking damages for PCB contamination in the Transportation and Safety Building ("T&S Building") in Harrisburg, Pennsylvania, that it claimed necessitated the demolition of the T&S building. Solutia was not a named defendant in this litigation and therefore took no action to stay the litigation in connection with its Chapter 11 proceedings. Solutia assumed the defense of this litigation at the time of its spin-off from Pharmacia. Solutia determined that its obligation to defend and indemnify Pharmacia with regard to this litigation was a pre-petition obligation that Solutia was prohibited from performing, except pursuant to a confirmed plan of reorganization. Therefore, Solutia ceased defending Pharmacia with respect to this litigation. Solutia did, however, provide a $20 letter of credit to secure a portion of Pharmacia's obligations with respect to an appeal bond issued with respect to the case. On May 25, 2006 the Supreme Court of Pennsylvania issued its ruling on the appeal in this case, reversing in whole and remanding in part the decision of the trial court against Pharmacia. With respect to those claims that were reversed and remanded, the Supreme Court of Pennsylvania significantly limited the amount of damages that could be awarded. Based upon this ruling, Solutia recognized a gain in its Consolidated Statement of Operations during the second quarter 2006 from the reversal of a significant portion of the existing litigation reserve with respect to this matter. FLEXSYS RELATED LITIGATION Antitrust authorities in the United States, Europe and Canada are continuing to investigate past commercial practices in the rubber chemicals industry. Flexsys, Solutia's joint venture with Akzo Nobel N.V. ("Akzo"), remains a subject of such investigation and continues to fully cooperate with the authorities in the ongoing investigation. In addition, a number of purported civil class actions on behalf of consumers have been filed against Flexsys and other producers of rubber chemicals. State court actions against Flexsys. Solutia is presently aware of nine purported class actions that remain pending in various state courts against Flexsys and other producers of rubber chemicals seeking actual and treble damages under state law. Seven of these cases purport to be on behalf of all retail purchasers of tires in the respective states since as early as 1994 and two of the cases purport to be on behalf of all retail purchasers of any product containing rubber chemicals during the same period. Solutia is not named as a defendant in any of these cases. All of these cases remain pending in various procedural stages and no substantive discovery or other actions have taken place. Canadian actions against Flexsys. In May 2004, two purported class actions were filed in the Province of Quebec, Canada, against Flexsys and other rubber chemical producers alleging that collusive sales and marketing activities of the defendants damaged all persons in Quebec during the period July 1995 through September 2001. Plaintiffs seek statutory damages of (CAD) $14.6 along with exemplary damages of (CAD) $0.000025 per person. In May 2005 a case was filed in Ontario, Canada against Flexsys and other rubber chemical producers alleging the same claims as in the Quebec cases and seeking damages of (CAD) $95 on behalf of all persons in Canada injured by the alleged collusive activities of the defendants. In August 2005, a similar case was filed in British Columbia seeking unspecified damages under a variety of theories on behalf of all purchasers of rubber chemicals and products containing rubber chemicals in British Columbia. No responses are yet due nor have any been filed by defendants in any of these cases. Solutia is not a named defendant in any of these cases. 24 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Federal court actions by indirect purchasers of rubber chemicals. On January 14, 2006, Solutia became aware of a newly filed case, Pearman, Benson and Immerman v. Crompton Corp., Flexsys, Solutia, et al., in the United States District Court for the Eastern District of Tennessee at Greenville, purportedly filed on behalf of consumers in 37 states of products produced with rubber chemicals for the period 1994 through the present under the Tennessee Trade Practices Act. Solutia was initially named in the suit but was voluntarily dismissed without prejudice on February 3, 2006. On April 28, 2006, Solutia received notice that this case was voluntarily dismissed, without prejudice, by the plaintiffs. Federal court actions alleging violations of federal securities laws. Between approximately July and September 2003, six purported shareholder class actions were filed in the U.S. District Court for the Northern District of California against Solutia, its then and former chief executive officers and its then chief financial officer. The complaints were consolidated into a single action called In Re Solutia Securities Litigation, and a consolidated complaint, which named two additional defendants, Solutia's then current and past controllers, was filed. The consolidated complaint alleged that from December 16, 1998 to October 10, 2002, Solutia's accounting practice of incorporating Flexsys's results into Solutia's financial reports violated federal securities laws by misleading investors as to Solutia's actual results and causing inflated prices to be paid by purchasers of Solutia's publicly traded securities during the period. The plaintiffs sought damages and any equitable relief that the court deemed proper. The consolidated action was automatically stayed with respect to Solutia by virtue of Section 362(a) of the U.S. Bankruptcy Code. In March 2005 the court issued a final order dismissing with prejudice the complaint against the individual defendants, which became final when the plaintiffs failed to file an appeal of the dismissal within the applicable appeals period, and the case was dismissed without prejudice as against Solutia pending resolution of the bankruptcy case. Shareholder Derivative Suits. Two purported shareholder derivative suits were filed in the Missouri Circuit Court for the Twenty-First Judicial Circuit of St. Louis County against certain of Solutia's current and past directors, chief executive officers, chief financial officer and former vice chairman. Solutia is included as a nominal defendant. The plaintiffs seek damages on behalf of Solutia for the individual defendants' alleged breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment, arising out of Flexsys' alleged participation in the price-fixing of rubber chemicals and Solutia's incorporation of Flexsys's purportedly inflated financial results arising from the alleged price-fixing into Solutia's financial statements. These two shareholder derivative suits were consolidated into a single action, In re Solutia Inc. Derivative Litigation. On December 29, 2003, the court entered an Order in the consolidated action staying the litigation with respect to all defendants, including Solutia. In August 2004, the court involuntarily dismissed the case for lack of prosecution. In late 2004, plaintiffs' filed a motion to reinstate the actions which motion remains pending with no further action yet taken by plaintiffs. CASH BALANCE PLAN LITIGATION Since October 2005, three cases have been filed by participants in the Solutia Inc. Employees' Pension Plan alleging that the Pension Plan: (1) violates the Employee Retirement Income Security Act of 1974 ("ERISA") prohibitions on reducing rates of benefit accrual based on age; (2) results in the impermissible forfeiture of accrued benefits under ERISA; (3) violates ERISA's present value calculation rules for determining lump sum distributions; and (4) violates the minimum accrual requirements of ERISA. The cases were captioned Davis, et. al. v. Solutia, Inc. Employees' Pension Plan, Scharringhausen, et. al. v. Solutia, Inc. Employees' Pension Plan, et al. and Juanita Hammond, et. al. v. Solutia, Inc. Employees' Pension Plan. None of the Debtors, and, except for the Solutia Inc. Employee Benefits Plans Committee which was named in the Scharringhausen case, no individual or entity other than the Pension Plan, has been named as a defendant in any of these cases. The plaintiffs in each of these cases sought to obtain injunctive and other equitable relief (including money damages awarded by the creation of a common fund) on behalf of themselves and the nationwide putative class of similarly situated current and former participants in the Pension Plan for whose pension benefits the Pension Plan is responsible. The Pension Plan, and 25 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) in the case of the Scharringhausen case, the Employee Benefits Plans Committee, moved to dismiss all three actions for plaintiffs' failure to exhaust administrative remedies and failure to join necessary and indispensable parties. The Scharringhausen plaintiffs have moved to intervene in the Davis action and to consolidate the Davis, Scharringhausen and Hammond cases. The Hammond plaintiff has moved to consolidate the three cases and the Pension Plan has responded by agreeing that it should not be required to defend itself against three cases. The Davis plaintiffs have intervened in the Scharringhausen and Hammond cases and moved to stay or dismiss those later-filed cases, rather than consolidating them with the Davis case. The plaintiffs' counsel in the Davis, Scharringhausen and Hammond cases each have sought appointment as interim lead class counsel. In response to these motions, on April 24, 2006 the Scharringhausen plaintiffs voluntarily dismissed their case. On June 2, 2006, the Hammond plaintiffs agreed to stay their action pending exhaustion of administrative remedies with respect to count (4), above. Thereafter the Hammond and Davis plaintiffs also each withdrew their respective motions to consolidate and to stay or dismiss. In addition, the Hammond and Davis plaintiffs each withdrew their motions to appoint interim class counsel and have advised the court that they are cooperating in the representation of the putative class. The Pension Plan's motions to dismiss in both the Hammond and Davis cases remain pending. The Pension Plan intends to continue to vigorously defend itself against any and all claims asserted in the Davis and Hammond litigation. GE LITIGATION On January 3, 2006, Solutia received notice that an action captioned Michael Abbatiello et al. v. Monsanto Company, Pharmacia Corporation and Solutia Inc. (the "Abbatiello Case"), was filed on December 26, 2005 in the Supreme Court of the State of New York. The action was filed on behalf of 590 current General Electric employees who work at its Schenectady, New York plant and states eleven separate causes of action alleging that General Electric purchased various PCB containing products from Pharmacia which were used in the manufacture of a variety of products including electric motors, generators, gas turbines, wire and cable, insulating materials and microwave tubes. PCBs were later detected in various locations, including retention ponds, ground water, and water treatment centers on the approximately 628 acre site. On May 10, 2006, Solutia received notice that an action, captioned Alan Abele, et al. v. Monsanto Company, Pharmacia Corporation and Solutia Inc., (the "Abele Case" and, together with the Abbatiello Case, the "GE Litigation") was filed on March 15, 2006 in the Supreme Court of the State of New York. The action was filed on behalf of 486 former General Electric employees who were employed at General Electric's Schenectady, NY plant and states eleven separate causes of action based on claims identical to those made on behalf of current General Electric employees in the Abbatiello Case. The plaintiffs in each of the GE Litigation cases are seeking $1,000 in compensatory damages and $1,000 in punitive damages for each cause of action for a total of $2,000. The GE Litigation is automatically stayed as to Solutia pursuant to Section 362 of the U.S. Bankruptcy Code. At the time of the spinoff from Pharmacia, Solutia assumed liability for, among other things, litigation liabilities related to chemical products formerly manufactured, released or used by Pharmacia prior to the spinoff, including the costs of toxic tort lawsuits alleging exposure to PCBs. Solutia also agreed to defend Pharmacia against, and indemnify Pharmacia for, such liability. Upon filing for Chapter 11 protection, Solutia determined that its defense and indemnification obligations to Pharmacia with respect to such litigation liabilities were pre-petition obligations under the U.S. Bankruptcy Code and that Solutia was therefore prohibited from performing, except pursuant to a confirmed plan of reorganization. As a result, after filing for Chapter 11 protection, Solutia ceased performance of its defense obligations and those defense obligations have been managed by Monsanto during Solutia's Chapter 11 Case. Because such litigation was no longer being managed by Solutia, Solutia became unable to provide complete status updates and, as a result, Solutia disclosed that it would cease reporting on those litigation matters. The GE Litigation falls within the scope of litigation liabilities described above. Accordingly, Monsanto is managing this litigation and Solutia will be unable to provide complete status updates on the GE Litigation. Therefore, Solutia will cease reporting on the status of the GE Litigation. 26 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) OTHER LEGAL PROCEEDINGS Dickerson v. Feldman. On October 7, 2004, a purported class action captioned Dickerson v. Feldman, et al. was filed in the United States District Court for the Southern District of New York against a number of defendants, including former officers and employees of Solutia and Solutia's Employee Benefits Plans Committee and Pension and Savings Funds Committee. Solutia was not named as a defendant. The action alleged breach of fiduciary duty under ERISA and sought to recover alleged losses to the Solutia Inc. Savings and Investment Plan ("SIP Plan") during the period from December 16, 1998 to the date the action was filed. The investment of SIP Plan assets in Solutia's common stock is alleged to have been imprudent because of the risks and liabilities related to Solutia's legacy environmental and litigation liabilities and because of Flexsys's alleged involvement in the matters described above under "Flexsys Related Litigation." The action sought monetary payment to the SIP Plan to recover the losses resulting from the alleged breach of fiduciary duties, as well as injunctive and other appropriate equitable relief, reasonable attorney's fees and expenses, costs and interest. In addition, the plaintiff in this action filed a proof of claim for $269 against Solutia in the U.S. Bankruptcy Court for the Southern District of New York. The plaintiff sought to withdraw the reference of their ERISA claim from the Bankruptcy Court to the District Court so that the proof of claim and the class action could be considered together by the District Court. On February 11, 2005, Solutia filed an objection to the motion to withdraw the reference. On March 11, 2005, the District Court denied without prejudice Dickerson's motion to withdraw the reference. The Dickerson plaintiffs subsequently amended their initial complaint to add several current officers and directors of Solutia as defendants. On July 5, 2005, the defendants filed motions to dismiss Dickerson's amended complaint. In early September, 2005, Dickerson filed an amended proof of claim against Solutia increasing Dickerson's claim from $269 to $290, based on his amended complaint. Dickerson also filed a motion for class certification of his proof of claim. On March 30, 2006, the District Court granted the defendants' motion to dismiss on grounds that the Dickerson plaintiffs lacked standing to sue and that the complaint failed to state a claim on which relief may be granted. The dismissal of Dickerson's cause of action resulted in dismissal of the entire purported class action, including claims asserted on behalf of the unnamed purported class members. On April 3, 2006 Dickerson filed an appeal of this dismissal with the United States Court of Appeals for the Second Circuit. Solutia Inc. v. FMC Corporation. On October 14, 2003, Solutia filed an action captioned Solutia Inc. v. FMC Corporation ("FMC") in Circuit Court in St. Louis County, Missouri, against FMC over the failure of purified phosphoric acid technology provided by FMC to Astaris, the 50/50 joint venture formed by Solutia and FMC, which was sold to Israeli Chemicals Limited in 2005. On February 20, 2004, Solutia voluntarily dismissed the state court action and filed an adversary proceeding against FMC in the Bankruptcy Court. FMC filed with the Bankruptcy Court a motion to withdraw the reference. The motion was granted, and, as a result, the matter is now pending in the U.S. District Court for the Southern District of New York. FMC filed a motion to dismiss Solutia's action based upon an alleged lack of standing. On March 29, 2005, the New York District Court granted in part and denied in part FMC's motion to dismiss. Specifically, the court dismissed with prejudice three of Solutia's causes of action for breach of contract. The New York District Court denied FMC's motion to dismiss Solutia's other causes of action for breach of warranty, breach of fiduciary duty, negligent misrepresentation, fraud and fraud in the inducement. In this action, FMC does not have a counterclaim against Solutia or Astaris. On July 31, 2006, the District Court entered its order regarding FMC's motion for summary judgment, ruling that Solutia's breach of fiduciary duty claim would be allowed to proceed, but only on a limited basis. The Court overruled the parties' motions for summary judgment on the remaining claims. The Court also ruled that there will be a bench trial on the four claims remaining in the case. The sale of substantially all of the assets of Astaris to Israeli Chemicals Limited, as further described in Solutia's Annual Report on Form 10-K for the year ended December 31, 2005, did not affect the claims asserted by Solutia against FMC in this proceeding. Solutia is vigorously pursuing this action. Ferro Antitrust Investigation. 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 27 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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. Environmental Liabilities Environmental compliance and remediation costs and other environmental liabilities incurred by Solutia generally fall into two broad categories: (a) those related to properties currently owned or operated by Solutia and (b) those related to properties that are not owned by Solutia, including non-owned properties adjacent to plant sites and certain owned offsite disposal locations. For the owned and operated sites, Solutia had an accrued liability of $78 and $71 as of June 30, 2006 and December 31, 2005, respectively, for solid and hazardous waste remediation, which represents Solutia's best estimate of the underlying obligation. In addition, this balance also includes post-closure costs at certain of Solutia's operating locations. This liability is not classified as subject to compromise in the Statement of Consolidated Financial Position because, irrespective of the bankruptcy proceedings, Solutia will be required to comply with environmental requirements in the conduct of its business, regardless of when the underlying environmental contamination occurred. However, Solutia ultimately expects to seek recovery against other potentially responsible parties at certain of these locations. Solutia had an accrued liability of $81 as of June 30, 2006 and $82 as of December 31, 2005 for properties not owned or operated by Solutia. This liability is classified as subject to compromise in the Statement of Consolidated Financial Position as of both June 30, 2006 and December 31, 2005, as Solutia currently believes it constitutes a pre-petition claim that will be discharged in the bankruptcy process. Under the Plan and Relationship Agreement, as between Monsanto and Solutia, Monsanto will accept financial responsibility for environmental remediation obligations at all sites for which Solutia was required to assume responsibility at the Solutia Spinoff but which were never owned or operated by Solutia. This includes 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 will share financial responsibility with Solutia for off-site remediation costs in Anniston, Alabama and Sauget, Illinois. The EPA and/or Pharmacia are currently contesting the enforceability of the automatic stay provisions with respect to the Anniston, Alabama location (as more fully described in the Anniston Partial Consent Decree disclosure above). Remediation activities are currently being funded by Monsanto for certain of these properties not owned or operated by Solutia. Monsanto's funding of these remediation activities may give rise to a claim against Solutia which Monsanto may assert in Solutia's Chapter 11 bankruptcy case. In addition, Solutia has not adjusted its recorded environmental liabilities classified as subject to compromise for ongoing remediation activities at these sites since the inception of Solutia's bankruptcy case. In addition to the bankruptcy proceedings, Solutia's environmental liabilities are also subject to changing governmental policy and regulations, discovery of unknown conditions, judicial proceedings, method and extent of remediation, existence of other potentially responsible parties and future changes in technology. Solutia believes that the known and unknown environmental matters, including matters classified as subject to compromise for which Solutia may ultimately assume responsibility, when ultimately resolved, which may be over an extended period of time, could have a material effect on the consolidated financial position, liquidity and profitability of Solutia. 28 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Impact of Chapter 11 Proceedings During the reorganization process, substantially all pending litigation against Solutia and its subsidiaries that filed for reorganization under Chapter 11 ("Debtors") is stayed, as well as the majority of all other pre-petition claims. Exceptions would generally include pre-petition claims addressed by the bankruptcy court, as well as fully secured claims. Such claims may be subject to future adjustments. Adjustments may result from actions of the bankruptcy court, negotiations, assumption or rejection of executory contracts, determination as to the value of any collateral securing claims, proofs of claims or other events. Additional pre-filing claims not currently reflected in the consolidated financial statements may be identified through the proof of claim reconciliation process. The amount of pre-filing claims ultimately allowed by the bankruptcy court with respect to contingent claims may be materially different from the amounts reflected in the consolidated financial statements. Generally, claims against Debtors arising from actions or omissions prior to their filing date may be subject to compromise in connection with a plan of reorganization. The ultimate resolution of all of these claims may be settled through negotiation as compared to court proceedings, with the result being that Solutia may retain certain obligations currently classified as subject to compromise in the Statement of Consolidated Financial Position. 10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Components of Net Periodic Benefit Cost For the three and six months ended June 30, 2006 and 2005, Solutia's pension and healthcare and other benefit costs were as follows:
PENSION BENEFITS ---------------- THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2006 2005 2006 2005 ---- ---- ---- ---- Service costs for benefits earned ...................... $ 1 $ 1 $ 2 $ 3 Interest costs on benefit obligation ................... 16 17 32 35 Assumed return on plan assets .......................... (15) (16) (30) (33) Prior service costs .................................... -- 1 -- 1 Recognized net loss .................................... 1 3 3 6 ---- ---- ---- ---- TOTAL .................................................. $ 3 $ 6 $ 7 $ 12 ==== ==== ==== ==== HEALTHCARE AND OTHER BENEFITS ----------------------------- THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2006 2005 2006 2005 ---- ---- ---- ---- Service costs for benefits earned ...................... $ 1 $ 2 $ 2 $ 3 Interest costs on benefit obligation ................... 7 8 15 17 Prior service costs .................................... (2) (2) (5) (5) Recognized net loss .................................... 1 3 2 7 ---- ---- ---- ---- TOTAL .................................................. $ 7 $ 11 $ 14 $ 22 ==== ==== ==== ====
Employer Contributions According to IRS funding rules, Solutia will be required to make approximately $179 in pension contributions to its U.S. qualified pension plan in 2006 assuming Congress extends the interest rate relief provision currently proposed. If this relief is not granted, required contributions in 2006 would be approximately $195. Approximately $43 of these required 2006 contributions were made in the six months ended June 30, 2006. Solutia also expects to be required to fund approximately $5 in pension contributions for its foreign pension plans in 2006. 29 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 11. DEBT OBLIGATIONS Solutia amended its DIP financing facility on March 17, 2006 with bankruptcy court approval. This amendment, among other things, (i) increased the DIP facility from $525 to $825; (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 amendment also contains a number of other changes and other modifications required to make the remaining terms of the DIP facility consistent with the amendments set forth above. Solutia analyzed the modifications of the DIP facility in March 2006 in accordance with the provisions of Emerging Issues Task Force ("EITF") No. 02-04, Determining Whether a Debtor's Modification or Exchange of Debt Instruments is within the Scope of FASB Statement No. 15, and EITF No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments, and recorded a charge of approximately $8 to record the write-off of debt issuance costs and to record the DIP facility as modified at its fair value. In addition, $1 of unamortized debt issuance costs associated with the DIP facility were written off at the time of modification in March 2006. See Note 13 for description of events related to Solutia's Euronotes that occurred subsequent to June 30, 2006. 12. SEGMENT DATA Solutia, together with its subsidiaries, is a global manufacturer and marketer of a variety of high-performance chemical-based materials, which are used in a broad range of consumer and industrial applications. Solutia manages its business in two segments: Performance Products and Integrated Nylon. The Performance Products segment is a world leader in performance films for laminated safety glass and after-market applications, and specialties such as water treatment chemicals, heat transfer fluids and aviation hydraulic fluid. The Integrated Nylon segment consists of an integrated family of nylon products including high-performance polymers and fibers. The major products by reportable segment are as follows:
PERFORMANCE PRODUCTS INTEGRATED NYLON SAFLEX(R) and VANCEVA(R) plastic Nylon intermediate "building block" interlayer chemicals Polyvinyl butyral for KEEPSAFE(R) and Nylon resins and polymers, including KEEPSAFE MAXIMUM(R) laminated window VYDYNE(R) and ASCEND(R) glass LLUMAR(R), VISTA(R), GILA(R) and FORMULA Carpet fibers, including the WEAR-DATED(R) ONE(R) professional and retail window films and ULTRON(R) brands Industrial nylon fibers THERMINOL(R) heat transfer fluids
30 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) DEQUEST(R) water treatment chemicals SKYDROL(R) aviation hydraulic fluids and SKYKLEEN(R) brand of aviation solvents ASTROTURF(R), CLEAN MACHINE(R) and CLEARPASS(R) entrance matting and automotive spray suppression flaps
31 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Solutia evaluates the performance of its operating segments based on segment earnings before interest expense and income taxes ("EBIT"), which includes marketing, administrative, technological and amortization expenses, gains and losses from asset dispositions and restructuring charges, and other income and expense items that can be directly attributable to the segment. Certain expenses and other items that are managed outside the segments are excluded. These unallocated items consist primarily of corporate expenses, certain equity earnings from affiliates, other income and expense items, reorganization items, gains and losses from asset dispositions and restructuring charges that are not directly attributable to the operating segment. There were no inter-segment sales in the periods presented below. Segment data from continuing operations for the three and six months ended June 30, 2006 and 2005 are as follows:
THREE MONTHS ENDED JUNE 30, ------------------------------------------------ 2006 2005 ------------------------- ------------------ NET PROFIT NET PROFIT SALES (LOSS) SALES (LOSS) ----- ------ ----- ------ SEGMENT: Performance Products................ $308 $ 46 $298 $ 36 Integrated Nylon.................... 457 4 432 14 ---- ------ ---- ------ SEGMENT TOTALS...................... 765 50 730 50 RECONCILIATION TO CONSOLIDATED TOTALS: Corporate gains (expenses)...... 7 (14) Equity earnings from affiliates. 12 20 Interest expense................ (27) (22) Other income, net............... 3 1 Reorganization items, net....... (16) (15) CONSOLIDATED TOTALS: ---- ---- NET SALES....................... $765 $730 ==== ------ ==== ----- INCOME BEFORE INCOME TAXES...... $ 29 $ 20 ====== ===== SIX MONTHS ENDED JUNE 30, ------------------------------------------------ 2006 2005 ------------------- ------------------ NET PROFIT NET PROFIT SALES (LOSS) SALES (LOSS) ----- ------ ----- ------ SEGMENT: Performance Products................ $ 594 $ 88 $ 566 $ 69 Integrated Nylon.................... 849 (10) 878 13 ------ ------- ----- ------ SEGMENT TOTALS...................... 1,443 78 1,444 82 RECONCILIATION TO CONSOLIDATED TOTALS: Corporate expenses.............. (13) (25) Equity earnings from affiliates. 21 33 Interest expense................ (50) (44) Other income, net............... 3 1 Loss on debt modification....... (8) -- Reorganization items, net....... (26) (2) CONSOLIDATED TOTALS: ------ ------ NET SALES....................... $1,443 $1,444 ====== ------- ====== ------ INCOME BEFORE INCOME TAXES $ 5 $ 45 ======= ======
32 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 13. SUBSEQUENT EVENTS Euronotes Refinancing As described in a Form 8-K filed on August 1, 2006, on July 26, 2006, Solutia's indirect wholly-owned subsidiary Solutia Services International S.C.A./Comm. V.A., a subsidiary of Solutia's wholly-owned subsidiary Solutia Europe S.A./N.V. ("SESA"), entered into a (euro) 200 million Facility Agreement (the "Facility Agreement") guaranteed by SESA and CPFilms Vertriebs GmbH, a subsidiary of SESA. Closing of the credit facility contemplated by the Facility Agreement, which at signing remained subject to the satisfaction of a number of conditions precedent, occurred on August 1, 2006. SESA used the proceeds of the new credit facility to refinance all of its (euro) 200 million of 10 percent Senior Secured Notes (the "Euronotes") on August 1, 2006 at a prepayment premium of 3 percent, as required pursuant to the Euronotes, for a total redemption amount of approximately (euro) 215 million, including accrued interest. The Euronotes were refinanced to reduce the interest rate, extend the term of the indebtedness and facilitate certain dispositions by Solutia, including the potential sale of its pharmaceutical services business described in Note 4. The Facility Agreement has a five-year term, with a termination date of July 31, 2011 and an adjustable rate structure which is EURIBOR plus a margin which currently yields a rate of approximately 5.75 to 6.50 percent. The margin is subject to adjustment upon the occurrence of certain events specified in the Facility Agreement or upon SESA and its subsidiaries attaining certain financial benchmarks. The new credit facility consists of a (euro) 160 million term loan B1 and a (euro) 40 million term loan B2. The (euro) 40 million term loan B2 is expected to be repaid from the proceeds of the sale of Solutia's pharmaceutical services business (as further described in Note 4); accordingly, this amount has been classified as current in the Consolidated Statement of Financial Position as of June 30, 2006. The new loan is secured by substantially all of the assets of SESA and its subsidiaries (excluding Flexsys Holding B.V. and Carbogen Amcis AG). The Facility Agreement also contains other customary terms and conditions, including certain financial covenants relating to the performance of SESA and its subsidiaries. 14. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS CPFilms Inc., Monchem International, Inc., Monchem, Inc., Solutia Systems, Inc., Solutia Investments, LLC and Solutia Business Enterprises, Inc., wholly-owned subsidiaries of Solutia (the "Guarantors"), are guarantors of Solutia's 11.25% Senior Secured Notes due 2009 (the "Notes"). In connection with the completion of the October 2003 credit facility, Solutia Investments, LLC and Solutia Business Enterprises, Inc. became guarantors of the Notes through cross-guarantor provisions. Solutia's obligations under the October 2003 facility were paid in full with the proceeds of the DIP facility dated January 16, 2004, which payment did not affect the Guarantors' obligations in respect of the Notes. Certain other wholly-owned subsidiaries of Solutia (the "DIP Guarantors") guaranteed the final DIP facility (as well as a smaller, interim DIP facility put in place as of December 19, 2003), but the DIP Guarantors were not required by the cross-guarantor provisions to guarantee the Notes. The Guarantors fully and unconditionally guarantee the Notes on a joint and several basis. The following condensed consolidating financial statements present, in separate columns, financial information for: Solutia Inc. on a parent only basis carrying its investment in subsidiaries under the equity method; Guarantors on a combined, or where appropriate, consolidated basis, carrying investments in subsidiaries which do not guarantee the debt (the "Non-Guarantors") under the equity method; Non-Guarantors on a combined, or where appropriate, consolidated basis; eliminating adjustments; and consolidated totals as of June 30, 2006 and December 31, 2005, and for the three and six months ended June 30, 2006 and 2005. The eliminating adjustments primarily reflect intercompany transactions, such as interest income and expense, accounts receivable and payable, advances, short and long-term debt, royalties and profit in inventory eliminations. Solutia has not presented separate financial statements and other disclosures concerning the Guarantors as such information is not material and would substantially duplicate disclosures included elsewhere in this report. 33 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2006
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES ............................................... $ 574 $ 56 $ 250 $(115) $ 765 Cost of goods sold ...................................... 517 26 213 (121) 635 ---------------------------------------------------------------- GROSS PROFIT ............................................ 57 30 37 6 130 Marketing expenses ...................................... 19 8 8 -- 35 Administrative expenses ................................. 16 3 4 -- 23 Technological expenses .................................. 11 -- 1 -- 12 Amortization expense .................................... -- -- 1 -- 1 ---------------------------------------------------------------- OPERATING INCOME ........................................ 11 19 23 6 59 Equity earnings (loss) from affiliates .................. 51 15 (2) (53) 11 Interest expense ........................................ (22) -- (12) 7 (27) Other income, net ....................................... 6 4 7 (13) 4 Reorganization items, net ............................... (18) -- -- -- (18) ---------------------------------------------------------------- INCOME BEFORE INCOME TAXES .............................. 28 38 16 (53) 29 Income tax expense (benefit) ............................ (1) -- 5 1 5 ---------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS ....................... 29 38 11 (54) 24 Income (loss) from discontinued operations, net of tax .................................. (1) -- 5 -- 4 ---------------------------------------------------------------- NET INCOME .............................................. $ 28 $ 38 $ 16 $ (54) $ 28 ================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME THREE MONTHS ENDED JUNE 30, 2006
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME .............................................. $ 28 $ 38 $ 16 $ (54) $ 28 OTHER COMPREHENSIVE INCOME: Currency translation adjustments ........................ 10 7 8 (15) 10 ---------------------------------------------------------------- COMPREHENSIVE INCOME .................................... $ 38 $ 45 $ 24 $ (69) $ 38 ================================================================
34 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES ...................................... $ 549 $ 52 $ 229 $(100) $ 730 Cost of goods sold ............................. 515 25 195 (106) 629 ---------------------------------------------------------------------- GROSS PROFIT ................................... 34 27 34 6 101 Marketing expenses ............................. 19 6 9 -- 34 Administrative expenses ........................ 16 2 6 -- 24 Technological expenses ......................... 10 1 -- -- 11 ---------------------------------------------------------------------- OPERATING INCOME (LOSS) ........................ (11) 18 19 6 32 Equity earnings (loss) from affiliates ......... 42 11 (1) (31) 21 Interest expense ............................... -- -- (13) (9) (22) Other income, net .............................. (1) (9) 12 2 4 Reorganization items, net ...................... (13) -- (2) -- (15) ---------------------------------------------------------------------- INCOME BEFORE INCOME TAXES ..................... 17 20 15 (32) 20 Income tax expense ............................. 2 -- 5 -- 7 ---------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS .............. 15 20 10 (32) 13 Income (loss) from discontinued operations, net of tax ......................... (1) -- 2 -- 1 ---------------------------------------------------------------------- NET INCOME ..................................... $ 14 $ 20 $ 12 $ (32) $ 14 ======================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME THREE MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME ..................................... $ 14 $ 20 $ 12 $ (32) $ 14 OTHER COMPREHENSIVE INCOME: Currency translation adjustments ............... (2) (6) (9) 15 (2) ---------------------------------------------------------------------- COMPREHENSIVE INCOME ........................... $ 12 $ 14 $ 3 $ (17) $ 12 ======================================================================
35 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2006
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES ....................................... $ 1,081 $105 $ 479 $(222) $ 1,443 Cost of goods sold .............................. 1,010 50 413 (234) 1,239 ------------------------------------------------------------------- GROSS PROFIT .................................... 71 55 66 12 204 Marketing expenses .............................. 38 14 16 -- 68 Administrative expenses ......................... 29 5 10 -- 44 Technological expenses .......................... 22 1 1 -- 24 Amortization expense ............................ -- -- 1 -- 1 ------------------------------------------------------------------- OPERATING INCOME (LOSS) ......................... (18) 35 38 12 67 Equity earnings (loss) from affiliates .......... 96 28 (3) (100) 21 Interest expense ................................ (40) -- (23) 13 (50) Loss on debt modification ....................... (8) -- -- -- (8) Other income, net ............................... 10 8 15 (26) 7 Reorganization items, net ....................... (32) -- -- -- (32) ------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE ................ 8 71 27 (101) 5 Income tax expense .............................. 1 -- 6 -- 7 ------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 7 71 21 (101) (2) Income (loss) from discontinued operations ...... (1) -- 9 -- 8 ------------------------------------------------------------------- NET INCOME ...................................... $ 6 $ 71 $ 30 $(101) $ 6 ===================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME SIX MONTHS ENDED JUNE 30, 2006
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME ...................................... $ 6 $ 71 $ 30 $(101) $ 6 OTHER COMPREHENSIVE INCOME (LOSS): Net unrealized loss on derivative instruments ..................................... (1) -- -- -- (1) Currency translation adjustments ................ 12 9 10 (19) 12 ------------------------------------------------------------------- COMPREHENSIVE INCOME ............................ $ 17 $ 80 $ 40 $(120) $ 17 ===================================================================
36 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES .................................. $ 1,100 $ 92 $ 455 $(203) $ 1,444 Cost of goods sold ......................... 1,033 41 384 (217) 1,241 ------------------------------------------------------------------------ GROSS PROFIT ............................... 67 51 71 14 203 Marketing expenses ......................... 38 12 16 -- 66 Administrative expenses .................... 30 4 12 -- 46 Technological expenses ..................... 20 1 1 -- 22 ------------------------------------------------------------------------ OPERATING INCOME (LOSS) .................... (21) 34 42 14 69 Equity earnings (loss) from affiliates ..... 110 24 (2) (97) 35 Interest expense ........................... (32) -- (26) 14 (44) Other income, net .......................... (1) 11 21 (26) 5 Reorganization items, net .................. (18) -- (2) -- (20) ------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES ................. 38 69 33 (95) 45 Income tax expense ......................... 2 -- 11 -- 13 ------------------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS .......... 36 69 22 (95) 32 Income (loss) from discontinued operations, net of tax ..................... (1) -- 4 -- 3 ------------------------------------------------------------------------ NET INCOME ................................. $ 35 $ 69 $ 26 $ (95) $ 35 ========================================================================
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME SIX MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME ................................. $ 35 $ 69 $ 26 $ (95) $ 35 OTHER COMPREHENSIVE INCOME: Currency translation adjustments ........... (7) (10) (16) 26 (7) ------------------------------------------------------------------------ COMPREHENSIVE INCOME ....................... $ 28 $ 59 $ 10 $ (69) $ 28 ========================================================================
37 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2006
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents .................................... $ 144 $ 10 $ 111 $ -- $ 265 Trade receivables, net ....................................... 12 189 146 -- 347 Intercompany receivables ..................................... 113 729 108 (950) -- Miscellaneous receivables .................................... 58 1 31 -- 90 Inventories .................................................. 133 34 110 (14) 263 Prepaid expenses and other current assets .................... 17 -- 9 3 29 Assets of discontinued operations ............................ -- -- 84 84 ------------------------------------------------------------- TOTAL CURRENT ASSETS ......................................... 477 963 599 (961) 1,078 PROPERTY, PLANT AND EQUIPMENT, NET ........................... 575 83 114 -- 772 INVESTMENTS IN AFFILIATES .................................... 2,414 243 12 (2,456) 213 GOODWILL ..................................................... -- 72 17 -- 89 IDENTIFIED INTANGIBLE ASSETS, NET ............................ 2 26 4 -- 32 INTERCOMPANY ADVANCES ........................................ 128 1,238 737 (2,103) -- OTHER ASSETS ................................................. 59 -- 46 -- 105 ------------------------------------------------------------- TOTAL ASSETS ................................................. $ 3,655 $2,625 $1,529 $(5,520) $ 2,289 ============================================================= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable ............................................. $ 147 $ 8 $ 44 $ (2) $ 197 Intercompany payables ........................................ 70 8 145 (223) -- Accrued liabilities .......................................... 160 14 71 -- 245 Short-term debt .............................................. 650 -- 50 -- 700 Intercompany short-term debt ................................. 1 -- 185 (186) -- Liabilities of discontinued operations ....................... 1 -- 29 -- 30 ------------------------------------------------------------- TOTAL CURRENT LIABILITIES .................................... 1,029 30 524 (411) 1,172 LONG-TERM DEBT ............................................... -- -- 210 -- 210 INTERCOMPANY LONG-TERM DEBT .................................. -- -- 426 (426) -- OTHER LIABILITIES ............................................ 193 1 66 -- 260 ------------------------------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE .................. 1,222 31 1,226 (837) 1,642 LIABILITIES SUBJECT TO COMPROMISE ............................ 3,870 410 22 (2,218) 2,084 SHAREHOLDERS' EQUITY (DEFICIT): Common stock ................................................. 1 -- -- -- 1 Additional contributed capital ............................... 56 -- -- -- 56 Treasury stock ............................................... (251) -- -- -- (251) Net (deficiency) excess of assets at spinoff and subsidiary capital .................................................... (113) 2,184 281 (2,465) (113) Accumulated other comprehensive loss ......................... (82) -- -- -- (82) Accumulated deficit .......................................... (1,048) -- -- -- (1,048) ------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ......................... (1,437) 2,184 281 (2,465) (1,437) ------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ......... $ 3,655 $2,625 $1,529 $(5,520) $ 2,289 =============================================================
38 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2005
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents ................................... $ 1 $ 15 $ 91 $ -- $ 107 Trade receivables, net ...................................... 7 118 121 -- 246 Intercompany receivables .................................... 115 754 89 (958) -- Miscellaneous receivables ................................... 67 -- 28 -- 95 Inventories ................................................. 142 31 94 (13) 254 Prepaid expenses and other assets ........................... 23 -- 8 3 34 Assets of discontinued operations ........................... -- -- 69 -- 69 --------------------------------------------------------------- TOTAL CURRENT ASSETS ........................................ 355 918 500 (968) 805 PROPERTY, PLANT AND EQUIPMENT, NET .......................... 589 84 97 -- 770 INVESTMENTS IN AFFILIATES ................................... 2,291 209 13 (2,308) 205 GOODWILL .................................................... -- 72 4 -- 76 IDENTIFIED INTANGIBLE ASSETS, NET ........................... 2 26 -- -- 28 INTERCOMPANY ADVANCES ....................................... 128 1,238 703 (2,069) -- OTHER ASSETS ................................................ 62 -- 38 -- 100 --------------------------------------------------------------- TOTAL ASSETS ................................................ $ 3,427 $2,547 $1,355 $(5,345) $ 1,984 =============================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable ............................................ $ 167 $ 9 $ 43 $ (1) $ 218 Intercompany payables ....................................... 108 12 111 (231) -- Accrued liabilities ......................................... 143 13 67 -- 223 Short-term debt ............................................. 300 -- -- -- 300 Intercompany short-term debt ................................ -- -- 182 (182) -- Liabilities of discontinued operations ...................... 1 -- 25 -- 26 --------------------------------------------------------------- TOTAL CURRENT LIABILITIES ................................... 719 34 428 (414) 767 LONG-TERM DEBT .............................................. -- -- 247 -- 247 INTERCOMPANY LONG-TERM DEBT ................................. -- -- 401 (401) -- OTHER LIABILITIES ........................................... 201 -- 47 -- 248 --------------------------------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ................. 920 34 1,123 (815) 1,262 LIABILITIES SUBJECT TO COMPROMISE ........................... 3,961 407 21 (2,213) 2,176 SHAREHOLDERS' EQUITY (DEFICIT): Common stock ................................................ 1 -- -- -- 1 Additional contributed capital .............................. 56 -- -- -- 56 Treasury stock .............................................. (251) -- -- -- (251) Net (deficiency) excess of assets at spinoff and subsidiary capital ........................................ (113) 2,106 211 (2,317) (113) Accumulated other comprehensive loss ........................ (93) -- -- -- (93) Accumulated deficit ......................................... (1,054) -- -- -- (1,054) --------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ........................ (1,454) 2,106 211 (2,317) (1,454) --------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIT) ......... $ 3,427 $2,547 $1,355 $(5,345) $ 1,984 ===============================================================
39 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2006
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH PROVIDED BY (USED IN) OPERATIONS ...................... $(121) $ (23) $ 20 $ -- $(124) -------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment purchases .................... (26) (3) (14) -- (43) Acquisition, net of cash acquired .......................... (23) -- 7 -- (16) -------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES .......................... (49) (3) (7) -- (59) -------------------------------------------------------------- FINANCING ACTIVITIES: Net change in short-term debt obligations .................. 350 -- -- -- 350 Deferred debt issuance costs ............................... (9) -- -- -- (9) Changes in investments and advances from (to) affiliates ... (28) 21 7 -- -- -------------------------------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES ...................... 313 21 7 -- 341 -------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... 143 (5) 20 -- 158 CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR .......................................... 1 15 91 -- 107 -------------------------------------------------------------- END OF PERIOD .............................................. $ 144 $ 10 $ 111 $ -- $ 265 ===============================================================
40 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2005
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH PROVIDED BY (USED IN) OPERATIONS ................ $ (65) $ 24 $ 15 $ -- $ (26) ------------------------------------------------------------------ INVESTING ACTIVITIES: Property, plant and equipment purchases .............. (18) (4) (7) -- (29) Other investing activities ........................... 1 -- 1 -- 2 ------------------------------------------------------------------ CASH USED IN INVESTING ACTIVITIES .................... (17) (4) (6) -- (27) ------------------------------------------------------------------ FINANCING ACTIVITIES: Net change in cash collateralized letters of credit ............................................. 17 -- -- -- 17 Changes in investments and advances from (to) affiliates ......................................... 19 (13) (6) -- -- ------------------------------------------------------------------ CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ...... 36 (13) (6) -- 17 ------------------------------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... (46) 7 3 -- (36) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR .................................... 43 7 65 -- 115 ------------------------------------------------------------------ END OF PERIOD ........................................ $ (3) $ 14 $ 68 $ -- $ 79 ==================================================================
41 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include all statements regarding expected future financial position, results of operations, profitability, cash flows and liquidity. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, Solutia's ability to develop, confirm and consummate a Chapter 11 plan of reorganization; Solutia's ability to reduce its overall leveraged position; the potential adverse impact of Solutia's Chapter 11 filing on its operations, management and employees, and the risks associated with operating businesses under Chapter 11 protection; Solutia's ability to comply with the terms of its debtor-in-possession ("DIP") financing facility; customer response to Solutia's Chapter 11 filing; general economic, business and market conditions; customer acceptance of new products; raw material and energy costs or shortages; limited access to capital resources; currency and interest rate fluctuations; increased competitive and/or customer pressure; gain or loss of significant customers; compression of credit terms with suppliers; exposure to product liability and other litigation; changes in cost of environmental remediation obligations and other environmental liabilities; changes in accounting principles generally accepted in the U.S.; ability to implement cost reduction initiatives in a timely manner; geopolitical instability; and changes in pension and other postretirement assumptions. OVERVIEW Summary of Significant Second Quarter 2006 Events Reorganization Strategy In the second quarter 2006, Solutia continued its stated reorganization strategy with a focus on the principal objectives of (i) managing the businesses to enhance Solutia's performance; (ii) making changes to Solutia's asset portfolio to maximize the value of the estate; (iii) achieving reallocation of "legacy liabilities"; and (iv) negotiating an appropriate capital structure. Solutia took steps in 2006 to enhance its financial performance including using the tools of bankruptcy and making changes to its asset portfolio, as explained below. Solutia also continues to pursue a reallocation of legacy liabilities in the bankruptcy proceeding through negotiations with the other constituents in the bankruptcy case. Solutia will also be working in 2006 to establish a proper capital structure upon emergence from bankruptcy. However, as a result of the numerous uncertainties and complexities inherent in Solutia's bankruptcy proceedings, its ability and timing of emergence from bankruptcy are subject to significant uncertainty. PERFORMANCE ENHANCEMENT Solutia benefited in the second quarter of 2006 from several actions implemented earlier in the bankruptcy reorganization process designed to enhance its performance. These included implementing significant general and administrative expense reductions; increasing performance-based compensation and benefits programs; enacting key senior management changes; initiating a cost reduction program at Solutia's operating sites focused on actions such as lean manufacturing techniques, yield improvement, maintenance savings and utilities optimization; and implementing an enterprise-wide procurement effort. As described in Note 13 to the accompanying consolidated financial statements, on July 26, 2006, Solutia Europe S.A./N.V. ("SESA"), entered into a (euro) 200 million facility agreement that closed on August 1, 2006. SESA used the proceeds of the new credit facility to refinance all of its (euro) 200 million of 10 percent Euronotes due 2008 (the "Euronotes") on August 1, 2006. It is projected this new financing will result in significant interest savings for Solutia, as well as allow Solutia greater flexibility to divest non-core assets, such as Solutia's pharmaceutical services business described below. 42 PORTFOLIO EVALUATION Solutia's stated strategy is to build a portfolio of high-potential businesses that can consistently deliver returns in excess of Solutia's cost of capital. As part of this strategy, Solutia made several changes to re-shape its asset portfolio in 2004 and 2005 and continued these efforts in the second quarter 2006. On May 23, 2006, SESA agreed to sell its pharmaceutical services business to Dishman Pharmaceuticals & Chemicals Ltd. ("Dishman") pursuant to a Stock and Asset Purchase Agreement dated as of May 23, 2006 between SESA and Dishman. Under the terms of the agreement, Dishman has agreed to purchase 100 percent of the stock of the pharmaceutical services business, as well as certain other assets used in the pharmaceutical services business, for approximately $75 million, subject to certain purchase price adjustments. The transaction is anticipated to close in the third quarter 2006 and based upon the current transaction terms, Solutia expects to record a gain on the sale of the pharmaceutical services business in the range of approximately $45 million to $55 million. See Note 4 to the accompanying consolidated financial statements for additional information regarding sale of the pharmaceutical services business. REALLOCATION OF LEGACY LIABILITIES On February 14, 2006, the Debtors filed with the Bankruptcy Court their Plan of Reorganization (the "Plan") and Disclosure Statement (the "Disclosure Statement") providing 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. See Note 1 to the accompanying consolidated financial statements for further description of the Plan and Disclosure Statement, as well as a summary of developments in Solutia's ongoing Chapter 11 bankruptcy case. Summary Results of Operations The discussions below and the accompanying consolidated financial statements have been prepared in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7"), and on a going concern basis, which assumes the continuity of operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business. However, as a result of the Chapter 11 bankruptcy proceedings, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. Results of Operations - Second Quarter 2006 Compared with Second Quarter 2005 Net sales and operating income of Solutia for the three months ended June 30, 2006 and 2005 are as follows:
(dollars in millions) 2006 2005 ---- ---- Net Sales ................................................................ $ 765 $ 730 ===== ===== Operating Income: Performance Products Segment Profit .................................. $ 46 $ 36 Integrated Nylon Segment Profit ...................................... 4 14 Less: Corporate Gains (Expenses) ................................ 7 (14) Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense and Reorganization Items included in Segment Profit ..... 2 (4) ----- ----- Operating Income ......................................................... $ 59 $ 32 ===== ===== Gains (Charges) included in Operating Income ............................. $ 19 $ -- ===== =====
The $35 million, or 5 percent, increase in net sales as compared to the second quarter 2005 was primarily a result of higher average selling prices of approximately 6 percent, partially offset by lower sales volumes of approximately 1 percent. The $27 million increase in operating income as compared to the second quarter 2005 43 resulted primarily from higher net sales and higher one-time net gains, which are described in greater detail in the Results of Operations section below, partially offset by higher raw material and energy costs. Results of Operations - Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005 Net sales and operating income of Solutia for the six months ended June 30, 2006 and 2005 are as follows:
(dollars in millions) 2006 2005 ---- ---- Net Sales ..................................................................... $ 1,443 $ 1,444 ======= ======= Operating Income: Performance Products Segment Profit ....................................... $ 88 $ 69 Integrated Nylon Segment Profit (Loss) .................................... (10) 13 Less: Corporate Expenses ............................................. (13) (25) Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense and Reorganization Items included in Segment Profit (Loss) ... 2 12 ------- ------- Operating Income .............................................................. $ 67 $ 69 ======= ======= Gains (Charges) included in Operating Income .................................. $ 10 $ -- ======= =======
Net sales in the six months ended June 30, 2006 remained consistent with the comparable period in 2005 consisting of higher average selling prices of approximately 6 percent offset by lower sales volumes of approximately 5 percent and unfavorable currency exchange rate fluctuations of approximately 1 percent. The $2 million decrease in operating income as compared to the six months ended June 30, 2005 resulted primarily from unfavorable manufacturing variances resulting principally from manufacturing interruptions and higher raw material and energy costs, partially offset by one-time net gains in 2006, which are described in greater detail in the Results of Operations section below. Financial Information Summarized financial information concerning Solutia and subsidiaries in reorganization and subsidiaries not in reorganization as of and for the three and six months ended June 30, 2006 is presented as follows:
SOLUTIA AND SOLUTIA AND SUBSIDIARIES IN SUBSIDIARIES NOT SUBSIDIARIES (dollars in millions) REORGANIZATION IN REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- ----------------- ------------ ------------ Three Months Ended June 30, 2006: - --------------------------------- Net Sales ............................................ $ 633 $ 248 $ (116) $ 765 Operating Income ..................................... 30 22 7 59 Net Income ........................................... 28 16 (16) 28 Six Months Ended June 30, 2006: - ------------------------------- Net Sales ............................................ $ 1,190 $ 475 $ (222) $ 1,443 Operating Income ..................................... 18 36 13 67 Net Income ........................................... 6 29 (29) 6 As of June 30, 2006: - -------------------- Total Assets ......................................... $ 1,938 $ 909 $ (558) $ 2,289 Liabilities not Subject to Compromise ................ 1,291 530 (179) 1,642 Liabilities Subject to Compromise .................... 2,084 -- -- 2,084 Total Shareholders' Equity (Deficit) ................. (1,437) 379 (379) (1,437)
44 CRITICAL ACCOUNTING POLICIES AND ESTIMATES There were no changes in the six months ended June 30, 2006 with respect to Solutia's critical accounting policies, as presented on pages 33 through 36 of Solutia's 2005 Form 10-K. RESULTS OF OPERATIONS--SECOND QUARTER 2006 COMPARED WITH SECOND QUARTER 2005 PERFORMANCE PRODUCTS
THREE MONTHS ENDED JUNE 30, ------------------- (dollars in millions) 2006 2005 ---- ---- Net Sales ................................................................... $ 308 $298 ===== ==== Segment Profit .............................................................. $ 46 $ 36 ===== ==== Charges and Reorganization Items included in Segment Profit ............. $ (2) $ -- ===== ====
The $10 million, or 3 percent, increase in net sales as compared to the second quarter 2005 resulted primarily from higher sales volumes of approximately 2 percent, an increase in average selling prices of approximately 2 percent, partially offset by unfavorable currency exchange rate fluctuations of approximately 1 percent. Higher volumes were experienced in SAFLEX(R) and VANCEVA(R) plastic interlayer products and LLUMAR(R) professional film products, partially offset by lower volumes in THERMINOL(R) heat transfer fluids. Higher average selling prices were experienced in SAFLEX(R) and VANCEVA(R) plastic interlayer products and THERMINOL(R) heat transfer fluids. The $10 million, or 28 percent, increase in segment profit in comparison to the second quarter 2005 resulted primarily from higher net sales and favorable manufacturing variances resulting from improved capacity utilization, partially offset by higher raw material and energy costs. In addition, segment profit in the second quarter 2006 was affected by $1 million of restructuring charges including primarily severance and retraining costs and $1 million of reorganizations items consisting primarily of certain asset write-downs. INTEGRATED NYLON
THREE MONTHS ENDED JUNE 30, ------------------- (dollars in millions) 2006 2005 ---- ---- Net Sales ................................................................... $ 457 $432 ======= ==== Segment Profit .............................................................. $ 4 $ 14 ======= ==== Charges and Reorganization Items included in Segment Profit ............. $ -- $ -- ======= ====
The $25 million, or 6 percent, increase in net sales as compared to the second quarter 2005 resulted primarily from higher average selling prices of approximately 9 percent, partially offset by lower sales volumes of approximately 3 percent. Average selling prices increased in all businesses as a result of favorable market conditions and in response to the escalating cost of raw materials. Sales volumes were impacted by the exit from the unprofitable acrylic fibers operations, as well as a portion of the nylon industrial fibers operations, both in the second quarter 2005. Further, lower sales volumes were experienced within the carpet business, partially offset by higher sales volumes in intermediate chemicals and nylon plastics and polymers. The $10 million, or 71 percent, decrease in segment profit in comparison to the second quarter 2005 resulted principally from unfavorable manufacturing costs and higher raw material costs, partially offset by higher net sales. In addition, 2005 segment profit included $7 million to shut-down principally the acrylic fibers operations including $5 million of asset write-downs and $2 million of decontamination costs, offset by a $7 million gain from the reversal of the LIFO reserve associated with the inventory sold and written off as part of the business shut-down. 45 CORPORATE EXPENSES
THREE MONTHS ENDED JUNE 30, -------------------- (dollars in millions) 2006 2005 ---- ---- Corporate Expenses (Gains)................................................... $ (7) $14 ==== === Gains (Charges) included in Corporate Expenses .......................... $ 20 $-- ==== ===
With the exception of a $20 million one-time gain in 2006, corporate expenses remained consistent in comparing the three months ended June 30, 2006 and 2005, respectively, with benefits from cost reduction measures offsetting inflationary increases in corporate expenses. The $20 million one-time gain resulted from the reversal of a litigation reserve with respect to a litigation matter that was decided favorably in the second quarter 2006 (as further described in Note 9 of the accompanying consolidated financial statements). EQUITY EARNINGS (LOSS) FROM AFFILIATES
THREE MONTHS ENDED JUNE 30, ------------------- (dollars in millions) 2006 2005 ---- ---- Equity Earnings from Affiliates not included in Reportable Segment Profit .............................................................. $ 12 $20 ---- --- Equity Earnings (loss) from Affiliates included in Reportable Segment Profit .............................................................. $ (1) $ 1 ---- --- Equity Earnings from Affiliates ............................................. $ 11 $21 ==== === Gains (charges) included in Equity Earnings (Loss) from Affiliates .......... $ (1) $ 5 ==== ===
Equity earnings (loss) from affiliates decreased by $10 million in the second quarter 2006 as compared to the second quarter 2005. This decline was a primarily a result of the sale of the Astaris joint venture in the fourth quarter 2005 and lower selling prices and sales volumes at the Flexsys joint venture in the second quarter 2006 in comparison to the second quarter 2005. In addition, the second quarter 2006 results included a $1 million restructuring charge from the Flexsys joint venture, while the 2005 results included a one-time, non-operational gain of $5 million recognized by the Flexsys joint venture. REORGANIZATION ITEMS, NET
THREE MONTHS ENDED JUNE 30, ------------------- (dollars in millions) 2006 2005 ---- ---- Reorganization Items, net ............................................ $(18) $(15) ==== ====
Reorganization items, net are presented separately in the Consolidated Statement of Operations and represent items of income, expense, gain, or loss that are realized or incurred by Solutia because it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items incurred in the second quarter 2006 included $15 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; $1 million of expense provisions for (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court; and $2 million of other reorganization charges primarily involving costs incurred with the shut-down of certain non-strategic businesses. Reorganization items incurred in the second quarter 2005 included $13 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings and $2 million of expense provisions for (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court. 46 INCOME TAX EXPENSE
THREE MONTHS ENDED JUNE 30, ----------------------- (dollars in millions) 2006 2005 ---- ---- Income Tax Expense ..................................................... $ 5 $ 7 ===== =====
Solutia's income tax expense in the second quarter 2006 and 2005 was primarily a result of foreign income taxes. As a result of Solutia's Chapter 11 filing, Solutia did not record any U.S. income tax expense or benefit for domestic operations (including temporary differences) during the three months ended June 30, 2006 and 2005. Consequently, the changes in federal and state deferred tax assets were offset by corresponding changes in valuation allowances. See Note 14 of Solutia's 2005 Form 10-K for additional information concerning the Company's deferred tax assets and changes in valuation allowances due to Solutia's Chapter 11 filing. DISCONTINUED OPERATIONS
THREE MONTHS ENDED JUNE 30, ----------------------- (dollars in millions) 2006 2005 ---- ---- Income from Discontinued Operations, net of tax ........................ $ 4 $ 1 ===== =====
Income from discontinued operations consists of the results of Solutia's pharmaceutical services business. As described in Note 4 to the accompanying consolidated financial statements, on May 23, 2006, SESA agreed to sell its pharmaceutical services business to Dishman Pharmaceuticals & Chemicals Ltd. ("Dishman"). The transaction is anticipated to close in the third quarter 2006. Included in the results of discontinued operations in the three months ended June 30, 2006 was a tax gain of $5 million for the reversal of a valuation allowance previously established for the potential inability to fully utilize net operating losses from the CarboGen subsidiary of the pharmaceutical services business. However, independent of the aforementioned sales transaction, the CarboGen and AMCIS subsidiaries of the pharmaceutical services business were merged into one legal entity in the second quarter 2006 with the current assumption of the net operating losses from CarboGen being able to be fully utilized in the future as part of the combined entity. RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2005 PERFORMANCE PRODUCTS
SIX MONTHS ENDED JUNE 30, ----------------------- (dollars in millions) 2006 2005 ---- ---- Net Sales .............................................................. $ 594 $ 566 ===== ===== Segment Profit ......................................................... $ 88 $ 69 ===== ===== Charges and Reorganization Items included in Segment Profit ........ $ (3) $ (7) ===== =====
The $28 million, or 5 percent, increase in net sales as compared to the six months ended June 30, 2005 resulted primarily from higher sales volumes of approximately 5 percent and an increase in average selling prices of approximately 2 percent, partially offset by unfavorable currency exchange rate fluctuations of approximately 2 percent. Higher volumes were experienced in SAFLEX(R) and VANCEVA(R) plastic interlayer products and LLUMAR(R) and VISTA(R) professional film products, partially offset by lower volumes in THERMINOL(R) heat transfer fluids. Higher average selling prices were experienced in SAFLEX(R) and VANCEVA(R) plastic interlayer 47 products and THERMINOL(R) heat transfer fluids. The unfavorable exchange rate fluctuations occurred primarily as a result of the strengthening U.S. dollar in relation to the euro in comparison to the second quarter 2005. The $19 million, or 28 percent, increase in segment profit in comparison to the six months ended June 30, 2005 resulted principally from higher net sales and favorable manufacturing variances resulting from improved capacity utilization, partially offset by higher raw material and energy costs. Segment profit in 2006 included $2 million of severance and retraining costs and $1 million for certain asset write-downs. In addition, segment profit in the six months ended June 30, 2005 was affected by $7 million of reorganization items, which consisted primarily of adjustments to record certain pre-petition claims at estimated amounts of the allowed claims. INTEGRATED NYLON
SIX MONTHS ENDED JUNE 30, ---------------------- (dollars in millions) 2006 2005 ---- ---- Net Sales .................................................................... $ 849 $ 878 ===== ===== Segment Profit (Loss) ........................................................ $ (10) $ 13 ===== ===== Charges and Reorganization Items included in Segment Profit (Loss) ...... $ (3) $ (11) ===== =====
The $29 million, or 3 percent, decrease in net sales as compared to the six months ended June 30, 2005 resulted primarily from lower sales volumes of approximately 12 percent, partially offset by higher average selling prices of approximately 9 percent. Sales volumes were impacted by the exit from the unprofitable acrylic fibers operations, as well as a portion of the nylon industrial fibers operations, both in the second quarter 2005. Further, lower sales volumes were experienced within the carpet and nylon industrial business, partially offset by higher sales volumes in intermediate chemicals and nylon plastics and polymers. Average selling prices increased in all businesses as a result of favorable market conditions and in response to the escalating cost of raw materials. The $23 million decrease in the segment profit in comparison to the six months ended June 30, 2005 resulted primarily from lower net sales, unfavorable manufacturing costs and higher raw material costs. The unfavorable manufacturing costs were precipitated by a manufacturing interruption incurred at the Alvin, Texas facility, resulting in a significant turnaround being accelerated in its timing, as well as extended in its duration. Segment profit in 2006 included approximately $2 million of decommissioning and dismantling costs as a result of the shut-down of its acrylic fibers business in 2005 and $1 million of asset write-downs. In addition, 2005 segment profit included reorganization items of $11 million comprised of $10 million principally to shut-down the acrylic fibers operations and $1 million of other restructuring charges. The shut-down costs included $11 million of asset write-downs, $4 million of severance and retraining costs and $2 million of decontamination costs, partially offset by a $7 million gain from the reversal of the LIFO reserve associated with the inventory sold and written off as part of the business shut-down. CORPORATE EXPENSES
SIX MONTHS ENDED JUNE 30, ---------------------- (dollars in millions) 2006 2005 ---- ---- Corporate Expenses .......................................................... $ 13 $ 25 ===== ===== Gains (Charges) included in Corporate Expenses .......................... $ 11 $ -- ===== =====
With the exception of $11 million of net gains recorded in 2006, corporate expenses remained consistent in comparing the six months ended June 30, 2006 to the comparable period in 2005, with benefits from cost reduction measures offsetting inflationary increases in corporate expenses. The net gains include a $20 million one-time gain that resulted from the reversal of a litigation reserve with respect to a litigation matter that was decided favorably in the second quarter 2006 (as further described in Note 9 of the accompanying consolidated financial statements), partially offset by a $9 million environmental charge that was precipitated by the notification by a third-party of its intent to terminate a tolling agreement at one of Solutia's facilities outside the U.S. that will likely result in the cessation of operations at that site. 48 EQUITY EARNINGS FROM AFFILIATES
SIX MONTHS ENDED JUNE 30, ---------------------- (dollars in millions) 2006 2005 ---- ---- Equity Earnings from Affiliates not included in Reportable Segment Profit ... $ 21 $ 33 ----- ----- Equity Earnings from Affiliates included in Reportable Segment Profit ....... $ -- $ 2 ----- ----- Equity Earnings from Affiliates ............................................. $ 21 $ 35 ===== ===== Gains (charges) included in Equity Earnings (Loss) from Affiliates ..... $ (1) $ 5 ===== =====
Equity earnings (loss) from affiliates decreased by $14 million in comparison to the six months ended June 30, 2005. This decline was primarily a result of the sale of the Astaris joint venture in the fourth quarter 2005 and lower selling prices and sales volumes at the Flexsys joint venture in the six months ended June 30, 2006 in comparison to the same period in 2005. In addition, results in the six months ended June 30, 2006 included a $1 million restructuring charge from the Flexsys joint venture, while the results for the six months ended June 30, 2005 included a one-time, non-operational gain of $5 million incurred by the Flexsys joint venture. INTEREST EXPENSE
SIX MONTHS ENDED JUNE 30, ---------------------- (dollars in millions) 2006 2005 ---- ---- Interest Expense ............................................................ $ 50 $ 44 ===== ===== Charges included in Interest Expense ................................... $ (1) $ -- ===== =====
The $6 million, or 14 percent, increase in interest expense in 2006 in comparison to the six months ended June 30, 2005 resulted principally from higher debt outstanding in the six months ended June 30, 2006 than in the comparable period of 2005. REORGANIZATION ITEMS, NET
SIX MONTHS ENDED JUNE 30, ---------------------- (dollars in millions) 2006 2005 ---- ---- Reorganization Items, net ................................................... $ (32) $ (20) ===== =====
Reorganization items, net are presented separately in the Consolidated Statement of Operations and represent items of income, expense, gain, or loss that are realized or incurred by Solutia because it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items incurred in the six months ended June 30, 2006 included: $27 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; $3 million of expense provisions related to (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court; a $2 million net gain from adjustments to record certain pre-petition claims at estimated amounts of the allowed claims; and $4 million of other reorganization charges primarily involving costs incurred with exiting certain non-strategic businesses. Reorganization items incurred in the six months ended June 30, 2005 included: a $29 million net gain representing the difference between the settlement amount of certain pre-petition obligations and the corresponding amounts previously recorded; $24 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; $11 million of net charges for adjustments to record certain pre-petition claims at estimated amounts of the allowed claims; $8 million of expense provisions related to (i) employee severance costs 49 incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court; and $6 million of other reorganization charges primarily involving costs incurred with the exit from the acrylic fibers business. INCOME TAX EXPENSE
SIX MONTHS ENDED JUNE 30, ------------------------ (dollars in millions) 2006 2005 ---- ---- Income Tax Expense .......................................................... $ 7 $ 13 ===== =====
Solutia's income tax expense in the six months ended June 30, 2006 and 2005 was primarily a result of foreign income taxes. As a result of Solutia's Chapter 11 filing, Solutia did not record any U.S. income tax expense or benefit for domestic operations (including temporary differences) during the six months ended June 30, 2006 and 2005. Consequently, the changes in federal and state deferred tax assets were offset by corresponding changes in valuation allowances. See Note 14 of Solutia's 2005 Form 10-K for additional information concerning Solutia's deferred tax assets and changes in valuation allowances due to Solutia's Chapter 11 filing. DISCONTINUED OPERATIONS
SIX MONTHS ENDED JUNE 30, ------------------------ (dollars in millions) 2006 2005 ---- ---- Income from Discontinued Operations, net of tax ............................. $ 8 $ 3 ===== =====
Income from discontinued operations consists of the results of Solutia's pharmaceutical services business. As described in Note 4 to the accompanying consolidated financial statements, on May 23, 2006, SESA agreed to sell its pharmaceutical services business to Dishman Pharmaceuticals & Chemicals Ltd. ("Dishman"). The transaction is anticipated to close in the third quarter 2006. Included in the results of operations in the six months ended June 30, 2006 was a tax gain of $5 million as described further in the Discontinued Operations portion of the Results of Operations section for the three months ended June 30, 2006 above. 50 SUMMARY OF EVENTS AFFECTING COMPARABILITY In the six months ended June 30, 2006 and 2005 certain events affecting comparability were recorded in Reorganization Items, net in the Statement of Consolidated Operations. A comparison of reorganization items for these periods is provided in the above Results of Operations section, as well as Note 2 to the accompanying consolidated financial statements. Charges recorded in the six months ended June 30, 2006 and 2005 and other events affecting comparability recorded outside of reorganization items have been summarized in the table below (dollars in millions).
2006 ---------------------------------------------------------------- PERFORMANCE INTEGRATED CORPORATE/ INCREASE/(DECREASE) PRODUCTS NYLON OTHER CONSOLIDATED -------- ----- ----- ------------ IMPACT ON: Cost of goods sold.......................... $ -- $ -- $ 9 $ 9 (a) -- -- (20) (20) (b) Marketing and administrative expenses....... 1 -- -- 1 (c) ---------------------------------------------------------------- OPERATING INCOME IMPACT..................... (1) -- 11 10 Interest expense ........................... -- -- (1) (1) (d) Equity earnings from affiliates............. -- -- (1) (1) (e) Loss on debt modification................... -- -- (8) (8) (d) ---------------------------------------------------------------- PRE-TAX INCOME STATEMENT IMPACT............. $ (1) $ -- $ 1 -- ============================================== Income tax impact........................... 2 (f) ----- AFTER-TAX INCOME STATEMENT IMPACT........... $ 2 ======
2006 EVENTS a) Environmental charge precipitated by the notification by a third-party of its intent to terminate a tolling agreement at one of Solutia's facilities outside the U.S. that will likely result in the cessation of operations at that site ($9 million pre-tax and $7 million after-tax). b) One-time gain resulting from the reversal of a litigation reserve with respect to a litigation matter that was decided favorably in the second quarter 2006, as further described in Note 9 of the accompanying consolidated financial statements ($20 million pre-tax and after-tax). c) Restructuring costs related principally to severance and retraining costs ($1 million pre-tax and after-tax). d) Solutia recorded a charge of approximately $8 million (pre-tax and after-tax) to record the write-off of debt issuance costs and to record the DIP facility as modified at its fair value. In addition, $1 million (pre-tax and after-tax) of unamortized debt issuance costs associated with the DIP facility were written off at the time of modification in March 2006. See the Financial Condition and Liquidity section below for further description of the DIP facility amendment. e) Restructuring charges at Flexsys, Solutia's 50 percent owned joint venture ($1 million pre-tax and after-tax). f) With the exception of items (a) and (c) above, which primarily relate to ex-U.S. operations, the above items are considered to have like pre-tax and after-tax impact as the tax benefit or expense realized from these events is offset by the change in valuation allowance for U.S. deferred tax assets resulting from uncertainty as to their recovery due to Solutia's Chapter 11 bankruptcy filing. 51
2005 ----------------------------------------------------------------- PERFORMANCE INTEGRATED CORPORATE/ INCREASE/(DECREASE) PRODUCTS NYLON OTHER CONSOLIDATED - ---------------------------------------- -------- ----- ----- ------------ IMPACT ON: Cost of Goods Sold...................... $-- $-- $-- $-- ----------------------------------------------------------------- OPERATING INCOME IMPACT................. -- -- -- -- Equity earnings from affiliates......... -- -- 5 5 (a) ----------------------------------------------------------------- PRE-TAX INCOME STATEMENT IMPACT......... $-- $-- $ 5 5 Income tax impact....................... -- =============================================== -------------- AFTER-TAX INCOME STATEMENT IMPACT....... $ 5 ==============
2005 EVENTS a) One-time, non-operational gain recognized by the Flexsys joint venture ($5 million pre-tax and after-tax). FINANCIAL CONDITION AND LIQUIDITY As discussed in Note 1 to the accompanying consolidated financial statements, Solutia is operating as a debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code. As a result of the uncertainty surrounding Solutia's current circumstances, it is difficult to predict Solutia's actual liquidity needs and sources at this time. However, based upon current and anticipated levels of operations during the continuation of the bankruptcy proceedings, Solutia believes that its liquidity and capital resources will be sufficient to maintain its normal operations at current levels. Solutia's access to additional financing while in the Chapter 11 bankruptcy process may be limited. Financial Analysis Solutia used its existing cash on-hand to finance operating needs and capital expenditures during the six months ended June 30, 2006. Cash used in continuing operations was $126 million in the six months ended June 30, 2006, a change of $96 million from $30 million used in continuing operations for the comparable period of 2005. This change in cash used in operations in comparing the six months ended June 30, 2006 and 2005 was primarily attributable to higher pension contributions of approximately $43 million and changes in working capital items, including a significant increase in trade receivables resulting from a considerable increase in net sales in the latter part of the second quarter 2006. Capital spending increased $14 million to $41 million in the six months ended June 30, 2006, compared to $27 million in the comparable period of 2005. The expenditures in the six months ended June 30, 2006 were primarily to fund certain growth initiatives in the Performance Products segment, as well as various capital improvements and certain cost reduction projects. Net cash used for the acquisition of Quimica (as described in Note 4 to the accompanying consolidated financial statements) totaled $16 million and consisted of approximately $20 million cash paid, less approximately $4 million of cash acquired. There were no acquisitions in the six months ended June 30, 2005. Total debt of $1,578 million as of June 30, 2006, including $668 million subject to compromise and $910 million not subject to compromise, increased by $363 million as compared to $1,215 million at December 31, 2005, including $668 million subject to compromise and $547 million not subject to compromise. This increase in total debt resulted primarily from $350 million of additional borrowings from Solutia's DIP facility in the six months ended June 30, 2006, of which $300 million resulted from the March 2006 amendment to the DIP facility (as described below). In addition, as a result of the Chapter 11 filing, Solutia was in default on all its debt agreements as of June 30, 2006, with the exception of its DIP credit facility and Euronotes. 52 Solutia's working capital decreased by $132 million to $(94) million at June 30, 2006, compared to $38 million at December 31, 2005. The change was primarily a result of higher short-term debt, partially offset by higher cash on-hand and an increase in trade receivables resulting from higher net sales. Solutia had a shareholders' deficit of $1,437 million at June 30, 2006 compared to $1,454 million at December 31, 2005. The $17 million decrease in shareholders' deficit resulted primarily from the $11 million decrease in accumulated other comprehensive loss coupled with the $6 million net income in the six months ended June 30, 2006. The weighted average interest rate on Solutia's total debt outstanding was approximately 8.8 percent at June 30, 2006 and 8.7 percent at December 31, 2005. Excluding debt subject to compromise, with the exception of the 11.25 percent notes due 2009 on which the bankruptcy court has permitted continued payments of the contractual interest, the weighted average interest rate on total debt was 9.5 percent at June 30, 2006 compared to 9.8 percent at December 31, 2005. While operating as a debtor-in-possession during the Chapter 11 proceedings, Solutia has ceased paying interest on its 6.72 percent debentures due 2037 and its 7.375 percent debentures due 2027. The amount of contractual interest expense not recorded in each of the six months ended June 30, 2006 and 2005 was approximately $16 million. At June 30, 2006, Solutia's total liquidity was $350 million in the form of $85 million of availability under the DIP credit facility and approximately $265 million of cash on-hand, of which $109 million was cash of Solutia's subsidiaries that are not parties to the Chapter 11 proceedings. In comparison, Solutia's total liquidity at December 31, 2005 was $238 million in the form of $131 million of availability under the DIP credit facility and approximately $107 million of cash on-hand, of which $89 million was cash of Solutia's subsidiaries that are not parties to the Chapter 11 bankruptcy proceedings. The increase in cash on-hand was primarily a result of the DIP amendment in March 2006 and will be used for ongoing operations and to fund upcoming mandatory pension contributions as described below. According to IRS funding rules, Solutia will be required to make approximately $179 million in pension contributions to its U.S. qualified pension plan in 2006 assuming Congress extends the interest rate relief provision currently proposed. If this relief is not granted, required contributions in 2006 would be approximately $195 million. Approximately $43 million of these required 2006 contributions were made in the six months ended June 30, 2006. Solutia also expects to be required to fund approximately $5 million in pension contributions for its foreign pension plans in 2006. Amendment to DIP Financing Agreement On March 17, 2006, Solutia amended its DIP financing facility with bankruptcy court approval. This 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, SESA's outstanding Euronotes; and (vii) amended certain financial and other covenants. The amendment also contains a number of other changes and other modifications required to make the remaining terms of the DIP facility consistent with the amendments set forth above. Euronotes Refinancing As described in a Form 8-K filed on August 1, 2006, on July 26, 2006, Solutia's indirect wholly-owned subsidiary Solutia Services International S.C.A./Comm. V.A., a subsidiary of SESA, entered into a (euro) 200 million Facility Agreement (the "Facility Agreement") guaranteed by SESA and CPFilms Vertriebs GmbH, a subsidiary of SESA. Closing of the credit facility contemplated by the Facility Agreement, which at signing remained subject to the satisfaction of a number of conditions precedent, occurred on August 1, 2006. SESA used the proceeds of the new credit facility to refinance all of the Euronotes on August 1, 2006, at a prepayment premium of 3 percent, as required pursuant to the Euronotes, for a total redemption amount of approximately (euro) 215 million, including accrued interest. The Euronotes were refinanced to reduce the interest rate, extend the term of the indebtedness and facilitate certain dispositions by Solutia, including the sale of its pharmaceutical services business described below. 53 The Facility Agreement has a five-year term, with a termination date of July 31, 2011 and an adjustable rate structure of EURIBOR plus a margin which currently yields a rate of approximately 5.75 to 6.50 percent. The margin is subject to adjustment upon the occurrence of certain events specified in the Facility Agreement or upon SESA and its subsidiaries attaining certain financial benchmarks. The new credit facility consists of a (euro) 160 million term loan B1 and a (euro) 40 million term loan B2. The (euro) 40 million term loan B2 is expected to be repaid from the proceeds of the sale of Solutia's pharmaceutical services business (as further described in Note 4 to the accompanying consolidated financial statements); accordingly, this amount has been classified as current in the Consolidated Statement of Financial Position as of June 30, 2006. The new loan is secured by substantially all of the assets of SESA and its subsidiaries (excluding Flexsys Holding B.V. and Carbogen Amcis AG). The Facility Agreement also contains other customary terms and conditions, including certain financial covenants relating to the performance of SESA and its subsidiaries. PENNDOT Letter of Credit As a result of the favorable ruling in the PENNDOT litigation matter described in Note 9 to the accompanying consolidated financial statements, in August 2006, Monsanto, which is managing the defense obligations of Pharmacia, released the $20 million letter of credit that Solutia posted to secure a portion of Pharmacia's obligations with respect to an appeal bond issued in relation to this case. CONTINGENCIES See Note 9 to the accompanying consolidated financial statements for a summary of Solutia's contingencies as of June 30, 2006. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS There have been no material changes in market risk exposures during the six months ended June 30, 2006 that affect the disclosures presented in the information appearing under "Derivative Financial Instruments" on page 47 of Solutia's Form 10-K for the year-ended December 31, 2005. ITEM 4. CONTROLS AND PROCEDURES During the period covered by this Form 10-Q, Solutia carried out an evaluation, under the supervision and with the participation of Solutia's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Solutia's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act")). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, Solutia's disclosure controls and procedures are effective in timely alerting them to material information relating to Solutia and its consolidated subsidiaries that is required to be included in Solutia's periodic SEC filings. There were no changes in Solutia's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 54 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS LEGAL PROCEEDINGS IN SOLUTIA'S BANKRUPTCY CASE - ---------------------------------------------- JPMorgan Adversary Proceeding. As described in Solutia's Annual Report on Form 10-K for the year ended December 31, 2005 (the "2005 Form 10-K") and Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the "First Quarter 10-Q"), on May 27, 2005, JPMorgan as indenture trustee under the indenture for Solutia's debentures due 2027 and 2037 (the "Prepetition Indenture"), filed an adversary proceeding (the "JPM Proceeding") against Solutia in the Chapter 11 Cases. In its adversary proceeding, JPMorgan asserted five causes of action seeking declaratory judgments to establish the validity and priority of the purported security interest of the holders of the 2027 and 2037 debentures, and one cause of action pursuant to section 363 of the Bankruptcy Code asserting that the alleged security interests lacked adequate protection. The Unsecured Creditors' Committee and the Ad Hoc Solutia Trade Claims Committee have intervened in the JPM Proceeding in support of Solutia and the Ad Hoc Committee of Solutia Noteholders has intervened in the JPM Proceeding in support of JPMorgan. Trial of the JPM Proceeding concluded on July 10, 2006. Post-trial briefs are expected to be submitted by the parties by August 9, 2006. The Bankruptcy Court has indicated that it will take at least six weeks after submission of the post-trial briefs to make a ruling in the JPM Proceeding. Equity Committee Adversary Proceeding. As described in the 2005 Form 10-K and First Quarter 10-Q, on March 7, 2005, the Equity Committee filed a complaint against Pharmacia and Monsanto and objections to the proofs of claim filed by Pharmacia and Monsanto in Solutia's bankruptcy case (the "Equity Committee Complaint"). In the Equity Committee Complaint, the Equity Committee seeks to avoid certain obligations assumed by Solutia at the time of its spinoff from Pharmacia. The Equity Committee Complaint alleges, among other things, that the Solutia Spinoff was a fraudulent transfer under the Bankruptcy Code because Pharmacia forced Solutia to assume excessive liabilities and insufficient assets such that Solutia was destined to fail from its inception. The Ad Hoc Committee of Solutia Noteholders and the Ad Hoc Solutia Trade Claims Committee have intervened in this adversary proceeding in support of the Equity Committee. The Unsecured Creditors' Committee has intervened, and Solutia intends to intervene, in this adversary proceeding as neutral parties due to the importance of this proceeding with respect to Solutia's bankruptcy case. The case is proceeding and the Bankruptcy Court has set this matter for trial to commence on September 11, 2006. ANNISTON PARTIAL CONSENT DECREE - ------------------------------- Solutia's 2005 Form 10-K described a Partial Consent Decree (the "Anniston Consent Decree") approved by the U.S. District Court for the Northern District of Alabama in the case captioned United States of America v. Pharmacia Corporation (p/k/a Monsanto Company) and Solutia which requires Pharmacia and Solutia to sample certain residential properties and remove soils found on those sites if polychlorinated biphenyls ("PCBs") are above a certain level, conduct a Remedial Investigation and Feasibility Study to help determine a cleanup remedy for the Anniston, Alabama PCB site and pay the Environmental Protection Agency's ("EPA") past response costs and future oversight costs related to the foregoing work. The 2005 Form 10-K also discussed negotiations and proceedings among EPA, Solutia and Pharmacia, and other potentially responsible parties ("PRPs") with respect to the Anniston lead site, EPA's intention to enter into an Administrative Order on Consent with the lead site PRPs which would deny Pharmacia and Solutia contribution rights against the lead site PRPs with respect to PCB cleanup and a related order issued by the United States District Court for the Northern District of Alabama issued an Order (the "PCB Order") authorizing co-defendants Pharmacia and Solutia to "suspend" performance of the PCB clean-up at the Anniston site under the Anniston Consent Decree, upon the filing of a motion by either defendant requesting that relief. In July 2006, Solutia and Pharmacia reached an agreement with the EPA that clarifies the extent of remaining obligations under the Anniston Consent Decree and the coordination of that work with the Lead Site clean-up being performed by others, and by which Solutia and Pharmacia will forego the opportunity to suspend their obligations under the Anniston Consent Decree pursuant to the PCB Order. Solutia and Pharmacia preserved their rights under this agreement to continue to argue that the contribution protection afforded certain other potentially responsible parties performing Lead Site clean-up should not be effective as to Solutia and Pharmacia. 55 CASH BALANCE PLAN LITIGATION - ---------------------------- As described in the 2005 Form 10-K and First Quarter 10-Q, since October 2005, three cases have been filed by participants in the Solutia Inc. Employees' Pension Plan alleging that the Pension Plan: (1) violates the Employee Retirement Income Security Act of 1974 ("ERISA") prohibitions on reducing rates of benefit accrual based on age; (2) results in the impermissible forfeiture of accrued benefits under ERISA; (3) violates ERISA's present value calculation rules for determining lump sum distributions; and (4) violates the minimum accrual requirements of ERISA. The cases were captioned Davis, et. al. v. Solutia, Inc. Employees' Pension Plan, Scharringhausen, et. al. v. Solutia, Inc. Employees' Pension Plan, et al. and Juanita Hammond, et. al. v. Solutia, Inc. Employees' Pension Plan. None of the Debtors, and, except for the Solutia Inc. Employee Benefits Plans Committee which was named in the Scharringhausen case, no individual or entity other than the Pension Plan, has been named as a defendant in any of these cases. The Scharringhausen plaintiffs voluntarily dismissed their case on April 24, 2006. On June 2, 2006, the Hammond plaintiffs' agreed to stay their action pending exhaustion of administrative remedies with respect to count (4), above. Thereafter the Hammond and Davis plaintiffs also each withdrew their respective motions to consolidate and to stay or dismiss. In addition, the Hammond and Davis plaintiffs each withdrew their motions to appoint interim class counsel and have advised the court that they are cooperating in the representation of the putative class. The Pension Plan's motions to dismiss in both the Hammond and Davis cases remain pending. The Pension Plan intends to continue to vigorously defend itself against any and all claims asserted in the Davis and Hammond litigation. GE LITIGATION - ------------- Solutia's 2005 Form 10-K and First Quarter 10-Q described a case captioned Michael Abbatiello et al. v. Monsanto Company, Pharmacia Corporation and Solutia Inc. (the "Abbatiello Case"), which was filed on December 26, 2005 in the Supreme Court of the State of New York on behalf of 590 current General Electric employees who work at its Schenectady, New York plant stating eleven separate causes of action alleging that General Electric purchased various PCB containing products from Pharmacia which were used in the manufacture of a variety of products including electric motors, generators, gas turbines, wire and cable, insulating materials and microwave tubes. PCBs were later detected in various locations, including retention ponds, ground water, and water treatment centers on the approximately 628 acre site. On May 10, 2006, Solutia received notice that another action, captioned Alan Abele, et al. v. Monsanto Company, Pharmacia Corporation and Solutia Inc. (the "Abele Case" and, together with the Abbatiello Case, the "GE Litigation"), was filed on March 15, 2006 in the Supreme Court of the State of New York on behalf of 486 former General Electric employees who were employed at General Electric's Schenectady, NY plant asserting eleven separate causes of action and alleging claims identical to those made on behalf of current General Electric employees in the Abbatiello Case. As in the Abbatiello Case, the plaintiffs in the Abele Case are seeking $1 billion in compensatory damages and $1 billion in punitive damages for each cause of action. The GE Litigation is automatically stayed as to Solutia pursuant to Section 362 of the U.S. Bankruptcy Code. At the time of the spinoff from Pharmacia, Solutia assumed liability for, among other things, litigation liabilities related to chemical products formerly manufactured, released or used by Pharmacia prior to the spinoff, including the costs of toxic tort lawsuits alleging exposure to PCBs. Solutia also agreed to defend Pharmacia against, and indemnify Pharmacia for, such liability. Upon filing for Chapter 11 protection, Solutia determined that its defense and indemnification obligations to Pharmacia with respect to such litigation liabilities were pre-petition obligations under the U.S. Bankruptcy Code and that Solutia was therefore prohibited from performing, except pursuant to a confirmed plan of reorganization. As a result, after filing for Chapter 11 protection, Solutia ceased performance of its defense obligations and those defense obligations have been managed by Monsanto during Solutia's Chapter 11 Case. Because such litigation was no longer being managed by Solutia, Solutia became unable to provide complete status updates and, as a result, Solutia disclosed that it would cease reporting on those litigation matters. The GE Litigation falls within the scope of litigation liabilities described above. Accordingly, Monsanto is managing this litigation and Solutia will be unable to provide complete status updates on the GE Litigation. Therefore, Solutia will cease reporting on the status of the GE Litigation. PENNDOT CASE - ------------ Solutia's Annual Report on Form 10-K (as amended) for the year ended December 31, 2003 described a case then pending in the Commonwealth Court of Pennsylvania by the Commonwealth of Pennsylvania against Pharmacia seeking damages for PCB contamination in the Transportation and Safety Building ("T&S Building") in Harrisburg, Pennsylvania, that it claimed necessitated the demolition of the T&S building. Solutia was not a named defendant in this litigation and therefore took no action to stay the litigation in connection with its Chapter 11 proceedings. Solutia assumed the defense of this litigation at the time of its spin-off from Pharmacia. Solutia determined that its obligation to defend and indemnify Pharmacia with regard to this litigation was a pre-petition obligation that Solutia was prohibited from performing, except pursuant to a confirmed plan of reorganization. Therefore, Solutia ceased defending Pharmacia with respect to this litigation. Solutia did, however, provide a $20 million letter of credit to secure a portion of Pharmacia's obligations with respect to an appeal bond issued with respect to the case. On May 25, 2006 the Supreme Court of Pennsylvania issued its ruling on the appeal in this case, reversing in whole and remanding in part the decision of the trial court against Pharmacia. With respect to those claims that were reversed and remanded, the Supreme Court of Pennsylvania significantly limited the amount of damages that could be awarded. As a result of this ruling, Monsanto has released the $20 million letter of credit that Solutia posted to secure a portion of Pharmacia's obligations with respect to an appeal bond issued with respect to the case. 56 SOLUTIA INC. V. FMC CORPORATION - ------------------------------- Solutia's 2005 Annual Report described an action captioned Solutia Inc. v. FMC Corporation ("FMC") in Circuit Court in St. Louis County, Missouri, against FMC over the failure of purified phosphoric acid technology provided by FMC to Astaris, the 50/50 joint venture between Solutia and FMC. On July 31, 2006, the District Court entered its order regarding FMC's motion for summary judgment, ruling that Solutia's breach of fiduciary duty claim would be allowed to proceed, but only on a limited basis. The Court further overruled the parties' motions for summary judgment on the remaining claims. The Court also ruled that there will be a bench trial on the four claims remaining in the case. ITEM 5. OTHER INFORMATION Euronotes Refinancing As previously disclosed in a Form 8-K filed with the Securities and Exchange Commission (the "SEC") on June 30, 2006, Solutia delivered a redemption notice and certificate (the "Notice") to the holders of its (euro) 200 million 10.00 percent Senior Secured Notes due 2008 (the "Euronotes") issued by Solutia Europe S.A./N.V. ("SESA"), Solutia's wholly owned subsidiary, in accordance with the terms and conditions of the Euronotes. Delivery of the Notice obligated SESA to redeem the Euronotes on August 1, 2006 at a 3 percent premium. As described in a Form 8-K filed on August 1, 2006, on July 26, 2006, Solutia's indirect wholly-owned subsidiary Solutia Services International S.C.A./Comm. V.A. ("SSI"), a subsidiary of SESA, entered into a (euro) 200 million Facility Agreement (the "Facility Agreement") between SSI as borrower, SESA and CPFilms Vertriebs GmbH, as original guarantors, Citigroup Global Markets Limited, as arranger, the financial institutions listed therein, as the original lenders, Citibank International plc as agent for the finance parties and Citibank N.A. as security agent for the secured parties. Closing of the credit facility contemplated by the Facility Agreement, which at signing remained subject to the satisfaction of a number of conditions precedent, occurred on August 1, 2006. SESA used the proceeds of the new credit facility to refinance of all of the Euronotes on August 1, 2006, at a prepayment premium of 3 percent, as required pursuant to the Euronotes, for a total redemption amount of approximately (euro) 215 million, including accrued interest. The Euronotes were refinanced to reduce the interest rate, extend the term of the indebtedness and allow for certain dispositions by Solutia, including the sale of its pharmaceutical services business. The Facility Agreement has a five-year term, with a termination date of July 31, 2011 and an adjustable rate structure of EURIBOR plus a margin which currently yields a rate of approximately 5.75 to 6.50 percent. The margin is subject to adjustment upon the occurrence of certain events specified in the Facility Agreement or upon SESA and its subsidiaries attaining certain financial benchmarks. The new credit facility consists of a (euro) 160 million term loan B1 and a (euro) 40 million term loan B2. The (euro) 40 million term loan B2 is expected to be repaid from the proceeds of the sale of Solutia's pharmaceutical services business described in Note 4 to the accompanying consolidated financial statements. The new loan is secured by substantially all of the assets of SESA and its subsidiaries (excluding Flexsys Holding B.V. and Carbogen Amcis AG). The Facility Agreement also contains other customary terms and conditions, including certain financial covenants relating to the performance of SESA and its subsidiaries. The foregoing description of the Facility Agreement does not purport to be complete and is qualified in its entirety by reference to the Facility Agreement, a copy of which is attached hereto as Exhibit 10.1. ITEM 6. EXHIBITS See the Exhibit Index at page 59, of this report. 57 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOLUTIA INC. -------------------------- (Registrant) /s/ TIMOTHY J. SPIHLMAN -------------------------------------- (Vice President and Controller) (On behalf of the Registrant and as Principal Accounting Officer) Date: August 2, 2006 58 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.1 (Euro) 200,000,000 Facility Agreement dated July 26, 2006 between Solutia Europe S.A./N.V., Solutia Services International S.C.A./Comm. V.A., the guarantors listed therein, Citigroup Global Markets Limited, as mandated lead arranger, the financial institutions listed therein, as the original lenders, Citibank International plc as agent for the finance parties and Citibank N.A. as security agent for the secured parties 10.2 Share and Asset Purchase Agreement entered into on May 23, 2006 between Solutia Europe S.A./N.V. and Dishman Pharmaceuticals & Chemicals Ltd.* 11 Omitted--Inapplicable; see "Consolidated Statement of Operations" on page 1 31(a) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31(b) Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *Confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, for portions of this exhibit that contain confidential commercial and financial information. 59 EX-10.1 2 ex10p1.txt Exhibit 10.1 (euro)200,000,000 FACILITY AGREEMENT dated 26 July 2006 for SOLUTIA SERVICES INTERNATIONAL S.C.A./COMM. V.A. arranged by CITIGROUP GLOBAL MARKETS LIMITED as Arranger with CITIBANK INTERNATIONAL PLC acting as Agent and CITIBANK, N.A. acting as Security Agent LINKLATERS Ref: SBL/CIXT/ALW CONTENTS CLAUSE PAGE SECTION 1 INTERPRETATION 1. Definitions and interpretation..........................................1 SECTION 2 THE FACILITIES 2. The Facilities.........................................................28 3. Purpose................................................................29 4. Conditions of Utilisation..............................................29 SECTION 3 UTILISATION 5. Utilisation............................................................31 SECTION 4 REPAYMENT, PREPAYMENT AND CANCELLATION 6. Repayment..............................................................32 7. Prepayment and cancellation............................................32 SECTION 5 COSTS OF UTILISATION 8. Interest...............................................................40 9. Interest Periods.......................................................42 10. Changes to the calculation of interest.................................43 11. Fees...................................................................44 SECTION 6 ADDITIONAL PAYMENT OBLIGATIONS 12. Tax gross-up and indemnities...........................................45 13. Increased costs........................................................48 14. Other indemnities......................................................49 15. Mitigation by the Lenders..............................................50 16. Costs and expenses.....................................................51 SECTION 7 GUARANTEE AND SECURITY 17. Guarantee and indemnity................................................52 SECTION 8 REPRESENTATIONS, UNDERTAKINGS AND EVENTS OF DEFAULT 18. Representations........................................................57 19. Information undertakings...............................................63 20. Financial covenants....................................................71 21. General undertakings...................................................77 22. Events of Default......................................................84 SECTION 9 CHANGES TO PARTIES 23. Changes to the Lenders.................................................89 24. Changes to the Obligors................................................93 26 Jul 2006 - i - SECTION 10 THE FINANCE PARTIES 25. Role of the Agent and the Arranger.....................................95 26. Conduct of business by the Finance Parties............................100 27. Sharing among the Finance Parties.....................................100 SECTION 11 ADMINISTRATION 28. Payment mechanics.....................................................102 29. Set-off...............................................................104 30. Notices...............................................................104 31. Calculations and certificates.........................................106 32. Partial invalidity....................................................106 33. Remedies and waivers..................................................106 34. Amendments and waivers................................................107 35. Counterparts..........................................................108 SECTION 12 GOVERNING LAW AND ENFORCEMENT 36. Governing law.........................................................109 37. Enforcement...........................................................109 26 Jul 2006 - ii - THIS AGREEMENT is dated 26 July 2006 and made between: (1) SOLUTIA EUROPE SA/NV (the "COMPANY"); (2) SOLUTIA SERVICES INTERNATIONAL S.C.A./COMM V.A. (the "BORROWER"); (3) THE COMPANIES listed in Part I of Schedule 1 as original guarantors (the "ORIGINAL GUARANTORS"); (4) CITIGROUP GLOBAL MARKETS LIMITED as mandated lead arranger (the "ARRANGER"); (5) THE FINANCIAL INSTITUTIONS listed in Part II of Schedule 1 as lenders (the "ORIGINAL LENDERS"); (6) CITIBANK INTERNATIONAL PLC as agent of the other Finance Parties (the "AGENT"); and (7) CITIBANK. N.A. as security agent for the Secured Parties (the "SECURITY AGENT"). IT IS AGREED as follows: SECTION 1 INTERPRETATION 1. DEFINITIONS AND INTERPRETATION 1.1 DEFINITIONS In this Agreement: "ACCESSION LETTER" means a document substantially in the form set out in Schedule 6 (Form of Accession Letter). "ACCOUNTANTS REPORT" means the report by PricewaterhouseCoopers in the Agreed Form. "ACCOUNTING MONTH" means each period of approximately thirty days ending on the last day of each calendar month in any financial year of the Company. "ACCOUNTING QUARTER" means each period of three Accounting Months ending on or about 31 March, 30 June, 30 September and 31 December in any financial year of the Company. "ADDITIONAL COST RATE" has the meaning given to it in Schedule 4 (Mandatory Cost formulae). "ADDITIONAL DEBT" means, in relation to any Intercompany Debt, any money, debt or liability due, owing or incurred under or in connection with: (a) any refinancing, deferral or extension of that Intercompany Debt; (b) any further advance which may be made under any document, agreement or instrument supplemental to any relevant Finance Document together with any related interest, fees and costs; (c) any claim for damages or restitution in the event of rescission of the Intercompany Debt or otherwise in connection with any relevant Finance Document; (d) any claim against any Obligor flowing from any recovery by an Obligor or any liquidator, receiver, administrator, administrative receiver, compulsory manager or other similar - 1 - officer of a payment or discharge in respect of that Intercompany Debt on the grounds of preference or otherwise; and (e) any amount (such as post insolvency interest) which would be included in any of the above but for any discharge, non provability, unenforceability or non allowability of the same in any insolvency or other proceedings. "ADDITIONAL GUARANTOR" means a company which becomes an Additional Guarantor in accordance with Clause 24 (Changes to the Obligors) (excluding for the avoidance of doubt any Original Guarantor). "AFFILIATE" means, in relation to any person, a Subsidiary of that person or a Holding Company of that person or any other Subsidiary of that Holding Company. "AGREED FORM" means, in relation to a document, that: (a) it is in a form initialled by or on behalf of the Company and the Agent on or before the signing of this Agreement for the purposes of identification; or (b) if not falling within paragraph (a) above, it is in form and substance satisfactory to the Agent (acting reasonably) and, in relation to any document which is not a documentary condition precedent falling within Clause 4.1, initialled by or on behalf of the Agent for the purposes of identification, or in relation to a documentary condition precedent falling within Clause 4.1, notice has been given by the Agent thereunder. "AMCIS" means Carbogen Amcis AG (formerly Amcis AG), incorporated in Switzerland with registered number CH-280.3.916.120-1 and whose registered office is at Hauptstrasse 159, 4416 Bubendorf, Switzerland as such company exists at the date of this Agreement. "APPLICABLE ACCOUNTING PRINCIPLES" means GAAP and practices and financial reference periods used in the Original Financial Statements. "AUTHORISATION" means an authorisation, consent, approval, resolution, licence, exemption, filing, notarisation or registration. "AVAILABLE COMMITMENT" means, in relation to a Facility, a Lender's Commitment under that Facility minus: (a) the amount of its participation in any outstanding Utilisations under that Facility; and (b) in relation to any proposed Utilisation, the amount of its participation in any Utilisations that are due to be made under that Facility on or before the proposed Utilisation Date. "AVAILABLE FACILITY" means, in relation to a Facility, the aggregate for the time being of each Lender's Available Commitment in respect of that Facility. "AVAILABILITY PERIOD" means the period from and including the date of this Agreement to and including 31 August 2006. "BANKRUPTCY EMERGENCE" means the time at which any direct or indirect shareholders of the Company who are or become subject to proceedings pursuant to Title 11 of the United States Code (the "Bankruptcy Code") emerge from such proceedings (whether by the occurrence of the effective date of a chapter 11 plan of reorganisation, the dismissal of a case under chapter 7 or - 2 - chapter 11 of the Bankruptcy Code, or otherwise) and are no longer required to seek bankruptcy court approval for actions taken outside the ordinary course of business. "BREAK COSTS" means the amount (if any) by which: (a) the interest (excluding the Margin and Mandatory Costs (if any)) which a Lender should have received for the period from the date of receipt of all or any part of its participation in a Loan or Unpaid Sum to the last day of the current Interest Period in respect of that Loan or Unpaid Sum, had the principal amount or Unpaid Sum received been paid on the last day of that Interest Period; exceeds: (b) the amount which that Lender would be able to obtain by placing an amount equal to the principal amount or Unpaid Sum received by it on deposit with a leading bank in the Relevant Interbank Market for a period starting on the Business Day following receipt or recovery and ending on the last day of the current Interest Period. "BUDGET" means the Business Plan and each budget supplied under and complying with Clause 19.6 (Annual Budget). "BUSINESS DAY" means a day (other than a Saturday or Sunday) on which banks are open for general business in London, Brussels and which is a TARGET Day. "BUSINESS PLAN" means the business plan in relation to the Group prepared by the Company and in the Agreed Form. "CAPITAL EXPENDITURE" means any expenditure which should in accordance with the Applicable Accounting Principles be treated as capital expenditure in the audited consolidated financial statements of the Group. "CASH" means any credit balance on any deposit, savings, current or other account, and any cash in hand, which is: (a) freely withdrawable on demand; (b) not subject to any Security (other than pursuant to any Security Document); (c) denominated and payable in any freely transferable and freely convertible currency; and (d) capable of being remitted to an Obligor. "CASH EQUIVALENT INVESTMENTS" means: (a) securities with a maturity of less than 12 Months from the date of acquisition issued or fully guaranteed or fully insured by the Government of the United States or any member state of the European Union; (b) commercial paper or other debt securities issued by an issuer rated at least A-1 by Standard & Poor's Ratings Group or P-1 by Moody's Investors Service, Inc. or a comparable rating from an internationally recognised rating agency and with a maturity of less than 12 Months; and (c) any other instrument, security or investment approved by the Majority Lenders; or - 3 - (d) certificates of deposit or time deposits of any commercial bank (which has outstanding debt securities rated as referred to in paragraph (b) above) and with a maturity of less than 12 Months, (e) repurchase agreements having maturities of not more than 90 days from the date of acquisition which are entered into with major money centre banks which are members of the Federal Reserve System; (f) money market accounts maintained with mutual funds having assets in excess of USD$2,500,000,000; (g) tax exempt securities rated A or better by Moody's or A+ or better by Standard & Poor's; or (h) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody's or Standard & Poor's, in each case not subject to any Security or Quasi Security (other than pursuant to any Security Document), denominated and payable in any freely transferable and freely convertible currency and the proceeds of which are capable of being remitted to an Obligor. "CASH FLOW" has the meaning given to it in Clause 20 (Financial covenants). "CHANGE OF CONTROL" has the meaning given to it in Clause 8.5 (Adjustment of Margin). "CHARGED ASSETS" means the assets over which Security is expressed to be created pursuant to any Security Document. "CHARGOR" means any person expressed to create Security pursuant to any Security Document. "CLOSING DATE" means the date falling one Business Day immediately after the first Utilisation. "COMMITMENT" means a Facility B1 Commitment or a Facility B2 Commitment. "COMMITMENT LETTER" means the commitment letter attaching the term sheet dated on or about 8 June 2006 between the Borrower, the Company, the Arranger and the Agent. "COMPLIANCE CERTIFICATE" means a certificate substantially in the form set out in Schedule 7 (Form of Compliance Certificate). "CONFIDENTIALITY UNDERTAKING" means a confidentiality undertaking substantially in the form agreed between the Company and the Arranger on or prior to the date of this Agreement or in any other form agreed between the Company and the Agent. "CURE AMOUNT" has the meaning given to it in Clause 20.3(e) (Financial covenant calculations). "DEBT SERVICE" has the meaning given to it in Clause 20 (Financial covenants). "DEFAULT" means an Event of Default or any event or circumstance specified in Clause 22 (Events of Default) which would (with the lapse of time, the giving of notice, the making of any determination under the Finance Documents or any combination of any of the foregoing) be an Event of Default. "DISRUPTION EVENT" means either or both of: - 4 - (a) a material disruption to those payment or communications systems or to those financial markets which are, in each case, required to operate in order for payments to be made in connection with the Facilities (or otherwise in order for the transactions contemplated by the Finance Documents to be carried out) which disruption is not caused by, and is beyond the control of, any of the Parties; or (b) the occurrence of any other event which results in a disruption (of a technical or systems-related nature) to the treasury or payments operations of a Party preventing that, or any other Party: (i) from performing its payment obligations under the Finance Documents; or (ii) from communicating with other Parties in accordance with the terms of the Finance Documents, and which (in either such case) is not caused by, and is beyond the control of, the Party whose operations are disrupted. "DIP FINANCING" means the facility agreement dated 16 January 2004 between Solutia Inc., Solutia Business Enterprises, Inc., each Guarantor (as defined therein), the DIP Lenders and Citicorp USA, Inc. as collateral agent, administrative agent and documentation agent as amended from time to time. "DIP LENDER" means a lender under the DIP Financing. "DUE DILIGENCE REPORT" means the legal due diligence report by Allen & Overy LLP in the Agreed Form. "EBITDA" has the meaning given to it in Clause 20 (Financial covenants). "ENVIRONMENT" means living organisms including the ecological systems of which they form part and the following media: (a) air (including air within natural or man-made structures, whether above or below ground); (b) water (including territorial, coastal and inland waters, water under or within land and water in drains and sewers); and (c) land (including land under water). "ENVIRONMENTAL LAW" means all laws and regulations of any relevant jurisdiction which: (a) have as a purpose or effect the protection of, and/or prevention of harm or damage to, the Environment; (b) provide remedies or compensation for harm or damage to the Environment; or (c) relate to Hazardous Substances or health and safety matters. "ENVIRONMENTAL LICENCE" means any Authorisation required at any time under Environmental Law. "ENVIRONMENTAL REPORT" means the report by Environment Resources Management in the Agreed Form. - 5 - "ESCROW AGREEMENT" means the escrow agreement dated on or about the date of this Agreement between, among others, KBC Bank NV/SA, Citibank International plc, Citibank N.A., the Borrower, the Company, Carbogen Amcis AG and CP Films Vertriebs GmBH. "EURIBOR" means: (a) the applicable Screen Rate; or (b) (if no Screen Rate is available for the Interest Period of that Loan), the rate quoted by the Reference Bank or the arithmetic mean of the rates rounded upwards to four decimal places if there is more than one Reference Bank as supplied to the Agent at its request quoted by the Reference Bank(s) to leading banks in the European interbank market, as of the Specified Time on the Quotation Day for the offering of deposits in euro for a period comparable to the Interest Period of the relevant Loan. "EURO NOTES" means the (euro)200,000,000 10% senior secured notes due 2008 issued by the Company. "EVENT OF DEFAULT" means any event or circumstance specified as such in Clause 22 (Events of Default). "EXCESS CASH FLOW" means, for any financial year of the Company, Cash Flow for that financial year, less: (a) Debt Service for that financial year; (b) prepayments of any Loans in that financial year under Clause 7.11 (Voluntary prepayment of Loans); (c) any amount included in Cash Flow for the Relevant Period which the Company is permitted to retain under Clause 7.5 (Mandatory prepayment - Net Sale Proceeds); and (d) the amount of unspent Capital Expenditure during the current financial year which is permitted to be carried forward to the following financial year under Clause 20.2 (Capital Expenditure). "EXCLUDED COMPANY" means: (a) subject to paragraph (b) below, Flexsys and Amcis; (b) Amcis will, from the date falling 65 days after the Closing Date, be included as a member of the Group for all purposes (and excluded from this definition) if it has not been sold to a third party buyer by way of share sale on arms' length terms on or before such date. "FACILITY" means Facility B1 or Facility B2. "FACILITY B1" means the term loan facility made available under this Agreement as described in paragraph (a) of Clause 2.1 (The Facilities). "FACILITY B1 COMMITMENT" means: (a) in relation to an Original Lender, the amount in euro set opposite its name under the heading "Facility B1 Commitment" in Part II of Schedule 1 (The Original Lenders) and the amount of any other Facility B1 Commitment transferred to it under this Agreement; - 6 - and (b) in relation to any other Lender, the amount in euro of any Facility B1 Commitment transferred to it under this Agreement, to the extent not cancelled, reduced or transferred by it under this Agreement. "FACILITY B1 LENDER" means: (a) any Original Facility B1 Lender; and (b) any bank, financial institution, trust, fund or other entity which has become a Facility B1 Lender in accordance with Clause 23 (Changes to the Lenders), which in each case has not ceased to be a Facility B1 Lender in accordance with this Agreement. "FACILITY B1 LOAN" means a loan made or to be made under Facility B1 or the principal amount outstanding for the time being of that loan. "FACILITY B2" means the term loan facility made available under this Agreement as described in paragraph (b) of Clause 2.1 (The Facilities). "FACILITY B2 COMMITMENT" means: (a) in relation to an Original Lender, the amount in euro set opposite its name under the heading "Facility B2 Commitment" in Part II of Schedule 1 (The Original Lenders) and the amount of any other Facility B2 Commitment transferred to it under this Agreement; and (b) in relation to any other Lender, the amount in euro of any Facility B2 Commitment transferred to it under this Agreement, to the extent not cancelled, reduced or transferred by it under this Agreement. "FACILITY B2 LENDER" means: (a) any Original Facility B2 Lender; and (b) any bank, financial institution, trust, fund or other entity which has become a Facility B2 Lender in accordance with Clause 23 (Changes to the Lenders), which in each case has not ceased to be a Facility B2 Lender in accordance with the terms of this Agreement. "FACILITY B2 LOAN" means a loan made or to be made under Facility B2 or the principal amount outstanding for the time being of that loan. "FACILITY OFFICE" means the office or offices notified by a Lender to the Agent in writing on or before the date it becomes a Lender (or, following that date, by not less than five Business Days' written notice) as the office or offices through which it will perform its obligations under this Agreement. "FEE LETTER" means any letter or letters dated on or about the date of this Agreement between, as the case may be, the Arranger and the Company and/or the Borrower; or the Agent and the - 7 - Company and/or the Borrower; or the Security Agent and the Company and/or the Borrower; setting out any of the fees referred to in Clause 11 (Fees). "FINANCE DOCUMENT" means this Agreement, each Accession Letter, the Commitment Letter, each Fee Letter, any Hedging Document, the Hedging Letter, the Intercreditor Agreement, each Security Document, the Escrow Agreement and any other document designated as such by the Agent and the Company. "FINANCE PARTY" means the Agent, the Arranger, a Lender or the Security Agent. "FINANCIAL INDEBTEDNESS" means any indebtedness for or in respect of: (a) moneys borrowed; (b) any amount raised by acceptance under any acceptance credit facility or dematerialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar debt instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which would, in accordance with the Applicable Accounting Principles, be treated as a finance or capital lease; (e) receivables sold or discounted (other than any receivables to the extent they are sold on a non-recourse basis and for these purposes, recourse will not include contractual damages for breach of warranty relating to the condition of the receivables sold); (f) any amount raised under any other transaction (including any forward sale or purchase agreement) having the commercial effect of a borrowing; (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price (and, when calculating the value of any derivative transaction, only the marked to market value shall be taken into account) for all purposes other than for the purposes of Clause 22.5 (Cross default) where only the relevant unpaid amount (if any) shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, standby or documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any credit for goods and services supplied to the Group raised in the ordinary course of trade outstanding for more than 150 days after its customary date of payment; and (j) the amount of any liability in respect of any guarantee for any of the items referred to in paragraphs (a) to (i) above. "FLEXSYS" means Flexsys Holding BV whose address is 51010 Zutphenseweg, NL-7418 AJ Deventer, The Netherlands, and whose company number at the Commercial Register is 38023104. - 8 - "FUNDS FLOW MEMORANDUM" means the funds flow memorandum in the Agreed Form containing details of the flow of funds on the Closing Date. "GAAP" means principles, standards and practices in the United States. "GERMAN OBLIGOR" means an Obligor incorporated in the Federal Republic of Germany. "GROUP" means the Company and its Subsidiaries other than any Excluded Company or Non-Recourse Subsidiary for the time being. For the avoidance of doubt, Flexsys does not fall with this definition. "GROUP STRUCTURE CHART" means the group structure chart in the Agreed Form. "GUARANTOR" means an Original Guarantor or an Additional Guarantor. "HAZARDOUS SUBSTANCE" means any waste, pollutant, contaminant or other substance (including any liquid, solid, gas, ion, living organism or noise) that may be harmful to human health or other life or the Environment or a nuisance to any person or that may make the use or ownership of any affected land or property more costly. "HEDGING BANK" means a Lender (or an Affiliate of a Lender) which has become a party to the Intercreditor Agreement as a Hedging Bank in accordance with the Intercreditor Agreement. "HEDGING DOCUMENTS" means the documents entered into between a member of the Group and a Hedging Bank for the purpose of implementing the hedging strategy required by the Hedging Letter. "HEDGING LETTER" means a letter dated on or about the date of this Agreement between the Arranger and the Company setting out the hedging strategy agreed in relation to the Facilities. "HOLDING ACCOUNT" means the interest bearing account of the Borrower with Citibank N.A. with number 11648292. "HOLDING COMPANY" means, in relation to a company, corporation or other legal entity, any other company, corporation or other legal entity in respect of which it is a Subsidiary. "INCREASED COSTS" has the meaning given to it in Clause 13.1 (Increased Costs). "INFORMATION MEMORANDUM" means the document in the form approved by the Company concerning the Group which, at the Company's request and on its behalf, will be prepared in relation to Syndication and distributed by the Arranger to selected financial institutions. "INFORMATION PACKAGE" means the Budget, the Business Plan, the Reports and the Information Memorandum. "INSURANCE PROCEEDS" has the meaning given to it in Clause 7.6 (Mandatory prepayment - Insurance Proceeds). "INTELLECTUAL PROPERTY" means all trade marks, service marks, trade names, domain names, logos, get-up, patents, inventions, registered and unregistered design rights, copyrights, topography rights, database rights, rights in confidential information and know-how, and any associated or similar rights anywhere in the world, which it now or in the future owns or (to the extent of its interest) in which it now or in the future has an interest (in each case whether - 9 - registered or unregistered and including any related licences and sub-licences of the same granted by it or to it, applications and rights to apply for the same). "INTERCOMPANY DEBT" means all present and future moneys, debts and liabilities due, owing or incurred by any Intercompany Borrower (as defined in the Intercreditor Agreement) to any Intercompany Lender (as defined in the Intercreditor Agreement) (in each case, whether alone or jointly, or jointly and severally, with any other person, whether actually or contingently and whether as principal, surety or otherwise) together with any related Additional Debt. "INTERCREDITOR AGREEMENT" means the intercreditor agreement entered into or to be entered into between the Agent, the Security Agent, the Hedging Banks and the Obligors in the Agreed Form. "INTEREST PERIOD" means, in relation to a Loan, each period determined in accordance with Clause 9 (Interest Periods) and, in relation to an Unpaid Sum, each period determined in accordance with Clause 8.3 (Default interest). "JOINT VENTURE" means any joint venture entity, whether a company, unincorporated firm, undertaking, joint venture, association, partnership or any other entity. "LENDER" means a Facility B1 Lender or a Facility B2 Lender. "LIABILITIES" of a Chargor means all present and future moneys, debts and liabilities due, owing or incurred by it to any Secured Party under or in connection with any Secured Document (in each case, whether alone or jointly, or jointly and severally, with any other person, whether actually or contingently and whether as principal, surety or otherwise). "LOAN" means a Facility B1 Loan or a Facility B2 Loan. "MAJORITY LENDERS" means, at any time, a Lender or Lenders: (a) whose share in the outstanding Loans and whose undrawn Commitments then aggregate more than 66.67 per cent. of the aggregate of all the outstanding Loans and the undrawn Commitments of all the Lenders; (b) if there is no Loan then outstanding, whose undrawn Commitments then aggregate more than 66.67 per cent. of the Total Commitments; or (c) if there is no Loan then outstanding and the Total Commitments have been reduced to zero, whose Commitments aggregated more than 66.67 per cent. of the Total Commitments immediately before the reduction. "MANDATORY COST" means the percentage rate per annum calculated by the Agent in accordance with Schedule 4 (Mandatory Cost formulae). "MARGIN" means 2.75 per cent. per annum subject to adjustment in accordance with Clause 8.5 (Adjustment of Margin). "MARGIN ADJUSTMENT DATE" has the meaning given to it in Clause 8.5 (Adjustment of Margin). "MARKET REPORT" means the report by CRA International Inc. in the Agreed Form. "MASTER OPERATING AGREEMENT" means the master operating agreement entered into between Monsanto Company and Solutia, Inc. dated 1 September 1997 as amended from time to time as described in further detail in the Due Diligence Report. - 10 - "MATERIAL ADVERSE EFFECT" means a material adverse effect on or material adverse change in: (a) ability of the Obligors, taken as a whole to perform and comply with their payment obligations under any Finance Document; or (b) the ability of any Obligor to perform and comply with the financial covenants under the Facility Agreement; or (c) the validity, legality or enforceability of any Finance Document. "MATERIAL SUBSIDIARY" means: (a) a Subsidiary of the Company listed in the lists of Material Subsidiaries provided to the Agent under Clause 4.1 (Initial conditions precedent); (b) a Subsidiary of the Company, the total assets, EBITDA or total revenues of which (unconsolidated where that Subsidiary itself has Subsidiaries) as at the date at which its latest audited financial statements were prepared or, as the case may be, for the financial period to which those financial statements relate account for 5 per cent. or more of the consolidated total assets, EBITDA or total revenues of the Group (including for these purposes any Excluded Company) (all as calculated by reference to the latest audited consolidated financial statements of the Group); (c) a Subsidiary of the Company which is a Holding Company of any Subsidiary in paragraph (b) above; or (d) a Subsidiary of the Company to which it has been transferred (whether in a single transaction or a series of transactions (whether related or not)) the whole or substantially the whole of the assets of a Subsidiary which immediately prior to such transaction(s) was a Material Subsidiary. For the purposes of this definition: (i) if a Subsidiary becomes a Material Subsidiary under paragraph (c) above, the Material Subsidiary by which the relevant transfer was made shall, subject to paragraph (b) above, cease to be a Material Subsidiary; and (ii) if a Subsidiary is acquired by the Company after the end of the financial period to which the latest audited consolidated financial statements of the Group relate, those financial statements shall be adjusted as if that Subsidiary had been shown in them by reference to its then latest audited financial statements until audited consolidated financial statements of the Group for the financial period in which the acquisition is made have been prepared. "MONTH" means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month, except that: (a) if the numerically corresponding day is not a Business Day, that period shall end on the next Business Day in that calendar month in which that period is to end if there is one, or if there is not, on the immediately preceding Business Day; and - 11 - (b) if there is no numerically corresponding day in the calendar month in which that period is to end, that period shall end on the last Business Day in that calendar month. The above rules will only apply to the last Month of any period. "NON-CONSENTING LENDER" has the meaning given to it in Clause 7.13 (Replacement of a Non-Consenting Lender or Non-Funding Lender). "NON-FUNDING LENDER" has the meaning given to it in Clause 7.13 (Replacement of a Non-Consenting Lender or Non-Funding Lender). "NON-RECOURSE SUBSIDIARY" means a Subsidiary of the Company which is designated in writing by the Company to the Facility Agent as a Non-Recourse Subsidiary and: (a) is a single purpose company whose sole business comprises the ownership, creation, development or exploitation of certain of its assets; and (b) the share capital or other ownership interests of which are organised such that liability for all financial and other obligations of that subsidiary are limited to that subsidiary and its assets and without any further recourse (including the absence of financial support, comfort or other assistance obligations), whether as a matter of law, regulation, contract or otherwise, to any other member of the Group other than (i) recourse falling within paragraph (q) of the definition of Permitted Security (ii) recourse falling within paragraph (n) of the definition of Permitted Guarantee or any (iii) obligations arising under a commercial contract otherwise permitted by the terms of this Agreement. "OBLIGOR" means the Company, the Borrower or a Guarantor. "ORIGINAL FACILITY B1 LENDER" means a Lender listed in Part II of Schedule 1 (The Original Lenders) as having a Facility B1 Commitment. "ORIGINAL FACILITY B2 LENDER" means a Lender listed in Part II of Schedule 1 (The Original Lenders) as having a Facility B2 Commitment. "ORIGINAL FINANCIAL STATEMENTS" means the unaudited consolidated financial statements of the Group for the financial year ended December 2005 filed by Solutia Inc. with the United States Securities and Exchange Commission on a Form 8-K on 19 April 2006, together with such statements for the period January to March 2006 filed by Solutia Inc. with the United States Securities and Exchange Commission on a Form 8-K on 30 May 2006. "ORIGINAL OBLIGOR" means the Borrower or an Original Guarantor. "PARTICIPATING MEMBER STATE" means any member state of the European Communities that adopts or has adopted the euro as its lawful currency in accordance with legislation of the European Community relating to Economic and Monetary Union. "PARTY" means a party to this Agreement. "PERFECTION REQUIREMENTS" means the making of the appropriate registrations, filings or notifications of the Security Documents as specifically contemplated by the Security Principles. "PERFECTION REQUIREMENTS LIST" means the list of Perfection Requirements set out in paragraph 2(e) of part 1 of Schedule 2 of this Agreement. - 12 - "PERMITTED ACQUISITION" means: (a) the acquisition of, or investment in, any share or interest in any Permitted Non-Recourse Subsidiary; (b) the acquisition by a member of the Group of any share or asset sold, leased, transferred or otherwise disposed of by another member of the Group in circumstances constituting a Permitted Disposal provided that the Security Agent, acting reasonably, is satisfied that the Finance Parties will enjoy the same or equivalent Security following completion of that acquisition; (c) an acquisition by way of merger on a solvent basis of any Obligor with any other Obligor provided that the Security Agent, acting reasonably, is satisfied that the Finance parties will enjoy the same or equivalent Security following completion of that acquisition; or (d) acquisitions or investments where the consideration (when aggregated with the consideration for each other acquisition or investment not otherwise permitted under paragraph (a) to (c) above) does not exceed (euro)5,000,000 in any financial year of the Group. "PERMITTED DISPOSAL" means the sale, lease, transfer or other disposal(s) in each case on arms' length terms, and, in the case of paragraphs (n) to (p), provided that the Facility Agent has received in writing a certification of the directors of the disposing company that any apportionment of disposal proceeds has been carried out on a fair value basis: (a) by any member of the Group in the ordinary course of business of the disposing entity; (b) as a result of any Permitted Security; (c) of assets to a Permitted Non-Recourse Subsidiary at a price not less than full market value; (d) of obsolete or redundant vehicles, plant and equipment and which, in the reasonable opinion of the member of the Group making the sale, transfer or disposal, are not required for the efficient operation of its business; (e) of assets in exchange for other assets comparable or superior as to type, value and quality; (f) of assets by a Obligor to another member of the Group provided that the Secured Parties will enjoy the same or equivalent Security over those assets; (g) of assets by a member of the Group which is not an Obligor to another member of the Group which is not an Obligor; (h) to another member of the Group as part of a Permitted Merger; (i) made with the prior written consent of the Majority Lenders; (j) of Cash for purposes not otherwise prohibited by this Agreement; (k) pursuant to a Permitted Sale and Leaseback; - 13 - (l) of all or any part of the shares in or assets of CP Films Vertriebs GmbH, provided that the Agent has received in writing a certification of the directors of Solutia Europe S.A./N.V. that all or any part of the shares in or assets of CP Films Vertriebs GmbH have been disposed of at fair market value at the time of conclusion of a legally binding contract in respect of the disposal of CP Films Vertriebs GmbH; (m) of Amcis; (n) of the company referred to in paragraph (a) of Schedule 8 (Disposals); (o) of the assets referred to in paragraph (b) of Schedule 8 (Disposals); (p) of the assets referred to in paragraph (c) of Schedule 8 (Disposals); or (q) of Cash Equivalent Investments: (i) for Cash; or (ii) in exchange for other Cash Equivalent Investments; (r) pursuant to any Permitted Merger; (w) where the higher of the market value and consideration receivable (when aggregated with the higher of the market value and/or consideration (as the case may be) receivable for any other sale, lease, transfer or other disposal, other than any permitted under paragraphs (a) to (r) above, does not exceed (euro)15,000,000 (or its equivalent in another currency or currencies). "PERMITTED FINANCIAL INDEBTEDNESS" means: (a) any Financial Indebtedness arising under any Finance Document; (b) any Financial Indebtedness arising under a Permitted Loan or a Permitted Guarantee; (c) any Financial Indebtedness arising under a Permitted Hedging Transaction; (d) any Financial Indebtedness incurred by a Permitted Non-Recourse Subsidiary; and (e) any Financial Indebtedness under finance or capital leases of vehicles, plant, equipment or computers, where the aggregate capital value of all the items so leased by members of the Group does not exceed (euro)2,500,000 or its equivalent at any time; (f) any Financial Indebtedness expressly permitted by the Majority Lenders; (g) any Financial Indebtedness arising under a Permitted Sale and Leaseback; (h) any Financial Indebtedness arising from factoring receivables on a recourse basis the aggregate amount of which does not exceed (euro)5,000,000 or its equivalent at any time; (i) any Financial Indebtedness arising under the Permitted Revolving Credit Facility; (j) any Financial Indebtedness under the intra-group loans set out in Schedule 7 of the Due Diligence Report on the terms as at the date of this Agreement or any refinancing of those loans where the principal amount of such loans cannot be increased and the terms of such loans cannot be on terms more onerous than the existing loans; - 14 - (k) any Financial Indebtedness arising from the honouring by a bank or other financial institution of a cheque, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business provided that such Financial Indebtedness is discharged within 3 Business Days of occurrence; or (l) any Financial Indebtedness not falling within paragraphs (a) to (k) above where the aggregate outstanding principal amount of which across the Group does not at any time exceed (euro)5,000,000 (or its equivalent in another currency or currencies). "PERMITTED GUARANTEE" means: (a) any guarantee arising under the Finance Documents; (b) any guarantee issued by an Obligor in respect of the Financial Indebtedness of another Obligor; (c) any guarantee issued by a member of the Group which is not an Obligor in respect of the Financial Indebtedness of another member of the Group which is not an Obligor; (d) any guarantee issued by a member of the Group which is not an Obligor in respect of the Financial Indebtedness of an Obligor; (e) any guarantee issued by a member of the Group in respect of the liabilities or obligations of a Permitted Non-Recourse Subsidiary; (f) any guarantee issued by a member of the Group on arm's length terms (including any counter-indemnity obligation) and in the ordinary course of its trading, not in respect of Financial Indebtedness; (g) any customary indemnity in relation to a Permitted Hedging Transaction; (h) in respect of a netting or set-off arrangement entered into by a member of the Group in the ordinary course of its banking arrangements for the purpose of netting debit and credit balances for members of the Group, provided that the arrangement does not permit credit balances of Obligors to be netted or set off against debit balances of members of the Group which are not Obligors and the arrangement does not give rise to Security or Quasi Security over the assets of Obligors in support of liabilities of members of the Group which are not Obligors; or (i) guarantees by Obligors in respect of Permitted Financial Indebtedness of other Obligors; (j) the endorsement of negotiable instruments in the ordinary course of trade; (k) the (euro)590,904 guarantee issued by the Company in favour of OVAM and any amendment or increase to the amount guaranteed as required by Belgian law; (l) any guarantee issued by an Obligor in relation to the Financial Indebtedness of a member of the Group which is not an Obligor provided that the aggregate principal amount guaranteed at any time does not, when aggregated with: (i) the amount of any loans outstanding at that time which are permitted under paragraph (g) of the definition of Permitted Loans; and - 15 - (ii) the amount of any shares issued at that time which are permitted under paragraph (b) of the definition of Permitted Share Transaction, (when aggregated with all amounts previously paid in respect of any such share issues), exceed (euro)5,000,000 (or its equivalent in another currency or currencies); (m) any guarantee not falling within paragraphs (a) to (l) above where that guarantee is an existing guarantee as set out in Part B of Schedule 7 of the Due Diligence Report on the terms as at the date of this Agreement or the replacement or amendment of such guarantee where (A) the principal amount of such guarantees (as amended or replaced) cannot be increased and (B) the terms of such guarantees cannot be on more onerous terms than the existing guarantees; (n) any guarantee not falling within paragraphs (a) to (m) above where the aggregate liability (whether actual or contingent) of members of the Group under all such guarantees does not, when aggregated with the aggregate principal amount of any loans outstanding at that time which are permitted under paragraph (j) of the definition of Permitted Loan, at any time exceed (euro)5,000,000 (or its equivalent in another currency or currencies); or (o) any guarantee given in respect of the obligations of a Non-Recourse Subsidiary given by its direct Holding Company provided that the recourse of the beneficiary in respect of that guarantee (by contract, law or otherwise) is limited to the shares in that Non-Recourse Subsidiary. "PERMITTED HEDGING TRANSACTION" means: (a) any derivative transaction required by the Hedging Letter and documented by a Hedging Document and any replacement or extension (on similar terms and up to the maximum amount of the Financial Indebtedness under the Finance Documents); (b) any unsecured derivative transaction to hedge actual or projected interest or forward exposures arising in the ordinary course of business of a member of the Group and not for speculative purposes; or (c) existing unsecured currency hedging on the terms as at, and entered into prior to, the date hereof. "PERMITTED LOAN" means: (a) any trade credit extended by any member of the Group to its customers in the ordinary course of its trading activities requiring payment within 150 days; (b) a loan to a Restricted Person provided that: (i) at the time such loan is made the aggregate of: (A) the principal available amount of the Permitted Revolving Credit Facility (if any) at the date it was made available; and (B) the daily average Cash on the Company's balance sheet over the past 30 days prior to the date of making such loan, is equal to or greater than (euro)25,000,000; - 16 - (ii) the principal amount of all such loans does not exceed, when aggregated with all aggregate dividends referred to in paragraph (b)(i) of the definition of Permitted Payment an amount equal to the aggregate of (A) the principal available amount of the Permitted Revolving Credit Facility (if any) at the date it was made available, (B) (euro)10,000,000 (or its equivalent in another currency or currencies) and (C) Retained Cash (to the extent it has not been applied or committed to be applied in accordance with this Agreement for another purpose) provided that: (iii) any loan funded to the extent set out in paragraph (b)(ii)(B) above is made to a Restricted Person to which the circumstances contemplated in Clauses 22.6 (Insolvency) - 22.8 (Creditors' process) do not apply. (c) a loan made by an Obligor to another Obligor; (d) a loan made by a member of the Group which is not an Obligor to another member of the Group which is not an Obligor; (e) a loan made by a member of the Group which is not an Obligor to an Obligor; (f) a loan made to a Permitted Non-Recourse Subsidiary; (g) a loan made by an Obligor to another member of the Group which is not an Obligor provided that the aggregate principal amount of all such loans outstanding at any time does not, when aggregated with: (i) the amount of any guarantees outstanding at that time which are permitted under paragraph (i) of the definition of Permitted Guarantees; and (ii) the amount of any shares issued at that time which are permitted under paragraph (b) of the definition of Permitted Share Transaction (when aggregated with all amounts previously paid in respect of any such share issues), exceed (euro)5,000,000 (or its equivalent in another currency or currencies); or (h) any loan as set out in Part A of Schedule 7 of the Due Diligence Report in the form as at the date of this Agreement and any amendment or refinancing of such loan, provided that the principal amount of such loan is not increased and any amendment to the terms of the loan is no less favourable to the creditor. (i) a loan from a member of the Group to its employees provided that the aggregate amount of loans to directors or employees of members of the Group does not exceed (euro)10,000 at any time; (j) any loan not falling within paragraphs (a) to (i) above the aggregate principal amount of which at any time does not, when aggregated with the aggregate principal amount of the Financial Indebtedness under any such loans and the aggregate liability (whether actual or contingent) of any guarantees at that time which are permitted under paragraph (m)(ii) of the definition of Permitted Guarantee, exceed (euro) 5,000,000 (or its equivalent in another currency or currencies). - 17 - "PERMITTED MERGER" means: (a) an acquisition by way of merger provided that the acquisition is a Permitted Acquisition; or (b) an amalgamation, demerger, merger, consolidation or corporate reconstruction on a solvent basis of a member of the Group (not involving the Company or the Borrower) where all of the business and assets of that member remain within the Group and, if that member of the Group was an Obligor immediately prior to that amalgamation, demerger, merger, consolidation or corporate reconstruction, all of the business and assets of that member are retained by one or more other Obligors, and: (A) at that time no Event of Default has occurred and is continuing or will arise as a result of such amalgamation, demerger, merger, consolidation or corporate reconstruction; (B) the surviving entity of that amalgamation, demerger, merger, consolidation or corporate reconstruction is liable for the obligations of the member of the Group is has merged with; (C) the surviving entity of that amalgamation, demerger, merger, consolidation or corporate reconstruction is incorporated in the same jurisdiction as that member of the Group; and (D) the Agent and the Security Agent are given 30 Business Days' notice by the Company of that proposed amalgamation, demerger, merger, consolidation or corporate reconstruction and the Security Agent, acting reasonably, is satisfied that the Finance Parties will enjoy the same or equivalent Security over the same assets and over that member of the Group and the shares in it (or the shares of the surviving entity). (c) Any other amalgamation, demerger, merger, consolidation or corporate reconstruction approved by the Majority Lenders. "PERMITTED NON-RECOURSE SUBSIDIARY" means a Non-Recourse Subsidiary: (a) which is incorporated or established after the date of this Agreement; (b) where no Default is continuing on the date of the acquisition of, or investment in, or transfer or loan to, or guarantee, Security or Quasi Security for the obligations of, the Non-Recourse Subsidiary or would occur as a result of the acquisition of or investment in, or transfer or loan to, or guarantee, Security or Quasi Security for the obligations of, a Non- Recourse Subsidiary; and (c) the amount invested in or paid to acquire any share or interest in, or value of assets transferred to, or lent to or the actual or contingent liability under any guarantee, Security or Quasi Security, does not exceed in aggregate (euro)2,500,000 (or its equivalent in another currency or currencies). - 18 - "PERMITTED PAYMENT" means: (a) approximately $9,000,000 (or its equivalent in another currency or currencies) payment of an intercompany receivable by the Company to Solutia Inc. immediately after the Closing Date; or (b) any dividend: (i) by the Company to its shareholders as at the date of this Agreement in an amount not exceeding, when aggregated with any loans referred to in paragraph (b) of the definition of Permitted Loan, the maximum amount set out in that paragraph and subject to the conditions set out in paragraph (b)(i) and (iii) of the definition of Permitted Loan; (ii) to Solutia Inc. in its capacity as a minority shareholder in certain Subsidiaries of the Company to permit conformity with Belgian law in an amount not exceeding, when aggregated with all other such dividends, (euro)500,000 (or its equivalent in another currency or currencies) in any financial year of the Company; (c) any payment, investment, dividend or distribution of any kind expressly permitted by the Majority Lenders; (d) any payment in the ordinary course of trading in relation to licence fees for the use of Intellectual Property. "PERMITTED REVOLVING CREDIT FACILITY" means a revolving credit facility to be made available to the Borrower under the Finance Documents which satisfies all of the following terms and has been approved by the DIP Lenders or any other creditors in respect of Financial Indebtedness of any Restricted Person (to the extent required by the terms of any financing in relation thereto): (a) it is provided to the Obligors by a Finance Party or a bank or financial institution which has a rating for its long term unsecured and non-credit enhanced debt obligations of BBB or higher by Standard & Poor's or Fitch or Baa or higher by Moody's or a comparable rating from an internationally recognised credit rating agency (the "RCF LENDER"); (b) the aggregate principal amount of the commitments of that facility do not at any time exceed (euro)20,000,000, although the facility may be drawn in other currencies as agreed between the Company and the RCF Lender; (c) the termination date of the facility is no earlier than the Termination Date; (d) the margin is no greater than 2.25 per cent. per annum; (e) the commitment fees shall not exceed an annual rate equal to 50 per cent. of the margin of the facility; (f) the facility ranks pari passu as to payments and security with the Facility; (g) the facility must be paid down to zero (net of any Cash and Cash Equivalent Investments held by a member of the Group) for a period of 5 Business Days once in each financial year of the Company; and - 19 - (h) the facility is documented within this Agreement in accordance with usual market practice. "PERMITTED SALE AND LEASEBACK" means the sale and leaseback of the real estate assets at Rue Laid Burniat 3, 1348, Ottignies, Louvain-la-Neuve, Belgium. "PERMITTED SECURITY" means: (a) any Security or Quasi Security created pursuant to any Finance Document; (b) any netting or set-off arrangement entered into under a Permitted Hedging Transaction where the obligations of the parties are calculated by reference to net exposure under that Permitted Hedging Transaction; (c) any Security or Quasi Security over or affecting any asset acquired by a member of the Group after the date of this Agreement, if: (i) the Security or Quasi Security was not created in contemplation of the acquisition of that asset by a member of the Group; (ii) the principal amount secured has not been increased in contemplation of or since the acquisition of that asset by a member of the Group; and (iii) the Security or Quasi Security is removed or discharged within six Months of the date of acquisition of such asset; (d) any netting or set-off arrangement entered into by a member of the Group in the ordinary course of its banking arrangements for the purpose of netting debit and credit balances of members of the Group, provided that the arrangement does not permit credit balances of Obligors to be netted or set off against debit balances of members of the Group which are not Obligors and the arrangement does not give rise to other Security or Quasi Security over the assets of Obligors in support of liabilities of members of the Group which are not Obligors; (e) any Quasi Security arising as a result of a sale, transfer or other disposal which is a Permitted Disposal; (f) any lien (or in relation to standard terms and conditions of any bank in Belgium or Germany, pledge) arising by operation of law or any lien or retention of title arrangement arising by a contract having an equivalent effect (including those arising under the standard terms and conditions of any bank with which any member of the Group is permitted to have accounts under this Agreement) and in the ordinary course of business and not as a result of any default or omission by any member of the Group unless being contested in good faith and adequate reserves have been set aside for payment thereof in accordance with GAAP; (g) any Security or Quasi Security entered into in connection with the Euro Notes provided such Security or Quasi Security is removed or discharged on the Closing Date; (h) any Security or Quasi Security: - 20 - (i) created after the commencement of legal proceedings with a view to preserving the status quo between the litigants pending the outcome of those proceedings, provided that such Security or Quasi Security does not secure Financial Indebtedness exceeding in aggregate (euro)1,000,000 (or its equivalent in another currency or currencies) at any time and is released forthwith upon final determination of such litigation; or (ii) arising pursuant to an order of attachment, distraint, garnishee or injunction restraining disposal of assets or similar legal process arising in connection with court proceedings being contested by the relevant member of the Group in good faith, provided that, in the case of both sub-paragraphs (i)(i) and (i)(ii), such Security or Quasi Security shall be created or arise solely pursuant to a legal obligation or requirement; (i) any Security or Quasi Security created with the prior written consent of the Majority Lenders; (j) any Security or Quasi Security over goods, documents of title to goods and related documents and insurances and their proceeds to secure liabilities of any member of the Group in respect of a letter of credit or other similar instrument issued for all or part of the purchase price and costs of shipment, insurance and storage of goods acquired by any member of the Group in the ordinary course of trading or business; (k) any Security or Quasi Security securing the permitted refinancing of any Financial Indebtedness allowed to be secured in accordance with paragraphs (a) and (c) above where the principal amount secured has not been increased above the then outstanding amount of Financial Indebtedness refinanced; (l) any lien for taxes, assessments and governmental charges with respect of which adequate reserves have been set aside for the payment thereof in accordance with GAAP and with respect to which (i) such lien for taxes is not more than 30 days overdue, or (ii) if such lien is more than 30 days overdue, it is being contested in good faith and adequate reserves have been set aside for the payment thereof in accordance with GAAP; (m) easements, zoning restrictions and similar encumbrances on real property and minor irregularities in the title thereto that do not (i) secure obligations for the payment of money or (ii) materially impair the value of such property or its use by any member of the Group in the ordinary course of business; (n) any Security or Quasi Security arising under any retention of title, hire purchase or conditional sale arrangement or arrangements having similar effect in respect of goods supplied to a member of the Group in the ordinary course of business and not as a result of any default or omission by any member of the Group; (o) any Quasi Security arising as a result of any factoring of receivables permitted under paragraph (h) of the definition of Permitted Financial Indebtedness; - 21 - (p) any Security or Quasi Security created or subsisting to secure any obligations incurred in order to comply with the requirements of Section 8a of the German Partial Retirement Act (Altersteilzeitgesetz) and/or Section 7d of the German Sozialgesetzbuch IV; (q) any Security created over the shares in a Non-Recourse Subsidiary; and (r) any Security or Quasi Security securing indebtedness the principal amount of which (when aggregated with the principal amount of any other indebtedness which has the benefit of Security or Quasi Security given by any member of the Group other than any permitted under paragraphs (a) to (q) above) does not at any time exceed (euro)1,500,000 (or its equivalent in another currency or currencies). "PERMITTED SHARE TRANSACTION" means: (a) the reduction by the Company or any of its Subsidiaries of its share capital by way of incorporating previous losses or any capital increase by the Company or any of its subsidiaries by way of an incorporation of reserves with or without the issuance of new shares provided that in each case (i) there is no impact on cash available to such person as a result thereof, (ii) such reduction does not have a prejudicial effect on the Security granted pursuant to the Security Documents, (iii) prior written notice is given to the Agent; and (ii) there is no resulting or outstanding Event of Default; or (b) the issue of ordinary and fully paid up shares, provided (in the case of a Subsidiary of the Company) those shares are: (i) the subject of Security in favour of the Secured Parties on terms pursuant to the Security Documents; and (ii) where such shares are issued by a member of the Group which is not an Obligor to an Obligor, the aggregate principal amount paid in respect of such shares, does not when aggregated with: (A) all amounts previously paid in respect of any such share issues; and (B) the amount of any loans outstanding at that time which are permitted under paragraph (g) of the definition of Permitted Loans; and (C) the amount of any guarantees outstanding at that time which are permitted under paragraph (i) of the definition of Permitted Guarantees exceed (euro)2,500,000 (or its equivalent in another currency or currencies); (c) any issue of Shares authorised by the Majority Lenders in writing. "PHARMA BUSINESS" means Solutia, Inc.'s pharmaceutical services business, owned and operated primarily by Amcis, which provides leading pharmaceutical companies with pharmaceutical development expertise, including process research and manufacturing services, which allows pharmaceutical companies to bridge the gap from discovery of new drugs to the manufacturing of those drugs. "PREPAYMENT ACCOUNT" means the interest bearing account of the Borrower with Citibank N.A. with account number 11648306. - 22 - "PREPAYMENT DATE" has the meaning given to it in Clause 7.9 (Prepayment Account). "QUALIFYING LENDER" has the meaning given to it in Clause 12 (Tax gross-up and indemnities). "QUASI SECURITY" means a transaction under which any member of the Group will: (a) sell, transfer or otherwise dispose of any of its assets on terms whereby they are or may be leased to or re-acquired by any other member of the Group; (b) sell, transfer or otherwise dispose of any of its receivables on recourse terms; (c) enter into any arrangement under which money or the benefit of a bank or other account may be applied, set-off or made subject to a combination of accounts; or (d) enter into any other preferential arrangement having a similar effect, in circumstances where the arrangement or transaction is entered into primarily as a method of raising Financial Indebtedness or of financing the acquisition of an asset. "QUOTATION DAY" means, in relation to any period for which an interest rate is to be determined two TARGET Days before the first day of that period unless market practice differs in the Relevant Interbank Market for a currency, in which case the Quotation Day for that currency will be determined by the Agent in accordance with market practice in the Relevant Interbank Market (and if quotations for that currency and period would normally be given by leading banks in the Relevant Interbank Market on more than one day, the Quotation Day will be the last of those days). "RECEIPT DATE" has the meaning given to it in Clause 7.9 (Prepayment Account). "REFERENCE BANKS" means the principal office of Citibank, N.A., or such other banks as may be appointed by the Agent in consultation with the Company. "REINVESTMENT PREPAYMENT DATE" has the meaning given to it in Clause 7.8 (Holding Account). "REINVESTMENT RECEIPT DATE" has the meaning given to it in Clause 7.8 (Holding Account). "RELATED FUND" means, in relation to a trust, fund or other entity, another trust, fund or other entity which is: (a) regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets; and (b) has the same fund manager or asset manager or is owned by the same person as the first trust, fund or other entity. "RELEVANT INTERBANK MARKET" means the European interbank market. "RELEVANT JURISDICTION" means, in relation to an Obligor: (a) its jurisdiction of incorporation; and (b) the jurisdiction whose laws govern any of the Security Documents entered into by it. "RELEVANT PERIOD" has the meaning given to it in Clause 20.4 (Definitions). "REPEATING REPRESENTATIONS" means each of the representations set out in Clause 18.1 (Status), Clause 18.2 (Binding obligations), Clause 18.4 (Power and authority) to Clause 18.6 - 23 - (Governing law and enforcement), Clause 18.12 (Financial statements) to Clause 18.18 (Group structure), Clause 18.20 (Shares) and Clause 18.21(a) and (b) (Intellectual property). "REPORTS" means the documents listed in paragraph 5 of Part 1 of Schedule 2 (Conditions Precedent). "RESERVATIONS" means any general principles of law limiting the obligations of any Obligor which are specifically referred to in any legal opinion delivered pursuant to Clause 4 (Conditions of Utilisation) or Clause 24 (Changes to the Obligors). "RESTRICTED PERSON" means Solutia Inc. and any Subsidiary of Solutia Inc. which is not a member of the Group. "RETAINED CASH" means any Excess Cash Flow that the Company is not required to prepay under Clause 7.7 (Mandatory Prepayment - Excess Cash Flow) in relation to any financial year of the Company until it has been applied or committed to be applied in any of the way contemplated in paragraphs (a) to (f) below: (a) in satisfaction of the purchase price of a Permitted Acquisition; (b) in payment of Capital Expenditure under Clause 20.2 (Capital Expenditure); (c) in or towards a Permitted Payment; (d) in or towards a Permitted Non-Recourse Subsidiary; (e) in making a loan falling within paragraph (b) of the definition of Permitted Loan; or (f) any other payment permitted to be made under this Agreement from Retained Cash. "SALE" has the meaning given to it in Clause 7.2 (Sale). "SCREEN RATE" means the percentage rate per annum determined by the Banking Federation of the European Union for the relevant period, displayed on the appropriate page of the Telerate screen. If the agreed page is replaced or service ceases to be available, the Agent may specify another page or service displaying the appropriate rate after consultation with the Company and the Lenders. "SECURED DOCUMENTS" means the Finance Documents and the Hedging Documents. "SECURED PARTY" means a Finance Party or a Hedging Bank. "SECURITY" means a mortgage, charge, pledge, lien or other security interest securing any obligation of any person or any other security interest. "SECURITY DOCUMENTS" means: (a) the documents listed in paragraph 2 of Part I and paragraph 13 of Part II of Schedule 2 (Conditions precedent); and (b) any other security document that may at any time be given as security for any of the Liabilities pursuant to or in connection with any Secured Document. "SECURITY PRINCIPLES" means the principles in the Agreed Form set out in Schedule 9 (Security Principles). - 24 - "SECURITY PROPERTY" has the meaning given to it in the Intercreditor Agreement. "SELECTION NOTICE" means a notice substantially in the form set out in Part II of Schedule 3 (Requests) given in accordance with Clause 9 (Interest Periods) in relation to a Facility. "SOLUTIA INC." means Solutia Inc. incorporated in Delaware with Federal Employer ID Number 43-1891797 and whose registered office is at 575 Maryville Centre Drive, P.O. Box 66760, St. Louis, MO 63166-7670, USA as such company exists at the date of this Agreement. "SPECIFIED TIME" means a time determined in accordance with Schedule 9 (Timetables). "SUBSIDIARY" means in relation to any company, corporation or other legal entity, (a "HOLDING COMPANY"), a company, corporation or other legal entity: (a) which is controlled, directly or indirectly, by the holding company; (b) more than half the issued share capital of which is beneficially owned, directly or indirectly, by the holding company; or (c) which is a subsidiary of another Subsidiary of the holding company, and, for this purpose, a company or corporation shall be treated as being controlled by another if that other company or corporation is able to determine the composition of the majority of its board of directors or equivalent body. For the avoidance of doubt Flexsys does not fall within this definition. "SYNDICATION" means general syndication of the Facilities. "SYNDICATION DATE" means the earlier of: (a) the date 3 months after the later of the date of the Facility Agreement and the date of commencement of syndication which will be commenced as soon as possible and no later than the Closing Date; and (b) the date (as determined by the Arranger and notified to the Company) on which Syndication has been completed and the additional syndicate members have become bound by this Agreement. "TARGET" means Trans-European Automated Real-time Gross Settlement Express Transfer payment system. "TARGET DAY" means any day on which TARGET is open for the settlement of payments in euro. "TAX" means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any penalty or interest payable in connection with any failure to pay or any delay in paying any of the same). "TAXES ACT" means the Income and Corporation Taxes Act 1988. "TAX PAYMENT" has the meaning given to it in Clause 12.1 (Definitions). "TAX STATUS CERTIFICATE" means a certificate substantially in the form set out in Schedule 5 Part II (Form of Tax Status Certificate). - 25 - "TERMINATION DATE" means the date which is 5 years after the Closing Date. "TOTAL COMMITMENTS" means the aggregate of the Total Facility B1 Commitments and the Total Facility B2 Commitments, being (euro)200,000,000 at the date of this Agreement. "TOTAL FACILITY B1 COMMITMENTS" means the aggregate of the Facility B1 Commitments, being (euro)160,000,000 at the date of this Agreement. "TOTAL FACILITY B2 COMMITMENTS" means the aggregate of the Facility B2 Commitments, being (euro)40,000,000 at the date of this Agreement. "TRANSFER CERTIFICATE" means a certificate substantially in the form set out in Schedule 5 Part I (Form of Transfer Certificate) or any other form agreed between the Agent and the Company. "TRANSFER DATE" means, in relation to a transfer, the later of: (a) the proposed Transfer Date specified in the Transfer Certificate; and (b) the date on which the Agent executes the Transfer Certificate. "UNPAID SUM" means any sum due and payable but unpaid by an Obligor under the Finance Documents. "UTILISATION" means a Loan. "UTILISATION DATE" means the date on which a Utilisation is, or is to be, made. "UTILISATION REQUEST" means a notice substantially in the form set out in Part I of Schedule 3 (Requests). "VAT" means value added tax as provided for in the Value Added Tax Act 1994 and any other tax of a similar nature. 1.2 CONSTRUCTION (a) Unless a contrary indication appears, any reference in this Agreement to: (i) the "AGENT", the "ARRANGER", any "FINANCE PARTY", the "HEDGING BANK", any "LENDER", any "OBLIGOR", any "PARTY" or the "SECURITY AGENT" shall be construed so as to include its successors in title, permitted assigns and permitted transferees; (ii) "ASSETS" includes present and future properties, revenues and rights of every description; (iii) "DOLLARS" means the lawful currency for the time being of the United States of America. (iv) "GUARANTEE" means any guarantee, letter of credit, bond, indemnity or similar assurance against loss, or any obligation, direct or indirect, actual or contingent, to purchase or assume any indebtedness of any person or to make an investment in or loan to any person or to purchase assets of any person where, in each case, such obligation is assumed in order to maintain or assist the ability of such person to meet its indebtedness; (v) a "SECURED DOCUMENT" or any other agreement or instrument is a reference to that Secured Document or other agreement or instrument as amended, novated, supplemented, extended, restated (however fundamentally and whether or not more - 26 - onerous) or replaced and includes any change in the purpose of, any extension of or any increase in any facility or the addition of any new facility under that Secured Document or other agreement or instrument; (vi) "INDEBTEDNESS" includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money, whether present or future, actual or contingent; (vii) a "PERSON" includes any person, firm, company, corporation, government, state or agency of a state or any association, trust or partnership (whether or not having separate legal personality) or two or more of the foregoing; (viii) a "REGULATION" includes any regulation, rule, official directive, request or guideline (whether or not having the force of law but, if not having force of law, one that is customarily complied with in the relevant jurisdiction of any governmental, intergovernmental or supranational body, agency, department or regulatory, self-regulatory or other authority or organisation; (ix) "SHARES" or "SHARE CAPITAL" includes equivalent ownership interests (and "SHAREHOLDER" and similar expressions shall be construed accordingly); (x) a provision of law is a reference to that provision as amended or re-enacted; and (xi) a time of day is a reference to London time. (b) Section, Clause and Schedule headings are for ease of reference only. (c) Unless a contrary indication appears, a term used in any other Finance Document or in any notice given under or in connection with any Finance Document has the same meaning in that Finance Document or notice as in this Agreement. (d) A Default or an Event of Default is "CONTINUING" if it has not been remedied or waived. 1.3 THIRD PARTY RIGHTS A person who is not a Party has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or to enjoy the benefit of any term of this Agreement. 1.4 INTERCREDITOR AGREEMENT This Agreement is subject to the Intercreditor Agreement. In the event of any inconsistency between this Agreement and the Intercreditor Agreement, the Intercreditor Agreement shall prevail. - 27 - SECTION 2 THE FACILITIES 2. THE FACILITIES 2.1 THE FACILITIES Subject to the terms of this Agreement: (a) the Lenders make available to the Borrower a term loan facility in an aggregate amount equal to the Facility B1 Commitments; and (b) the Lenders make available to the Borrower a term loan facility in an aggregate amount equal to the Facility B2 Commitments. 2.2 FINANCE PARTIES' RIGHTS AND OBLIGATIONS (a) The obligations of each Finance Party under the Finance Documents are several. Failure by a Finance Party to perform its obligations under the Finance Documents does not affect the obligations of any other Party under the Finance Documents. No Finance Party is responsible for the obligations of any other Finance Party under the Finance Documents. (b) The rights of each Finance Party under or in connection with the Finance Documents are separate and independent rights and any debt arising under the Finance Documents to a Finance Party from an Obligor shall be a separate and independent debt. (c) A Finance Party may, except as otherwise stated in the Finance Documents, separately enforce its rights under the Finance Documents. 2.3 OBLIGORS' AGENT (a) Each Obligor (other than the Company) irrevocably appoints the Company to act on its behalf as its agent in relation to the Finance Documents and irrevocably authorises: (i) the Company on its behalf to supply all information concerning itself contemplated by this Agreement to the Finance Parties and to give and receive all notices, consents and instructions (including Utilisation Requests), to agree, accept and execute on its behalf all documents in connection with the Finance Documents (including amendments and variations of and consents under any Finance Document) and to execute any new Finance Document and to take such other action as may be necessary or desirable under or in connection with the Finance Documents; and (ii) each Finance Party and each Hedging Bank to give any notice, demand or other communication to that Obligor pursuant to the Finance Documents to the Company. (b) Each Obligor (other than the Company) confirms that: (i) it will be bound by any action taken by the Company under or in connection with the Finance Document; and (ii) each Finance Party and each Hedging Bank may rely on any action purported to be taken by the Company on behalf of that Obligor. - 28 - 2.4 ACTS OF THE COMPANY (a) The respective liabilities of each of the Obligors under the Finance Documents shall not be in any way affected by: (i) any actual or purported irregularity in any act done, or failure to act, by the Company; (ii) the Company acting (or purporting to act) in any respect outside any authority conferred upon it by any Obligor; or (iii) any actual or purported failure by, or inability of, the Company to inform any Obligor of receipt by it of any notification under the Finance Documents. (b) In the event of any conflict between any notices or other communications of the Company and any other Obligor, those of the Company shall prevail. 3. PURPOSE 3.1 PURPOSE (a) All amounts borrowed under the Facilities shall be applied (directly or indirectly) towards refinancing the Euro Notes together with any related costs and fees, in each case in accordance with the Funds Flow Memorandum (and the Borrower irrevocably authorises and directs the Agent to make the payments to the relevant recipients on its behalf as described in the Funds Flow Memorandum). (b) No amount borrowed under the Facilities shall be applied in any manner that may be illegal or contravene any applicable law or regulation in any jurisdiction concerning financial assistance by a company for the acquisition of or subscription for shares or concerning the protection of shareholders' capital. 3.2 MONITORING No Finance Party is bound to monitor or verify the application of any amount borrowed pursuant to this Agreement. 4. CONDITIONS OF UTILISATION 4.1 INITIAL CONDITIONS PRECEDENT The obligations of each Finance Party to the Borrower under the Finance Documents are subject to the condition precedent that the Agent has received all of the documents and other evidence listed in Part I of Schedule 2 (Conditions precedent) in the Agreed Form no later than midday one Business Day prior to the first proposed Utilisation Date. The Agent shall notify the Company and the Lenders promptly upon being so satisfied. 4.2 FURTHER CONDITIONS PRECEDENT The Lenders will only be obliged to comply with Clause 5.4 (Lenders' participation) if on the date of the Utilisation Request and on the proposed Utilisation Date: (a) no Default is continuing or would result from the proposed Loan; and (b) the representations and warranties set out in Clause 18 (Representations) which are made or deemed to be made in accordance with Clause 18.27 (Times when representations made) are true. - 29 - 4.3 MAXIMUM NUMBER OF UTILISATIONS The Borrower may not deliver a Utilisation Request if as a result of the proposed Loan more than 1 Facility B1 Loan and 1 Facility B2 Loan would be outstanding. - 30 - SECTION 3 UTILISATION 5. UTILISATION 5.1 DELIVERY OF A UTILISATION REQUEST The Borrower may utilise a Facility by delivery to the Agent of a duly completed Utilisation Request not later than the Specified Time. 5.2 COMPLETION OF A UTILISATION REQUEST (a) Each Utilisation Request for a Loan is irrevocable and will not be regarded as having been duly completed unless: (i) it specifies that it is for a Loan; (ii) it identifies the Facility to be utilised; (iii) the proposed Utilisation Date is a Business Day within the Availability Period; (iv) the currency and amount of the Loan comply with Clause 5.3 (Currency and amount); (v) the proposed Interest Period complies with Clause 9 (Interest Periods); and (vi) it specifies the account and bank (which must be in the principal financial centre of the country of the currency of the Utilisation or, in the case of euro, the principal financial centre of a Participating Member State in which banks are open for general business on that day or London) to which the proceeds of the Loan are to be credited. (b) Only one Loan may be requested in each Utilisation Request. 5.3 CURRENCY AND AMOUNT (a) The currency specified in a Utilisation Request must be euro. 5.4 LENDERS' PARTICIPATION (a) If the conditions set out in this Agreement have been met, each Lender participating in a Facility shall make its participation in each Loan under that Facility available by the Utilisation Date through its Facility Office. (b) The amount of each Lender's participation in each Loan will be equal to the proportion borne by its Available Commitment to the Available Facility immediately prior to making the Loan. - 31 - SECTION 4 REPAYMENT, PREPAYMENT AND CANCELLATION 6. REPAYMENT (a) The Borrower shall repay each Loan on the Termination Date. (b) The Borrower may not reborrow any part of the Facility which is repaid. 7. PREPAYMENT AND CANCELLATION 7.1 ILLEGALITY If it becomes unlawful in any applicable jurisdiction for a Lender to perform any of its obligations as contemplated by this Agreement or to fund or maintain its participation in any Loan: (a) that Lender shall promptly notify the Agent upon becoming aware of that event; (b) upon the Agent notifying the Borrower the Commitment of that Lender will be immediately cancelled; and (c) the Borrower shall repay that Lender's participation in the Loans on the last day of the Interest Period for each Utilisation occurring after the Agent has notified the Borrower or, if earlier, the date specified by the Lender in the notice delivered to the Agent (being no earlier than the last day of any applicable grace period permitted by law). 7.2 SALE (a) In this Clause 7.2 "SALE" means a disposal of all or substantially all of the assets of the Group (whether in a single transaction or a series of related transactions). (b) If a Sale occurs: (i) the Borrower shall promptly notify the Agent upon becoming aware of that event; (ii) a Lender shall not be obliged to fund a Loan; and (iii) the Facilities shall immediately be cancelled and all outstanding Loans, together with accrued interest, and all other amounts accrued under the Finance Documents shall become immediately due and payable. 7.3 MANDATORY CANCELLATION Any Commitment which is not utilised on the earlier of: (i) the final day of the Availability Period; (ii) the close of business on the date of the first Utilisation; will be immediately and automatically cancelled. 7.4 VOLUNTARY CANCELLATION (a) The Borrower may, if it gives the Agent not less than 5 Business Days' (or such shorter period as the Majority Lenders may agree) prior notice, cancel the whole or any part (being a minimum amount of (pound)5,000,000) of an Available Facility. Any cancellation under this Clause 7.4 shall reduce the Commitment of each Lender rateably under that Facility. - 32 - 7.5 MANDATORY PREPAYMENT - NET SALE PROCEEDS (a) In this Clause 7.5: "NET SALE PROCEEDS" means the cash or cash equivalent proceeds (including but not limited to, when received, the cash or cash equivalent proceeds of any deferred consideration, whether by way of adjustment to the purchase price or otherwise and any amount received in consideration of the assumption of any debt) received by a member of the Group in connection with the sale, transfer or other disposal by any member of the Group of an asset after deducting: (i) fees, transaction costs and any reserves and other sums in each case required to be set aside under the contractual terms of the applicable sale and purchase agreement by way of escrow or segregation or otherwise for the sole purpose to cover the warranty claims properly incurred in connection with that sale, transfer or disposal (provided that to the extent such reserves and other sums are no longer required to be set aside, such amounts shall at such time be designated Net Sales Proceeds); and (ii) taxes paid or reasonably estimated by the Borrower to be payable (as certified by the Borrower to the Agent) as a result of that sale, transfer or disposal. In the event of any sale, transfer or other disposal by any member of the Group of an asset where such asset is not wholly owned, legally and beneficially, by such member of the Group, the apportionment of Net Sale Proceeds between the legal and beneficial owners of such asset shall be determined by the directors of the Borrower on a fair value basis and the Borrower shall provide a certificate signed by two directors to the Agent confirming its determination of such apportionment. "IMMEDIATE PREPAYMENT PROCEEDS" means Net Sale Proceeds which relate to disposals referred to in paragraphs (l), (m), (n), (o) and (p) of the definition of Permitted Disposal to the extent not excluded by virtue of paragraph (c) of Clause 7.5 (Mandatory Prepayment - Net Sale Proceeds). "PERMITTED DISPOSAL PROCEEDS" means any Net Sale Proceeds which relate to the disposals referred to in paragraphs (a), (b), (e), (f), (g), (h), (j), (q) and (r) of the definition of Permitted Disposals. "RELEVANT PROCEEDS" means Net Sale Proceeds other than Immediate Prepayment Proceeds and Permitted Disposal Proceeds. (b) The Company shall ensure that any Net Sale Proceeds are paid into the Prepayment Account for application in accordance with Clause 7.9 (Prepayment Account) and Clause 7.10 (Application of Proceeds). (c) Paragraph (b) above does not apply to any: (i) Net Sale Proceeds to the extent that, in the case of any Net Sale Proceeds which relate to the disposals referred to in paragraphs (m) of the definition of "Permitted Disposal", the amount by which such Net Sale Proceeds exceed (euro)40,000,000; (ii) Permitted Disposal Proceeds; - 33 - (iii) Net Sale Proceeds to the extent such Net Sale Proceeds are received by a member of the Group in connection with the sale, transfer or other disposal by any member of the Group of an asset in the ordinary course of business (including, without limitation, a disposal under paragraph (a) of the definition of Permitted Disposal); (iv) Net Sale Proceeds in an amount equal to 50 per cent. of the Net Sale Proceeds of the disposal referred to in paragraph (n) of the definition of "Permitted Disposal"; (v) Net Sale Proceeds in an amount equal to 50 per cent. of the Net Sale Proceeds of the disposals referred to in paragraphs (o) and (p) of the definition of "Permitted Disposal"; and (vi) Relevant Proceeds to the extent such Relevant Proceeds are paid into the Holding Account and have within six months of receipt been contractually committed to be applied and have within eighteen months of receipt have been applied towards the purchase of other similar assets for use in the Group's business and no part of those Relevant Proceeds is withdrawn from the Holding Account except for that purpose within that eighteen month period. 7.6 MANDATORY PREPAYMENT - INSURANCE PROCEEDS (a) In this Clause 7.6: "INSURANCE PROCEEDS" means any proceeds (other than in relation to third party liabilities that are actually applied to meet such liabilities or in relation to consequential loss policies that are actually applied to cover operating losses, loss of profits or business interruption) exceeding (euro)3,000,000 (or its equivalent in another currency or currencies) received by any member of the Group under or pursuant to any insurance policy (or equivalent) after the date of this Agreement. (b) The Company shall ensure that any Insurance Proceeds are paid into the Prepayment Account for application in accordance with Clause 7.9 (Prepayment Account) and Clause 7.10 (Application of Proceeds). (c) Paragraph (b) above does not apply to any Insurance Proceeds to the extent that such Insurance Proceeds are paid into the Holding Account and have within six Months of receipt been contractually committed to be applied and have within eighteen Months of receipt been applied to replace, repair or reinstate the asset(s) to which those Insurance Proceeds relate and no part of those Insurance Proceeds is withdrawn from the Holding Account except for that purpose within that eighteen Month period. 7.7 MANDATORY PREPAYMENT - EXCESS CASH FLOW (a) Within five Business Days of delivery to the Agent of the Company's audited consolidated financial statements for any financial year, commencing with such financial statements for the financial year ending on 31 December 2006, the Company shall ensure that an amount equal to 50 per cent. of the Excess Cash Flow for that financial year (or, in the case of the financial year ending on 31 December 2006, an amount equal to 50 per cent. of the Excess Cash Flow multiplied by the fraction equal to the number of days for the period from the date of this Agreement to 31 December 2006 (inclusive) divided by 365) is paid into the Prepayment Account. - 34 - (b) All amounts paid into the Prepayment Account under paragraph (a) above will be applied in prepayment of the Loans as described in Clause 7.9 (Prepayment Account) and Clause 7.10 (Application of Proceeds), as if those amounts were "Proceeds" and the date of payment into the Prepayment Account were the "Receipt Date". 7.8 HOLDING ACCOUNT (a) In this Clause 7.8, Clause 7.9 (Prepayment Account) and Clause 7.10 (Application of Proceeds): "PROCEEDS" means, Insurance Proceeds, Net Sale Proceeds (other than Immediate Prepayment Proceeds) and amounts paid into the Prepayment Account under Clause 7.7 (Mandatory Prepayment - Excess Cash Flow). (b) The Company shall ensure that any Insurance Proceeds which are to be applied to replace, repair or reinstate asset(s) in accordance with paragraph (c) of Clause 7.6 (Mandatory prepayment - Insurance Proceeds) (or an equal amount), are paid directly into (or as soon as practicable after receipt are transferred into) the Holding Account. (c) The Company shall ensure that any Relevant Proceeds which are to be applied towards the purchase of other similar assets for use in the Group's business in accordance with paragraph (c)(vi) of Clause 7.5 (Mandatory Prepayment - Net Sale Proceeds) (or an equal amount), are paid directly into (or as soon as practicable after receipt are transferred into) the Holding Account. (d) Within five Business Days after the date (the "REINVESTMENT RECEIPT DATE") on which any such Proceeds have been received by any member of the Group (or have become Proceeds), the Borrower shall notify the Agent of the Reinvestment Receipt Date and the amount in euro of those Proceeds. (e) No amount may be withdrawn or transferred from the Holding Account except: (i) to purchase other similar assets for use in the Group's business under paragraph (c)(iv) of Clause 7.5 (Mandatory Prepayment Net Sale Proceeds); (ii) to replace, repair or reinstate assets under paragraph (c) of Clause 7.6 (Mandatory prepayment - Insurance Proceeds); (iii) to make the prepayments required Clause 7.10 (Application of Proceeds); or (iv) with the prior consent of the Majority Lenders, provided that, upon an Event of Default, all amounts standing to the credit of the Holding Account shall be transferred to the Prepayment Account. (f) To the extent that any amount in respect of any Proceeds falling within sub-paragraph of paragraph (d) above is not withdrawn from the Holding Account in accordance with paragraph (c)(vi) of Clause 7.5 (Mandatory Prepayment - Net Sale Proceeds) and paragraph (c) of Clause 7.6 (Mandatory prepayment - Insurance Proceeds) and under sub-paragraph (i) above, the Borrower shall notify the Agent of the proposed date of prepayment of those Proceeds (the "REINVESTMENT PREPAYMENT DATE") which must be at least five Business Days after the date of that notice. - 35 - (g) The Borrower irrevocably authorises the Agent to withdraw any amounts credited to the Holding Account which have not been withdrawn from the Holding Account under sub-paragraphs (i) and (ii) of paragraph (e) above and apply such amounts against cancellations and prepayments which are due under this Agreement in accordance with Clause 7.10 (Application of Proceeds). (h) Interest which has accrued on the Holding Account may be withdrawn by the Borrower in accordance with the mandate relating to the Holding Account, provided that no such withdrawal may be made while an Event of Default is outstanding in respect of which notice has been served on the Borrower by the Agent. 7.9 PREPAYMENT ACCOUNT (a) The Borrower shall ensure that all Proceeds (or an equal amount) including, for the avoidance of doubt Immediate Prepayment Proceeds (other than, subject to Clause 7.8(e), any proceeds paid into the Holding Account) are paid directly into (or as soon as practicable after receipt are transferred into) the Prepayment Account. (b) Within five Business Days after the date (the "RECEIPT DATE") on which any such Proceeds have been received by any member of the Group (or have become Proceeds), the Company shall notify the Agent of the Receipt Date, the amount in euro of those Proceeds and the proposed date of prepayment of those Proceeds (the "PREPAYMENT DATE") (which must be at least five Business Days after the date of that notice or as otherwise agreed between the Borrower and the Agent only in respect of such Proceeds which relate to the disposals referred to in paragraph (m) of the definition of Permitted Disposal). (c) No amount may be withdrawn or transferred from the Prepayment Account except: (i) to make the prepayments required under Clause 7.10 (Application of Proceeds); or (ii) with the prior consent of the Majority Lenders. (d) The Borrower irrevocably authorises the Agent to withdraw amounts credited to the Prepayment Account and apply such amounts against cancellations and prepayments which are due under this Agreement in accordance with Clause 7.10 (Application of Proceeds). (e) Interest which has accrued on the Prepayment Account may be withdrawn by the Borrower in accordance with the mandate relating to the Prepayment Account, provided that no such withdrawal may be made while an Event of Default is outstanding in respect of which notice has been served on the Borrower by the Agent. 7.10 APPLICATION OF PROCEEDS (a) Any Proceeds in respect of which the Borrower has delivered a notice under paragraph (e) of Clause 7.8 (Holding Account) or paragraph (b) of Clause 7.9 (Prepayment Account) shall be applied in the following order, in each case until the relevant Loans or other liabilities have been satisfied in full: (i) in the case of any Net Sale Proceeds which relate to any disposal referred to in paragraph (m) of the definition of "Permitted Disposal", in prepayment of the outstanding Facility B2 Loan only; and (ii) in the case of any other Proceeds: - 36 - (A) subject to paragraph (B) below, FIRST in prepayment of amounts outstanding under Facility B1 and SECOND in prepayment of amounts outstanding under Facility B2; or (B) from the earlier of the date of any disposal referred to in paragraphs (m) and (n) of the definition of "Permitted Disposal" and the date which is 65 days after the Closing Date, in prepayment pro rata of amounts outstanding under Facility B1 and Facility B2. (b) Any Proceeds to be applied in prepayment of any Loan under paragraph (a) above shall be applied on the earlier of the Reinvestment Prepayment Date or, as the case may be, the Prepayment Date and the last day of the Interest Period relating to that Loan. 7.11 VOLUNTARY PREPAYMENT OF LOANS (a) The Borrower may, if it gives the Agent not less than five Business Days' (or such shorter period as the Majority Lenders may agree) prior notice, prepay the whole or any part of any Loan but if in part by an aggregate amount that reduces the relevant Loan by a minimum amount of (euro)5,000,000. (b) Any Loan may only be voluntarily prepaid after 31 August 2006 (or, if earlier, the day on which the Available Facility for the relevant Facility is zero). 7.12 RIGHT OF REPLACEMENT OF A SINGLE LENDER If: (a) any sum payable to any Lender by an Obligor is required to be increased under paragraph (c) of Clause 12.2 (Tax gross-up); or (b) any Lender claims indemnification from the Company under Clause 12.3 (Tax indemnity) or Clause 13.1 (Increased costs), (c) an Obligor is, or will be, required to pay to a Lender any amount under Schedule 4 (Mandatory Cost Formulae), the Borrower may, whilst the circumstance giving rise to the requirement or indemnification continues (and by not less than 15 Business Days' prior written notice): (i) arrange for the transfer of the whole (but not part only) of that Lender's Commitment and participations in the Loans to a new or existing Lender or financial institution which is not a Restricted Person, a member of the Group or an Affiliate of either of the foregoing willing to accept that transfer and acceptable to the Borrower; or (ii) with the prior consent of the Majority Lenders, give the Agent notice of cancellation of the Commitment of that Lender and its intention to procure the repayment of that Lender's participation in the Utilisations granted by that Lender, whereupon the Commitment of that Lender shall immediately be reduced to zero. On the last day of each Interest Period which ends after the Borrower has given notice under this paragraph (ii) (or, if earlier, the date specified by the Borrower in that notice), the Borrower shall repay that Lender's participation in that Utilisation. - 37 - 7.13 REPLACEMENT OF A NON-CONSENTING LENDER OR NON-FUNDING LENDER (a) In this Clause 7.13 and in Clause 7.14 (Replacement of a Lender): (i) "NON-CONSENTING LENDER" means any Lender which does not agree to a consent, waiver or amendment directly or by virtue of Clause 34.2(d) (Exceptions) if: (A) the Borrower or the Agent has requested a consent under or waiver or amendment of any provision of any Finance Document; (B) that consent, waiver or amendment requires the agreement of all the Lenders; and (C) a Lender or Lenders: 1. whose share in the outstanding Loans and whose undrawn Commitments then aggregate 80 per cent. or more of the aggregate of all the outstanding Loans and undrawn Commitments of all the Lenders; 2. if there is no Loan then outstanding, whose undrawn Commitments then aggregate 80 per cent. or more of the Total Commitments; or 3. if there is a Loan then outstanding and the Total Commitments have been reduced to zero, whose Commitments aggregated 80 per cent. or more of the Total Commitments immediately before the reduction. (ii) "NON-FUNDING LENDER" means: (A) any Lender which has failed to make or participate in any Utilisation as required by this Agreement and the Agent has determined that the Lender is not likely to advance that amount; or (B) any Lender which has given notice to the Borrower or the Agent that it does not intend to make or participate in any Utilisation as required by this Agreement or has repudiated its obligation to do so. (b) If: (i) any Lender becomes a Non-Consenting Lender; or (ii) any Lender becomes a Non-Funding Lender, the Borrower may, if it gives the Agent and that Lender not less than 15 Business Days' prior notice, arrange for the transfer of the whole (but not part only) of that Lender's Commitment and participations in the Loans to a new or existing Lender or financial institution which is not a Restricted Person, a member of the Group or an Affiliate of either of the foregoing willing to accept that transfer and acceptable to the Borrower. 7.14 REPLACEMENT OF A LENDER (a) The replacement of a Lender pursuant to Clause 7.12 (Right of replacement of a single Lender) or Clause 7.13 (Replacement of a Non-Consenting Lender or Non-Funding Lender) shall be subject to the following conditions: (i) no Finance Party shall have any obligation to find a replacement Lender; - 38 - (ii) any replacement of a Non-Consenting Lender must take place no later than 60 days after the earlier of (A) the date the Non-Consenting Lender notified the Agent of its refusal to agree to the relevant consent, waiver or amendment and (B) the deadline (being not less than 15 Business Days after the Lender received the request for the relevant consent, waiver or amendment) by which the Non-Consenting Lender failed to reply to that request; (iii) any Lender replaced pursuant to Clause 7.12 (Right of replacement of a single Lender) or Clause 7.13 (Replacement of a Non-Consenting Lender or Non-Funding Lender) shall not be required to refund, or to pay or surrender to any other Lender, any of the fees or other amounts received by that Lender under any Finance Document; and (iv) any replacement pursuant to Clause 7.12 (Right of replacement of a single Lender) or Clause 7.13 (Replacement of a Non-Consenting Lender or Non-Funding Lender) of a Lender which is the Agent shall not affect its role as the Agent. (b) The Borrower's right to replace a Non-Funding Lender is in addition to all other rights and remedies available to the Borrower against the Non-Funding Lender. 7.15 RESTRICTIONS (a) Any notice of cancellation or prepayment given by any Party under this Clause 7 shall be irrevocable and, unless a contrary indication appears in this Agreement, specify the date or dates upon which the relevant cancellation or prepayment is to be made and the amount of that cancellation or prepayment. (b) Any prepayment under this Agreement shall be made together with accrued interest on the amount prepaid and, subject to any Break Costs, without premium or penalty. (c) The Borrower may not reborrow any part of a Facility which is prepaid. (d) The Borrower shall not repay or prepay all or any part of the Utilisations or cancel all or any part of the Commitments except at the times and in the manner expressly provided for in this Agreement. (e) Unless a contrary indication appears in this Agreement, no amount of the Total Commitments cancelled under this Agreement may be subsequently reinstated. (f) If the Agent receives a notice under this Clause 7 it shall promptly forward a copy of that notice to either the Borrower or the affected Lender, as appropriate. - 39 - SECTION 5 COSTS OF UTILISATION 8. INTEREST 8.1 CALCULATION OF INTEREST The rate of interest on each Loan for each Interest Period is the percentage rate per annum which is the aggregate of the applicable: (a) Margin; (b) EURIBOR; and (c) Mandatory Cost, if any. 8.2 PAYMENT OF INTEREST The Borrower shall pay accrued interest on each Loan on the last day of each Interest Period (and, if the Interest Period is longer than six Months, on the dates falling at six monthly intervals after the first day of the Interest Period). 8.3 DEFAULT INTEREST (a) If an Obligor fails to pay any amount payable by it under a Finance Document on its due date, interest shall accrue on the overdue amount from the due date up to the date of actual payment (both before and after judgment) at a rate which, subject to paragraph (b) below, is the sum of one per cent. and the rate which would have been payable if the overdue amount had, during the period of non-payment, constituted a Loan in the currency of the overdue amount for successive Interest Periods, each of a duration selected by the Agent (acting reasonably) of up to three Months. Any interest accruing under this Clause 8.3 shall be immediately payable by the Obligor on demand by the Agent. (b) If any overdue amount consists of all or part of a Loan which became due on a day which was not the last day of an Interest Period relating to that Loan: (i) the first Interest Period for that overdue amount shall have a duration equal to the unexpired portion of the current Interest Period relating to that Loan; and (ii) the rate of interest applying to the overdue amount during that first Interest Period shall be the sum of one per cent. and the rate which would have applied if the overdue amount had not become due. (c) Default interest (if unpaid) arising on an overdue amount will be compounded with the overdue amount at the end of each Interest Period applicable to that overdue amount but will remain immediately due and payable. 8.4 NOTIFICATION OF RATES OF INTEREST The Agent shall promptly notify the relevant Lenders and the Borrower of the determination of a rate of interest under this Agreement. 8.5 ADJUSTMENT OF MARGIN This Clause 8.5 sets out the mechanics of adjustment of the Margin, each provision of this Clause 8.5 operating cumulatively. - 40 - (a) Subject to this Clause 8.5, in respect of each Interest Period commencing on or after the date which is 6 Months from the Closing Date the Margin applicable to each Utilisation shall be the rate per annum specified in the definition of Margin set out in Clause 1.1 (Definitions) adjusted, by reference to the ratio of Net Borrowings to EBITDA as shown in the then most recent Compliance Certificate (and the financial statements with which it is required by this Agreement to be delivered) received by the Agent, to equal the rate per annum specified opposite the relevant range set out in the following table in which the ratio of Net Borrowings to EBITDA falls:
------------------------------------------------------------------------- RATIO MARGIN (% P.A.) ------------------------------------------------------------------------- Higher than 3:1 2.75 ------------------------------------------------------------------------- Equal to or lower than 3:1 but higher than 2.5:1 2.50 ------------------------------------------------------------------------- Equal to or lower than 2.5:1 2.25 -------------------------------------------------------------------------
(b) Any adjustment to the Margin under paragraph (a) above shall take effect on the date (the "Margin Adjustment Date") falling five Business Days after receipt by the Agent of a Compliance Certificate (and the financial statements with which it is required by this Agreement to be delivered) in accordance with Clause 19.4 (Compliance Certificate). (c) Until such a resolution as referred to in paragraph (d)(i) below is actually passed, if at any time, the Collateral Agent for the DIP Lenders declares by notice to the Administrative Borrower (as defined in the DIP Financing) all or any portion of the Loans (as defined in the DIP Financing) to be due and payable pursuant to section 10.01(i) of the DIP Financing, the Margin shall be the sum of one per cent. per annum and the Margin which would otherwise have been applicable in accordance with this Clause 8.5. (d) If at any time it is no longer necessary to obtain a court approval to pass a shareholder resolution of the Company by virtue of Bankruptcy Emergence: (i) the Company shall procure that such a shareholder resolution of the Company is promptly passed which shall approve the adjustment to the Margin applicable on a Change of Control as set out in paragraph (ii) below; and (ii) following such resolution being passed, if a Change of Control occurs the Margin shall be the sum of one per cent. and the Margin which would otherwise have been applicable in accordance with this Clause 8.5. In this paragraph (d): (i) a "CHANGE OF CONTROL" will occur if: (A) any person or group of persons acting in concert acquires: (A) more than 50 per cent. of the issued share capital of Solutia Inc.; (B) issued share capital having the right to cast more than 50 per cent. of the votes capable of being cast in general meetings of Solutia Inc.; or - 41 - (C) the right to determine the composition of the majority of the board of directors or equivalent body of Solutia Inc., but excluding any such acquisition made pursuant to the terms of the plan of reorganization of Solutia Inc.; or (B) Solutia Inc. ceases to own, directly or indirectly, 100% of the issued share capital of the Company, or ceases to have the right to determine the composition of the majority of the board of directors or equivalent body of the Company. (ii) "ACTING IN CONCERT" has the meaning given to it in the City Code on Takeovers and Mergers. (e) If any Security is created over the share capital of the Company (except for Security over such share capital as set out under paragraph 2.2(a)(v) of the Due Diligence Report as in existence at the date of this Agreement) the Margin shall be the sum of one per cent. per annum and the Margin which would otherwise have been applicable in accordance with this Clause 8.5 (f) If the Margin for a Loan is reduced for any period under this Clause 8.5 but the annual audited financial statements of the Group (and the Compliance Certificate with which they are required by this Agreement to be delivered) subsequently received by the Agent do not confirm the basis for that reduction, that reduction shall be reversed with retrospective effect. In the event the Margin for that Loan shall be the rate per annum specified opposite the relevant range set out in the table above and the revised ratio of Net Borrowings to EBITDA calculated using the figures in that Compliance Certificate. The Company shall promptly pay to the Agent any amount necessary to put the Agent and Lenders in the position they would have been in had the appropriate rate of the Margin applied during that period. (g) While an Event of Default is continuing, the Margin applicable to each Utilisation shall, subject to paragraphs (c) to (e) above, revert to the rate specified in the definition of Margin in Clause 1.1 (Definitions). 9. INTEREST PERIODS 9.1 SELECTION OF INTEREST PERIODS (a) The Borrower (or the Company on behalf of the Borrower) may select an Interest Period for a Loan in the Utilisation Request for that Loan or (if the Loan has already been borrowed) in a Selection Notice. (b) Each Selection Notice for a Loan is irrevocable and must be delivered to the Agent by the Borrower (or the Company on behalf of the Borrower) to which that Loan was made not later than the Specified Time. (c) If the Borrower (or the Company) fails to deliver a Selection Notice to the Agent in accordance with paragraph (b) above, the relevant Interest Period will be one Month. (d) Subject to this Clause 9, the Borrower (or the Company) may select an Interest Period of 1, 2, 3 or 6 Months or any other period agreed between the Company and the Agent (acting on the instructions of all the Lenders participating in the relevant Loan). - 42 - (e) Until the Syndication Date, each Interest Period shall be a maximum duration of one Month or such shorter duration as the Company and the Agent may agree. (f) An Interest Period for a Loan shall not extend beyond the Termination Date. (g) Each Interest Period for a Loan shall start on the Utilisation Date or (if already made) on the last day of its preceding Interest Period. 9.2 NON-BUSINESS DAYS If an Interest Period would otherwise end on a day which is not a Business Day, that Interest Period will instead end on the next Business Day in that calendar month (if there is one) or the preceding Business Day (if there is not). 10. CHANGES TO THE CALCULATION OF INTEREST 10.1 ABSENCE OF QUOTATIONS Subject to Clause 10.2 (Market disruption), if EURIBOR is to be determined by reference to the Reference Banks but a Reference Bank does not supply a quotation by the Specified Time on the Quotation Day, the applicable EURIBOR shall be determined on the basis of the quotations of the remaining Reference Banks. 10.2 MARKET DISRUPTION (a) The Agent will notify the Company if a Market Disruption Event occurs in relation to a Loan for any Interest Period. After such notification the rate of interest on each Lender's share of that Loan for the Interest Period shall be the percentage rate per annum which is the sum of: (i) the Margin; (ii) the rate notified to the Agent by that Lender as soon as practicable and in any event before interest is due to be paid in respect of that Interest Period, to be that which expresses as a percentage rate per annum the cost to that Lender of funding its participation in that Loan from whatever source it may reasonably select; and (iii) the Mandatory Cost, if any, applicable to that Lender's participation in the Loan. (b) In this Agreement "MARKET DISRUPTION EVENT" means: (i) at or about noon on the Quotation Day for the relevant Interest Period the Screen Rate is not available and none or only one of the Reference Banks supplies a rate to the Agent to determine EURIBOR for the relevant currency and Interest Period; or (ii) before close of business in London on the Quotation Day for the relevant Interest Period, the Agent receives notifications from a Lender or Lenders (whose participations in a Loan exceed 35 per cent. of that Loan) that the cost to it of obtaining matching deposits in the Relevant Interbank Market would be in excess of EURIBOR for euro and the relevant Interest Period. 10.3 ALTERNATIVE BASIS OF INTEREST OR FUNDING (a) If a Market Disruption Event occurs and the Agent or the Company so requires, the Agent and the Company shall enter into negotiations (for a period of not more than thirty days) with a view to agreeing a substitute basis for determining the rate of interest. - 43 - (b) Any alternative basis agreed pursuant to paragraph (a) above shall, with the prior consent of all the Lenders and the Company, be binding on all Parties. 10.4 BREAK COSTS (a) The Borrower shall, within three Business Days of demand by a Finance Party, pay to that Finance Party its Break Costs attributable to all or any part of a Loan or Unpaid Sum being paid by the Borrower on a day other than the last day of an Interest Period for that Loan or Unpaid Sum. (b) Each Lender shall, as soon as reasonably practicable after a demand by the Agent, provide a certificate confirming the amount of its Break Costs for any Interest Period in which they accrue. 11. FEES 11.1 ARRANGEMENT FEE The Company or the Borrower shall pay to the Arranger an arrangement fee in the amount and at the times agreed in a Fee Letter. 11.2 AGENCY FEE The Company or the Borrower shall pay to the Agent (for its own account) an agency fee in the amount and at the times agreed in a Fee Letter. 11.3 SECURITY AGENCY FEE The Company or the Borrower shall pay to the Security Agent (for its own account) a security agency fee in the amount and at the times agreed in a Fee Letter. - 44 - SECTION 6 ADDITIONAL PAYMENT OBLIGATIONS 12. TAX GROSS-UP AND INDEMNITIES 12.1 DEFINITIONS (a) In this Agreement: "PROTECTED PARTY" means a Finance Party which is or will be subject to any liability, or required to make any payment, for or on account of Tax in relation to a sum received or receivable (or any sum deemed for the purposes of Tax to be received or receivable) under a Finance Document. "QUALIFYING LENDER" means a Lender which is beneficially entitled to interest payments under this Agreement and which is (i) a Belgian legal entity subject to Belgian corporate income tax, (ii) a non-Belgian legal entity or (iii) a non-Belgian entity having a legal form similar to the legal form of a Belgian company. "TAX CREDIT" means a credit against, relief or remission for, or repayment of any Tax. "TAX DEDUCTION" means a deduction or withholding for or on account of Tax from a payment under a Finance Document. "TAX PAYMENT" means either the increase in a payment made by an Obligor to a Finance Party under Clause 12.2 (Tax gross-up) or a payment under Clause 12.3 (Tax indemnity). (b) Unless a contrary indication appears, in this Clause 12 a reference to "determines" or "determined" means a determination made in the absolute discretion of the person making the determination. 12.2 TAX GROSS-UP (a) Each Obligor shall make all payments to be made by it without any Tax Deduction, unless a Tax Deduction is required by law. (b) The Company shall promptly upon becoming aware that an Obligor must make a Tax Deduction (or that there is any change in the rate or the basis of a Tax Deduction) notify the Agent accordingly. Similarly, a Lender shall notify the Agent on becoming so aware in respect of a payment payable to that Lender. If the Agent receives such notification from a Lender it shall notify the Company and that Obligor. (c) If a Tax Deduction is required by law to be made by an Obligor, the amount of the payment due from that Obligor shall be increased to an amount which (after making any Tax Deduction) leaves an amount equal to the payment which would have been due if no Tax Deduction had been required. (d) An Obligor is not required to make an increased payment to a Lender under paragraph (c) above for a Tax Deduction in respect of Tax imposed on a payment of interest on a Loan if: (i) (A) at any point in time between the date of the Agreement and the date on which the payment falls due or on the date on which the payment falls due such Lender is - 45 - not or has ceased to be a Qualifying Lender other than as a result of any change after the date he became a Lender under this Agreement in (or in the interpretation, administration, or application of) any law, or any published practice or concession of any relevant taxing authority; or (B) such Lender has not complied with its obligations under paragraph (g) below or its representation (if any) under paragraph (g) below is untrue; or (ii) unless Qualifying Lender status of a Lender is not required in order to enable the Borrower to make all payments made by it to the Lenders without a Tax Deduction. (e) If an Obligor is required to make a Tax Deduction, that Obligor shall make that Tax Deduction and any payment required in connection with that Tax Deduction within the time allowed and in the minimum amount required by law. (f) Within thirty days of making either a Tax Deduction or any payment required in connection with that Tax Deduction, the Obligor making that Tax Deduction shall deliver to the Agent for the Finance Party entitled to the payment an original receipt (or certified copy thereof) reasonably satisfactory to that Finance Party that the Tax Deduction has been made or (as applicable) any appropriate payment paid to the relevant taxing authority. (g) Each Original Lender shall deliver to the Borrower on or before the Closing Date a Tax Status Certificate duly executed by it with a copy sent to the Agent and represents to the other parties hereto as at the date of the Tax Status Certificate that it is a Qualifying Lender. Each other Lender shall comply with its obligation to deliver a Tax Status Certificate to the extent required under Clause 23.2(f) and where such obligation applies, it represents to the other parties hereto that as at the date of the Tax Status Certificate that it is a Qualifying Lender. (h) Each Lender shall co-operate directly with the Borrower in completing any procedural formalities or requirements necessary for that Obligor to obtain authorisation to make that payment without a Tax Deduction (including delivering additional Tax Status Certificates if the Belgian tax authorities inform the Obligor that such additional Tax Status Certificates are required). 12.3 TAX INDEMNITY (a) The Company shall (within three Business Days of demand by the Agent) pay to a Protected Party an amount equal to the loss, liability or cost which that Protected Party determines will be or has been (directly or indirectly) suffered for or on account of Tax by that Protected Party in respect of a Finance Document. (b) Paragraph (a) above shall not apply: (i) with respect to any Tax assessed on a Finance Party: (A) under the law of the jurisdiction in which that Finance Party is incorporated or, if different, the jurisdiction (or jurisdictions) in which that Finance Party is treated as resident for tax purposes; or (B) under the law of the jurisdiction in which that Finance Party's Facility Office is located in respect of amounts received or receivable in that jurisdiction, - 46 - if that Tax is imposed on or calculated by reference to the net income received or receivable (but not any sum deemed to be received or receivable) by that Finance Party; or (ii) to the extent a loss, liability or cost: (A) is compensated for by an increased payment under Clause 12.2 (Tax gross-up); or (B) would have been compensated for by an increased payment under Clause 12.2 (Tax gross-up) but was not so compensated solely because one of the exclusions in paragraph (d) of Clause 12.2 (Tax gross-up) applied. (c) A Protected Party making, or intending to make, a claim under paragraph (a) above shall promptly notify the Agent of the event which will give, or has given, rise to the claim, following which the Agent shall notify the Company. (d) A Protected Party shall, on receiving a payment from an Obligor under this Clause 12.3, notify the Agent. 12.4 TAX CREDIT If an Obligor makes a Tax Payment and the relevant Finance Party determines that: (a) a Tax Credit is attributable either to an increased payment of which that Tax Payment forms part, or to that Tax Payment; and (b) that Finance Party has obtained, utilised and fully retained that Tax Credit on an affiliated group basis, the Finance Party shall pay an amount to the Obligor which that Finance Party determines will leave it (after that payment) in the same after-Tax position as it would have been in had the Tax Payment not been required to be made by the Obligor. 12.5 STAMP TAXES The Company shall pay and, within three Business Days of demand, indemnify each Finance Party against any cost, loss or liability that Finance Party incurs in relation to all stamp duty, stamp duty land tax, registration and other similar Taxes payable in respect of any Finance Document. 12.6 VALUE ADDED TAX (a) All amounts set out, or expressed to be payable under a Finance Document by any Party to a Finance Party which (in whole or in part) constitute the consideration for VAT purposes shall be deemed to be exclusive of any VAT which is chargeable on such supply, and accordingly, subject to paragraph (c) below, if VAT is chargeable on any supply made by any Finance Party to any Party under a Finance Document, that Party shall pay to the Finance Party (in addition to and at the same time as paying the consideration) an amount equal to the amount of the VAT (and such Finance Party shall promptly provide an appropriate VAT invoice to such Party). (b) If VAT is chargeable on any supply made by any Finance Party (the "SUPPLIER") to any other Finance Party (the "Recipient") under a Finance Document, and any Party (the "RELEVANT PARTY") is required by the terms of any Finance Document to pay an amount equal to the - 47 - consideration for such supply to the Supplier (rather than being required to reimburse the Recipient in respect of that consideration), such Party shall also pay to the Supplier (in addition to and at the same time as paying such amount) an amount equal to the amount of such VAT. The Recipient will promptly pay to the Relevant Party an amount equal to any credit or repayment from the relevant tax authority which it reasonably determines relates to the VAT chargeable on that supply. (c) Where a Finance Document requires any Party to reimburse a Finance Party for any costs or expenses, that Party shall also at the same time pay and indemnify the Finance Party against all VAT incurred by the Finance Party in respect of the costs or expenses to the extent that the Finance Party reasonably determines that neither it nor any other member of any group of which it is a member for VAT purposes is entitled to credit or repayment from the relevant tax authority in respect of the VAT. 13. INCREASED COSTS 13.1 INCREASED COSTS (a) Subject to Clause 13.3 (Exceptions) the Company shall, within three Business Days of a demand by the Agent, pay for the account of a Finance Party the amount of any Increased Costs incurred by that Finance Party or any of its Affiliates as a result of (i) the introduction of or any change in (or in the interpretation, administration or application of) any law or regulation made after the date of this Agreement or (ii) compliance with any law or regulation made after the date of this Agreement. (b) In this Agreement "INCREASED COSTS" means: (i) a reduction in the rate of return from a Facility or on a Finance Party's (or its Affiliate's) overall capital; (ii) an additional or increased cost; or (iii) a reduction of any amount due and payable under any Finance Document, which is incurred or suffered by a Finance Party or any of its Affiliates to the extent that it is attributable to that Finance Party having entered into its Commitment or funding or performing its obligations under any Finance Document. 13.2 INCREASED COST CLAIMS (a) A Finance Party intending to make a claim pursuant to Clause 13.1 (Increased Costs) shall notify the Agent of the event giving rise to the claim, following which the Agent shall promptly notify the Company. (b) Each Finance Party shall, as soon as practicable after a demand by the Agent, provide a certificate confirming the amount of its Increased Costs. 13.3 EXCEPTIONS (a) Clause 13.1 (Increased Costs) does not apply to the extent any Increased Cost is: (i) attributable to a Tax Deduction required by law to be made by an Obligor; - 48 - (ii) compensated for by Clause 12.3 (Tax indemnity) (or would have been compensated for under Clause 12.3 (Tax indemnity) but was not so compensated solely because any of the exclusions in paragraph (b) of Clause 12.3 (Tax indemnity) applied); (iii) compensated for by the payment of the Mandatory Cost; or (iv) attributable to the wilful breach by the relevant Finance Party or its Affiliates of any law or regulation. (b) In this Clause 13.3, a reference to a "TAX DEDUCTION" has the same meaning given to the term in Clause 12.1 (Definitions). 14. OTHER INDEMNITIES 14.1 CURRENCY INDEMNITY (a) If any sum due from an Obligor under the Finance Documents (a "SUM"), or any order, judgment or award given or made in relation to a Sum, has to be converted from the currency (the "FIRST CURRENCY") in which that Sum is payable into another currency (the "SECOND CURRENCY") for the purpose of: (i) making or filing a claim or proof against that Obligor; or (ii) obtaining or enforcing an order, judgment or award in relation to any litigation or arbitration proceedings, that Obligor shall as an independent obligation, within three Business Days of demand, indemnify each Finance Party to whom that Sum is due against any cost, loss or liability arising out of or as a result of the conversion including any discrepancy between (A) the rate of exchange used to convert that Sum from the First Currency into the Second Currency and (B) the rate or rates of exchange available to that person at the time of its receipt of that Sum. (b) Each Obligor waives any right it may have in any jurisdiction to pay any amount under the Finance Documents in a currency or currency unit other than that in which it is expressed to be payable. 14.2 OTHER INDEMNITIES The Company shall (or shall procure that an Obligor will), within three Business Days of demand, indemnify each Finance Party against any cost, loss or liability incurred by that Finance Party as a result of: (a) the occurrence of any Event of Default; (b) a failure by an Obligor to pay any amount due under a Finance Document on its due date, including without limitation, any cost, loss or liability arising as a result of Clause 27 (Sharing among the Finance Parties); (c) funding, or making arrangements to fund, its participation in a Utilisation requested by the Borrower in a Utilisation Request but not made by reason of the operation of any one or more of the provisions of this Agreement (other than by reason of default or negligence by that Finance Party alone); or - 49 - (d) a Utilisation (or part of a Utilisation) not being prepaid in accordance with a notice of prepayment given by the Borrower or the Company or as required by this Agreement. 14.3 INDEMNITY TO THE AGENT The Company shall promptly indemnify the Agent against any cost, loss or liability incurred by the Agent (acting reasonably) as a result of: (a) investigating any event which it reasonably believes is a Default; or (b) acting or relying on any notice, request or instruction which it reasonably believes to be genuine, correct and appropriately authorised. 14.4 THIRD PARTY INDEMNITY (a) The Company hereby indemnifies and agrees to hold harmless each of the Finance Parties and in each case each of its and their affiliates and each of their respective officers, directors, employees, agents, advisors and representatives (each an "INDEMNIFIED PARTY") from and against any and all claims, damages, losses, liabilities, costs, legal expenses and expenses (altogether "LOSSES") that may be incurred by or awarded against any Indemnified Party, in each case arising out of or in connection with any claim, investigation, litigation or proceeding (or the preparation of any defence with respect thereto) commenced or threatened in relation to the Finance Documents (or the transactions contemplated thereby) or any use of the proceeds of the Facility whether or not such claim investigation, litigation or proceeding is brought by the Company, any of its shareholders or creditors or Indemnified Party or any other person, or an Indemnified Party is otherwise a party thereto, except to the extent that such Losses are found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence, wilful misconduct or breach of the Finance Documents by an Indemnified Party. (b) The company further agrees that no Indemnified Party shall have any liability (whether direct or indirect, in contract, tort or otherwise) to it or any of its shareholders or creditors for or in connection with the transactions referred to above, except for direct (as opposed to indirect or consequential) damages or losses to the extent such liability is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence, wilful misconduct or breach of the Finance Documents. 15. MITIGATION BY THE LENDERS 15.1 MITIGATION (a) Each Finance Party shall, in consultation with the Company, take all reasonable steps to mitigate any circumstances which arise and which would result in any amount becoming payable under or pursuant to, or cancelled pursuant to, any of Clause 7.1 (Illegality), Clause 12 (Tax gross-up and indemnities) or Clause 13 (Increased Costs) including (but not limited to) transferring its rights and obligations under the Finance Documents to another Affiliate or Facility Office. (b) Paragraph (a) above does not in any way limit the obligations of any Obligor under the Finance Documents. - 50 - 15.2 LIMITATION OF LIABILITY (a) The Company shall indemnify each Finance Party for all costs and expenses reasonably incurred by that Finance Party as a result of steps taken by it under Clause 15.1 (Mitigation). (b) A Finance Party is not obliged to take any steps under Clause 15.1 (Mitigation) if, in the opinion of that Finance Party (acting reasonably), to do so might be prejudicial to it. 16. COSTS AND EXPENSES 16.1 TRANSACTION EXPENSES The Company shall promptly on demand pay the Agent, the Security Agent and the Arranger the amount of all reasonable costs and expenses (including legal fees and subject to any agreed caps) incurred by any of them in connection with the negotiation, preparation, printing, execution and syndication of: (a) this Agreement and any other documents referred to in this Agreement; and (b) any other Finance Document (other than a Transfer Certificate) executed after the date of this Agreement. 16.2 AMENDMENT COSTS If (a) an Obligor requests an amendment, waiver or consent or (b) an amendment is required pursuant to Clause 28.9 (Change of currency), the Company shall, within three Business Days of demand, reimburse the Agent and the Security Agent for the amount of all costs and expenses (including legal fees) reasonably incurred by the Agent or the Security Agent in responding to, evaluating, negotiating or complying with that request or requirement. 16.3 ENFORCEMENT COSTS The Company shall, within three Business Days of demand, pay to each Finance Party the amount of all costs and expenses (including legal fees) properly incurred by that Finance Party in connection with the enforcement of, or the preservation of any rights under, any Finance Document. - 51 - SECTION 7 GUARANTEE AND SECURITY 17. GUARANTEE AND INDEMNITY 17.1 GUARANTEE AND INDEMNITY Each Guarantor irrevocably and unconditionally jointly and severally: (a) guarantees to each Finance Party and Hedging Bank punctual performance by each other Obligor of all that Obligor's obligations under the Finance Documents; (b) undertakes with each Finance Party and Hedging Bank that whenever an Obligor does not pay any amount when due under or in connection with any Finance Document, that Guarantor shall immediately on demand pay that amount as if it was the principal obligor; and (c) indemnifies each Finance Party and Hedging Bank immediately on demand against any cost, loss or liability suffered by that Finance Party or Hedging Bank (i) if any obligation guaranteed by it is or becomes unenforceable, invalid or illegal; or (ii) by operation of law the amount of the cost, loss or liability shall be equal to the amount which that Finance Party or Hedging Bank would otherwise have been entitled to recover. 17.2 CONTINUING GUARANTEE This guarantee is a continuing guarantee and will extend to the ultimate balance of sums payable by any Obligor under the Finance Documents, regardless of any intermediate payment or discharge in whole or in part. 17.3 REINSTATEMENT If any payment by an Obligor or any discharge given by a Finance Party or Hedging Bank (whether in respect of the obligations of any Obligor or any security for those obligations or otherwise) is avoided or reduced as a result of insolvency or any similar event: (a) the liability of each Obligor shall continue as if the payment, discharge, avoidance or reduction had not occurred; and (b) each Finance Party and Hedging Bank (as applicable) shall be entitled to recover the value or amount of that security or payment from each Obligor, as if the payment, discharge, avoidance or reduction had not occurred. 17.4 WAIVER OF DEFENCES The obligations of each Guarantor under this Clause 17 will not be affected by an act, omission, matter or thing which, but for this Clause 17, would reduce, release or prejudice any of its obligations under this Clause 17 (without limitation and whether or not known to it or any Secured Party) including: (a) any time, waiver or consent granted to, or composition with, any Obligor or other person; (b) the release of any other Obligor or any other person under the terms of any composition or arrangement with any creditor of any member of the Group or any other person; - 52 - (c) the taking, variation, compromise, exchange, renewal or release of, or refusal or neglect to perfect, take up or enforce, any rights against, or security over assets of, any Obligor or other person or any non-presentation or non-observance of any formality or other requirement in respect of any instrument or any failure to realise the full value of any security; (d) any incapacity or lack of power, authority or legal personality of or dissolution or change in the members or status of an Obligor or any other person; (e) any amendment, novation, supplement, extension, restatement (however fundamental and whether or not more onerous) or replacement of any Finance Document or any other document or security including any change in the purpose of, any extension of or any increase in any facility or the addition of any new facility under any Finance Document or other document or security; (f) any unenforceability, illegality or invalidity of any obligation of any person under any Finance Document or any other document or security; or (g) any insolvency or similar proceedings. 17.5 IMMEDIATE RECOURSE Each Guarantor waives any right it may have of first requiring any Finance Party or Hedging Bank (or any trustee or agent on its behalf) to proceed against or enforce any other rights or security or claim payment from any person before claiming from that Guarantor under this Clause 17. This waiver applies irrespective of any law or any provision of a Finance Document to the contrary. 17.6 APPROPRIATIONS Until all amounts which may be or become payable by the Obligors under or in connection with the Finance Documents have been irrevocably paid in full, each Finance Party and Hedging Bank (or any trustee or agent on its behalf) may: (a) refrain from applying or enforcing any other moneys, security or rights held or received by that Finance Party or Hedging Bank (or any trustee or agent on its behalf) in respect of those amounts, or apply and enforce the same in such manner and order as it sees fit (whether against those amounts or otherwise) and no Guarantor shall be entitled to the benefit of the same; and (b) hold in an interest-bearing suspense account any moneys received from any Guarantor or on account of any Guarantor's liability under this Clause 17. 17.7 DEFERRAL OF GUARANTORS' RIGHTS Until all amounts which may be or become payable by the Obligors under or in connection with the Finance Documents have been irrevocably paid in full and unless the Agent (or, as the case may be, the Security Agent) otherwise directs, no Guarantor will exercise any rights which it may have by reason of performance by it of its obligations under the Finance Documents: (a) to be indemnified by an Obligor; - 53 - (b) to claim any contribution from any other guarantor of any Obligor's obligations under the Finance Documents; and/or (c) to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Finance Parties or Hedging Banks under the Finance Documents or of any other guarantee or security taken pursuant to, or in connection with, the Finance Documents by any Finance Party or Hedging Bank. 17.8 RELEASE OF GUARANTORS' RIGHT OF CONTRIBUTION If any Guarantor (a "RETIRING GUARANTOR") ceases to be a Guarantor in accordance with the terms of the Finance Documents for the purpose of any sale or other disposal of that Retiring Guarantor then on the date such Retiring Guarantor ceases to be a Guarantor: (a) that Retiring Guarantor is released by each other Guarantor from any liability (whether past, present or future and whether actual or contingent) to make a contribution to any other Guarantor arising by reason of the performance by any other Guarantor of its obligations under the Finance Documents; and (b) each other Guarantor waives any rights it may have by reason of the performance of its obligations under the Finance Documents to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Finance Parties under any Finance Document or of any other security taken pursuant to, or in connection with, any Finance Document where such rights or security are granted by or in relation to the assets of the Retiring Guarantor. 17.9 ADDITIONAL SECURITY This guarantee is in addition to and is not in any way prejudiced by any other guarantee or security now or subsequently held by any Finance Party or Hedging Bank. 17.10 LIMITATIONS In relation to any Guarantor incorporated or established in Germany the following shall apply: (a) The enforcement of the guarantee and indemnity granted under this Clause 17 (the "GUARANTEE") shall be, at the date hereof and at any time thereafter, limited to an amount equal to the net assets of the Guarantor, which are calculated as such Guarantor's total assets (the calculation of which shall take into account the captions reflected in sections 266 (2) A, B and C of the German Commercial Code (Handelsgesetzbuch)) less its reserves for own shares (sections 266 (3) A III.2. of the German Commercial Code) less its liabilities (the calculation of which shall take into account the captions reflected in sections 266 (3) B, C, D of the German Commercial Code) less its registered share capital (Stammkapital) (the Net Assets). (b) For the purposes of calculating Net Assets the balance sheet shall be adjusted in a way that (i) any amounts which the Guarantor has received from any Loan which has been on-lent by the Borrower to the Guarantor and is still outstanding at the time of the enforcement of the Guarantee shall be disregarded or (ii) the amount of any increase of the Guarantor's registered share capital out of retained earnings (Kapitalerhohung aus Gesellschaftsmittein) after the date of the Guarantee that has been effected without the prior written consent of the Agent shall be deducted from the Guarantor's registered share capital. - 54 - (c) Furthermore, the Guarantor shall, in a situation where (i) it does not have sufficient assets to maintain its registered share capital; and (ii) the Agent would (but for this Clause) be entitled and is seeking to enforce the security granted under this Guarantee, (A) realise any and all of its assets that are shown in the balance sheet with a book value (Buchwert) which is significantly lower than the market value of such assets, provided such asset is not necessary for the Guarantor's business (betriebsnotwendig). (d) For the purpose of the calculation of the Net Assets and thus the enforceable amount, the Guarantor will deliver within 30 Business Days after his notification by the Agent of an Event of Default, to the Agent an up to date balance sheet drawn-up by its auditors or any other reputable firm of auditors together with a determination of the Net Assets by the respective auditors. The balance sheet and determination of Net Assets shall be prepared in accordance with accounting principles pursuant to the German Commercial Code (Handelsgesetzbuch) and be based on the same principles that were applied when establishing the previous year's balance sheet. (e) Should the Guarantor fail to deliver such balance sheet and/or determination of the Net Assets within the 30 Business Day period referred to above or if the Guarantor has generally ceased to make payments or upon filing of an application for insolvency proceedings by the Guarantor, the Agent shall be entitled to enforce the Guarantee, without the enforcement limitations provided for above applying at the time of such enforcement, but is obliged to retransfer proceeds from such enforcement to the extent that the Guarantor demonstrates in reasonable detail that the enforcement of this Guarantee violated the rules on preservation of the stated share capital under sections 30,31 GmbH-Act as set out in paragraph (a)-(c) above by resulting or enhancing negative assets (Unterblilanz) of the Guarantor. (f) This Guarantee shall further not be enforced to the extent that the Guarantor demonstrates in reasonable detail that such enforcement would lead to a breach of the Gebot der Rucksichtnahme auf die Eigenbelange der Gesellschaft (duty of care owing by the relevant shareholders vis-a-vis the respective company) and of the Verbot des existenzvernichtenden Eingriffs (prohibition of insolvency-causing intervention), as developed by the recent jurisdiction (in particular BGH II ZR 178/99 "BREMER VULKAN", BGH II ZR 196/00 and BGH II ZR 300/00 "KBV"), of the Federal Supreme Court (Bundesgerichtshof), caused for example, as far as this would be within the scope of the cited court ruling, if the entering into the Guarantee and its enforcement results in the illiquidity (Zahlungsunfahigkeit) of the Guarantor. The Agent shall be obliged to retransfer proceeds from such enforcement to the extent that the Guarantor demonstrates in reasonable detail that the enforcement of the Guarantee violated the rules of the cited Federal Supreme Court rulings. Otherwise, any claim for damages to the Agent (excluding, for the avoidance of doubt, any claim relating to unjust enrichment) by the Guarantor, any shareholders of the Guarantor or its managing directors shall be excluded. (g) The guarantee of any Additional Guarantor is subject to any limitations relating to that Additional Guarantor set out in any relevant Accession Letter and in the case of each Additional Guarantor incorporated in Belgium (an "ADDITIONAL BELGIAN GUARANTOR") paragraph (c) will apply. - 55 - (h) With respect to the obligations of any Obligor, the Additional Belgian Guarantor's liability under this Clause 17 (Guarantee and Indemnity) shall be limited, at any time, to a maximum aggregate amount equal to the greater of: (i) an amount equal to 90% of such Additional Belgian Guarantor's net assets (as determined in accordance with the Belgian Companies Code and accounting principles generally accepted in Belgium, but not taking intra-groups debts into account as debts) as shown by its then most recent audited annual financial statements; and (ii) the aggregate of (a) the principal amount borrowed by such Additional Belgian Guarantor pursuant to this Agreement and (b) any intra-group loans or facilities made to it by any other member of the Group (whether or not such intra-group loan is retained by the relevant Guarantor for its own purposes or on-lent to another Group company) it being understood that the amount of each loan will only be counted once when calculating the aggregate amount of all loans. - 56 - SECTION 8 REPRESENTATIONS, UNDERTAKINGS AND EVENTS OF DEFAULT 18. REPRESENTATIONS Each Obligor or (if it so states) the Company makes the representations and warranties set out in this Clause 18 to each Finance Party on the dates set out in Clause 18.27 (Times when representations made) (in the case of any Obligor other than the Company, only in relation to itself and, to the extent expressed to be applicable to them, its Material Subsidiaries and/or other Subsidiaries (if any)). 18.1 STATUS (a) It is a limited liability company or corporation, duly incorporated and validly existing under the law of its jurisdiction of incorporation. (b) It has the power to own its assets and carry on its business as it is being, and is proposed to be, conducted. 18.2 BINDING OBLIGATIONS The obligations expressed to be assumed by it in each Finance Document to which it is or will be a party are legal, valid, binding and enforceable, subject to: (a) any applicable Reservations; or (b) in the case of any Security Document, any applicable Perfection Requirements. 18.3 NON-CONFLICT WITH OTHER OBLIGATIONS The entry into and performance by it of, and the transactions contemplated by, the Finance Document do not conflict with: (a) any material law or regulation applicable to it; (b) its or any of its Subsidiaries' constitutional documents; or (c) any agreement or instrument binding upon it or any of its Subsidiaries or any of its or any of its Subsidiaries' assets or constitute a default or termination event (however described), in each case to the extent that it would reasonably be expected to have a Material Adverse Effect. 18.4 POWER AND AUTHORITY It has the power to enter into, perform and deliver, and has taken all necessary action to authorise its entry into, performance and delivery of, the Finance Documents to which it is or will be a party and the transactions contemplated by the Finance Documents. 18.5 VALIDITY AND ADMISSIBILITY IN EVIDENCE All necessary Authorisations required: (a) to enable it lawfully to enter into, exercise its rights and comply with its obligations in the Finance Documents to which it is a party and the transactions contemplated by the Finance Documents; - 57 - (b) to make the Finance Documents to which it or any of its Subsidiaries is a party admissible in evidence in its Relevant Jurisdiction, subject to any applicable Reservations; and (c) to enable it to create the Security purported to be created by it or any of its Subsidiaries pursuant to any Security Document and, subject to any applicable Reservations, to ensure that such Security has the priority and ranking it is expressed to have, have been obtained or effected and are in full force and effect, save for complying with any applicable Perfection Requirements. 18.6 GOVERNING LAW AND ENFORCEMENT Subject to any applicable Reservations: (a) the choice of law specified in each Finance Document as the governing law of that Finance Document will be recognised and enforced in its Relevant Jurisdiction; and (b) any judgment obtained in England in relation to a Finance Document (or in the jurisdiction of the governing law of that Finance Document) will be recognised and enforced in its Relevant Jurisdiction and, in relation to a Finance Document governed by a law other than English law, in the jurisdiction of the governing law of that Finance Document. 18.7 DEDUCTION OF TAX Provided that each Lender is a Qualifying Lender it is not required to make any deduction for or on account of Tax from any payment it may make under any Finance Document. 18.8 NO FILING OR STAMP TAXES Under the law of its Relevant Jurisdiction it is not necessary that the Finance Documents be filed, recorded or enrolled with any court or other authority in that jurisdiction or that any stamp, registration, notarial or similar taxes or fees be paid on or in relation to the Finance Documents or the transactions contemplated by the Finance Documents except for: (a) in each case for complying with any applicable Perfection Requirements; (b) Belgian stamp duties of EUR 0.15 payable on any loan or credit agreement and any pledge agreement drafted and executed in Belgium, subject to the conditions of the Belgian Stamp Duties Code (Code des droits de timbre/Wetboek Zegelrechten) of 26 June 1947, as amended; and (c) notarial fees payable in connection with the notarisation of certain Security Documents governed by German law. 18.9 NO DEFAULT (a) No Event of Default is continuing or would reasonably be expected to result from the making of any Utilisation or the entry into, performance of, or any transaction contemplated by, any Finance Document. (b) No other event or circumstance is outstanding which constitutes (or which would, with the lapse of time, the giving of notice, the making of any determination under the relevant document or any combination of the foregoing, constitute) a default or termination event (however described) - 58 - under any other agreement or instrument which is binding on it or any of its Subsidiaries or to which its (or any of its Subsidiaries') assets are subject which would reasonably be expected to have a Material Adverse Effect. 18.10 NO BREACH OF LAW It has not (and none of its Subsidiaries has) breached any law or regulation which breach has, or would reasonably be expected to have, a Material Adverse Effect. 18.11 INFORMATION PACKAGE In the case of the Company and the Borrower only: (i) Any written factual information in the Information Package was true and accurate in all material respects as at the date it was provided or as at the date (if any) at which it is stated. (ii) Any financial projections in the Information Package have been prepared on the basis of recent historical information and on the basis of assumptions believed by the Company to be fair and reasonable at the time of such preparation. (iii) Any expressions of opinion or intention provided by or on behalf of any member of the Group in connection with the Information Package, were made after due and careful consideration and based on reasonable grounds. (iv) As at the date of this Agreement, nothing has occurred or been omitted from the Information Package and no information has been given or withheld that, if disclosed, would result in: (A) any factual information in the Information Package being untrue or misleading in any material respect; or (B) any assumption or ground on which any financial projection or expression of opinion or intention in the Information Package is based being unreasonable. 18.12 FINANCIAL STATEMENTS (a) Its Original Financial Statements were prepared in accordance with the Applicable Accounting Principles except as disclosed in any notes to the Original Financial Statements. (b) Its Original Financial Statements fairly represent its financial condition and operations as at the end of and for the relevant financial year except as disclosed in any notes to the Original Financial Statements. (c) As at the date of this Agreement, there has been no material adverse change in its assets, business or financial condition (or, in the case of the Company, the assets, business or financial condition of the Group) since 31 March 2006. (d) The financial year end of each member of the Group is 31 December. (e) The Business Plan was prepared in accordance with Applicable Accounting Principles except as otherwise agreed between the Company and the Agent and financial reference periods of the Company consistently applied as at the date of this Agreement. - 59 - 18.13 PARI PASSU RANKING Subject to any applicable Reservations, without limiting Clause 18.15 (Security) below, its payment obligations under the Finance Documents rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors, except for obligations mandatorily preferred by law applying to companies generally. 18.14 NO PROCEEDINGS PENDING OR THREATENED (a) No litigation, arbitration or administrative proceedings of or before any court, arbitral body or agency including, but not limited to, investigative proceedings (including any arising from or relating to Environmental Law) which could reasonably be expected to be adversely determined and, if so determined, would reasonably be expected to have a Material Adverse Effect have been started or (to the best of its knowledge and belief) threatened in writing against it or any of its Subsidiaries. 18.15 SECURITY (a) Subject to any applicable Perfection Requirements and any applicable Reservations, each Security Document creates (or, once entered into, will create) in favour of the Security Agent, the Security which it is expressed to create fully perfected and with the ranking and priority it is expressed to have. (b) Subject to Clause 21.27 (Amendment to articles of association of CP Films) the constitutional documents of any member of the Group do not and would not restrict or inhibit in any manner any transfer of any shares of any member of the Group which are expressed to be (or are required by this Agreement to be or become) subject to any Security under any Security Document. 18.16 ASSETS It and each of its Subsidiaries has good and marketable title to, or valid leases or licences of, or is otherwise entitled to use (in each case, on arm's length terms), all material assets necessary for the conduct of its business as it is being, and is proposed to be, conducted. 18.17 ENVIRONMENTAL LAWS AND LICENCES It and each of its Subsidiaries has: (a) complied with all Environmental Laws to which it may be subject; (b) all Environmental Licences required in connection with its business; and (c) complied with the terms of those Environmental Licences, in each case where failure to do so would reasonably be expected to have a Material Adverse Effect. 18.18 GROUP STRUCTURE (a) The Group Structure Chart shows: (i) each member of the Group and any person in whose shares any member of the Group has an interest (and the percentage of the issued share capital held, and whether legally or beneficially, by that member) as at the date of this Agreement; (ii) the jurisdiction of incorporation or establishment of each person shown in it; and - 60 - (iii) the status of each person shown in it which is not a limited liability company or corporation. (b) Each Obligor other than the Company is directly or indirectly a wholly-owned Subsidiary of the Company. (c) The Company does not own any of the shares in Flexsys other than 50% of the preference shares nor holds voting rights which would mean Flexsys would fall within the definition of being a subsidiary of the Company. 18.19 NO FINANCIAL INDEBTEDNESS, GUARANTEES OR SECURITY (a) No member of the Group has any Financial Indebtedness other than Permitted Financial Indebtedness. (b) No member of the Group has issued any guarantee other than a Permitted Guarantee. (c) No Security or Quasi Security exists over all or any of its (or any of its Subsidiaries') assets other than Permitted Security. 18.20 SHARES (a) The shares of any member of the Group which are expressed to be (or are required by this Agreement to be or become) subject to any Security under any Security Document are issued, fully paid, freely transferable other than as provided in the articles of association of the Borrower as delivered pursuant to Clause 4.1 (Initial conditions precedent) and subject to Clause 21.27 (Amendment to articles of association of CP Films) and constitute shares in the capital of limited liability companies, and there are no moneys or liabilities outstanding or payable in respect of any such share. (b) No person has or is entitled to any conditional or unconditional option, warrant or other right to call for the issue or allotment of, subscribe for (other than pursuant to the existing security over the shares in the Company expressly disclosed in paragraphs 2.2(a)(v), 2.2(b)(i) and 2.2(b)(ii) of the Due Diligence Report, purchase or otherwise acquire any share capital of any member of the Group (including any right of pre-emption, conversion or exchange). (c) Except in connection with any Permitted Share Transaction, there are no agreements in force or corporate resolutions passed which require or are reasonably expected to require the present or future issue or allotment of any share capital of any Obligor (including any option or right of pre-emption, conversion or exchange). (d) The shares of any member of the Group which are expressed to be (or are required by this Agreement to be or become) subject to any Security under any Security Document constitute all the share capital of the relevant member of the Group except for one share in the Borrower which is owned by Solutia, Inc.. 18.21 INTELLECTUAL PROPERTY (a) Each member of the Group owns or has valid license to all material Intellectual Property necessary for the conduct of its business as it is being, and is proposed to be, conducted. - 61 - (b) Each member of the Group has paid all necessary fees and is in compliance with all material terms of any such licence to the extent necessary to preserve its ability to use and enforce all such Intellectual Property. (c) No member of the Group has infringed any material Intellectual Property of any third party in any material respect. (d) To the best of the Company's knowledge and belief, there has been no material infringement or threatened or suspected infringement of or challenge to the validity of any Intellectual Property owned by or licensed to any member of the Group. 18.22 SOLVENCY No Event of Default set out in Clause 22.6 (Insolvency), Clause 22.7 (Insolvency proceedings) or Clause 22.8 (Creditors process) has occurred and is continuing. 18.23 TAXES (a) Each member of the Group has paid all Taxes required to be paid by it within the time period allowed for payment without incurring any penalties for non payment other than any Taxes: (i) being contested by it in good faith and in accordance with the relevant procedures; (ii) which have been disclosed to the Arranger and for which adequate reserves are being maintained in accordance with GAAP; and (iii) where payment can be lawfully withheld and will not result in the imposition of any penalty nor in any Security (other than paragraph (l) of the definition of Permitted Security) ranking in priority to the claims of any Finance Party under any Finance Document or to any Security created under any Security Document. For the avoidance of doubt, this does not include any payment or penalties incurred prior to the date of this Agreement to the extent those liabilities have been discharged and there is no longer a dispute with the relevant taxation authority. (b) No Finance Party is or will be deemed to be resident, domiciled or carrying on business in its Relevant Jurisdiction by reason only of the execution, performance and/or enforcement of any Finance Document or Hedging Document. 18.24 PENSIONS (a) No member of the Group has any material liability in respect of any pension scheme and there are no circumstances which would give rise to such a liability which would reasonably be expected to have a Material Adverse Effect. (b) No member of the Group is in breach of any applicable material laws relating to and the governing provisions of the pension schemes maintained by or for the benefit of any member of the Group and/or any of its employees which would reasonably be expected to have a Material Adverse Effect. 18.25 INSURANCES (a) The insurances required by Clause 21.22 (Insurance) are in full force and effect as required by this Agreement. - 62 - (b) To the best of the Company's knowledge and belief (following all reasonable enquiries), no event or circumstance has occurred, and there has been no failure to disclose a fact, which would entitle any insurer to reduce or avoid its liability under any such insurance where such event, circumstance or failure would reasonably be expected to have a Material Adverse Effect. 18.26 MASTER OPERATING AGREEMENT The Security created pursuant to any Security Document does not violate the terms and conditions of the Master Operating Agreement it being understood that the Belgian floating charge agreement and any floating charge granted upon exercise of the Belgian floating charge mandate shall not include a pledge of the Company's rights under the Master Operating Agreement, to the extent such pledge would violate the Master Operating Agreement. 18.27 TIMES WHEN REPRESENTATIONS MADE (a) The representations and warranties set out in this Clause 18 (except for Clause 18.11 (Information Package) are: (i) made by each Original Obligor on the date of this Agreement; (ii) deemed to be made by each Obligor on the Closing Date by reference to the facts and circumstances then existing (unless otherwise stated). (b) The representations and warranties set out in Clause 18.11 (Information Package) are deemed to be made by each Obligor: (i) with respect to the Information Memorandum, on the date on which the Information Memorandum is approved by the Company and the Syndication Date; (ii) with respect to the Reports, on the Closing Date and the Syndication Date; (iii) with respect to the Business Plan, the date of this Agreement, the Closing Date and the Syndication Date; and (iv) with respect to each Budget (other than the Business Plan), the date on which it is approved by the Company, in each case by reference to the facts and circumstances then existing. (c) The Repeating Representations (and, in the case of sub-paragraph (ii) below, the representations and warranties set out in Clause 18.8 (Validity and admissibility in evidence) and Clause 18.7 (No filing or stamp taxes)) are deemed to be made by each Obligor on: (i) the date of each Utilisation Request and the first day of each Interest Period; and (ii) in the case of an Additional Guarantor, the day on which the company becomes (or it is proposed that the company becomes) an Additional Guarantor, in each case by reference to the facts and circumstances then existing. 19. INFORMATION UNDERTAKINGS The undertakings in this Clause 19 remain in force from the date of this Agreement for so long as any amount is outstanding under the Finance Documents or any Commitment is in force. - 63 - 19.1 ANNUAL FINANCIAL STATEMENTS The Company shall supply to the Agent in sufficient copies for all the Lenders as soon as the same become available, but in any event: (a) within 120 days after the end of its financial years, its audited consolidated financial statements for that financial year (commencing with the financial year ended 31 December 2006); and (b) within 150 days after the end of each of its financial years, the audited financial statements of each Obligor for that financial year if requested by the Agent (acting on the instructions of any Lender). 19.2 QUARTERLY FINANCIAL STATEMENTS (a) The Company shall supply to the Agent in sufficient copies for all the Lenders as soon as the same become available its consolidated financial statements: (i) within 45 days of the end of the Accounting Quarters ending on or about 31 March, 30 June and 30 September in any financial year; and (ii) within 60 days of the end of the Accounting Quarter ending on or about 31 December in any financial year. (b) Each set of quarterly financial statements delivered pursuant to paragraph (a) above shall include: (i) a consolidated cash flow statement and profit and loss account for the relevant Accounting Quarter and for the financial year to date; (ii) a consolidated balance sheet as at the end of the relevant Accounting Quarter; (iii) a comparison with the corresponding Accounting Quarter, and the year to date performance, in the previous year; and (iv) management commentary on the Group's performance during the relevant Accounting Quarter and any material developments or proposals affecting the Group or its business. 19.3 MONTHLY FINANCIAL STATEMENTS (a) Commencing from and including the third Month after the Closing Date and for so long as and at any time that, the Company delivers a Compliance Certificate in accordance with the terms of this Agreement which shows the ratio of Net Borrowings to EBITDA to be greater than or equal to 2.5:1, the Company shall supply to the Agent in sufficient copies for all the Lenders as soon as the same become available, but in any event within 30 days after the end of each Accounting Month its monthly internal management information for that Accounting Month. (b) Each set of monthly internal management information delivered pursuant to paragraph (a) above shall be in a format agreed with the Facility Agent prior to the Closing Date. 19.4 COMPLIANCE CERTIFICATE (a) The Company shall supply to the Agent, with each set of financial statements delivered pursuant to paragraph (a) of Clause 19.1 (Annual financial statements) or Clause 19.2 (Quarterly financial statements) a Compliance Certificate which shall: - 64 - (i) set out (in reasonable detail) computations as to compliance with Clause 20 (Financial covenants) and Clause 21.20 (Security and guarantees) as at, or, as the case may be, in respect of the Relevant Period ending on the date as at which those financial statements were drawn up; and (ii) confirm that no Default is continuing (or if a Default is continuing, specify the Default and the steps being taken to remedy it). (b) If required to be delivered with the financial statements delivered pursuant to paragraph (a) of Clause 19.1 (Annual financial statements), the Compliance Certificate shall also: (i) set out (in reasonable detail) the computation of Excess Cash Flow and Retained Cash (noting to the extent it has been applied or committed to be applied in accordance with this Agreement for a specific purpose) for that financial year; (ii) set out (in reasonable detail) computations as to compliance with Clause 20.2 (Capital Expenditure) during that financial year; (iii) include a reconciliation of the audited financial statements of the Group for that financial year and the management accounts of the Group as at the end of that financial year; and (iv) set out the Material Subsidiaries and (in reasonable detail) computations for the determination of which members of the Group are Material Subsidiaries. (c) Each Compliance Certificate shall be signed by two directors of the Company and, if required to be delivered with the financial statements delivered pursuant to paragraph (a) of Clause 19.1 (Annual financial statements), shall be reported on by the Company's auditors in the Agreed Form. 19.5 REQUIREMENTS AS TO FINANCIAL STATEMENTS (a) Each set of financial statements delivered by the Company pursuant to Clause 19.1 (Annual financial statements), Clause 19.2 (Quarterly financial statements) or Clause 19.3 (Monthly financial statements) shall be certified by a director of the relevant company as fairly representing its (or, as the case may be, its consolidated) financial condition and operations as at the end of and for the period in relation to which those financial statements were drawn up. (b) The Company shall procure that each set of financial statements of an Obligor delivered pursuant to Clause 19.1 (Annual financial statements), Clause 19.2 (Quarterly financial statements) or Clause 19.3 (Monthly financial statements) is prepared deconsolidating Permitted Non-Recourse Subsidiaries. (c) The Company shall procure that each set of financial statements of an Obligor delivered pursuant to Clause 19.1 (Annual financial statements), Clause 19.2 (Quarterly financial statements) or Clause 19.3 (Monthly financial statements) is prepared using GAAP, accounting practices and financial reference periods in each case consistent with the Applicable Accounting Principles unless, in relation to any set of financial statements, it notifies the Agent that there has been a change in GAAP, the accounting practices or reference periods or its auditors (or, if appropriate, the auditors of the Obligor) deliver to the Agent: - 65 - (i) a description of any change necessary for the relevant financial statements to reflect the Applicable Accounting Principles; and (ii) sufficient information, in form and substance as may be reasonably required by the Agent, to enable the Lenders to determine whether Clause 20 (Financial covenants) has been complied with, to calculate the Excess Cash Flow, to determine any other relevant matter and/or to make an accurate comparison between the financial position indicated in those financial statements and that Obligor's Original Financial Statements. Any reference in this Agreement to those financial statements shall be construed as a reference to those financial statements as adjusted to reflect the Applicable Accounting Principles. (d) If the Company notifies the Agent of a change in accordance with paragraph (b) of this Clause 19.6 the Company and the Agent shall enter into negotiations in good faith with a view to agreeing any amendments to this Agreement which are necessary as a result of the change. To the extent practicable these amendments will be such as to ensure that the change does not result in any material alteration in the commercial effect of the obligations in this Agreement. If any amendments are agreed they shall take effect and be binding on each of the Parties in accordance with their terms. 19.6 ANNUAL BUDGET (a) The Company shall supply to the Agent in sufficient copies for all the Lenders as soon as the same becomes available, but in any event no later than the start of each of its financial years, a Budget in respect of that next financial year in the Agreed Form. (b) Each Budget shall include: (i) a projected consolidated cash flow statement and profit and loss account of the Group for that financial year; and; (ii) a management commentary on: (A) the proposed activities of the Group during that year (including material Capital Expenditure investments, acquisitions and disposals proposed during that year); (B) the principal assumptions underlying the projections in that Budget; and (C) any material variations to the Base Case during that year. (c) The Company shall supply to the Agent in sufficient copies for all the Lenders an updated Budget promptly upon becoming aware of any material change to the projections in the then most recent Budget. 19.7 PRESENTATIONS (a) If requested by the Agent (acting on the instructions of the Majority Lenders), the directors of the Company shall give a presentation to the Lenders, at such time and place as the Agent may reasonably request, about the business, financial performance and prospects of the Group, and such other matters as any Finance Party (through the Agent) may reasonably request. The Agent (acting on the instructions of the Majority Lenders) may not request more than one presentation in any financial year, unless an Event of Default is continuing. - 66 - 19.8 INFORMATION: MISCELLANEOUS The Company shall supply to the Agent (in sufficient copies for all the Lenders, if the Agent so requests): (a) at the same time as they are dispatched, copies of all documents dispatched by the Company to its shareholders, in their capacity as shareholders generally (or any class of them) or its creditors generally (or any class of them); (b) promptly upon becoming aware of them, the details of any litigation, arbitrations or administrative proceedings which are current, threatened in writing or pending against any member of the Group or any Restricted Person, which could reasonably be expected to be adversely determined and which, if so determined, would reasonably be expected to have a Material Adverse Effect; (c) promptly upon becoming aware of them, the details of any litigation, arbitration or administrative proceedings which are current, pending or threatened, and any claim, notice or other communication received by it in respect of any actual or alleged breach or liability or any notice of acceleration, enforcement or similar steps, which relates to the Security in Belgium granted in respect of the Euro Notes. (d) promptly upon becoming aware of them, the details of any litigation, arbitration or administrative proceedings which are current, pending or threatened in writing, and any claim, notice or other communication in respect of any actual or alleged breach or liability, relating to the DIP Financing (or any replacement to the DIP Financing); (e) promptly upon becoming aware of them, the details of any material labour dispute affecting any member of the Group which could reasonably be expected to be adversely determined and which, if so determined, would reasonably be expected to have a Material Adverse Effect; (f) promptly upon becoming aware of them, the details of any claim, notice or other written communication received by it in respect of any actual or alleged breach of or liability under Environmental Law, or any event or circumstance which is likely to result in any such claim or notice, which could reasonably be expected to be substantiated and which, if substantiated, would reasonably be expected to have a Material Adverse Effect; (g) promptly upon becoming aware of them, any change in the structure of the Group from that set out in the Group Structure Chart which is or would reasonably be expected to be adverse to the interests of the Finance Parties; (h) promptly upon becoming aware of them, the details of any claim and/or potential claim for an amount in excess of (euro)3,000,000 (or its equivalent in another currency or currencies) in aggregate made by or on behalf of any member of the Group under any insurance policy; (i) promptly such further information regarding the financial condition or the business of any member of the Group as any Finance Party (through the Agent) may reasonably request. - 67 - 19.9 NOTIFICATION OF EVENT OF DEFAULT (a) Each Obligor shall notify the Agent of any Event of Default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence (unless that Obligor is aware that a notification has already been provided by another Obligor). (b) Promptly upon a request by the Agent, the Company shall supply to the Agent a certificate signed by two of its directors on its behalf certifying that no Event of Default is continuing (or if an Event of Default is continuing, specifying the Event of Default and the steps, if any, being taken to remedy it). 19.10 INSPECTION OF BOOKS AND RECORDS (a) Each Obligor shall (and the Company shall ensure that each member of the Group will): (i) keep books and records which accurately reflect in all material respects all of its business, affairs and transactions; and (ii) following the occurrence of an Event of Default and upon reasonable notice, permit any Finance Party to visit any of its offices during normal working hours, to inspect any of its books and records and to discuss its financial matters with its officers and auditors. The cost and expense of each such visit shall be borne by the Company. (b) If requested by the Agent, each Obligor shall authorise and/or (as the case may be) engage its auditors and/or any of the firms which prepared the Reports to discuss any matter with any of the Finance Parties on terms and conditions acceptable to the Agent (acting reasonably). 19.11 AUDITORS (a) Subject to paragraph (b), the Company shall ensure that the same internationally recognised "big four" firm of accountants is appointed as its auditors and the auditors of each other member of the Group, with the exception of CPFilms Vertriebs GmbH which may continue to use its existing firm of accountants as auditors. (b) No Obligor shall (and the Company shall ensure that no other member of the Group will) change its auditors without the consent of the Majority Lenders. (c) The Company shall ensure that the financial year end of the Group and each member of the Group is 31 December. (d) No Obligor shall (and the Company shall ensure that no other member of the Group will) change its financial year end or the end of its Accounting Quarter or Accounting Month without the consent of the Majority Lenders. 19.12 INVESTIGATIONS (a) The Agent (acting reasonably) may (no more than once in any calendar year or at any time following the occurrence of an Event of Default which is continuing) require the Company to instruct the auditors of the Company (or such other internationally recognised "big four" firm of accountants as the Agent selects) to investigate the affairs, financial performance or accounting and other reporting procedures and standards of the Group. The cost and expense of each such investigation or report shall be borne by the Company. - 68 - (b) Each Obligor shall (and the Company shall ensure that each other member of the Group will) co-operate fully with any person carrying out an investigation or preparing a report pursuant to paragraph (a) above. 19.13 USE OF WEBSITES (a) The Company may satisfy its obligation under this Agreement to deliver any information in relation to those Lenders (the "WEBSITE LENDERS") who accept this method of communication by posting this information onto an electronic website designated by the Company and the Agent (the "DESIGNATED WEBSITE") if: (i) the Agent expressly agrees (after consultation with each of the Lenders) that it will accept communication of the information by this method; (ii) both the Company and the Agent are aware of the address of and any relevant password specifications for the Designated Website; and (iii) the information is in a format previously agreed between the Company and the Agent. If any Lender (a "PAPER FORM LENDER") does not agree to the delivery of information electronically then the Agent shall notify the Company accordingly and the Company shall supply the information to the Agent (in sufficient copies for each Paper Form Lender) in paper form. In any event the Company shall supply the Agent with at least one copy in paper form of any information required to be provided by it. (b) The Agent shall supply each Website Lender with the address of and any relevant password specifications for the Designated Website following designation of that website by the Company and the Agent. (c) The Company shall promptly upon becoming aware of its occurrence notify the Agent if: (i) the Designated Website cannot be accessed due to technical failure; (ii) the password specifications for the Designated Website change; (iii) any new information which is required to be provided under this Agreement is posted onto the Designated Website; (iv) any existing information which has been provided under this Agreement and posted onto the Designated Website is amended; or (v) the Company becomes aware that the Designated Website or any information posted onto the Designated Website is or has been infected by any electronic virus or similar software. If the Company notifies the Agent under sub-paragraph (i) or sub-paragraph (v) above, all information to be provided by the Company under this Agreement after the date of that notice shall be supplied in paper form unless and until the Agent and each Website Lender is satisfied that the circumstances giving rise to the notification are no longer continuing. (d) Any Website Lender may request, through the Agent, one paper copy of any information required to be provided under this Agreement which is posted onto the Designated Website. The Company shall comply with any such request within ten Business Days. - 69 - 19.14 "KNOW YOUR CUSTOMER" CHECKS (a) If: (i) the introduction of or any change in (or in the interpretation, administration or application of) any law or regulation made after the date of this Agreement; (ii) any change in the status of an Obligor after the date of this Agreement; or (iii) a proposed assignment or transfer by a Lender of any of its rights and obligations under this Agreement to a party that is not a Lender prior to such assignment or transfer, obliges the Agent or any Lender (or, in the case of sub-paragraph (iii) above, any prospective new Lender) to comply with "know your customer" or similar identification procedures in circumstances where the necessary information is not already available to it, each Obligor shall promptly upon the request of the Agent or any Lender supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Agent (for itself or on behalf of any Lender) or any Lender (for itself or, in the case of the event described in sub-paragraph (iii) above, on behalf of any prospective new Lender) in order for the Agent, such Lender or, in the case of the event described in sub-paragraph (iii) above, any prospective new Lender to carry out and be satisfied it has complied with all necessary "know your customer" or other similar checks under all applicable laws and regulations pursuant to the transactions contemplated in the Finance Documents. (b) Each Lender shall promptly upon the request of the Agent supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Agent (for itself) in order for the Agent to carry out and be satisfied it has complied with all necessary "know your customer" or other similar checks under all applicable laws and regulations pursuant to the transactions contemplated in the Finance Documents. (c) The Company shall, by not less than 10 Business Days' prior written notice to the Agent, notify the Agent (which shall promptly notify the Lenders) of its intention to request that one of its Subsidiaries becomes an Additional Obligor pursuant to Clause 24 (Changes to the Obligors). (d) Following the giving of any notice pursuant to paragraph (c) above, if the accession of such Additional Obligor obliges the Agent or any Lender to comply with "know your customer" or similar identification procedures in circumstances where the necessary information is not already available to it, the Company shall promptly upon the request of the Agent or any Lender supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Agent (for itself or on behalf of any Lender) or any Lender (for itself or on behalf of any prospective new Lender) in order for the Agent or such Lender or any prospective new Lender to carry out and be satisfied it has complied with all necessary "know your customer" or other similar checks under all applicable laws and regulations pursuant to the accession of such Subsidiary to this Agreement as an Additional Obligor. 19.15 NO PERSONAL LIABILITY No director, officer or employee of the Company or any other member of the Group shall be personally liable for any statement made by it in any certificate or other document as required to be delivered pursuant to any Finance Party pursuant to the Finance Documents. - 70 - 20. FINANCIAL COVENANTS 20.1 FINANCIAL CONDITION Commencing in and including the Relevant Period to 31 December 2006, the Company shall ensure that: (a) the ratio of EBITDA to Net Interest Expense for each Relevant Period ending on a Relevant Date set out in the table below will not be less than the ratio set out in the relevant column in the table below opposite that Relevant Date; (b) the ratio of Net Borrowings on each Relevant Date set out in the table below to EBITDA for the Relevant Period ending on that Relevant Date will not exceed the ratio set out in the relevant column in the table below opposite that Relevant Date; (c) the ratio of Cash Flow to Debt Service for each Relevant Period ending on a Relevant Date set out in the table below will not be less than 1:1.
--------------------------------------------------------------------------------- RELEVANT DATE NET BORROWINGS / EBITDA EBITDA / NET INTEREST EXPENSE --------------------------------------------------------------------------------- 31 December 2006 3.10 : 1 3.90 : 1 31 March 2007 3.10 : 1 3.90 : 1 30 June 2007 3.10 : 1 3.90 : 1 30 September 2007 3.10 : 1 3.90 : 1 31 December 2007 2.65 : 1 3.95 : 1 31 March 2008 2.65 : 1 3.95 : 1 30 June 2008 2.65 : 1 3.95 : 1 30 September 2008 2.65 : 1 3.95 : 1 31 December 2008 2.00 : 1 4.30 : 1 31 March 2009 2.00 : 1 4.30 : 1 30 June 2009 2.00 : 1 4.30 : 1 30 September 2009 2.00 : 1 4.30 : 1 31 December 2009 2.00 : 1 4.95 : 1 31 March 2010 2.00 : 1 4.95 : 1 30 June 2010 2.00 : 1 4.95 : 1 30 September 2010 2.00 : 1 4.95 : 1 31 December 2010 2.00 : 1 5.00 : 1 31 March 2011 2.00 : 1 5.00 : 1 30 June 2011 2.00 : 1 5.00 : 1 30 September 2011 2.00 : 1 5.00 : 1 31 December 2011 2.00 : 1 5.00 : 1 ---------------------------------------------------------------------------------
- 71 - 20.2 CAPITAL EXPENDITURE (a) No Obligor shall (and the Company shall ensure that no other member of the Group will) in any financial year of the Company set out in column (1) below incur Capital Expenditure if as a result the aggregate amount of Capital Expenditure of the Group in that financial year would exceed the aggregate of (i) the amount set out in column (2) below opposite that financial year and (ii) any Retained Cash (to the extent it has not already been applied or committed to be applied in accordance with this Agreement for another purpose) for that financial year. (1) (2) FINANCIAL YEAR TO AMOUNT IN (EURO) 31 December 2007 13,300,000 31 December 2008 7,500,000 31 December 2009 6,000,000 31 December 2010 24,900,000 31 December 2011 12,500,000
(b) If the Capital Expenditure incurred in any financial year of the Company set out in column (1) in paragraph (a) above is less than the amount set out in column (2) in paragraph (a) above opposite that financial year, to the extent that the shortfall could have been incurred in that financial year without breaching any term of this Agreement then 50 per cent. of that shortfall may be carried forward to the subsequent financial year of the Company only and added to the maximum Capital Expenditure set out in column (2) in paragraph (a) above for that subsequent financial year. (c) If any shortfall is carried forward to any subsequent financial year under paragraph (b) above, in that subsequent financial year any Capital Expenditure incurred up to the amount set out in column (2) in paragraph (a) above opposite that financial year shall be treated as incurred before any Capital Expenditure incurred up to the amount of any such shortfall. (d) If any shortfall carried forward to any subsequent financial year under paragraph (c) above is not spent in that subsequent financial year it shall cease to be available. 20.3 FINANCIAL COVENANT CALCULATIONS (a) Capital Expenditure, Cash Flow, Debt Service, EBITDA, Interest Expense, Net Borrowings, Net Interest Expense, Total Borrowings and Working Capital shall be calculated and interpreted on a consolidated basis in accordance with the Applicable Accounting Principles and shall be expressed in euro. (b) Subject to paragraph (c) below, Capital Expenditure, Cash Flow, EBITDA, Interest Expense, Net Interest Expense and Working Capital shall be determined (except as needed to reflect the - 72 - terms of this Clause 20) from the financial statements of the Group and Compliance Certificates delivered under Clause 19.1 (Annual financial statements), Clause 19.2 (Quarterly financial statements), and Clause 19.4 (Compliance Certificate). (c) In respect of the Relevant Periods ending on each of 31 December 2006, 31 March 2007 and 30 June 2007, Interest Expense and Net Interest Expense shall each be calculated on a pro forma basis to the extent applicable as if the Facilities had been utilised in full on the date of commencement of each such Relevant Period with the exception that Interest Expense and Net Interest Expense shall not be calculated on a pro forma basis for the purpose of calculating Excess Cash Flow. (d) For the purpose of this Clause 20, no item shall be included or excluded more than once in any calculation. (e) If any requirement set out in paragraphs (a) to (c) Clause 20.1 (Financial condition) is not, or may not be, complied with at any time the Company may, no later than the date of delivering to the Agent the Compliance Certificate setting out that non-compliance, procure that Monchem International Inc. or Solutia Investments LLC provides further investment in the shares of the Company, or makes a capital contribution to the Company or makes a shareholder loan to the Company (which shall be subordinated to the Facilities on terms satisfactory to the Agent) which does not exceed on any occasion (euro)10,000,000 (the "CURE AMOUNT"), in an amount sufficient to ensure compliance with the relevant requirement immediately after that investment or capital contribution or shareholder loan and any applicable breach or default of the requirements of paragraphs (a) to (c) of Clause 20.1 (Financial condition) referred to in this paragraph shall be deemed cured for all purposes of the Finance Documents. This right may only be exercised once in any period of four consecutive Accounting Quarters and no more than twice in the period from the date of the Facility Agreement to the Termination Date. If any such investment or capital contribution or shareholder loan is made in any Relevant Period to ensure compliance with the relevant requirement in the immediately preceding Relevant Period, that investment or capital contribution or shareholder loan shall be deemed to have been made on the last day of that immediately preceding Relevant Period and to be added to EBITDA for that Relevant Period (and all subsequent Relevant Periods) for the purpose of this Clause 20. 20.4 DEFINITIONS In this Clause 20: "CASH FLOW" means, in relation to any Relevant Period, EBITDA for that Relevant Period adjusted (without double-counting): (a) by deducting any increase or adding any decrease in Working Capital during that Relevant Period; (b) by deducting amounts paid during the Relevant Period by the Group in respect of Capital Expenditure other than Capital Expenditure to the extent funded from Net Sale Proceeds or Insurance Proceeds, other than the proceeds of any insurance policy in relation to business interruption loss which are added back to the total consolidated operating profit - 73 - of the Group in accordance with the Applicable Accounting Principles, permitted to be applied for that purpose under this Agreement; (c) by deducting amounts paid during the Relevant Period by the Group in cash in respect of Tax; (d) by excluding any other non-cash items taken into account in calculating EBITDA (other than to the extent already taken into account in movements in Working Capital); (e) for the cash effect of extraordinary and exceptional items, to the extent that cash was actually received or expended during the Relevant Period; (f) by deducting any fees, expenses or charges paid in cash in relation to any equity offering, investment, acquisition or indebtedness permitted to be incurred under this Agreement (whether or not successful) to the extent not deducted from EBITDA; (g) by deducting the aggregate amount of any payments made as permitted under paragraph (c) of the definition of Permitted Non-Recourse Subsidiary or paragraph (f) of the definition of Permitted Loan; (h) by adding the aggregate amount received during the Relevant Period by the Group in cash in respect of any rebate of Tax; (i) by deducting the cost of acquisition of any shares or businesses to the extent not included in EBITDA; (j) by adding the net proceeds of any sale, lease, transfer or other disposal of assets received during that Relevant Period (other than any such proceeds received in relation to a sale, lease, transfer or other disposal permitted under paragraph (a) of the definition of Permitted Disposal) after deducting the amount of any such proceeds required to be applied in prepayment under Clause 7.5 (Mandatory prepayment - Net Sale Proceeds); (k) by adding the amount of any dividends or other profit distributions (net of Tax) received by any member of the Group from any person which is not a member of the Group during that Relevant Period; (l) by deducting the amount of any dividends or other profit distributions paid in cash by the Company during that Relevant Period; (m) by deducting the amount of any prepayment premium arising under the Euro Notes incurred as a result of early redemption; (n) to the extent not taken into account in any other paragraph in this definition, by adding all cash credits and release provisions, and deducting all cash debits and other cash charges and provisions not included in establishing EBITDA for such period; and (o) to the extent not taken into account in any other paragraph in this definition, by deducting all non-cash credits and release of provisions and adding all non-cash debits and other non-cash charges and provisions included in establishing EBITDA for such period. "DEBT SERVICE" means, in relation to any Relevant Period, the aggregate of: - 74 - (a) Net Interest Expense for that Relevant Period; and (b) scheduled repayments, and any other scheduled payments in the nature of principal, payable by the Group in that Relevant Period in respect of Financial Indebtedness: (i) including all capital payments falling due in relation to any lease that would be treated as a capital lease under the Applicable Accounting Principles; and (ii) excluding any amounts falling due under the Permitted Revolving Credit Facility which were available for simultaneous redrawing and any Financial Indebtedness between any members of the Group, in each case adjusted to reflect the assumption or repayment of debt relating to any member of the Group or business or assets acquired or sold during the Relevant Period. "EBITDA" means, in relation to any Relevant Period, the total consolidated operating profit of the Group on continuing operations for that Relevant Period: (a) including the net pre-taxation profits of a member of the Group or business or assets acquired during that Relevant Period for the part of that Relevant period when it was not a member of the Group and/or the business or assets were not owned by a member of the Group; but (b) excluding the net pre-taxation profits attributable to any member of the Group or to any business or assets sold during that Relevant Period. but: (i) before taking into account: (A) Net Interest Expense; (B) Tax; (C) Non-operational profits (or losses) and profits (or losses) attributable to minority interests in any member of the Group; (D) any share of the profit of any associated company or undertaking, except for dividends or other profit distributions (net of Tax) received in cash by any member of the Group; (E) all extraordinary and exceptional items; (F) exchange rate gains (or losses) arising due to the re-translation of balance sheet items and mark-to-market adjustments on currency swaps; and (G) excluding non-operating gains or losses; (ii) after excluding (to the extent included) any gains or losses on the disposal or revaluation of assets (other than in the ordinary course of trading); (iii) after adding any business interruption loss incurred which is covered by insurance and which is not added back to the total consolidated operating profit of the Group in accordance with the Applicable Accounting Principles; and - 75 - (iv) after adding back all amounts provided for depreciation and amortisation (including acquisition goodwill) and any Cure Amount provided that the right to provide any such Cure Amount may only be exercised once in any period of four consecutive Accounting Quarters and no more than twice in the period from the date of the Facility Agreement to the Termination Date. "INTEREST EXPENSE" means, in relation to any Relevant Period, the aggregate amount of interest and any other finance charges (whether or not paid or payable) accrued by the Group in that Relevant Period in respect of Total Borrowings including: (a) the interest element of leasing and hire purchase payments; (b) commitment fees, regular periodic finance charges, arrangement fees and guarantee fees; and (c) prepayment fees, with each of (a), (b) and (c) above adjusted by: (i) adding back the net amount payable (or deducting the net amount receivable) by members of the Group in respect of that Relevant Period under any interest or (so far as they relate to interest) currency hedging arrangements; (ii) excluding any arrangement fees in respect of the Facility; and (iii) excluding non-operational items. "NET BORROWINGS" means, as at any particular time, Total Borrowings less Cash and Cash Equivalent Investments at that time. "NET INTEREST EXPENSE" means, in relation to any Relevant Period, Interest Expense for that Relevant Period less interest income of the Group in respect of that Relevant Period to the extent received by an Obligor in cash in each case adjusted to reflect the assumption or repayment of debt relating to any member of the Group or business or assets acquired or sold during the Relevant Period. "RELEVANT DATE" means the last date of each Accounting Quarter. "RELEVANT PERIOD" means each period of four consecutive Accounting Quarters ending on a Relevant Date. "TOTAL BORROWINGS" means, as at any particular time, the aggregate outstanding principal, capital or nominal amount (and any fixed or minimum premium payable on prepayment or redemption) of the Financial Indebtedness of members of the Group excluding paragraph (g) of the definition of Financial Indebtedness. For this purpose, any amount outstanding or repayable in a currency other than euro shall on that day be taken into account in its euro equivalent at the rate of exchange that would have been used had an audited consolidated balance sheet of the Group been prepared as at that day in accordance with the Applicable Accounting Principles. - 76 - "WORKING CAPITAL" means, at any time, the current assets of the Group being realisable within one year (other than Cash and Cash Equivalent Investments) less current liabilities due within one year (other than Financial Indebtedness). 21. GENERAL UNDERTAKINGS The undertakings in this Clause 21 remain in force from the date of this Agreement for so long as any amount is outstanding under the Finance Documents or any Commitment is in force. AUTHORISATIONS AND COMPLIANCE WITH LAWS 21.1 AUTHORISATIONS (a) Each Obligor shall (and the Company shall ensure that each other member of the Group will) promptly obtain, comply with and do all that is necessary to maintain in full force and effect (and supply certified copies to the Agent of) any necessary Authorisation required under any applicable law or regulation of its Relevant Jurisdiction to: (i) enable it to perform its obligations under the Finance Documents; (ii) subject to the Reservations and any Perfection Requirements, ensure the legality, validity, enforceability or admissibility in evidence in the Relevant Jurisdiction of any Finance Documents; and (iii) enable it to carry on its business as it is being conducted from time to time if failure to obtain, comply with or maintain any such Authorisation would reasonably be expected to have a Material Adverse Effect. (b) The Company shall ensure that the Perfection Requirements are complied with promptly and in any event before the final date on which it is necessary to carry out any such Perfection Requirement in order to achieve the relevant perfection, protection or priority of any Security Document. 21.2 COMPLIANCE WITH LAWS Each Obligor shall (and the Company shall ensure that each other member of the Group will) comply in all respects with all laws to which it may be subject, if failure so to comply would reasonably be expected to have a Material Adverse Effect. 21.3 ENVIRONMENTAL LAWS AND LICENCES (a) Each Obligor shall (and the Company shall ensure that each other member of the Group will): (i) comply with all Environmental Laws to which it may be subject; (ii) obtain all Environmental Licences required in connection with its business; and (iii) comply with the terms of those Environmental Licences, in each case where failure to do so would reasonably be expected to have a Material Adverse Effect. - 77 - 21.4 TAXES (a) Each Obligor shall (and the Company shall ensure that each other member of the Group will) pay all Taxes required to be paid by it within the time period allowed for payment without incurring any penalties for non payment. (b) Paragraph (a) above does not apply to any Taxes: (i) being contested by the relevant member of the Group in good faith and in accordance with the relevant procedures; (ii) which have been disclosed in its financial statements and for which adequate reserves are being maintained in accordance with GAAP; and (iii) where payment can be lawfully withheld and will not result in the imposition of any penalty nor in any Security (other than paragraph (l) of the definition of Permitted Security) ranking in priority to the claims of any Finance Party under any Finance Document or to any Security created under any Security Document. (c) No member of the Group may change its residence for Tax purposes. RESTRICTIONS ON BUSINESS FOCUS 21.5 MERGER (a) No Obligor shall (and the Company shall ensure that no other member of the Group will) enter into any amalgamation, demerger, merger, sale or contribution of all assets and liabilities of a company ("universalite/algemeenheid") or of a branch of activities, consolidation or corporate reconstruction. (b) Paragraph (a) above does not apply to any amalgamation, demerger, merger, sale or contribution of all assets and liabilities of a company ("universalite/algemeenheid") or of a branch of activities, consolidation or corporate reconstruction which is a Permitted Merger. 21.6 CHANGE OF BUSINESS The Company shall ensure that no substantial change is made to the general nature of the business of the Company or the Group or the Obligors taken as a whole from that carried on at the date of this Agreement. 21.7 JOINT VENTURES (a) Without the prior consent of the Majority Banks no Obligor shall (and the Company shall ensure that no member of the Group will): (i) invest in or acquire (or agree to invest in or acquire) any share in, or any security issued by, any Joint Venture or any interest therein; or (ii) transfer any assets or lend to or give a guarantee, or Security or Quasi Security (other than Permitted Security), for the obligations of a Joint Venture (or agree to do any of the foregoing). (b) Paragraph (a) above does not apply to any investment in, or transfer or loan to, or guarantee for the obligations of the company referred to in paragraph (a) of Schedule 8 (Disposals) other than prior to the date hereof. - 78 - 21.8 ACQUISITIONS AND INVESTMENTS (a) No Obligor shall (and the Company shall ensure that no other member of the Group will): (i) invest in or acquire any share in, or any security issued by, any person, or any interest therein or in the capital of any person, or make any capital contribution to any person (or agree to do any of the foregoing); or (ii) invest in or acquire any business or going concern, or the whole or substantially the whole of the assets or business of any person, or any assets that constitute a division or operating unit of the business of any person (or agree to do any of the foregoing). (b) Paragraph (a) above does not apply to any acquisition or investment which is a Permitted Acquisition. 21.9 NON-RECOURSE SUBSIDIARIES (a) No Obligors shall (and the Company shall ensure that no member of the Group will ) without the consent of the Majority Lenders: (i) invest in or acquire (or agree to invest in or acquire) any share in, or any security issued by, any Non-Recourse Subsidiary or any interest therein; or (ii) transfer any assets or lend to or give a guarantee, or Security or Quasi Security, other than for the obligations of a Non-Recourse Subsidiary (or agree to do any of the foregoing). (b) Paragraph (a) above does not apply to any acquisition of or investment in, or transfer or loan to, or guarantee, Security or Quasi Security other than for the obligations of, a Permitted Non-Recourse Subsidiary. RESTRICTIONS ON DEALING WITH ASSETS AND SECURITY 21.10 ASSETS Each Obligor shall (and the Company shall ensure that each other member of the Group will) maintain to a standard of repair consistent with that maintained by companies carrying on businesses similar to that carried on by the Group (ordinary wear and tear excepted) all its physical assets necessary for the conduct of its business as conducted from time to time except where failure to so maintain could not reasonably be expected to have a Material Adverse Effect. 21.11 PARI PASSU Each Obligor shall ensure that its obligations under the Finance Documents rank at all times at least pari passu in right of priority and payment with the claims of all its other unsecured and unsubordinated creditors, except for obligations mandatorily preferred by law applying to companies generally. 21.12 NEGATIVE PLEDGE (a) No Obligor shall (and the Company shall ensure that no other member of the Group will) create or permit to subsist any Security or Quasi Security over any of its assets. (b) Paragraph (a) above does not apply to any Security or Quasi Security which is Permitted Security. - 79 - 21.13 DISPOSALS (a) No Obligor shall (and the Company shall ensure that no other member of the Group will) enter into a single transaction or a series of transactions (whether related or not and whether voluntary or involuntary) to sell, lease, transfer or otherwise dispose of any asset. (b) Paragraph (a) above does not apply to any sale, lease, transfer or other disposal which is a Permitted Disposal. 21.14 ARM'S LENGTH TERMS No Obligor shall (and the Company shall ensure that no other member of the Group will) enter into any material contract or arrangement with or for the benefit of any Restricted Person (including any disposal to that person) other than: (a) in the case of a transaction other than in the ordinary course of business, for full market value and on arm's length terms; or (b) in the case of a transaction in the ordinary course of business, on arm's length terms to the extent consistent with previous practice. 21.15 LOANS OR CREDIT (a) No Obligor shall (and the Company shall ensure that no other member of the Group will) be a creditor in respect of any Financial Indebtedness. (b) Paragraph (a) above does not apply to a Permitted Loan. 21.16 GUARANTEES (a) No Obligor shall (and the Company shall ensure that no other member of the Group will) issue or allow to remain outstanding any guarantee in respect of any liability or obligation of any person. (b) Paragraph (a) above does not apply to a Permitted Guarantee. 21.17 RESTRICTED PAYMENTS (a) No Obligor shall (and the Company shall ensure that no other member of the Group will): (i) pay, repay or prepay any principal, interest or other amount on or in respect of, or redeem, purchase or defease, any Financial Indebtedness owing to any Restricted Person; or (ii) make any investment in, or pay any fee or make any advance or other kind of payment to any Restricted Person other than in the ordinary course of business, on arm's length terms and at full market value. (b) The Company shall not: (i) declare, pay or make any dividend or other payment or distribution of any kind on or in respect of any of its shares; and (ii) reduce, return, purchase, repay, cancel or redeem any of its shares. (c) Paragraphs (a) and (b) above do not apply to a payment which is a Permitted Payment. MOVEMENT OF CASH - CASH IN - 80 - 21.18 FINANCIAL INDEBTEDNESS (a) No Obligor shall (and the Company shall ensure that no other member of the Group will) incur (or agree to incur) or allow to remain outstanding any Financial Indebtedness. (b) Paragraph (a) above does not apply to Financial Indebtedness that is Permitted Financial Indebtedness. 21.19 ISSUE OF SHARES (a) No Obligor shall (and the Company shall ensure that no other member of the Group will): (i) issue any share to any person; or (ii) grant to any person any conditional or unconditional option, warrant or other right to call for the issue or allotment of, subscribe for, purchase or otherwise acquire any share of any member of the Group (including any right of pre-emption, conversion or exchange), or alter any right attaching to any share capital of any member of the Group. (b) Paragraph (a) above does not apply to a Permitted Share Transaction. MISCELLANEOUS 21.20 SECURITY AND GUARANTEES (a) The Company shall: (i) promptly notify the Agent if: (A) any new member of the Group is incorporated; (B) any member of the Group becomes a Material Subsidiary; or (C) any business or asset that is material in the context of the business of the member of the Group that acquires that business or asset is acquired; and (ii) at any time within 30 days of request by the Agent, ensure, subject to the Security Principles, that the relevant member of the Group will: (A) become an Additional Guarantor; and (B) provide Security in form and substance satisfactory to the Security Agent, in favour of the Secured Parties to secure all of the obligations of the Obligors under the Secured Documents. (b) The Company shall ensure that members of the Group shall at all times grant security in accordance with the Security Principles. (c) The Company shall ensure that all perfection requirements set out in the Perfection Requirements List are satisfied within the time period set out in that list to the extent these are required to be satisfied by such specified time following the Closing Date. (d) Each Obligor shall (and the Company shall ensure that each other member of the Group will), at its own expense, promptly take all such action as the Agent or the Security Agent may require acting in accordance with the Security Principles: - 81 - (i) for the purpose of perfecting or protecting any of the Secured Parties' rights under, and preserving the Security intended to be created or evidenced by, any of the Finance Documents; and (ii) for the purpose of facilitating the realisation of any of that Security, including the execution of any transfer, conveyance, assignment or assurance of any asset and the giving of any notice, order or direction and the making of any registration which the Agent or the Security Agent may reasonably require. (e) No Obligor shall (and the Company shall ensure that no other member of the Group will) do, or consent to the doing of, anything which might prejudice the validity, enforceability or priority of any of the Security created pursuant to the Security Documents. (f) The Company shall ensure that at all times after the date of this Agreement: (i) the aggregate of the unconsolidated total assets (excluding any intragroup loans) of the Guarantors (without double counting and excluding any interests in any Subsidiaries which are Guarantors) exceeds 80 per cent. of the consolidated total assets of the Group; and (ii) the aggregate of the unconsolidated revenues and EBITDA of the Guarantors (without double counting and excluding any dividends or other distributions from Subsidiaries which are Guarantors) exceeds 80 per cent. of the consolidated revenues and EBITDA of the Group, in each case calculated by reference to the then most recent unconsolidated financial statements of each Guarantor and the then most recent consolidated financial statements of the Group. 21.21 INTERCOMPANY DEBT The Company shall ensure that (i) each Obligor and (ii) members of the Group (other than Obligors) which are or become creditors in respect of Financial Indebtedness of Obligors to the extent such aggregate amount exceeds (euro)5,000,000 (or its equivalent in another currency or currencies) accedes to the Intercreditor Agreement as an Intercompany Borrower (as defined in the Intercreditor Agreement) and, as the case may be, an Intercompany Lender (as defined in the Intercreditor Agreement), in accordance with the Intercreditor Agreement. 21.22 INSURANCE (a) Each Obligor shall (and the Company shall ensure that each other member of the Group will) maintain insurances (including as to self insurance) on and in relation to its business and assets with reputable independent underwriters or insurance companies: (i) against those risks, and to the extent, usually insured against by prudent companies located in the same or a similar location and carrying on a similar business; and (ii) against those risks, and to the extent, required by applicable law or by contract. (b) Without limiting paragraph (a) above, each Obligor shall (and the Company shall ensure that each other member of the Group will) maintain insurance on all of its assets of an insurable nature against loss or damage by fire and other risks normally insured against by persons - 82 - carrying on a similar business in a sum or sums at least equal to their replacement value (meaning the total cost of entirely rebuilding, reinstating or replacing those assets if completely destroyed, together with architects', surveyors' and other professional fees). (c) Each Obligor shall (and the Company shall ensure that each other member of the Group will) promptly pay premiums and do all things necessary to maintain insurances required of it by paragraphs (a) and (b) above. 21.23 PENSIONS The Company shall ensure that all pension schemes maintained or operated by or for the benefit of any member of the Group and/or any of its employees: (a) are maintained and operated in all material respects in accordance with all applicable laws and contracts and their governing provisions; and (b) are funded substantially in accordance with the governing provisions of the scheme with any funding shortfall advised by actuaries of recognised standing being rectified in accordance with those governing provisions except where failure to maintain or fund could not reasonably be expected to have a Material Adverse Effect. The Company shall promptly notify the Agent of any material change in the rate of contributions to any pension schemes referred to in paragraph (a) above paid or recommended to be paid (whether by the scheme actuary or otherwise) or required (by law or otherwise). 21.24 INTELLECTUAL PROPERTY Each Obligor shall (and the Company shall ensure that each other member of the Group will): (a) take all reasonable action to obtain, safeguard, maintain in full force and effect and preserve its ability to enforce all Intellectual Property necessary for the conduct of its business as conducted from time to time, and not discontinue the use of any such Intellectual Property, including: (i) paying all applicable renewal fees, licence fees and other outgoings; and (ii) performing and complying with all material laws and material obligations to which it is subject as registered proprietor, beneficial owner, user, licensor or licensee of any such necessary Intellectual Property; and (b) promptly notify the Agent of any material infringement or threatened or suspected material infringement of or any challenge to the validity of any such necessary Intellectual Property owned by or licensed to it which may come to its notice, supply the Agent (if requested) with all information in its possession relating thereto; (c) take all necessary steps permitted under the relevant licence to the extent consistent with normal business practice to ensure that the licensor of the Intellectual Property prevents third parties infringing any such necessary Intellectual Property; and (d) take all necessary steps permitted under the relevant licence to the extent consistent with normal business practice to ensure that the licensor of the Intellectual Property - 83 - enforces the confidentiality of and prevents any improper use of any trade secret which is Intellectual Property. 21.25 HEDGING (a) The Company shall ensure that the hedging required by the Hedging Letter is effected within 6 Months after the Closing Date (and is maintained in effect) in accordance with the terms of the Hedging Letter. (b) At or before the time that any member of the Group enters into any Hedging Document with a Hedging Bank, the Company shall ensure that the counterparty accedes as a Hedging Bank to the Intercreditor Agreement. (c) No Obligor shall (and the Company shall ensure that no other member of the Group will) enter (or agree to enter) into any derivative transaction. (d) Paragraph (c) above does not apply to any derivative transaction which is a Permitted Hedging Transaction. 21.26 BANK ACCOUNTS (a) No Obligor shall (and the Company shall ensure that no other member of the Group will) open or maintain any account with any bank or other financial institution unless if the account is subject to any Permitted Security under paragraph (f) of that definition, provided that such member of the Group uses its reasonable commercial endeavours to have such Permitted Security released, subordinated or waived, in form and substance satisfactory to the Security Agent, in favour of the Secured Parties to secure all of the obligations of the Obligors under the Secured Documents. (b) Each Obligor shall (and the Company shall ensure that each other member of the Group will) pay all sums received by it into a bank account permitted by paragraph (f) above. 21.27 AMENDMENT TO ARTICLES OF ASSOCIATION OF CPFILMS The Company shall ensure that within 90 days of the date of this Agreement, CPFilms Vertriebs GmbH delivers to the Agent a certified copy of its articles of association (Gesellschaftsvertrag) together with a certified extract from the commercial register (Handelsregister) of the local court (Amtsgericht) of Bielefeld evidencing that the restrictions on transferring and encumbering the Shares (formerly No. 8 (Transfer of shares encumbrances) of the articles of association) have been removed. 22. EVENTS OF DEFAULT Each of the events or circumstances set out in this Clause 22 is an Event of Default. 22.1 NON-PAYMENT An Obligor does not pay on the due date any amount payable pursuant to a Finance Document at the place at and in the currency in which it is expressed to be payable unless: (a) its failure to pay is caused by administrative or technical error; and (b) payment is made within 3 Business Days of its due date. - 84 - 22.2 FINANCIAL COVENANTS Any requirement of Clause 20 (Financial covenants) is not satisfied. 22.3 OTHER OBLIGATIONS (a) Any Obligor does not comply with any provision of the Finance Documents (other than those referred to in Clause 22.1 (Non-payment), Clause 22.2 (Financial covenants) above) unless the failure to comply is capable of remedy and is remedied within 15 Business Days of the Agent giving notice to the Company or the Company becoming aware of the failure to comply. 22.4 MISREPRESENTATION Any representation or statement made or deemed to be made by an Obligor in the Finance Documents or any other document delivered by or on behalf of any Obligor under any Finance Document is or proves to have been incorrect or misleading in any material respect when made or deemed to be made unless the facts or circumstances underlying the misrepresentation are capable of remedy and are remedied within 15 Business Days of the Agent giving notice to the Company or the Company becoming aware of the misrepresentation. 22.5 CROSS DEFAULT (a) Any Financial Indebtedness of any member of the Group is not paid when due nor within any originally applicable grace period. (b) Any Financial Indebtedness of any member of the Group is declared to be or otherwise becomes due and payable prior to its specified maturity as a result of an event of default (however described). (c) Any commitment for any Financial Indebtedness of any member of the Group is cancelled or suspended by a creditor of any member of the Group as a result of an event of default (however described). (d) Any creditor of any member of the Group becomes entitled to declare any Financial Indebtedness of any member of the Group due and payable prior to its specified maturity as a result of an event of default (however described). (e) No Event of Default will occur under this Clause 22.5 if: (i) the aggregate amount of Financial Indebtedness or commitment for Financial Indebtedness falling within paragraphs (a) to (d) above is less than (euro)10,000,000 (or its equivalent in another currency or currencies); and (ii) where the Financial Indebtedness falling within paragraphs (a) to (d) above comprises an overdraft or other uncommitted or on demand facility, such event is remedied within 5 Business Days of the Agent giving notice to the Company or the Company becoming aware of the relevant event. 22.6 INSOLVENCY (a) Any Obligor or Material Subsidiary is unable on a persistent basis (op duurzame wiize/de maniere persistante) (in relation to any Belgian Obligors and Material Subsidiaries) or admits inability to pay its debts as they fall due, suspends, or threatens to suspend, making payments on any of its debts (or any class of them) including cessation de paiements/stakring van - 85 - betalingen, or, by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors (or any class of them) (other than the Lenders) with a view to rescheduling any of its indebtedness. (b) The value of the assets of any Obligor or Material Subsidiary is less than its liabilities (taking into account contingent and prospective liabilities). (c) A moratorium is declared in respect of any indebtedness of any Obligor or Material Subsidiary. (d) Any procedure or step is taken in any jurisdiction of an Obligor which is analogous to those provisions in (a) to (c) above. 22.7 INSOLVENCY PROCEEDINGS (a) Any corporate action, legal proceedings or other procedure or step is taken in relation to: (i) the suspension of payments, a moratorium of any indebtedness (including concordat judiciaire/gerechtelijk akkoord) winding-up, dissolution, administration, bankruptcy (including faillite/faillissement), or reorganisation (by way of voluntary arrangement, scheme of arrangement or otherwise) of any Obligor or Material Subsidiary; (ii) a composition, compromise, assignment or arrangement with any creditor of any Obligor or Material Subsidiary. In relation to an Obligor incorporated in Belgium, these concepts shall mean a "minnelijk akkoord met alle schuldeisers" /'accord amiable avec tous les creanciers"; (iii) the appointment of a liquidator, receiver, administrative receiver, administrator, an administrateur judiciaire/gerechtelijk bestuurder, a commissaire special/speciaal commissaris, administrateur provisoire/voorlopige bewindvoerder, compulsory manager or other similar officer in respect of any Obligor or Material Subsidiary or any of its assets; or (iv) the enforcement of any Security over any assets of any Obligor or Material Subsidiary where such Security secures Financial Indebtedness in excess of (euro)2,500,000 (or its equivalent in another currency or currencies), or any analogous procedure or step is taken in any jurisdiction, in particular (in relation to a German Obligor or a Material Subsidiary incorporated in Germany): (i) a petition for insolvency proceedings in respect of its assets (Antrag auf Eroffnung eines Insolvenzverfahrens) is filed or any event occurs which constitutes a mandatory cause for the initiation of insolvency proceedings (Eroffnungsgrund) as set out in sections 17 and 19 of the German Insolvency Code (Insolvenzordnung) or; (ii) actions are taken pursuant to section 21 of the German Insolvency Code by the competent court. Paragraph (a) above shall not apply to: (iii) any corporate action, legal proceedings or other procedure or step which is part of a solvent reorganisation of any Obligor or Material Subsidiary permitted under this Agreement; or - 86 - (iv) any winding-up petition which is frivolous or vexatious and is discharged, stayed or dismissed within 30 days of commencement and prior to its advertisement. 22.8 CREDITORS' PROCESS Any expropriation, conservatory or executory seizure, attachment, sequestration, distress or execution or any analogous process in any jurisdiction affects any asset or assets of a Obligor or Material Subsidiary and is not discharged within 90 days. 22.9 OWNERSHIP Any Obligor or Material Subsidiary (other than the Company) is not or ceases to be a wholly-owned Subsidiary of the Company unless expressly permitted under the terms of this Agreement. 22.10 UNLAWFULNESS It is or becomes unlawful for any Obligor to perform any of its obligations under the Finance Documents. 22.11 REPUDIATION Any Obligor repudiates a Finance Document or evidences an intention to repudiate a Finance Document. 22.12 CONSTITUTIONAL DOCUMENTS Any constitutional document of any member of the Group is terminated, or is amended in a way, or any consent or waiver is given in respect of any such document, which would be materially detrimental in the interests of the Secured Parties under the Security Documents. 22.13 CESSATION OF BUSINESS Any Obligor or Material Subsidiary suspends or ceases (or threatens to suspend or cease) to carry on all or a material part of its business as a going concern except as part of a Permitted Merger or a Permitted Disposal. 22.14 NATIONALISATION Any step is taken by any person with a view to the seizure, compulsory acquisition, expropriation or nationalisation of all or any of the shares, or all or any substantial part of the assets of any Obligor or Material Subsidiary. 22.15 MATERIAL ADVERSE CHANGE Any event or series of events occurs which the Majority Lenders determine is reasonably likely to have a Material Adverse Effect. 22.16 ACCELERATION (a) On and at any time after the occurrence of an Event of Default the Agent may, and shall if so directed by the Majority Lenders, by notice to the Company: (i) cancel the Total Commitments whereupon they shall immediately be cancelled; (ii) declare that all or part of the Utilisations, together with accrued interest, and all other amounts accrued or outstanding under the Finance Documents be immediately due and payable, whereupon they shall become immediately due and payable; and/or - 87 - (iii) declare that all or part of the Utilisations be payable on demand, whereupon they shall immediately become payable on demand by the Agent on the instructions of the Majority Lenders. - 88 - SECTION 9 CHANGES TO PARTIES 23. CHANGES TO THE LENDERS 23.1 ASSIGNMENTS AND TRANSFERS BY THE LENDERS Subject to this Clause 23, a Lender (the "EXISTING LENDER") may: (a) assign any of its rights; or (b) transfer by novation any of its rights and obligations, to another bank or financial institution or to a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets (the "NEW LENDER"). 23.2 CONDITIONS OF ASSIGNMENT OR TRANSFER (a) The consent of neither the Company nor any other Obligor is required for an assignment or transfer by an Existing Lender. (b) An assignment will only be effective on: (i) receipt by the Agent of written confirmation from the New Lender (in form and substance satisfactory to the Agent) that the New Lender will assume the same obligations to the other Finance Parties as it would have been under if it was an Original Lender; (ii) the New Lender acceding to the Intercreditor Agreement in accordance with the Intercreditor Agreement; and (iii) the performance by the Agent of all necessary "know your customer" or other similar checks under all applicable laws and regulations in relation to such assignment to a New Lender, the completion of which the Agent shall promptly notify to the Existing Lender and the New Lender. (c) A transfer will only be effective if the New Lender accedes to the Intercreditor Agreement in accordance with the Intercreditor Agreement and the procedure set out in Clause 23.5 (Procedure for transfer) is complied with. (d) If: (i) a Lender assigns or transfers any of its rights or obligations under the Finance Documents or changes its Facility Office; and (ii) as a result of circumstances existing at the date the assignment, transfer or change occurs, an Obligor would be obliged to make a payment to the New Lender or Lender acting through its new Facility Office under Clause 12 (Tax gross-up and indemnities) or Clause 13 (Increased Costs), then the New Lender or Lender acting through its new Facility Office is only entitled to receive payment under those Clauses to the same extent as the Existing Lender or Lender acting through its previous Facility Office would have been if the assignment, transfer or change had not occurred. - 89 - (e) If a Lender assigns or transfers part but not all of its share in the Facilities to a person other than one of its Affiliates, another Lender or a Related Fund, the amount of such assignment or transfer must be a minimum of (euro)1,000,000 and in integral multiples of (euro)1,000,000. (f) A transfer or assignment will only be effective if the New Lender has delivered to the Company and copied to the Agent a Tax Status Certificate duly completed and executed by it: (i) in the case of an assignment, together with or prior to its written confirmation as required by Clause 23.2(b)(i); or (ii) in the case of a transfer, together with or prior to the delivery of the Transfer Certificate to the Agent contemplated in Clause 23.5(a), but only if (A) such Tax Status Certificate is required at such time in order to enable the Borrower to make all payments made by it to the Lenders without a Tax Deduction; and (B) such New Lender is not a Belgian legal entity subject to Belgian corporate income tax. 23.3 ASSIGNMENT OR TRANSFER FEE The New Lender shall, on the date upon which an assignment or transfer takes effect, pay to the Agent (for its own account) a fee of (euro)2,000. 23.4 LIMITATION OF RESPONSIBILITY OF EXISTING LENDERS (a) Unless expressly agreed to the contrary, an Existing Lender makes no representation or warranty and assumes no responsibility to a New Lender for: (i) the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any other documents; (ii) the financial condition of any Obligor or other person; (iii) the performance and observance by any Obligor or other person of its obligations under the Finance Documents or any other documents; or (iv) the accuracy of any statements (whether written or oral) made in or in connection with any Finance Document or any other document, and any representations or warranties implied by law are excluded. (b) Each New Lender confirms to the Existing Lender and the other Finance Parties that it: (i) has made (and shall continue to make) its own independent investigation and assessment of the financial condition and affairs of each Obligor and its related entities in connection with its participation in this Agreement and has not relied exclusively on any information provided to it by the Existing Lender or any other Finance Party in connection with any Secured Document; and (ii) will continue to make its own independent appraisal of the creditworthiness of each Obligor and its related entities and any other person whilst any amount is or may be outstanding under the Finance Documents or any Commitment is in force. (c) Nothing in any Finance Document obliges an Existing Lender to: - 90 - (i) accept a re-transfer from a New Lender of any of the rights and obligations assigned or transferred under this Clause 23; or (ii) support any losses directly or indirectly incurred by the New Lender by reason of the non-performance by any Obligor or other person of its obligations under the Finance Documents or otherwise. 23.5 PROCEDURE FOR TRANSFER (a) Subject to the conditions set out in this Clause 23 a transfer is effected in accordance with paragraph (c) below when the Agent executes an otherwise duly completed Transfer Certificate delivered to it by the Existing Lender and the New Lender and a duly completed Tax Status Certificate. The Agent shall, subject to paragraph (b) below, as soon as reasonably practicable after receipt by it of a duly completed Transfer Certificate appearing on its face to comply with the terms of this Agreement and delivered in accordance with the terms of this Agreement, execute that Transfer Certificate. (b) The Agent shall only be obliged to execute a Transfer Certificate delivered to it by the Existing Lender and the New Lender once it is satisfied it has complied with all necessary "know your customer" or other similar checks under all applicable laws and regulations in relation to the transfer to such New Lender. (c) On the Transfer Date: (i) to the extent that in the Transfer Certificate the Existing Lender seeks to transfer by novation its rights and obligations under the Finance Documents each of the Obligors and the Existing Lender shall be released from further obligations towards one another under the Finance Documents and their respective rights against one another under the Finance Documents shall be cancelled (being the "DISCHARGED RIGHTS AND OBLIGATIONS"); (ii) each of the Obligors and the New Lender shall assume obligations towards one another and/or acquire rights against one another which differ from the Discharged Rights and Obligations only insofar as that Obligor and the New Lender have assumed and/or acquired the same in place of that Obligor and the Existing Lender; (iii) the Agent, the Arranger, the Security Agent, the New Lender and the other Lenders shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had the New Lender been an Original Lender with the rights and/or obligations acquired or assumed by it as a result of the transfer and to that extent the Agent, the Arranger, the Security Agent and the Existing Lender shall each be released from further obligations to each other under the Finance Documents; and (iv) the New Lender shall become a Party as a "Lender". (d) For the avoidance of doubt, the Parties agree that in case of a transfer effected in accordance with this Clause 23 (whether by way of novation or otherwise), with respect to Security Documents governed by Belgian law, all rights (including in relation to Security) of the Finance - 91 - Parties shall be maintained and preserved, including for the purposes of Article 1278 of the Belgian Civil Code. 23.6 COPY OF TRANSFER CERTIFICATE TO COMPANY The Agent shall, as soon as reasonably practicable after it has executed a Transfer Certificate, send to the Company a copy of that Transfer Certificate. 23.7 DISCLOSURE OF INFORMATION Any Lender may disclose to any of its Affiliates and: (a) any other person to (or through) whom that Lender assigns or transfers (or may potentially assign or transfer) all or any of its rights and obligations under this Agreement; (b) any other person with (or through) whom that Lender enters into (or may potentially enter into) any sub-participation in relation to, or any other transaction under which payments are to be made by reference to, this Agreement or any Obligor; (c) any other person to whom, and to the extent that, information is required to be disclosed by any applicable law or regulation; or (d) any rating agency or, with the prior written consent of the Company, any other person, any information about any Obligor, the Group, any other person and the Finance Documents as that Lender shall consider appropriate if, in relation to paragraphs (a) and (b) above, the person to whom the information is to be given has entered into a Confidentiality Undertaking. This Clause 23.7 supersedes any previous agreement relating to the confidentiality of this information. 23.8 HEDGING BANKS (a) A Lender (or an Affiliate of a Lender) which becomes a Hedging Bank shall accede to this Agreement and to the Intercreditor Agreement by delivery to the Security Agent of a duly completed and signed accession deed in the form required under the Intercreditor Agreement and by the Security Agent executing that accession deed. (b) Where this Agreement or any other Finance Document imposes an obligation on a Hedging Bank and the relevant Hedging Bank is an Affiliate of a Lender and is not a party to that document, the relevant Lender shall ensure that the obligation is performed by its Affiliate. 23.9 ASSIGNMENT BY WAY OF SECURITY In addition to the other rights provided in this Clause 23, each Lender may, without the consent of any Obligor, at any time charge, assign or otherwise create Security in or over (whether by way of collateral or otherwise) all or any of its rights under any Finance Document to secure the obligations of that Lender, including: (a) any charge, assignment or other Security to secure obligations to a federal reserve or central bank; and (b) in the case of any Lender which is a fund, any charge, assignment or other Security granted to any holders (or trustee or representatives of holders) of obligations owed, or securities issued, by that Lender as Security for those obligations or securities, - 92 - except that no such charge, assignment or Security shall: (i) release a Lender from any of its obligations under the Finance Documents or substitute the beneficiary of the relevant charge, assignment or Security for the Lender as a party to any of the Finance Documents; or (ii) require any payments to be made by an Obligor or grant to any person any more extensive rights than those required to be made or granted to the relevant Lender under the Finance Documents. 23.10 SUB-PARTICIPATIONS Any Lender may, without the consent of any Obligor, at any time sub-participate or sub-contract any of its rights or obligations under the Finance Documents. 24. CHANGES TO THE OBLIGORS 24.1 ASSIGNMENTS AND TRANSFER BY OBLIGORS No Obligor may assign any of its rights or transfer any of its rights or obligations under the Finance Documents. 24.2 ADDITIONAL GUARANTORS (a) Subject to compliance with the provisions of paragraphs (c) and (d) of Clause 19.14 ("Know your customer" checks), the Company may request that any of its wholly owned Subsidiaries becomes an Additional Guarantor. That Subsidiary, and/or any Subsidiary which is required by this Agreement to become an Additional Guarantor, shall become an Additional Guarantor if: (i) the Company delivers to the Agent a duly completed and executed Accession Letter; and (ii) the Agent has received all of the documents and other evidence listed in Part II of Schedule 2 (Conditions precedent) in relation to that Additional Guarantor, each in form and substance satisfactory to the Agent. (b) The Agent shall notify the Company and the Lenders promptly upon being satisfied that it has received (in form and substance satisfactory to it) all the documents and other evidence listed in Part II of Schedule 2 (Conditions precedent). 24.3 REPETITION OF REPRESENTATIONS Delivery of an Accession Letter constitutes confirmation by the relevant Subsidiary that the representations and warranties referred to in paragraph (c) of Clause 18.27 (Times when representations made) are true and correct in relation to it as at the date of delivery as if made by reference to the facts and circumstances then existing. 24.4 RELEASE OF GUARANTORS (a) If a Guarantor ceases to be a member of the Group in accordance with this Agreement, that Guarantor shall cease to be a Guarantor and shall be released from its rights and obligations under the Finance Documents and the Hedging Documents. (b) The Security Agent shall, at the request and cost of the Company, execute such documents as may be required to release that Guarantor pursuant to paragraph (a) above. - 93 - 24.5 RESIGNATION OF GUARANTOR AND RELEASE OF SECURITY ON DISPOSAL If a Guarantor is or is proposed to be the subject of a Permitted Disposal then: (a) where that Guarantor created Security over any of its assets or business in favour of the Security Agent, or Security in favour of the Security Agent was created over the shares (or equivalent) of that Guarantor, the Security Agent shall promptly, at the cost and request of the Company release those assets, business or shares (or equivalent) and issue certificates of non-crystallisation; (b) the resignation of that Guarantor and related release of Security referred to in paragraph (a) above shall not become effective until the date of that disposal; and (c) if the disposal of that Guarantor is not made, the resignation letter of that Guarantor and the related release of Security referred to in paragraph (a) above shall have no effect and the obligations of the Guarantor and the Security created or intended to be created by or over that Guarantor shall continue in full force and effect. 24.6 RELEASE OF SECURITY ON DISPOSAL If an Obligor makes a Permitted Disposal then: (a) where Security has been taken over the assets or business (the subject of the Permitted Disposal) in favour of the Security Agent, the Security Agent shall promptly, at the cost and request of the Company release those assets or business and issue certificates of non-crystallisation; and (b) the release of Security referred to in paragraph (a) above shall not become effective until the date of that disposal. - 94 - SECTION 10 THE FINANCE PARTIES 25. ROLE OF THE AGENT AND THE ARRANGER 25.1 APPOINTMENT OF THE AGENT (a) Each other Finance Party appoints the Agent to act as its agent under and in connection with the Finance Documents. (b) Each other Finance Party authorises the Agent to exercise the rights, powers, authorities and discretions specifically given to the Agent under or in connection with the Finance Documents together with any other incidental rights, powers, authorities and discretions. (c) Each other Finance Party authorises each of the Agent and the Arranger to agree, accept and sign on its behalf the terms of any reliance or engagement letter in relation to any Report or any other report or letter provided by any person in connection with the Finance Documents or the transactions contemplated in them. 25.2 DUTIES OF THE AGENT (a) The Agent shall promptly forward to a Party the original or a copy of any document which is delivered to the Agent for that Party by any other Party. (b) Except where a Finance Document specifically provides otherwise, the Agent is not obliged to review or check the adequacy, accuracy or completeness of any document it forwards to another Party. (c) If the Agent receives notice from a Party referring to this Agreement, describing a Default and stating that the circumstance described is a Default, it shall promptly notify the Finance Parties. (d) If the Agent is aware of the non-payment of any principal, interest, commitment fee or other fee payable to a Finance Party (other than the Agent or the Arranger) under this Agreement, it shall promptly notify the other Finance Parties. (e) The Agent's duties under the Finance Documents are solely mechanical and administrative in nature. 25.3 ROLE OF THE ARRANGER Except as specifically provided in the Finance Documents, the Arranger has no obligations of any kind to any other Party under or in connection with any Finance Document. 25.4 NO FIDUCIARY DUTIES (a) Nothing in this Agreement constitutes the Agent, or the Arranger as a trustee or fiduciary of any other person. (b) Neither the Agent, nor the Arranger shall be bound to account to any Lender for any sum or the profit element of any sum received by it for its own account. 25.5 BUSINESS WITH THE GROUP The Agent and the Arranger may accept deposits from, lend money to and generally engage in any kind of banking or other business with any member of the Group or any other person. - 95 - 25.6 RIGHTS AND DISCRETIONS OF THE AGENT (a) The Agent may rely on: (i) any representation, notice or document believed by it to be genuine, correct and appropriately authorised; and (ii) any statement made by a director, authorised signatory or employee of any person regarding any matters which may reasonably be assumed to be within his knowledge or within his power to verify. (b) The Agent may assume, unless it has received notice to the contrary in its capacity as agent for the Lenders, that: (i) no Default has occurred (unless it has actual knowledge of a Default arising under Clause 22.1 (Non-payment)); (ii) any right, power, authority or discretion vested in any Party or any group of Lenders has not been exercised; and (iii) any notice or request made by the Company (other than a Utilisation Request or Selection Notice) is made on behalf of and with the consent and knowledge of all the Obligors. (c) The Agent may engage, pay for and rely on the advice or services of any lawyers, accountants, surveyors or other experts. (d) The Agent may act in relation to the Finance Documents through its personnel and agents. (e) The Agent may disclose to any other Party any information it reasonably believes it has received as agent under this Agreement. (f) Notwithstanding any other provision of any Finance Document to the contrary, neither the Agent, nor the Arranger is obliged to do or omit to do anything if it would or might in its reasonable opinion constitute a breach of any law or regulation or a breach of a fiduciary duty or duty of confidentiality. 25.7 MAJORITY LENDERS' INSTRUCTIONS (a) Unless a contrary indication appears in a Finance Document, the Agent shall (i) exercise any right, power, authority or discretion vested in it as Agent in accordance with any instructions given to it by the Majority Lenders (or, if so instructed by the Majority Lenders, refrain from exercising any right, power, authority or discretion vested in it as Agent) and (ii) not be liable for any act (or omission) if it acts (or refrains from taking any action) in accordance with an instruction of the Majority Lenders. (b) Unless a contrary indication appears in a Finance Document, any instructions given by the Majority Lenders will be binding on all the Finance Parties. (c) The Agent may refrain from acting in accordance with the instructions of the Majority Lenders (or, if appropriate, the Lenders) until it has received such security as it may require for any cost, loss or liability (together with any associated VAT) which it may incur in complying with the instructions. - 96 - (d) In the absence of instructions from the Majority Lenders (or, if appropriate, the Lenders), the Agent may act (or refrain from taking action) as it considers to be in the best interest of the Lenders. (e) The Agent is not authorised to act on behalf of a Lender (without first obtaining that Lender's consent) in any legal or arbitration proceedings relating to any Finance Document. 25.8 RESPONSIBILITY FOR DOCUMENTATION Neither the Agent, nor the Arranger: (a) is responsible for the adequacy, accuracy and/or completeness of any information (whether oral or written) supplied by the Agent, the Arranger, an Obligor or any other person given in or in connection with any Finance Document or any of the Information Package; or (b) is responsible for the legality, validity, effectiveness, adequacy or enforceability of any Finance Document or any other agreement, arrangement or document entered into, made or executed in anticipation of or in connection with any Finance Document. 25.9 EXCLUSION OF LIABILITY (a) Without limiting paragraph (b) below (and without prejudice to the provisions of paragraph (e) of Clause 28.10 (Disruption to Payment Systems etc)), the Agent will not be liable including without limitation for negligence or any other category of liability whatsoever for any action taken by it under or in connection with any Finance Document, unless directly caused by its gross negligence or wilful misconduct. (b) No Party (other than the Agent) may take any proceedings against any officer, employee or agent of the Agent in respect of any claim it might have against the Agent or in respect of any act or omission of any kind by that officer, employee or agent in relation to any Finance Document and any officer, employee or agent of the Agent may rely on this Clause 25.9. (c) The Agent will not be liable for any delay (or any related consequences) in crediting an account with an amount required under the Finance Documents to be paid by the Agent if the Agent has taken all necessary steps as soon as reasonably practicable to comply with the regulations or operating procedures of any recognised clearing or settlement system used by the Agent for that purpose. (d) Nothing in this Agreement shall oblige the Agent or the Arranger to carry out any "know your customer" or other checks in relation to any person on behalf of any Lender and each Lender confirms to the Agent and the Arranger that it is solely responsible for any such checks it is required to carry out and that it may not rely on any statement in relation to such checks made by the Agent or the Arranger. 25.10 LENDERS' INDEMNITY TO THE AGENT (a) Subject to paragraph (b) below, each Lender shall (in proportion to its Available Commitments and participations in the Loans then outstanding to the Available Facilities and all the Loans) indemnify the Agent, within three Business Days of demand, against any cost, loss or liability including without limitation for negligence or any other category of liability whatsoever incurred by the Agent (otherwise than by reason of its gross negligence or wilful misconduct) (or in the - 97 - case of any cost, loss or liability pursuant to Clause 28.10 (Disruption to Payment Systems etc) notwithstanding the Agent's negligence, gross negligence or any other category of liability whatsoever but not including any claim based on the fraud of the Agent) in acting as Agent under the Finance Documents (unless it has been reimbursed by an Obligor pursuant to a Finance Document). (b) If the Available Facilities are then zero, each Lender's indemnity under paragraph (a) above shall be in proportion to its Available Commitments to the Available Facilities immediately prior to their reduction to zero, unless there are then any Utilisations outstanding, in which case it shall be in proportion to its participations in the Utilisations then outstanding to all the Utilisations. 25.11 RESIGNATION OF THE AGENT (a) The Agent may resign and appoint one of its Affiliates acting through an office in the United Kingdom as successor by giving notice to the other Finance Parties and the Company. (b) Alternatively the Agent may resign by giving notice to the other Finance Parties and the Company, in which case the Majority Lenders (after consultation with the Company) may appoint a successor Agent. (c) If the Majority Lenders have not appointed a successor Agent in accordance with paragraph (b) above within 30 days after notice of resignation was given, the Agent (after consultation with the Company) may appoint a successor Agent (acting through an office in the United Kingdom). (d) The retiring Agent shall, at its own cost, make available to the successor Agent such documents and records and provide such assistance as the successor Agent may reasonably request for the purposes of performing its functions as Agent under the Finance Documents. (e) The Agent's resignation notice shall only take effect upon the appointment of a successor. (f) Upon the appointment of a successor, the retiring Agent shall be discharged from any further obligation in respect of the Finance Documents but shall remain entitled to the benefit of this Clause 25. Its successor and each of the other Parties shall have the same rights and obligations amongst themselves as they would have had if such successor had been an original Party. (g) After consultation with the Company, the Majority Lenders may, by notice to the Agent, require it to resign in accordance with paragraph (b) above. In this event, the Agent shall resign in accordance with paragraph (b) above. 25.12 CO-SECURITY AGENT (a) The Facility Agent may appoint or delegate to a separate security agent, delegate security agent or a co-security agent in any jurisdiction outside England and Wales: (i) if the Facility Agent considers that without the appointment the interests of the Lenders under the Finance Documents might be materially and adversely affected; (ii) for the purpose of complying with any law, regulation or other condition in any jurisdiction; or (iii) for the purpose of obtaining or enforcing a judgment or enforcing any Finance Document in any jurisdiction. - 98 - (b) Any appointment or delegation under this Subclause will only be effective if the security agent, delegate security agent or co-security agent confirms to the Facility Agent and the Company in form and substance satisfactory to the Facility Agent that it is bound by the terms of this Agreement as if it were the Facility Agent. (c) The Facility Agent may remove any security agent or co-security agent appointed by it and may appoint a new security agent or co-security agent in its place. 25.13 CONFIDENTIALITY (a) In acting as agent for the Finance Parties, the Agent shall be regarded as acting through its agency division which shall be treated as a separate entity from any other of its divisions or departments. (b) If information is received by another division or department of the Agent, it may be treated as confidential to that division or department and the Agent shall not be deemed to have notice of it. 25.14 RELATIONSHIP WITH THE LENDERS (a) The Agent may treat each Lender as a Lender, entitled to payments under this Agreement and acting through its Facility Office unless it has received not less than five Business Days' prior notice from that Lender to the contrary in accordance with the terms of this Agreement. (b) Each Lender shall supply the Agent with any information required by the Agent in order to calculate the Mandatory Cost in accordance with Schedule 4 (Mandatory Cost formulae). 25.15 CREDIT APPRAISAL BY THE LENDERS Without affecting the responsibility of any Obligor for information supplied by it or on its behalf in connection with any Finance Document, each Lender confirms to the Agent and the Arranger that it has been, and will continue to be, solely responsible for making its own independent appraisal and investigation of all risks arising under or in connection with any Finance Document including but not limited to: (a) the financial condition, status and nature of each member of the Group; (b) the legality, validity, effectiveness, adequacy or enforceability of any Finance Document and any other agreement, Security, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document; (c) whether that Lender has recourse, and the nature and extent of that recourse, against any Party or any of its respective assets under or in connection with any Finance Document, the transactions contemplated by the Finance Documents or any other agreement, Security, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document; and (d) the adequacy, accuracy and/or completeness of the Information Package and any other information provided by the Agent, any Party or by any other person under or in connection with any Finance Document, the transactions contemplated by the Finance Documents or any other agreement, Security, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document. - 99 - 25.16 REFERENCE BANKS If a Reference Bank (or, if a Reference Bank is not a Lender, the Lender of which it is an Affiliate) ceases to be a Lender, the Agent shall (in consultation with the Company) appoint another Lender or an Affiliate of a Lender to replace that Reference Bank. 25.17 MANAGEMENT TIME OF THE AGENT On the occurrence of an Event of Default which is continuing, any amount payable to the Agent under Clause 14.3 (Indemnity to the Agent), Clause 16 (Costs and expenses) and Clause 25.10 (Lenders' indemnity to the Agent) shall include the cost of utilising the Agent's management time or other resources and will be calculated on the basis of such reasonable daily or hourly rates as may be agreed between the Agent and the Company (each acting reasonably) and notified to the Lenders and is in addition to any fee paid or payable to the Agent under Clause 11 (Fees). 25.18 DEDUCTION FROM AMOUNTS PAYABLE BY THE AGENT If any Party owes an amount to the Agent under the Finance Documents, the Agent may, after giving notice to that Party, deduct an amount not exceeding that amount from any payment to that Party which the Agent would otherwise be obliged to make under the Finance Documents and apply the amount deducted in or towards satisfaction of the amount owed. For the purposes of the Finance Documents that Party shall be regarded as having received any amount so deducted. 26. CONDUCT OF BUSINESS BY THE FINANCE PARTIES No provision of this Agreement will: (a) interfere with the right of any Finance Party to arrange its affairs (tax or otherwise) in whatever manner it thinks fit; (b) oblige any Finance Party to investigate or claim any credit, relief, remission or repayment available to it or the extent, order and manner of any claim; or (c) oblige any Finance Party to disclose any information relating to its affairs (tax or otherwise) or any computations in respect of Tax. 27. SHARING AMONG THE FINANCE PARTIES 27.1 PAYMENTS TO FINANCE PARTIES If a Finance Party (a "RECOVERING FINANCE PARTY") receives or recovers any amount from an Obligor other than in accordance with Clause 28 (Payment mechanics) and applies that amount to a payment due under the Finance Documents then: (a) the Recovering Finance Party shall, within three Business Days, notify details of the receipt or recovery to the Agent; (b) the Agent shall determine whether the receipt or recovery is in excess of the amount the Recovering Finance Party would have been paid had the receipt or recovery been received or made by the Agent and distributed in accordance with Clause 28 (Payment mechanics), without taking account of any Tax which would be imposed on the Agent in relation to the receipt, recovery or distribution; and - 100 - (c) the Recovering Finance Party shall, within three Business Days of demand by the Agent, pay to the Agent an amount (the "SHARING PAYMENT") equal to such receipt or recovery less any amount which the Agent determines may be retained by the Recovering Finance Party as its share of any payment to be made, in accordance with Clause 28.5 (Partial payments). 27.2 REDISTRIBUTION OF PAYMENTS The Agent shall treat the Sharing Payment as if it had been paid by the relevant Obligor and distribute it between the Finance Parties (other than the Recovering Finance Party) in accordance with Clause 28.5 (Partial payments). 27.3 RECOVERING FINANCE PARTY'S RIGHTS (a) On a distribution by the Agent under Clause 27.2 (Redistribution of payments), the Recovering Finance Party will be subrogated to the rights of the Finance Parties which have shared in the redistribution. (b) If and to the extent that the Recovering Finance Party is not able to rely on its rights under paragraph (a) above, the relevant Obligor shall be liable to the Recovering Finance Party for a debt equal to the Sharing Payment which is immediately due and payable. 27.4 REVERSAL OF REDISTRIBUTION If any part of the Sharing Payment received or recovered by a Recovering Finance Party becomes repayable and is repaid by that Recovering Finance Party, then: (a) each Finance Party which has received a share of the relevant Sharing Payment pursuant to Clause 27.2 (Redistribution of payments) shall, upon request of the Agent, pay to the Agent for account of that Recovering Finance Party an amount equal to the appropriate part of its share of the Sharing Payment (together with an amount as is necessary to reimburse that Recovering Finance Party for its proportion of any interest on the Sharing Payment which that Recovering Finance Party is required to pay); and (b) that Recovering Finance Party's rights of subrogation in respect of any reimbursement shall be cancelled and the relevant Obligor will be liable to the reimbursing Finance Party for the amount so reimbursed. 27.5 EXCEPTIONS (a) This Clause 27 shall not apply to the extent that the Recovering Finance Party would not, after making any payment pursuant to this Clause 27, have a valid and enforceable claim against the relevant Obligor. (b) A Recovering Finance Party is not obliged to share with any other Finance Party any amount which the Recovering Finance Party has received or recovered as a result of taking legal or arbitration proceedings, if: (i) it notified that other Finance Party of the legal or arbitration proceedings; and (ii) that other Finance Party had an opportunity to participate in those legal or arbitration proceedings but did not do so as soon as reasonably practicable having received notice and did not take separate legal or arbitration proceedings. - 101 - SECTION 11 ADMINISTRATION 28. PAYMENT MECHANICS 28.1 PAYMENTS TO THE AGENT (a) On each date on which an Obligor or a Lender is required to make a payment under a Finance Document, that Obligor or Lender shall make the same available to the Agent (unless a contrary indication appears in a Finance Document) for value on the due date at the time and in such funds specified by the Agent as being customary at the time for settlement of transactions in the relevant currency in the place of payment. (b) Payment shall be made to such account in the principal financial centre of the country of that currency (or, in relation to euro, in the principal financial centre in a Participating Member State or London) with such bank as the Agent specifies. 28.2 DISTRIBUTIONS BY THE AGENT Each payment received by the Agent under the Finance Documents for another Party shall, subject to Clause 28.3 (Distributions to an Obligor) and Clause 28.4 (Clawback), be made available by the Agent as soon as practicable after receipt to the Party entitled to receive payment in accordance with this Agreement (in the case of a Lender, for the account of its Facility Office), to such account as that Party may notify to the Agent by not less than five Business Days' notice with a bank in the principal financial centre of the country of that currency (or, in relation to euro, in the principal financial centre of a Participating Member State or London). 28.3 DISTRIBUTIONS TO AN OBLIGOR The Agent may (with the consent of the Obligor or in accordance with Clause 29 (Set-off)) apply any amount received by it for that Obligor in or towards payment (on the date and in the currency and funds of receipt) of any amount due from that Obligor under the Finance Documents or in or towards the purchase of any amount of any currency to be so applied. 28.4 CLAWBACK (a) Where a sum is to be paid to the Agent under the Finance Documents for another Party, the Agent is not obliged to pay that sum to that other Party (or to enter into or perform any related exchange contract) until it has been able to establish to its satisfaction that it has actually received that sum. (b) If the Agent pays an amount to another Party and it proves to be the case that it had not actually received that amount, then the Party to whom that amount (or the proceeds of any related exchange contract) was paid by the Agent shall on demand refund the same to the Agent together with interest on that amount from the date of payment to the date of receipt by the Agent, calculated by it to reflect its cost of funds. 28.5 PARTIAL PAYMENTS (a) If the Agent receives a payment that is insufficient to discharge all the amounts then due and payable by an Obligor under the Finance Documents, the Agent shall apply that payment towards the obligations of that Obligor under the Finance Documents in the following order: - 102 - (i) FIRST, in or towards payment pro rata of any unpaid fees, costs and expenses of the Agent, the Security Agent, or the Arranger under the Finance Documents; (ii) SECONDLY, in or towards payment pro rata of any accrued interest, fee or commission due but unpaid under this Agreement; (iii) THIRDLY, in or towards payment pro rata of any principal due but unpaid under this Agreement; and (iv) FOURTHLY, in or towards payment pro rata of any other sum due but unpaid under the Finance Documents. (b) The Agent shall, if so directed by the Majority Lenders vary the order set out in paragraphs (a)(ii) to (iii) above. (c) Paragraphs (a) and (b) above will override any appropriation made by an Obligor. 28.6 NO SET-OFF BY OBLIGORS All payments to be made by an Obligor under the Finance Documents shall be calculated and be made without (and free and clear of any deduction for) set-off or counterclaim. 28.7 BUSINESS DAYS (a) Any payment which is due to be made on a day that is not a Business Day shall be made on the next Business Day in the same calendar Month (if there is one) or the preceding Business Day (if there is not). (b) During any extension of the due date for payment of any principal or an Unpaid Sum under this Agreement interest is payable on the principal or Unpaid Sum at the rate payable on the original due date. 28.8 CURRENCY OF ACCOUNT (a) Subject to paragraph (b) below, euro is the currency of account and payment for any sum due from an Obligor under any Finance Document. (b) Each payment in respect of costs, expenses or Taxes shall be made in the currency in which the costs, expenses or Taxes are incurred. 28.9 CHANGE OF CURRENCY (a) Unless otherwise prohibited by law, if more than one currency or currency unit are at the same time recognised by the central bank of any country as the lawful currency of that country, then: (i) any reference in the Finance Documents to, and any obligations arising under the Finance Documents in, the currency of that country shall be translated into, or paid in, the currency or currency unit of that country designated by the Agent (after consultation with the Company); and (ii) any translation from one currency or currency unit to another shall be at the official rate of exchange recognised by the central bank for the conversion of that currency or currency unit into the other, rounded up or down by the Agent (acting reasonably). (b) If a change in any currency of a country occurs, this Agreement will, to the extent the Agent (acting reasonably and after consultation with the Company) specifies to be necessary, be - 103 - amended to comply with any generally accepted conventions and market practice in the Relevant Interbank Market and otherwise to reflect the change in currency. 28.10 DISRUPTION TO PAYMENT SYSTEMS ETC. If either the Agent determines (in its discretion) that a Disruption Event has occurred or the Agent is notified by the Company that a Disruption Event has occurred: (a) Agent may, and shall if requested to do so by the Company, consult with the Company with a view to agreeing with the Company such changes to the operation or administration of the Facilities as the Agent may deem necessary in the circumstances; (b) the Agent shall not be obliged to consult with the Company in relation to any changes mentioned in paragraph (a) above if, in its opinion, it is not practicable to do so in the circumstances and, in any event, shall have no obligation to agree to such changes; (c) the Agent may consult with the Finance Parties in relation to any changes mentioned in paragraph (a) above but shall not be obliged to do so if, in its opinion, it is not practicable to do so in the circumstances; (d) any such changes agreed upon by the Agent and the Company shall (whether or not it is finally determined that a Disruption Event has occurred) be binding upon the Parties as an amendment to (or, as the case may be, waiver of) the terms of the Finance Documents notwithstanding the provisions of Clause 34 (Amendments and Waivers); (e) the Agent shall not be liable for any damages, costs or losses whatsoever (including, without limitation for negligence, gross negligence or any other category of liability whatsoever but not including any claim based on the fraud of the Agent) arising as a result of its taking, or failing to take, any actions pursuant to or in connection with this Clause 28.10; and (f) the Agent shall notify the Finance Parties of all changes agreed pursuant to paragraph (d) above. 29. SET-OFF A Finance Party may set off any matured obligation due from an Obligor under the Finance Documents (to the extent beneficially owned by that Finance Party) against any matured obligation owed by that Finance Party to that Obligor, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Finance Party may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off. 30. NOTICES 30.1 COMMUNICATIONS IN WRITING Any communication to be made under or in connection with the Finance Documents shall be made in writing and, unless otherwise stated, may be made by fax or letter. - 104 - 30.2 ADDRESSES The address and fax number (and the department or officer, if any, for whose attention the communication is to be made) of each Party for any communication or document to be made or delivered under or in connection with the Finance Documents is: (a) in the case of the Company, that identified with its name below; (b) in the case of each Lender or any other Original Obligor, that notified in writing to the Agent on or prior to the date on which it becomes a Party; and (c) in the case of the Agent or the Security Agent, that identified with its name below, or any substitute address, fax number or department or officer as the Party may notify to the Agent (or the Agent may notify to the other Parties, if a change is made by the Agent) by not less than five Business Days' notice. 30.3 DELIVERY (a) Any communication or document made or delivered by one person to another under or in connection with the Finance Documents will only be effective: (i) if by way of fax, when received in legible form; or (ii) if by way of letter, when it has been left at the relevant address or five Business Days after being deposited in the post postage prepaid in an envelope addressed to it at that address, and, if a particular department or officer is specified as part of its address details provided under Clause 30.2 (Addresses), if addressed to that department or officer. (b) Any communication or document to be made or delivered to the Agent or the Security Agent will be effective only when actually received by it and then only if it is expressly marked for the attention of the department or officer identified with its signature below (or any substitute department or officer as it shall specify for this purpose). (c) All notices from or to an Obligor shall be sent through the Agent. (d) Any communication or document made or delivered to the Company in accordance with this Clause 30.3 will be deemed to have been made or delivered to each of the Obligors. 30.4 NOTIFICATION OF ADDRESS AND FAX NUMBER Promptly upon receipt of notification of an address and fax number or change of address or fax number pursuant to Clause 30.2 (Addresses) or changing its own address or fax number, the Agent shall notify the other Parties. 30.5 ELECTRONIC COMMUNICATION (a) Any communication to be made between the Agent and a Lender under or in connection with the Finance Documents may be made by electronic mail or other electronic means, if the Agent and the relevant Lender: (i) agree that, unless and until notified to the contrary, this is to be an accepted form of communication; - 105 - (ii) notify each other in writing of their electronic mail address and/or any other information required to enable the sending and receipt of information by that means; and (iii) notify each other of any change to their address or any other such information supplied by them. (b) Any electronic communication made between the Agent and a Lender will be effective only when actually received in readable form and in the case of any electronic communication made by a Lender to the Agent only if it is addressed in such a manner as the Agent shall specify for this purpose. 30.6 ENGLISH LANGUAGE (a) Any notice given under or in connection with any Finance Document must be in English. (b) All other documents provided under or in connection with any Finance Document must be: (i) in English; or (ii) if not in English, and if so required by the Agent, accompanied by a certified English translation and, in this case, the English translation will prevail unless the document is a constitutional, statutory or other official document or a Security Document. 31. CALCULATIONS AND CERTIFICATES 31.1 ACCOUNTS In any litigation or arbitration proceedings arising out of or in connection with a Finance Document, the entries made in the accounts maintained by a Finance Party are prima facie evidence of the matters to which they relate. 31.2 CERTIFICATES AND DETERMINATIONS Any certification or determination by a Finance Party of a rate or amount under any Finance Document is, in the absence of manifest error, conclusive evidence of the matters to which it relates. 31.3 DAY COUNT CONVENTION Any interest, commission or fee accruing under a Finance Document will accrue from day to day and is calculated on the basis of the actual number of days elapsed and a year of 360 days or, in any case where the practice in the Relevant Interbank Market differs, in accordance with that market practice. 32. PARTIAL INVALIDITY If, at any time, any provision of the Finance Documents is or becomes illegal, invalid or unenforceable in any respect under any law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions nor the legality, validity or enforceability of such provision under the law of any other jurisdiction will in any way be affected or impaired. 33. REMEDIES AND WAIVERS No failure to exercise, nor any delay in exercising, on the part of any Finance Party, any right or remedy under the Finance Documents shall operate as a waiver, nor shall any single or partial - 106 - exercise of any right or remedy prevent any further or other exercise or the exercise of any other right or remedy. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law. 34. AMENDMENTS AND WAIVERS 34.1 REQUIRED CONSENTS (a) Subject to Clause 34.2 (Exceptions) any term of the Finance Documents may be amended or waived only with the consent of the Majority Lenders and the Company and any such amendment or waiver will be binding on all Parties. (b) The Agent may effect, on behalf of any Finance Party, any amendment or waiver permitted by this Clause 34. (c) Each Obligor acknowledges that its consent is not required for any amendment or waiver permitted by this Clause 34 which is agreed to by the Company. 34.2 EXCEPTIONS (a) An amendment or waiver that has the effect of changing or which relates to: (i) the definition of "Majority Lenders" in Clause 1.1 (Definitions); (ii) an extension to the date of payment of any amount under the Finance Documents; (iii) a reduction in the Margin or a reduction in the amount of any payment of principal, interest, fees or commission payable; (iv) an increase in or an extension of any Commitment; (v) a change to the Borrowers or Guarantors other than in accordance with Clause 24 (Changes to the Obligors); (vi) any provision which expressly requires the consent of all the Lenders; (vii) Clause 2.2 (Finance Parties' rights and obligations), Clause 7.2 (Sale), Clause 7.3 (Mandatory cancellation), Clause 7.5 (Mandatory prepayment - Net Sale Proceeds) to Clause 7.10 (Application of Proceeds), Clause 23 (Changes to the Lenders), Clause 27 (Sharing among the Finance Parties) or this Clause 34; (viii) the release of any Security created pursuant to any Security Document; or (ix) the ranking or subordination under the Intercreditor Agreement. shall not be made without the prior consent of all the Lenders. (b) An amendment or waiver which relates to the rights or obligations of the Agent, the Security Agent or the Arranger may not be effected without its consent. (c) An amendment or waiver which relates to Clause 17 (Guarantee and indemnity) may not be effected without the consent of the Guarantors. (d) If any Lender has failed to respond to any consent, waiver or amendment of any provision of any Finance Document within 15 Business Days of delivery of the request for such consent, waiver or amendment by the Company or the Agent in accordance with the terms of this Agreement, the - 107 - Available Commitments and participations in the Utilisations of such Lender shall be excluded for the purposes of determining whether the consent of the Majority Lenders or all Lenders has been obtained in respect of such consent, waiver or amendment. (e) No further consent is required from any Finance Party in respect of the Permitted Revolving Credit Facility (documented within this Agreement following amendments hereto). Each Finance Party agrees to execute amendments to the Finance Documents, including without limitation, any Security Documents, as required by the Agent to provide for the Permitted Revolving Credit Facility to be made available, and secured, under such documents so long as the RCF Lender accedes to the terms of the Intercreditor Agreement. The existing terms hereof shall apply the Permitted Revolving Credit Facility and shall be amended only to the extent they relate to the mechanics and economics of the Permitted Revolving Credit Facility. (f) Notwithstanding paragraph (e) above, the terms of the Permitted Revolving Credit Facility shall be approved and agreed by the Agent (acting reasonably). 35. COUNTERPARTS Each Finance Document may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of the Finance Document. - 108 - SECTION 12 GOVERNING LAW AND ENFORCEMENT 36. GOVERNING LAW This Agreement is governed by English law. 37. ENFORCEMENT 37.1 JURISDICTION (a) The courts of England have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement) (a "DISPUTE"). (b) The Parties agree that the courts of England are the most appropriate and convenient courts to settle Disputes and accordingly no Party will argue to the contrary. (c) This Clause 37.1 is for the benefit of the Finance Parties only. As a result, no Finance Party shall be prevented from taking proceedings relating to a Dispute in any other courts with jurisdiction. To the extent allowed by law, the Finance Parties may take concurrent proceedings in any number of jurisdictions. 37.2 SERVICE OF PROCESS Without prejudice to any other mode of service allowed under any relevant law, each Obligor (other than an Obligor incorporated in England and Wales): (a) irrevocably appoints Solutia UK Limited as its agent for service of process in relation to any proceedings before the English courts in connection with any Finance Document; and (b) agrees that failure by a process agent to notify the relevant Obligor of the process will not invalidate the proceedings concerned. 37.3 WAIVER OF CONSEQUENTIAL DAMAGES In no event shall any Finance Party be liable on any theory of liability for any special, indirect, consequential or punitive damages and the Company hereby waives, releases and agrees (for itself and on behalf of its Subsidiaries) not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favour. THIS AGREEMENT HAS BEEN ENTERED INTO ON THE DATE STATED AT THE BEGINNING OF THIS AGREEMENT. - 109 - THE COMPANY SOLUTIA EUROPE SA/NV Address: Parc Scientifique Fleming, Rue Laid Burniat 3, 1348 Louvain-la-Neuve, Belgium Fax No: 32 10 48 12 24 Attention: Legal Counsel By: /s/ VEERLE HENDRICKX Managing Director - 137 - THE BORROWER SOLUTIA SERVICES INTERNATIONAL SCA/COMM V.A. Address: Parc Scientifique Fleming, Rue Laid Burniat 3, 1348 Louvain-la-Neuve, Belgium Fax No: 32 10 48 12 24 Attention: Legal Counsel By: /s/ KRISTEL DEROOVER Ad-hoc proxy-holder By: By: - 138 - THE ORIGINAL GUARANTORS SOLUTIA EUROPE SA/NV Address: Parc Scientifique Fleming, Rue Laid Burniat 3, 1348 Louvain-la-Neuve, Belgium Fax No: 32 10 48 12 24 Attention: Legal Counsel By: /s/ VEERLE HENDRICKX Managing Director CPFILMS VERTRIEBS GMBH Address: Herforderstrasse 119-131, 33609 Bielefeld, Germany Fax No: 49 521 93 24 828 Attention: Managing Director By: /s/ ARTHUR BOWYER Managing Director - 139 - THE ARRANGER CITIGROUP GLOBAL MARKETS LIMITED Address: Fax No: Attention: By: /s/ SOREN CHRISTENSEN - 140 - THE ORIGINAL LENDERS CITIBANK, N.A. Address: Citigroup Centre Canary Wharf London, E14 5LB Fax No: 44 20 7500 5278 Attention: Agency and Trust By: /s/ SOREN CHRISTENSEN - 141 - THE AGENT CITIBANK INTERNATIONAL PLC Address: Citigroup Centre Canary Wharf London, E14 5LB Fax No: 44 20 8636 3824 Attention: By: /s/ CASILDA CLOVIS By: /s/ CHARLES MILLER - 142 - THE SECURITY AGENT CITIBANK, N.A. Address: Citigroup Centre Canary Wharf London, E14 5LB Fax No: 44 20 7500 5278 Attention: Agency and Trust By: /s/ VIOLA JAPAUL Director - 143 - EX-10.2 3 ex10p2.txt EXHIBIT 10.2 PORTIONS OF THIS EXHIBIT INDICATED BY "******" HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND THE OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION SHARE AND ASSET PURCHASE AGREEMENT BETWEEN SOLUTIA EUROPE S.A./N.V., AS THE SELLER, AND DISHMAN PHARMACEUTICALS & CHEMICALS LTD., AS THE BUYER DATED AS OF MAY 23, 2006 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS...............................................................................1 Section 1.1 Certain Defined Terms.............................................................1 Section 1.2 Table of Definitions..............................................................8 ARTICLE II PURCHASE AND SALE.......................................................................10 Section 2.1 Purchase and Sale of the Shares..................................................10 Section 2.2 Purchase and Sale of Transferred Assets..........................................10 Section 2.3 Purchase Price...................................................................11 Section 2.4 Working Capital Adjustment.......................................................11 Section 2.5 Closing..........................................................................13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER...........................................14 Section 3.1 Organization of the Seller.......................................................15 Section 3.2 Authority of the Seller..........................................................15 Section 3.3 No Conflict; Required Filings and Consents.......................................15 Section 3.4 Capitalization...................................................................16 Section 3.5 Shares...........................................................................16 Section 3.6 Organization and Qualification of the Swiss Companies............................16 Section 3.7 Equity Interests.................................................................16 Section 3.8 Financial Statements.............................................................17 Section 3.9 Absence of Certain Changes or Events.............................................17 Section 3.10 Compliance with Law; Permits.....................................................18 Section 3.11 Litigation.......................................................................18 Section 3.12 Social Security Contributions; Company Plans.....................................18 Section 3.13 Labor and Employment Matters.....................................................19 Section 3.14 Insurance........................................................................20 Section 3.15 Real Property....................................................................20 Section 3.16 Intellectual Property............................................................20 Section 3.17 Taxes............................................................................21 Section 3.18 Environmental Matters............................................................21 Section 3.19 Material Contracts...............................................................21
i TABLE OF CONTENTS (CONTINUED)
Page ---- Section 3.20 Title to Assets..................................................................22 Section 3.21 Brokers..........................................................................23 Section 3.22 Product Liability................................................................23 Section 3.23 Buildings........................................................................23 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER.............................................23 Section 4.1 Organization.....................................................................23 Section 4.2 Authority........................................................................23 Section 4.3 No Conflict; Required Filings and Consents.......................................24 Section 4.4 Financing........................................................................24 Section 4.5 Brokers..........................................................................25 Section 4.6 Investment Intent................................................................25 Section 4.7 No Knowledge of Breaches.........................................................25 ARTICLE V COVENANTS AND AGREEMENTS.................................................................25 Section 5.1 Conduct of Business Prior to the Closing.........................................25 Section 5.2 Covenants Regarding Information..................................................27 Section 5.3 Notification of Certain Matters..................................................28 Section 5.4 Intercompany Arrangements; Cash; Third-Party Debt; Merger........................28 Section 5.5 Resignation or Dismissal of Directors and Auditors...............................29 Section 5.6 Confidentiality..................................................................29 Section 5.7 Consents and Filings; Further Assurances.........................................29 Section 5.8 Public Announcements.............................................................31 Section 5.9 ****** Guarantee; Release of Guarantees..........................................31 Section 5.10 Directors' and Officers' Indemnification.........................................31 Section 5.11 Employees........................................................................31 Section 5.12 Transferred Assets...............................................................37 Section 5.13 Transition Services Agreement....................................................37 Section 5.14 Non-Competition..................................................................37 Section 5.15 March Financials.................................................................39
ii TABLE OF CONTENTS (CONTINUED)
Page ---- ARTICLE VI INDEMNIFICATION.........................................................................39 Section 6.1 Survival of Representations, Etc.................................................39 Section 6.2 Indemnity by the Seller..........................................................40 Section 6.3 Indemnity by the Buyer...........................................................40 Section 6.4 Limitations......................................................................41 Section 6.5 Procedures.......................................................................42 Section 6.6 Exercise of Remedies by Buyer Indemnified Parties Other Than Buyer...............44 Section 6.7 Assignment of Claims.............................................................44 Section 6.8 Exclusivity......................................................................44 Section 6.9 Disclaimer of Implied Warranties.................................................45 ARTICLE VII CONDITIONS TO CLOSING..................................................................45 Section 7.1 General Conditions...............................................................45 Section 7.2 Conditions to the Obligations of the Seller......................................46 Section 7.3 Conditions to Obligations of the Buyer...........................................47 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER.....................................................48 Section 8.1 Termination......................................................................48 Section 8.2 Effect of Termination............................................................49 ARTICLE IX GENERAL PROVISIONS......................................................................49 Section 9.1 Fees and Expenses................................................................49 Section 9.2 Transfer Taxes...................................................................49 Section 9.3 Amendment and Modification.......................................................49 Section 9.4 Waiver...........................................................................49 Section 9.5 Notices..........................................................................50 Section 9.6 Interpretation...................................................................51 Section 9.7 Entire Agreement.................................................................51 Section 9.8 No Third-Party Beneficiaries.....................................................51 Section 9.9 Governing Law; Dispute Settlement................................................51
iii TABLE OF CONTENTS (CONTINUED)
Page ---- Section 9.10 Disclosure Generally.............................................................53 Section 9.11 Assignment; Successors...........................................................54 Section 9.12 Personal Liability...............................................................54 Section 9.13 Severability.....................................................................54 Section 9.14 Counterparts.....................................................................54 Section 9.15 Facsimile Signature..............................................................54 Section 9.16 Headings.........................................................................54 Section 9.17 Further Assurances...............................................................54 Section 9.18 Conversion Methodology...........................................................54
iv LIST OF SCHEDULES AND EXHIBITS: Schedule 1.1 Knowledge of the Seller Schedule 1.2 Working Capital Calculation Schedule 1.3 Transferred Assets Schedule 1.4 Landlord Notice Schedule 3.3(a) Conflicts Schedule 3.3(b) Required Filings and Consents Schedule 3.4 Agreements with Respect to the Shares Schedule 3.5 Encumbrances on Shares Schedule 3.6(b) Organizational Documents of the Swiss Companies Schedule 3.8(a)(i) Audited Financial Statements Schedule 3.8(a)(ii) Exceptions to Audited Financial Statements Schedule 3.8(b) Normalization Schedule Schedule 3.8(d) Encumbrances on Receivables Schedule 3.9 Absence of Certain Changes Schedule 3.11 Litigation Schedule 3.12(a) Social Security Contributions Schedule 3.12(b)(i)-1 Company Plans Schedule 3.12(b)(i)-2 Compliance of Company Plans Schedule 3.12(b)(iii) Pension Plans Schedule 3.13(b) Organized Labor Schedule 3.14 Insurance Schedule 3.15(a) Owned Real Property Schedule 3.15(b) Leased Real Property Schedule 3.16 Intellectual Property Schedule 3.17 Taxes Schedule 3.19(a) Material Contracts Schedule 3.19(b) Validity of Material Contracts Schedule 3.20(a) Encumbrances on Transferred Assets Schedule 3.20(b) Sufficiency of Assets Schedule 3.20(c) Encumbrances on Assets of Swiss Companies Schedule 3.22 Product Liability
v Schedule 3.23 Buildings Schedule 4.3 Required Filings and Consents Schedule 5.1 Conduct of Business Schedule 5.1(i) Capital Budget Schedule 5.9 Guarantees Schedule 5.10 Directors' and Officers' Agreements Schedule 5.11 (a)(iv) Terms of Employment Schedule 5.11(f) Specified Employment Agreements LIST OF EXHIBITS: Exhibit A Intentionally Omitted Exhibit B Form of Bill of Sale (US) Form of Bill of Sale (Europe) Exhibit C Form of Assignment and Assumption Agreement (US/Australia) Form of Assignment and Assumption Agreement (Europe) Exhibit D Form of Patent Assignment Agreement Exhibit E Form of Trademark Assignment Agreement Exhibit F Form of Transition Services Agreement
vi SHARE AND ASSET PURCHASE AGREEMENT SHARE AND ASSET PURCHASE AGREEMENT, dated as of May 23, 2006 (this "Agreement"), between SOLUTIA EUROPE S.A./N.V., a Belgian corporation (societe anonyme/naamloze vennootschap) (the "Seller"), and DISHMAN PHARMACEUTICALS & CHEMICALS LTD., a company organized under the laws of the Republic of India (the "Buyer"). RECITALS A. The Seller owns 100% of the outstanding share capital of CarboGen AG, a stock company incorporated in Switzerland ("CarboGen"), in the amount of CHF 1,400,000.--, divided into 14,000 registered shares with a par value of CHF 100.-- each (the "CarboGen Shares"). B. The Seller owns 100% of the outstanding share capital of Amcis AG, a stock company incorporated in Switzerland ("Amcis," and together with CarboGen (and in all cases subject to Section 5.4(e)), the "Swiss Companies" and each a "Swiss Company"), in the amount of CHF 50,000.--, divided into 100 registered shares with a par value of CHF 500.-- each (the "Amcis Shares"). C. As of the date hereof, one or more Affiliates of the Swiss Companies (including Solutia Inc., the indirect parent of the Seller ("SOI")) is a party to certain contracts and agreements related exclusively to the business of the Swiss Companies. D. At the time of the Closing, the Seller wishes to sell to the Buyer and its Affiliates, and the Buyer wishes to purchase from the Seller and its Affiliates, the CarboGen Shares and the Amcis Shares (subject to Section 5.4(e), collectively, the "Shares") and certain other assets of the Business, and in connection therewith, the Buyer is willing to assume, or cause its Affiliates to assume, certain liabilities related thereto, all upon the terms and subject to the conditions set forth herein. In consideration of the foregoing and the mutual representations, warranties, covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows: AGREEMENT ARTICLE I DEFINITIONS Section 1.1 Certain Defined Terms. For purposes of this Agreement: "Action" means any claim, action, suit, inquiry, proceeding, audit or investigation by or before any Governmental Authority, or any other arbitration, mediation or similar proceeding. "Affiliate" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, such specified Person. "******" means ****** Ltd. "****** Agreement" means (i) the ****** Supply Agreement, and (ii) the ****** Side-Letter. "****** Side-Letter" means that certain letter agreement between SOI and ****** dated April 7, 2005. "****** Supply Agreement" means that certain Supply Agreement effective January 1, 2005 by and between Amcis and ******. "Amcis Property Agreements" means (i) the agreements listed on Schedule 3.15(a) of the Disclosure Schedules and (ii) the agreements listed on Schedule 3.15(b) of the Disclosure Schedules, in each case (A) to which Amcis is a party, (B) as amended, restated or otherwise modified from time to time in accordance therewith and (C) excluding the Investment Agreement. "Ancillary Agreements" means the Transition Services Agreement, the Bills of Sale, the Assignment and Assumption Agreements, the Patent Assignment Agreements and the Trademark Assignment Agreement. "Assignment and Assumption Agreement" means an Assignment and Assumption Agreement substantially in the form of Exhibit C. "Assumed Contracts" means all agreements and contracts set forth in Schedule 1.3 of the Disclosure Schedules. "Belgian Business" means the business/undertakings of the Seller consisting solely of the services to be performed by the European Business Employees employed by the Seller, the employment agreements of such European Business Employees and the assets held by or in the name of the Seller that are set forth in Schedule 1.3 of the Disclosure Schedules. "Bill of Sale" means a Bill of Sale substantially in the form of Exhibit B. "Business" means the business of the Swiss Companies. "Business Day" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in The City of New York, Zurich, Switzerland or Brussels, Belgium. "Business Employees" means, collectively, the Swiss Business Employees, the U.S. Business Employees and the European Business Employees. 2 "Buyer Indemnified Parties" shall mean the following Persons: (i) Buyer; (ii) Buyer's current and future Affiliates (including each Swiss Company); (iii) the respective Representatives and directors of the Persons referred to in clauses (i) and (ii) above; and (iv) the respective successors and assigns of the Persons referred to in clauses (i), (ii) and (iii) above. "CHF" means Swiss francs, the lawful currency of Switzerland. "Closing Time" means (i) if the Closing occurs on the first Business Day of a calendar month, 00:01 a.m. on the Closing Date in Brussels, Belgium, and (ii) in all other cases, 11:59 p.m. on the Closing Date in Brussels, Belgium. "Confidentiality Agreements" means the Confidential Disclosure Agreements referred to in Schedule 1.3 of the Disclosure Schedules. "control," including the terms "controlled by" and "under common control with," means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, as trustee or executor, as general partner or managing member, by contract or otherwise, including the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person. "Damages" shall include any loss, damage, injury, liability, claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost (including costs of investigation) or expense of any nature; provided, however, Damages shall not include any punitive, incidental, consequential, special or indirect damages, including business interruption, loss of future revenue, profits or income, or loss of business reputation or opportunity. "DIP Agreement" means that certain debtor in possession Financing Agreement, dated as of January 16, 2004, between and among SOI and its debtor Affiliates, certain lenders and Citicorp USA, Inc. as collateral agent, administrative agent and documentation agent and documents executed in connection therewith (each as may be amended, restated or otherwise modified from time to time in connection therewith). "Directive" means EC Acquired Rights Directive 2001/23/EC of 12 March 2001. "Divisional" means the business of SOI consisting solely of the services performed and to be performed by the U.S. Business Employees, the employment agreements of such U.S. Business Employees and the costs with respect thereto reflected in the books and records of SOI. "Employee Letter" means that certain letter agreement, dated as of the date hereof, between the Seller and the Buyer with respect to certain employee related matters. "Encumbrance" means any charge, claim, mortgage, mortgage certificate, lien, option, pledge, security interest, encumbrance or other restriction of any kind. 3 "ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as amended. "EU Merger Regulation" means Council Regulation (EEC) No. 4064/89, as amended. "EUR" means Euros, the lawful currency of the European Union. "Euro Bond Documents" means any documents entered into by the Seller or any of its Subsidiaries in connection with the Euro Notes. "European Business Employee" means an employee of an Affiliate of the Swiss Companies (but not of the Swiss Companies) who is employed in Europe and primarily provides services to the Business. "Exchange Act" means the U.S. Securities Exchange Act of 1934. "Final Working Capital Adjustment Amount" equals (i) the Final Working Capital Value minus (ii) the Pre-Closing Working Capital Value. "Final Working Capital Statement" means the net working capital statement that sets forth the Working Capital as of the Closing Time, prepared by the Seller in accordance with Section 2.4(b) and, in the event of a Notice of Disagreement, as adjusted by agreement of the Buyer and the Seller, or by the Independent Accounting Firm, acting pursuant to Section 2.4(c). "Final Working Capital Value" means the Working Capital shown on the Final Working Capital Statement. "German Business" means the business/undertakings of Solutia Germany consisting solely of the services to be performed by the European Business Employees employed by Solutia Germany, the employment agreements of such European Business Employees and the assets held by or in the name of Solutia Germany set forth in Schedule 1.3 of the Disclosure Schedules. "Governmental Authority" means any federal, national, supranational, state, cantonal, provincial, local or similar government; governmental, regulatory or administrative authority, branch, agency or commission; or any court, tribunal or judicial body. "Intellectual Property" means (i) trade names, trademarks and service marks, domain names, trade dress and similar rights, and applications to register any of the foregoing, (ii) patents and patent applications, (iii) copyrights (whether registered or unregistered) and applications for registration, and (iv) confidential and proprietary information, including trade secrets and know-how. "Investment Agreement" means the Investment Agreement among Flint AG, Chemisches Institut Schafer AG and Amcis dated December 15, 2000. 4 "Knowledge" means, with respect to "the Seller," the actual knowledge of the persons listed in Schedule 1.1 of the Disclosure Schedules, in each case as of the date of this Agreement (or, with respect to a certificate delivered pursuant to this Agreement, as of the date of delivery of such certificate). "Landlord Notice" means (i) the e-mail from Dr. Hans Hitz set forth in Part I of Schedule 1.4 of the Disclosure Schedules and (ii) the e-mail from Dr. Rolf Schafer set forth in Part II of Schedule 1.4 of the Disclosure Schedules. "Law" means any statute, law, ordinance, regulation, rule, code, executive order, injunction, judgment, decree or order of any Governmental Authority. "Leased Real Property" means the real property or premises leased in whole or in part by the Swiss Companies, together with all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures, systems, equipment and items of personal property of the Swiss Companies attached or appurtenant thereto and all easements, licenses, rights and appurtenances relating to the foregoing. "LIBOR Rate" means, as of a determination date, the rate per annum for such date for deposits in U.S. Dollars for three months for amounts payable pursuant to Section 2.4(d) equal to the average of the respective rates per annum for such date (rounded upward to the next whole multiple of 1/100th of 1%) as fixed at 11:00 a.m. London time on the date of determination by the British Bankers Association displayed on the Bloomberg Marketing Screen, page 122, or such other page as may replace such page on such service for the purposes of displaying the London interbank offer rate of major banks for deposits in U.S. Dollars for three months comparable to the amount payable pursuant to Section 2.4(d) (calculated on the basis of the actual number of days elapsed in a year of 365 or 366 days, as the case may be). "Material Adverse Effect" means (i) with respect to "the Business," any event, change, circumstance, effect or state of facts that is materially adverse to the business, financial condition or results of operations of the Business, taken as a whole (taking into account all other such events, changes, circumstances, effects or states of fact), and (ii) with respect to "the Seller," any event, change, circumstance, effect or state of facts that is materially adverse to the ability of the Seller to perform its obligations under this Agreement or the Ancillary Agreements or to consummate the transactions contemplated hereby or thereby; provided, however, that "Material Adverse Effect" in this context shall not include the effect of any event, change, circumstance, or state of facts arising out of or attributable to (1) the markets in which the Business or the Seller, as applicable, operates generally, (2) general economic or political conditions (including those affecting the securities markets), (3) the announcement or disclosure of this Agreement or of the consummation of the transactions contemplated hereby, (4) acts of war (whether or not declared), sabotage or terrorism, military actions or the escalation thereof or other force majeure events occurring after the date hereof, or (5) any changes in applicable Laws or accounting rules. "Merger" means a merger between the Swiss Companies described in Section 5.4(e). 5 "Microsoft Licenses" means the license confirmations (and the licenses described therein) held by SOI and its Affiliates pursuant to the Microsoft Enterprise Agreement, Number OIE50326 between SOI and MLSI, GP, dated December 5, 2000, in each case to the extent such licenses are used in the Business. "Owned Real Property" means all real property, interest in and undertaking to buy real property, buildings and facilities owned by the Swiss Companies, including building rights (Baurecht). "Patent Assignment Agreement" means (i) with respect to patents or patent applications to be transferred or assigned pursuant to this Agreement that are registered in the U.S., a Patent Assignment Agreement substantially in the form of Exhibit D and (ii) with respect to all other patents and patent applications to be transferred or assigned pursuant to this Agreement, such patent assignment agreements that are required to be filed in the relevant jurisdictions, in form and substance reasonably satisfactory to the Seller and the Buyer. "Permit" means any material permit, license, franchise, approval, certificate, consent, waiver, concession, exemption, order, registration, notice or other authorization of any Governmental Authority necessary for any Swiss Company to own, lease and operate its properties and to carry on its respective Business as currently conducted (including the requisite compliance certificates and statements issued by Swissmedic, the Swiss Agency for Therapeutic Products). "Permitted Encumbrance" means (i) Encumbrances for Taxes and other governmental charges not yet due and payable, which are being disputed in good faith, or that may thereafter be paid without penalty, (ii) statutory liens (hypotheque legale) created by cantonal Laws for public law claims or general obligations imposed on the owners, (iii) artisans and entrepreneurs statutory liens (hypotheque legale des artisans et entrepreneurs), (iv) zoning, entitlement, conservation restriction and other land use and environmental regulations by Governmental Authorities, (v) any encumbrance, charge and other liens as described in the relevant excerpts of the land register, and (vi) all exceptions, restrictions, easements, charges, rights-of-way and other Encumbrances that have arisen in the ordinary course of business and that do not (individually or in the aggregate) materially detract from the value of the assets subject thereto or materially interfere with the present use of the assets of the Business taken as a whole. "Person" means an individual, corporation, partnership, limited liability company, limited liability partnership, syndicate, person, trust, association, organization or other entity, including any Governmental Authority, and including any successor, by merger or otherwise, of any of the foregoing. "Pre-Closing Working Capital Statement" means the net working capital statement that sets forth the Seller's estimate of the Working Capital as of the Closing Time, prepared by the Seller in accordance with Section 2.4(a). "Pre-Closing Working Capital Value" means the Working Capital shown on the Pre-Closing Working Capital Statement. 6 "Return" means any return, declaration, report, statement, information statement and other document or information filed or required to be filed with respect to Taxes. "Siemens Leases" means (i) that certain Lease Agreement No. 21288 between Amcis and Siemens Leasing AG regarding equipment and tank storage, dated July 30, 2001, and (ii) that certain Lease Agreement No. 21289 between Amcis and Siemens Leasing AG regarding tank storage, dated July 30, 2001, in each case, as amended, restated or otherwise modified from time to time in accordance with their respective terms. "Social Security Contributions" means the mandatory contributions to the old-age pension insurance scheme (AHV), pension fund scheme (BVG), invalidity insurance (IV), loss of salary insurance (EO) and unemployment insurance (ALV) or any equivalent or similar contributions and any other social security contributions (including accident and health insurance contributions as the case may be) applicable in the jurisdictions in which the Swiss Companies do business, together with any interest or any penalty imposed by any social security authority with respect thereto. "Solutia Germany" means Solutia Deutschland GmbH. "Solutia UK" means Solutia UK Ltd. "Specified Employees" means ******. "Specified Employment Agreements" means employment agreements with Specified Employees set forth in Schedule 5.11(f) of the Disclosure Schedules. "Specified Provisions" means the representations and warranties set forth in any of Sections 3.8(b) and 3.8(e), the information provided in the March Financials and the covenants set forth in Section 5.15. "Subsidiary" or "Subsidiaries" of any Person means any other Person controlled by such Person, directly or indirectly, through one or more intermediaries. "Swiss Business Employee" means an employee of a Swiss Company. "Swiss Code" means the Swiss Code of Obligations. "Swiss GAAP" means Swiss generally accepted accounting principles. "Taxes" means all income, profit, capital gains, capital, stamp, withholding, gross receipts, sales, value added, use, real property and other taxes, levies, assessments, tariffs, duties (including any customs duty), deficiencies or fees, and any related charges or amounts (including any fine, interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Authority. "Third-Party Debt" means all indebtedness of the Swiss Companies for borrowed money (other than (i) intercompany debt between the Seller and its Affiliates (excluding Swiss Companies), on the one hand, and any Swiss Company, on the other hand, and (ii) any 7 indebtedness between Swiss Companies). For the avoidance of doubt, "Third-Party Debt" shall not include any finance leases (including any Siemens Leases). "Trademark Assignment Agreement" means (i) with respect to any trademark to be transferred or assigned pursuant to this Agreement that is registered in the U.S., a Trademark Assignment Agreement substantially in the form of Exhibit E hereto and (ii) with respect to all other trademarks to be transferred or assigned pursuant to this Agreement, such trademark assignment agreements that are required to be filed in the relevant jurisdictions, in form and substance reasonably satisfactory to the Buyer and the Seller. "Transferred Assets" shall mean (i) the Belgian Business, the UK Business and the German Business, and (ii) all other assets held by or in the name of one or more Affiliates of the Swiss Companies set forth in Schedule 1.3 of the Disclosure Schedule (excluding the Specified Employment Agreements). "UK Business" means the business/undertakings of Solutia UK consisting solely of the services to be performed by the European Business Employees employed by Solutia UK, the employment agreements of such European Business Employees and the assets held by or in the name of Solutia UK set forth in Schedule 1.3 of the Disclosure Schedule, in all cases excluding the Specified Employment Agreements. "U.S." means United States of America. "U.S. Business Employee" means an employee of an Affiliate of the Swiss Companies who is employed in the United States of America and primarily provides services to the Business. "U.S. GAAP" means United States generally accepted accounting principles. "USD" or "U.S. Dollars" means U.S. dollars, the lawful currency of the U.S. "Working Capital" means, as of any time, the current assets and the current liabilities of the Swiss Companies and in respect of the Transferred Assets as of such time, calculated in a manner consistent with the Audited Financial Statements (except as set forth in Schedule 1.2) and excluding in all cases (i) intercompany and intragroup loans, receivables, payables and accruals between the Seller and its Affiliates (other than between the Swiss Companies), (ii) all cash and cash equivalents of the Swiss Companies, (iii) the current portion of finance lease payables (including Siemens Leases), and (iv) the current portion of the long-term incentive plans. The detailed methodology of computation of Working Capital, including the description of the relevant balance sheet positions and the applicable accounting rules and standards for such computation, are set forth in Schedule 1.2 hereto. For the avoidance of doubt, notwithstanding the exclusion of Siemens Leases from the calculation of "Working Capital", the Siemens Leases shall remain the obligation of Amcis. 8 Section 1.2 Table of Definitions. The following terms have the meanings set forth in the Sections set forth below: Definition Location ---------- -------- Acquired Company Plan.......................................5.11(b)(i) Acquired Entity.............................................5.14(b)(i) Acting Party.......................................................9.2 Agreement.....................................................Preamble Amcis.........................................................Recitals Amcis Shares..................................................Recitals Assumed Liabilities.............................................2.2(b) Audited Financial Statements....................................3.8(a) Bankruptcy Court................................................7.2(c) Base Purchase Price................................................2.3 Bondholders.....................................................7.2(d) Buyer.........................................................Preamble CarboGen......................................................Recitals CarboGen Shares...............................................Recitals Closing.........................................................2.5(a) Closing Date....................................................2.5(a) COBRA Coverage............................................5.11(b)(iii) Company Plan...............................................3.12(b)(ii) Competing Business..........................................5.14(a)(i) Confidentiality Agreement..........................................5.6 Cut-Off Date....................................................6.1(a) De Minimis Business............................................5.14(g) Disclosure Schedules.......................................Article III Dispute Notice..................................................6.5(c) Dollar Equivalent.................................................9.18 Environmental Laws..........................................3.18(c)(i) Environmental Permits......................................3.18(c)(ii) Estimated Purchase Price....................................2.4(a)(ii) Euro Notes......................................................7.2(d) First Closing Date..............................................2.5(a) Guarantees.........................................................5.9 Incurring Party....................................................9.2 Indemnified Party...............................................6.5(a) Indemnifying Party..............................................6.5(a) Independent Accounting Firm.....................................2.4(c) Liabilities.....................................................2.2(b) March Financials..................................................5.15 Material Contracts.............................................3.19(a) New Plans..................................................5.11(b)(iv) New Shares......................................................5.4(e) Notice of Disagreement......................................2.4(b)(ii) Old Plans......................................................5.11(d) Past Service Credit........................................5.11(b)(iv) Pension Plans..............................................3.12(b)(ii) Potential Contributor..............................................6.7 Purchase Price.....................................................2.3 9 Real Property Leases...........................................3.15(b) Reference Amount...................................................2.3 Registered Intellectual Property..................................3.16 Representatives..............................................5.2(a)(i) Restricted Entities............................................5.14(a) Rules...........................................................9.9(b) Seller........................................................Preamble Seller Indemnified Parties.........................................6.3 Shares........................................................Recitals SOI...........................................................Recitals Swiss Companies...............................................Recitals Swiss Company.................................................Recitals Termination Date................................................8.1(d) Third Party Claim...............................................6.5(a) Transfer Taxes.....................................................9.2 Transferred Employee........................................5.11(a)(i) Transition Services Agreement.....................................5.13 ARTICLE II PURCHASE AND SALE Section 2.1 Purchase and Sale of the Shares. On the basis of the representations, warranties, covenants and agreements set forth herein and subject to the satisfaction or waiver of the conditions set forth in Article VII herein, at the Closing, the Seller shall sell, assign, transfer, convey and deliver the Shares to the Buyer and the Buyer shall purchase and accept the Shares from the Seller. Section 2.2 Purchase and Sale of Transferred Assets. On the basis of the representations, warranties, covenants and agreements set forth herein and subject to the satisfaction or waiver of the conditions set forth in Article VII herein, at the Closing: (a) subject to requirements of Section 5.11, the Seller shall, and shall cause its applicable Affiliates to, sell, assign, transfer, convey and deliver, or cause to be sold, assigned, transferred, conveyed and delivered, to the Buyer and its Affiliates, and the Buyer shall, and shall cause such Affiliates to, purchase and accept from the Seller and its Affiliates the rights, title and interest of the Seller and its Affiliates to and in the Transferred Assets; and (b) subject to requirements of Section 5.11, the Buyer shall, and shall cause its applicable Affiliates to, assume and shall, and shall cause such Affiliates to, agree to pay, perform and discharge all liabilities and obligations (whether accrued or fixed, absolute or contingent, mature or unmatured or determined or determinable) (the "Liabilities") arising after the Closing Time with respect to the Transferred Assets, other than (i) with respect to Assumed Contracts that are not employment agreements, liabilities that result from any breach by the Seller or its Affiliates of such Assumed Contracts prior to the Closing Time, and (ii) with respect to Assumed Contracts that are employment agreements, liabilities, if any, retained by the Seller or any of its Affiliates pursuant to Section 5.11 (all such Liabilities with respect to the 10 Transferred Assets to be assumed by the Buyer pursuant to this Section 2.2(b), the "Assumed Liabilities"); (c) neither the Buyer nor any of its Affiliates shall be deemed to have purchased and accepted from the Seller and its Affiliates any assets other than the Shares and the Transferred Assets or assumed any liabilities with respect to the Transferred Assets other than the Assumed Liabilities; provided, however, that nothing in this Section 2.2(c) shall limit the liabilities and obligations of the Buyer set forth in the covenants of the Buyer in this Agreement. Section 2.3 Purchase Price. The aggregate purchase price (the "Purchase Price") for the Shares and the Transferred Assets shall be USD 74,500,000 (the "Base Purchase Price"), PLUS, if the Final Working Capital Value exceeds USD 8,000,000 (the "Reference Amount"), the amount of such excess or MINUS, if the Reference Amount exceeds the Final Working Capital Value, the amount of such excess. Section 2.4 Working Capital Adjustment. (a) Closing Date Working Capital Calculation. (i) Not later than five Business Days prior to the Closing, the Seller shall prepare and deliver to the Buyer the Pre-Closing Working Capital Statement. The Pre-Closing Working Capital Statement shall be prepared in a manner consistent with the accounting methods, policies, practices and procedures of the relevant Swiss Company used in the preparation of the Audited Financial Statements except as set forth in Schedule 1.2. The Seller shall derive the Pre-Closing Working Capital Value from the Pre-Closing Working Capital Statement, and shall deliver such calculation and the Pre-Closing Working Capital Statement to the Buyer. (ii) The "Estimated Purchase Price" shall be an amount equal to the Base Purchase Price, PLUS, if the Pre-Closing Working Capital Value exceeds the Reference Amount, the amount of such excess or MINUS, if the Reference Amount exceeds the Pre-Closing Working Capital Value, the amount of such excess. (b) Final Working Capital Adjustment. (i) Within 50 days following the Closing Date, the Seller shall deliver to the Buyer the draft Final Working Capital Statement. The draft Final Working Capital Statement shall be prepared in a manner consistent with the accounting methods, policies, practices and procedures of the relevant Swiss Company used in the preparation of the Audited Financial Statements except as set forth on Schedule 1.2. The Seller shall derive the Final Working Capital Value from the draft Final Working Capital Statement, and shall deliver such calculation together with the draft Final Working Capital Statement to the Buyer. The Buyer shall cause its employees and employees of the Business to assist the Seller and its Representatives in the preparation of the draft Final Working Capital Statement and shall provide the Seller and its Representatives reasonable access, during normal business hours and upon reasonable prior notice, to the personnel, properties, books and records of the Buyer and the Swiss Companies. 11 (ii) During the 50-day period after the delivery of the draft Final Working Capital Statement, the Seller shall cooperate with the Buyer and its Representatives to provide them with any information used in preparing the draft Final Working Capital Statement reasonably requested by the Buyer and its Representatives and reasonably available to the Seller. The draft Final Working Capital Statement shall become final and binding on the 50th day following the delivery thereof, unless prior to the end of such period, the Buyer delivers to the Seller a written notice of its disagreement ("Notice of Disagreement") specifying the nature and amount of any disputed item. The Buyer shall be deemed to have agreed with all items and amounts in the draft Final Working Capital Statement not specifically referenced in the Notice of Disagreement, and such items shall not be subject to review in accordance with Section 2.4(c). Any Notice of Disagreement may reference only disagreements based on mathematical errors or based on amounts reflected on the draft Final Working Capital Statement not being calculated in accordance with Section 2.4(b)(i). (c) Resolution of Notice of Disagreement. During the 20 Business Day period following delivery of a Notice of Disagreement by the Buyer to the Seller, the parties in good faith shall seek to resolve in writing any differences that they may have with respect to the matters specified therein. During such 20 Business Day period, the Buyer shall cooperate with the Seller and its Representatives to provide them with any information used in preparing the Notice of Disagreement reasonably requested by the Seller or its Representatives and reasonably available to the Buyer. Any disputed items resolved in writing between the Buyer and the Seller within such 20 Business Day period shall be final and binding with respect to such items, and if the Seller and the Buyer agree in writing on the resolution of each disputed item specified by the Buyer in the Notice of Disagreement and the amount of the Final Working Capital Value, the amount so determined shall be final and binding on the parties for all purposes hereunder. If the Seller and the Buyer have not resolved all such differences by the end of such 20 Business Day period, the Seller and the Buyer shall submit, in writing, to an independent public accounting firm (the "Independent Accounting Firm"), their briefs detailing their views as to the correct nature and amount of each item remaining in dispute and the amount of the Final Working Capital Value, and the Independent Accounting Firm shall make a written determination as to each such disputed item and the amount of the Final Working Capital Value, which determination shall be final and binding on the parties for all purposes hereunder. The determination of the Independent Accounting Firm shall be accompanied by a certificate of the Independent Accounting Firm that it reached such determination in accordance with the provisions of this Section 2.4. The Independent Accounting Firm shall be the Swiss office of BDO Seidman LLP or, if such firm is unable or unwilling to act, such other independent public accounting firm as shall be agreed in writing by the Seller and the Buyer. The Seller and the Buyer shall use their respective commercially reasonable efforts to cause the Independent Accounting Firm to render a written decision resolving the matters submitted to it within 20 Business Days following the submission thereof. The Independent Accounting Firm shall be authorized to resolve only those items remaining in dispute between the parties in accordance with the provisions of this Section 2.4 within the range of the difference between the Buyer's position with respect thereto and the Seller's position with respect thereto. The Independent Accounting Firm shall act as an expert (Schiedsgutachter) as that term is defined in Section 258 of the Zurich Code of Civil Procedure (Zurcherische Zivilprozessordnung), and not as an arbitrator, and its determination of any subject matter falling within the scope of its mandate shall be final and binding on the parties, except in the event of a manifest error on the part of the 12 Independent Accounting Firm, as a consequence of which the relevant part of its determination shall be void and the matter remitted to the Independent Accounting Firm for correction. The costs of any dispute resolution pursuant to this Section 2.4(c), including the fees and expenses of the Independent Accounting Firm and of any enforcement of the determination thereof, shall be borne by the parties in inverse proportion as they may prevail on the matters resolved by the Independent Accounting Firm, which proportionate allocation shall be calculated on an aggregate basis based on the relative values of the amounts in dispute and shall be determined by the Independent Accounting Firm at the time the determination of such firm is rendered on the merits of the matters submitted. The fees and disbursements of the Representatives of each party incurred in connection with their preparation or review of the Final Working Capital Statement and preparation or review of any Notice of Disagreement, as applicable, shall be borne by such party. (d) Final Settlement. Within three Business Days after the final determination of the Final Working Capital Value pursuant to the provisions of this Section 2.4, the following amounts, if any, shall be paid by wire transfer of U.S. Dollars in immediately available funds to such account or accounts as may be designated in writing by the party hereto entitled to such payment at least five Business Days prior to such payment date: (i) if the Final Working Capital Adjustment Amount is positive, the Buyer shall pay to the Seller an amount equal to the Final Working Capital Adjustment Amount. (ii) if the Final Working Capital Adjustment Amount is negative, the Seller shall pay to the Buyer an amount equal to the absolute value of the Final Working Capital Adjustment Amount. (e) Interest. Amounts to be paid pursuant to Section 2.4(d) shall bear interest from the Closing Date to the date of such payment at a rate equal to LIBOR Rate on the date of payment, which interest shall be payable by wire transfer of U.S. Dollars by the party making the payment pursuant to Section 2.4(d) concurrently with such payment. Section 2.5 Closing. (a) The sale and purchase of the Shares and the Transferred Assets shall take place at a closing (the "Closing") to be held at the offices of Gibson, Dunn & Crutcher LLP, 47 Avenue des Perdix, 1410 Waterloo, Brussels, Belgium, at 10:00 a.m., local time, on the later to occur of (i) the last Business Day of the first calendar month in which all conditions to the obligations of the parties set forth in Article VII shall have been satisfied or waived in accordance with this Agreement (the "First Closing Date); provided, however, that upon the request of the Seller, the Closing shall occur on the first Business Day after the First Closing Date, or (ii) such other date, time or place as the Seller and the Buyer mutually may agree in writing. The day on which the Closing takes place is referred to as the "Closing Date." (b) At the Closing: (i) the Buyer shall deliver to the Seller an amount equal to the Estimated Purchase Price in immediately available funds in U.S. Dollars by wire transfer to a 13 bank account designated in writing by the Seller to the Buyer at least five Business Days prior to the Closing Date; (ii) the Seller shall deliver to the Buyer certificates representing the Shares, endorsed in blank; (iii) the Seller shall deliver or cause to be delivered to the Buyer (A) a copy of a resolution of the board of directors of the Swiss Companies to the effect that the Buyer has been registered in the share register of each of the Swiss Companies as sole shareholder, and (B) the share register of each of the Swiss Companies reflecting the transfer of the Shares of the Swiss Companies from the Seller to the Buyer; (iv) the Seller shall cause the dismissal or resignation of the directors and auditors of the Swiss Companies whose resignation has been requested by the Buyer at least five Business Days prior to the Closing Date; (v) the Seller shall deliver to the Buyer such consents to transfer of the Assumed Contracts as have been received by the Seller prior to the Closing; (vi) the Buyer shall deliver to the Seller certificates executed by the Secretary of the Buyer and each applicable Affiliate of the Buyer certifying the incumbency, signature and authority of the officers of the Buyer and each of the relevant Affiliates, as applicable, authorized to execute, deliver and perform this Agreement and the Ancillary Agreements executed or to be executed by the Buyer and such Affiliates of the Buyer; (vii) the Seller shall deliver to the Buyer certificates executed by the Secretary of the Seller and each applicable Affiliate of the Seller certifying the incumbency, signature and authority of the officers of the Seller and each of the relevant Affiliates of the Seller, as applicable, authorized to execute, deliver and perform this Agreement and the Ancillary Agreements executed or to be executed by the Seller and such Affiliates of the Seller; and (viii) each of the Buyer and the Seller shall deliver to the other the certificates and executed counterparts to the Ancillary Agreements required to be delivered pursuant to Sections 7.2 and 7.3, respectively. (c) The economic benefit (Nutzen) with regard to the Shares and the Transferred Assets shall be for the benefit of the Buyer as of and after the Closing Time. The risk (Gefahr) with respect to the Shares, the Transferred Assets and the Assumed Liabilities shall pass to the Buyer as of the Closing Time as set forth in Sections 2.2(a) and (b). ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER Except as set forth in the Disclosure Schedules delivered by the Seller to the Buyer concurrently with the execution of this Agreement (collectively, the "Disclosure Schedules"), the Seller hereby represents and warrants to the Buyer as follows: 14 Section 3.1 Organization of the Seller. The Seller is a corporation (societe anonyme/naamloze vennootschap) duly organized and validly existing under the Laws of Belgium. Section 3.2 Authority of the Seller. The Seller has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which it will be a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by the Seller of this Agreement and each of the Ancillary Agreements to which it will be a party and the consummation by the Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action. This Agreement has been, and upon their execution each of the Ancillary Agreements to which the Seller will be a party will have been, duly executed and delivered by the Seller. This Agreement constitutes, and upon their execution each of the Ancillary Agreements to which the Seller will be a party will constitute, the legal, valid and binding obligations of the Seller, enforceable against the Seller in accordance with its and their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and by general principles of equity (regardless of whether considered in a proceeding in equity or at law). Section 3.3 No Conflict; Required Filings and Consents. (a) Except as set forth on Schedule 3.3(a) of the Disclosure Schedules, the execution, delivery and performance by the Seller of this Agreement and each of the Ancillary Agreements to which the Seller will be a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (i) conflict with or violate the articles of association or the organizational regulations of the Seller and the Swiss Companies; (ii) result in a material conflict with or material violation of any Law applicable to the Seller, the Swiss Companies, or the Business or by which any property or asset of the Seller or the Business is bound or affected; or (iii) conflict with, result in any breach of, constitute a default (or an event that, with notice or lapse of time or both, would become a default) under, or require any consent of any Person pursuant to, any Material Contract; except in the case of clauses (ii) and (iii), for such conflicts, violations, breaches, defaults or other occurrences that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect or that arise as a result of any facts or circumstances relating to the Buyer or any of its Affiliates. (b) Except as set forth on Schedule 3.3(b) of the Disclosure Schedules, neither the Seller nor its Affiliates (including the Swiss Companies) is required to file, seek or obtain any notice, authorization, approval, order, permit or consent of or with any Governmental Authority or any other Person in connection with the execution, delivery and performance by the Seller of this Agreement and each of the Ancillary Agreements to which the Seller will be a party or the consummation of the transactions contemplated hereby or thereby, except for (i) any 15 filings required to be made under applicable antitrust Laws, (ii) such filings as may be required by applicable federal, national, state or other securities or "blue sky" Laws, (iii) where failure to obtain such consent, approval, authorization or action, or to make such filing or notification, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Seller or the Business, or (iv) as may be necessary as a result of any facts or circumstances relating solely to the Buyer or any of its Affiliates. Section 3.4 Capitalization. The Swiss Companies' issued and outstanding share capital is as set forth in Paragraphs A and B of the Recitals to this Agreement. All of the Swiss Companies' issued and outstanding share capital is validly issued and fully paid up. Other than Buyer's rights with respect to the Shares under this Agreement and except as set forth in Schedule 3.4 of the Disclosure Schedules, there are no outstanding obligations, options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any kind relating to the shares of the Swiss Companies or obligating the Swiss Companies or their respective shareholders to issue, transfer or sell any shares of, or any other interest in, the Swiss Companies. There are no outstanding contractual obligations of the Swiss Companies to repurchase, redeem or otherwise acquire any shares of the Swiss Companies or to provide funds to, or make any investment in, any other Person. Section 3.5 Shares. Except as set forth in Schedule 3.5 of the Disclosure Schedules, the Seller is the legal and beneficial owner of the Shares, free and clear of any Encumbrance. Except as set forth in Schedule 3.5 of the Disclosure Schedules, the Seller has the right, authority and power to sell, assign and transfer the Shares to the Buyer. Section 3.6 Organization and Qualification of the Swiss Companies. (a) Each of the Swiss Companies is (i) a company duly organized and validly existing under the Laws of Switzerland and has all necessary corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted, and (ii) duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except in the case of clause (ii), for any such failures to be so qualified or licensed that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. (b) Attached as Schedule 3.6(b) of the Disclosure Schedules are complete and correct copies of the articles of association of the Swiss Companies and the organizational regulations of Amcis, each as amended to date. The minutes of (i) the meetings of the Board of Directors of CarboGen, and (ii) the meetings of the shareholders of CarboGen contain all material resolutions of the Board of Directors and the shareholders meetings of CarboGen since February 9, 2000 and the minutes of (1) the meetings of the Board of Directors of Amcis, and (2) the meeting of the shareholders of Amcis contain all material resolutions of the Board of Directors and the shareholders meetings of Amcis since March 24, 2000. Section 3.7 Equity Interests. The Swiss Companies do not own, directly or indirectly, any equity, partnership, membership or similar interest in, or any interest convertible into, 16 exercisable for the purchase of or exchangeable for any such equity, partnership, membership or similar interest in any Person. Section 3.8 Financial Statements. (a) Copies of the Audited Financial Statements are attached hereto as Schedule 3.8(a)(i) of the Disclosure Schedules. For purposes of this Agreement, "Audited Financial Statements" shall mean the audited financial statements (composed of the balance sheet, the income statement and notes to the financial statements) of CarboGen and Amcis for the year ended as of December 31, 2004 and for the year ended as of December 31, 2005. The Audited Financial Statements (i) have been prepared based on the books and records of the Swiss Companies (except as may be indicated in the notes contained in the Audited Financial Statements), (ii) have been prepared in accordance with the provisions of the Swiss Code applied on a consistent basis throughout the periods to which such Audited Financial Statements relate, except as set forth in Schedule 3.8(a)(ii) of the Disclosure Schedules, and (iii) represent and are true and accurate statements (in all material respects) of the financial position and the operating performance of the Swiss Companies as required by Swiss Code, except as set forth in Schedule 3.8(a)(ii) of the Disclosure Schedules. (b) The combined adjusted profit before tax of Amcis, CarboGen and Divisional as set forth in Schedule 3.8(b) to the Disclosure Schedules presents a true and accurate (in all material respects) view of the Specified Employees of the Swiss Companies of the underlying operating performance of Amcis, CarboGen and Divisional. The normalization adjustments as shown on such Schedule 3.8(b) present in the view of the Specified Employees of the Swiss Companies an accurate (in all material respects) listing of all non-recurring, extraordinary, non-operating and out-of-period income and expenses in such periods. (c) To the Knowledge of the Seller, there are no material debts or Liabilities of the Swiss Companies of a nature required to be reflected on a balance sheet prepared in accordance with the Swiss Code, other than any such debts or Liabilities (i) reflected or reserved against on the Audited Financial Statements or the notes thereto, if any, or (ii) incurred since December 31, 2005 in the ordinary course of the Business. (d) The receivables of the Swiss Companies have arisen out of bona fide transactions and, except as set forth on Schedule 3.8(d) of the Disclosure Schedules, such receivables are not subject to any Encumbrances other than Permitted Encumbrances. (e) All estimates, projections and forecasts for fiscal years relating to the Business delivered by the Seller or one of its Affiliates (including the Swiss Companies) were prepared in all material respects in the manner consistent with past practices of the Specified Employees of the Swiss Companies in respect of fiscal year 2003. Section 3.9 Absence of Certain Changes or Events. Except as set forth in Schedule 3.9 of the Disclosure Schedules: (a) since December 31, 2005, there has not been any Material Adverse Effect with respect to the Business; 17 (b) during the period commencing on December 31, 2005 and ending on the date hereof, there has not been any material loss, damage or destruction to any of the material assets of the Business by fire or other casualty (whether or not covered by insurance); (c) during the period commencing on December 31, 2005 and ending on the date hereof, none of the Swiss Companies has (i) established or adopted any employee benefit plan, or (ii) paid any bonus or made any profit sharing, incentive compensation or similar payment to, or increased the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers or employees outside the ordinary course of business consistent with past practice or except as otherwise permitted in this Agreement; (d) during the period commencing on December 31, 2005 and ending on the date hereof, none of the Swiss Companies has entered into any transaction or taken any other action outside the ordinary course of business or inconsistent with its past practices, other than entering into this Agreement and the Ancillary Agreements and transactions contemplated hereby and thereby; (e) during the period commencing on December 31, 2005 and ending on the date hereof, none of the Swiss Companies has sold or otherwise disposed of fixed tangible assets in the aggregate in excess of CHF 500,000; and (f) during the period commencing on December 31, 2005 and ending on the date hereof, none of the Swiss Companies has agreed to take, or committed to take, any of the actions referred to in clauses (c) through (e) above, except in the case of clause (e) to the extent provided in the 2006 Budget. Section 3.10 Compliance with Law; Permits. (a) The Swiss Companies are in material compliance with all applicable Laws. (b) The Swiss Companies are in possession of all Permits. Section 3.11 Litigation. Except as set forth on Schedule 3.11 of the Disclosure Schedules, as of the date hereof, there is no Action by or against the Swiss Companies pending, or to the Knowledge of the Seller, threatened in writing to be brought, before any Governmental Authority (i) seeking damages in excess of CHF 50,000.-- per occurrence or CHF 200,000.-- in the aggregate, (ii) pursuing any criminal sanctions or penalties, (iii) seeking equitable or injunctive relief, or (iv) that would otherwise, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Seller or the Business or that would affect the legality, validity or enforceability of this Agreement or any Ancillary Agreement or the consummation of the transactions contemplated hereby or thereby. Section 3.12 Social Security Contributions; Company Plans. (a) Except as set forth in Schedule 3.12(a) of the Disclosure Schedules: 18 (i) any and all returns and reports related to Social Security Contributions that are required to be filed with respect to the Business Employees prior to the date hereof have been timely and correctly filed in all material respects; (ii) the Swiss Companies and the applicable Affiliate of the Swiss Companies have paid all Social Security Contributions with respect to the Business Employees in all material respects, as and when due; and (iii) no social security authority is now asserting any material deficiency or material claim for additional Social Security Contributions (or interest thereon or penalties in connection therewith) with respect to the Business Employees and any and all material Social Security Contributions with respect to the Business Employees which (although not due) have accrued on the basis of the salaries to be paid until the date hereof have been fully provisioned. (b) (i) Each Company Plan is listed in Schedule 3.12(b)(i)-1 of the Disclosure Schedules. With respect to each Company Plan, the Seller has made available to the Buyer a true and correct copy of, where applicable, (A) each such Company Plan that has been reduced to writing and all amendments thereto or, to the extent such Company Plan has not been reduced to writing, a written description thereof and (B) the most recent actuarial report or valuation with respect to each Pension Plan of the Swiss Companies. Except as set forth in Schedule 3.12(b)(i)-2 of the Disclosure Schedules, each Company Plan complies in form and has complied in operation, in each case in all material respects, with applicable Laws. (ii) As used herein, "Company Plan" means (x) a "pension plan" (as defined in Section 3(2) of ERISA and the Swiss Bundesgesetz uber die berufliche Alters-, Hinterlassenen- und Invalidenvorsorge (BVG)) (the "Pension Plans"), (y) a "welfare plan" (as defined in Section 3(1) of ERISA), and (z) any other material bonus, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, restricted stock, stock appreciation right, holiday pay, vacation, severance, medical, dental, vision, disability, death benefit, sick leave, fringe benefit, personnel policy, insurance or other plan, program, agreement, arrangement or understanding, in each case established or maintained with respect to the Business or that otherwise covers the Business Employees. (iii) Except as set forth in Schedule 3.12(b)(iii) of the Disclosure Schedules, each of the Swiss Companies and the applicable Affiliate of the Swiss Companies is in compliance, in all material respects, with its obligations under the Pension Plans applicable to the Business Employees and have paid or provisioned, in all material respects, all contributions required to be so paid or provisioned prior to the date hereof as stipulated by the regulations of the Pension Plans applicable to the Business Employees. Section 3.13 Labor and Employment Matters. (a) The representations and warranties set forth in Section 1 of the Employee Letter are incorporated herein by reference as if fully set forth in this Section 3.13(a). (b) Except as set forth on Schedule 3.13(b) of the Disclosure Schedules, neither the Swiss Companies nor any Affiliate of the Swiss Companies is bound by any labor or collective bargaining contract that pertains to the Business Employees and neither the Swiss 19 Companies nor any Affiliate of the Swiss Companies has any employees' representative, mediator or ombudsman. Except as set forth on Schedule 3.13(b) of the Disclosure Schedules, to the Knowledge of the Seller, there are no organizing activities or collective bargaining arrangements that could affect the Business pending or under discussion with any labor organization or group of Business Employees. Section 3.14 Insurance. Schedule 3.14 of the Disclosure Schedules sets forth a true and complete list of all material insurance policies in force with respect to the Business. The Seller has heretofore made available to the Buyer copies of each such policy (except for any such policy held by SOI) and summaries of the coverage of such policies held by SOI. Section 3.15 Real Property. (a) Schedule 3.15(a) of the Disclosure Schedules sets forth the details of all Owned Real Property. The Swiss Companies have good and valid title to the Owned Real Property, including, but not limited to, right to build (superficies; Baurecht), in each case as described in Schedule 3.15(a) of the Disclosure Schedules. Each Owned Real Property set forth in Schedule 3.15(a) of the Disclosure Schedules is free and clear from any Encumbrance, except for any Encumbrances arising from such right to build (superficies; Baurecht), any Permitted Encumbrances and other Encumbrances set forth on Schedule 3.15(a) of the Disclosure Schedules. (b) Schedule 3.15(b) of the Disclosure Schedules lists the street address of each parcel of Leased Real Property and the leases pursuant to which the Swiss Companies lease such Leased Real Property (the "Real Property Leases"). The applicable Swiss Company has a valid leasehold estate in each Leased Real Property listed in Schedule 3.15(b) of the Disclosure Schedules, free and clear of all Encumbrances, other than Permitted Encumbrances, the Encumbrances listed in Schedule 3.15(b) of the Disclosure Schedules and any such exceptions that would not, individually or in the aggregate, reasonably be expected to materially impair the applicable Swiss Company's operations at the applicable Leased Real Property. Section 3.16 Intellectual Property. Schedule 3.16 of the Disclosure Schedules sets forth a true and complete list of all patents and patent applications, registered trademarks or service marks and applications to register any trademarks or service marks, and registered copyrights and applications for registration of copyrights, and domain names owned legally and beneficially by the Swiss Companies or an Affiliate of the Swiss Companies that are used in the Business (the "Registered Intellectual Property"). Except for any Registered Intellectual Property that will be provided under the Transition Services Agreement, the Registered Intellectual Property that will be owned by the Swiss Companies as of the Closing or that is included in the Transferred Assets constitutes all of the Registered Intellectual Property owned by or licensed to the Seller or any Affiliate of the Seller that is used by the Swiss Companies in the conduct of the Business and that is necessary for the conduct of the Business as currently conducted. No claim has been asserted in writing against the Swiss Companies or any Affiliate of the Swiss Companies in the two (2) years prior to the date hereof that the conduct of the Business by the Swiss Companies, including the use or exploitation of any Intellectual Property by any of the Swiss Companies in connection therewith, infringes or misappropriates the Intellectual Property of any third party. 20 Section 3.17 Taxes. Except as set forth in Schedule 3.17 of the Disclosure Schedules, (i) all Returns required to have been filed by or with respect to the Swiss Companies have been timely filed (taking into account any extension of time to file that has been granted or obtained), and such Returns have been duly and accurately prepared in all respects; (ii) all Taxes shown to be payable on such Returns on or before the Closing Date have been paid or will be timely paid on or before the Closing Date; (iii) no deficiency for any amount of Tax has been asserted or assessed by a Governmental Authority in writing against the Swiss Companies that has not been satisfied by payment, settled or withdrawn; (iv) there are no Tax liens on the assets of the Swiss Companies (other than the Permitted Encumbrances); (v) no additional Taxes other than accrued on the books of the Swiss Companies are due for the period before or in connection with the periods up to and including the Closing Date; and (vi) all records that the Swiss Companies required to keep for tax purposes or that would be required to substantiate any claim made or position taken in relation to Taxes by the Swiss Companies have been duly kept and are available for inspection at the premises of the Company. Section 3.18 Environmental Matters. (a) Except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business, (i) the Swiss Companies are in compliance with all Environmental Laws applicable to their respective Business and have obtained and are in compliance with all Environmental Permits applicable to their respective Business, and (ii) there are no written claims pursuant to any Environmental Law pending or, to the Knowledge of the Seller, threatened in writing, against the Business. (b) The Buyer acknowledges that (i) the representations and warranties contained in this Section 3.18 are the only representations and warranties being made with respect to compliance with or liability under Environmental Laws or with respect to any environmental, health or safety matter, including natural resources, related in any way to the Business, the Seller or to this Agreement or its subject matter, and (ii) no other representation contained in this Agreement shall apply to any such matters. (c) For purposes of this Agreement: (i) "Environmental Laws" means any federal, state, local or foreign Laws relating to pollution or protection of the environment. (ii) "Environmental Permits" means all Permits under any Environmental Law. Section 3.19 Material Contracts. (a) Schedule 3.19(a) of the Disclosure Schedules lists each of the following written or oral contracts and agreements relating to the Business as of the date hereof (such contracts and agreements as set forth in such schedule being "Material Contracts"): (i) all contracts or agreements, including any such contracts and agreements with customers or clients, that provide for payment or receipt by (A) CarboGen of more than CHF 250,000.-- per year, and (B) Amcis of more than CHF 500,000.-- per year; 21 (ii) each contract or agreement imposing any restriction on any right or ability of any Swiss Company to compete in any line of business with any other Person or in any geographic area or during any period of time; (iii) each material contract or agreement creating or relating to any material joint venture, partnership or similar agreement; (iv) each contract or agreement relating to indebtedness for borrowed money in excess of CHF 2,000,000.-- (other than in all cases any intercompany indebtedness between any Swiss Company, on one hand, and the Seller or any of its Affiliates (other than the Swiss Companies), on the other hand); and (v) any other contract or agreement that was entered into outside the ordinary course of business, and that is material to the Business, taken as a whole. Notwithstanding the foregoing, the Investment Agreement shall not be deemed a Material Contract. (b) Except as set forth in Schedule 3.19(b) of the Disclosure Schedule, each Material Contract is valid and binding on the applicable Swiss Company or the applicable Affiliate of the Swiss Companies that is the signatory to such Material Contract and, to the Knowledge of the Seller, the counterparties thereto, and is in full force and effect. Neither the Swiss Companies nor the applicable Affiliate of the Swiss Companies signatory to such Material Contract, or, to the Knowledge of the Seller, any of the counterparties thereto, is in material breach of, or material default under, any Material Contract to which it is a party. Section 3.20 Title to Assets. (a) Either SOI, Solutia UK, Solutia Germany, Solutia Australia PTY Limited, Solutia Services International or the Seller has good and valid title to, or lease to, all assets that constitute Transferred Assets, in each case free and clear of all Encumbrances except (i) such Encumbrances as are set forth in Schedule 3.20(a) of the Disclosure Schedules, (ii) Permitted Encumbrances, (iii) Encumbrances arising or incurred in the ordinary course of business, and (iv) other immaterial imperfections of title, licenses or Encumbrances, if any. (b) Except as set forth in Schedule 3.20(b) of the Disclosure Schedules, the assets and rights that will be owned by the Swiss Companies as of the Closing, the Transferred Assets and the licenses and services provided to Buyer under the Transition Services Agreement are sufficient to permit the Buyer to operate and conduct the Business immediately following the Closing in all material respects as such Business was operated and conducted by the Swiss Companies immediately prior to the Closing. (c) Each of the Swiss Companies has good and valid title to all material assets purported to be owned by it, including all material assets reflected on the Audited Financial Statements and all Material Contracts referred to in Schedule 3.19(a) of the Disclosure Schedules, in each case free and clear of all Encumbrances except (i) such Encumbrances as are set forth in Schedule 3.20(c) of the Disclosure Schedules, (ii) Permitted Encumbrances, 22 (iii) Encumbrances arising or incurred in the ordinary course of business, and (iv) other immaterial imperfections of title, licenses or Encumbrances, if any. Section 3.21 Brokers. Except for Rothschild Inc., the fee of which will be paid by the Seller or an Affiliate of the Seller (other than any Swiss Company), no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Seller or the Business. Section 3.22 Product Liability. Except as set forth in Schedule 3.22 of the Disclosure Schedules, there has been no Action brought or, to the Knowledge of the Seller, threatened in writing, against any Swiss Company in the last three years preceding the date hereof in respect of products or services provided by the Swiss Companies. Except for written notices in connection with the Action described in Schedule 3.22 of the Disclosure Schedules, to the Knowledge of the Seller, in the last three years preceding the date hereof, no Swiss Company has received any written notice that products or services provided by the Swiss Companies do not comply in any material respects with (i) any representations or warranties made by the Seller with respect to such products or services, or (ii) applicable Law. Section 3.23 Buildings. As of the date hereof, to the actual knowledge (without inquiry) of the Specified Employees, the buildings owned by the Swiss Companies and described in Schedule 3.15(a) of the Disclosure Schedules are not in need of maintenance or repairs except for ordinary, routine maintenance and repairs, except for such maintenance and repair that if not undertaken by the Swiss Companies would not reasonably be expected to have a Material Adverse Effect on the Business and except as set forth in Schedule 3.23 of the Disclosure Schedules. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer hereby represents and warrants to the Seller as follows: Section 4.1 Organization. The Buyer is a company duly organized, validly existing and in good standing under the Laws of the jurisdiction of its organization and has all necessary corporate power and authority to own, lease and operate its property and to carry on its business as it is now being conducted. Section 4.2 Authority. The Buyer has full corporate or equivalent power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which it will be a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by the Buyer of this Agreement and each of the Ancillary Agreements to which it will be a party and the consummation by the Buyer of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action. This Agreement has been, and upon their execution each of the Ancillary Agreements to which the Buyer will be a party will have been, duly and validly executed and delivered by the Buyer. This Agreement constitutes, and upon their execution each of the Ancillary Agreements to which the Buyer will be a party will constitute, 23 the legal, valid and binding obligations of the Buyer, enforceable against the Buyer in accordance with its and their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and by general principles of equity (regardless of whether considered in a proceeding in equity or at law). Section 4.3 No Conflict; Required Filings and Consents. (a) The execution, delivery and performance by the Buyer of this Agreement and each of the Ancillary Agreements to which the Buyer will be a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (i) conflict with or violate the certificate of incorporation or bylaws or similar organizational documents of the Buyer; (ii) result in a material conflict with or material violation of any Law applicable to the Buyer or by which any property or asset of the Buyer is bound or affected; or (iii) conflict with, result in any breach of, constitute a default (or an event that, with notice or lapse of time or both, would become a default) under, or require any consent of any Person pursuant to, any material contract or agreement to which the Buyer is a party; except, in the case of clauses (ii) and (iii), for any conflict, violations, breaches, defaults or other occurrences that would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of the Buyer to perform its obligations under this Agreement or any Ancillary Agreement or consummate transactions contemplated hereby or thereby. (b) Except as set forth in Schedule 4.3, the Buyer is not required to file, seek or obtain any notice, authorization, approval, order, permit or consent of or with any Governmental Authority or any other Person in connection with the execution, delivery and performance by the Buyer of this Agreement and each of the Ancillary Agreements to which it will be party or the consummation of the transactions contemplated hereby or thereby, except for (i) any filings required to be made under the applicable antitrust Laws, (ii) such filings as may be required by any applicable federal, national, state or other securities or "blue sky" Laws, or (iii) where failure to obtain such consent, approval, authorization or action or to make such filing or notification, would not individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of the Buyer to perform its obligations under this Agreement or any Ancillary Agreement or consummate transactions contemplated hereby or thereby. Section 4.4 Financing. The Buyer has, and will have at the Closing, sufficient funds to permit the Buyer to consummate the transactions contemplated by this Agreement and the Ancillary Agreements. The Buyer has provided the Seller with accurate and complete copies of the commitment letters or other materials satisfactory to the Seller evidencing the Buyer's possession of sufficient funds for the transactions contemplated by this Agreement. Notwithstanding anything to the contrary contained herein, the parties acknowledge and agree that it shall not be a condition to the obligations of the Buyer to consummate the transactions contemplated hereby that the Buyer have sufficient funds for payment of the Purchase Price. 24 Section 4.5 Brokers. Except for Rabo India Securities Pvt Ltd., the fees of which will be paid by the Buyer, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Buyer. Section 4.6 Investment Intent. The Buyer is acquiring the Shares for its own account for investment purposes only and not with a view to any public distribution thereof or with any intention of selling, distributing or otherwise disposing of the Shares in a manner that would violate any applicable securities or similar Laws. The Buyer agrees that the Shares may not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of without registration under the applicable securities Laws, except pursuant to an exemption from such registration under such Laws. The Buyer is able to bear the economic risk of holding the Shares for an indefinite period (including total loss of its investment), and (either alone or together with its Representatives) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risk of its investment. Section 4.7 No Knowledge of Breaches. The Buyer has no knowledge that any of the representations or warranties made by the Seller as of the date hereof are untrue, incomplete or inaccurate. ARTICLE V COVENANTS AND AGREEMENTS Section 5.1 Conduct of Business Prior to the Closing. Except as set forth in Schedule 5.1 of the Disclosure Schedules or as expressly contemplated by this Agreement (including Section 5.4), between the date of this Agreement and the Closing Date, without the prior written consent of the Buyer (which consent shall not be unreasonably withheld or delayed), (i) the Seller shall cause the Business to be conducted in the ordinary course of business, and, with respect to the Business, the Seller shall use and shall cause its Affiliates to use their respective commercially reasonable efforts to (A) preserve intact in all material respects the business organization, or (B) cause the preservation in all material respects of the Business, and (ii) the Seller shall not (and shall cause the Swiss Companies not to): (a) amend or otherwise change the articles of association and organizational regulations of the Swiss Companies; (b) issue or sell any shares of the Swiss Companies, or any options, warrants, convertible securities or other rights of any kind to acquire any such shares; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, shares, property or otherwise, or make any other payment on or with respect to any of the share capital of the Swiss Companies, except in all cases as set forth in Section 5.4; (d) increase or decrease, reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or indirectly, any of the share capital of the Swiss Companies or make any other change with respect to the capital structure of the Swiss Companies; 25 (e) acquire any corporation, partnership, limited liability company, other business organization or division thereof or otherwise acquire, lease or license any material rights or assets (other than in the ordinary course of business), or form any subsidiary in each case that is material, individually or in the aggregate, to the Business taken as a whole; (f) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation or recapitalization of the Swiss Companies or sale of substantially all of the assets of the Swiss Companies; (g) allow the Swiss Companies to incur or any indebtedness for borrowed money or issue any debt securities in excess of CHF 2,000,000.-- (other than in all cases any intercompany indebtedness between any Swiss Company, on one hand, and the Seller or any of its Affiliates (other than the Swiss Companies), on the other hand); (h) allow the Swiss Companies to enter into any contract, agreement or arrangement that would be a Material Contract if entered into prior to the date hereof, other than in the ordinary course of business; (i) authorize, or make any commitment with respect to, or cause the authorization or any commitment with respect to any capital expenditure by the Swiss Companies in excess of CHF 200,000.-- per project in any manner that is not reflected in the capital budget of the Business attached as Schedule 5.1(i) of the Disclosure Schedules; (j) allow the Swiss Companies to fail to exercise any rights of renewal with respect to any material Leased Real Property that by its terms would otherwise expire; (k) (x) establish, adopt or amend any Company Plan with respect to any Business Employee, or (y) grant or announce any increase in the salaries, bonuses or other benefits payable by the Swiss Companies or any other Affiliate of the Seller to any employees of the Swiss Companies and the Transferred Employees other than ordinary increases not inconsistent with the past practices of the Swiss Companies or the Affiliates of the Companies with which the Transferred Employees are employed on the date hereof and other than in all cases as required by Law, or pursuant to any plans, programs or agreements existing on the date hereof and disclosed in Schedule 3.12(b)(i)-1 or Schedule 3.19(a) of the Disclosure Schedules; (l) allow the Swiss Companies to enter into any employment agreement with any Person pursuant to which the aggregate annual compensation of such Person is expected to exceed CHF 110,000.--; or (m) make any change in any method of accounting or accounting practice or policy of the Swiss Companies, except as required by the Swiss Code, the Swiss GAAP, the U.S. GAAP or any other generally accepted accounting principles, as may be applicable. No provision of this Section 5.1 shall limit or restrict (a) any Swiss Company from applying any cash or cash equivalents of any Swiss Company prior to the Closing to pay off or discharge (i) any obligations or liabilities between any of the Seller and any of its Affiliates (other than any Swiss Company), on the one hand, and any of the Swiss Companies, on the other hand, or (ii) any Third-Party Debt; (b) any Swiss Company from transferring (including by means of a 26 dividend) cash or cash equivalents of any Swiss Company to the Seller or any of its Affiliates; (c) the Seller or any of its Affiliates from making any capital contribution to any Swiss Company; (d) effectuation of the Merger or other transactions contemplated in connection with the Merger as described in Section 5.4; or (e) termination of any insurance policy of SOI or any of its Affiliates (other than the Swiss Companies) with respect to the Swiss Companies, the Business, the Transferred Assets or the Business Employees effective as of the Closing. Section 5.2 Covenants Regarding Information. (a) (i) From and after the date of this Agreement until the Closing, upon reasonable notice, the Seller shall grant and shall cause to be granted to the Buyer and the officers, employees, agents, accountants, advisors, bankers, lawyers and other representatives (collectively, the "Representatives") of the Buyer reasonable access to the Representatives, properties, offices, plants and other facilities, books and records of the Swiss Companies and, solely to the extent that such books and records relate directly and exclusively to the Transferred Assets or Assumed Liabilities, of the Affiliates of the Swiss Companies and the Seller shall furnish or cause to be furnished to the Buyer such financial, operating and other data and information as the Buyer may reasonably request, such request to be made in writing and stating the grounds for such request; provided, however, that any such access or furnishing of information shall be conducted at the Buyer's expense, during normal business hours, under the supervision of and in such a manner as not unreasonably to interfere with the normal operations of the Business. Notwithstanding anything to the contrary in this Agreement, neither the Seller, the Swiss Companies nor any Affiliate of the Seller shall be required to disclose any information to the Buyer or its Representatives if such disclosure would, in the Seller's reasonable judgment, (x) jeopardize any attorney-client or other legal privilege, or (y) contravene any applicable Laws or binding agreement entered into prior to the date hereof. (ii) From and after the date of this Agreement until the Closing, in no event shall the Buyer communicate with any customer, supplier or employee (in case of an employee, except as specifically permitted in Section 5.2(a)(i)) of any Swiss Company or any of its Affiliates with respect to this Agreement, any Ancillary Agreement, any transactions contemplated hereby or thereby or the relationship among any Swiss Company or any of its Affiliates, on one hand, and any such customer, supplier or such employee, on the other hand, without obtaining prior written consent from the Seller. (b) In order to facilitate the resolution of any claims made against or incurred by the Seller (as it relates to the Business and the Transferred Assets), for the applicable period specified in the Buyer's document retention policy (or, if longer, the period required by applicable Law), the Buyer shall (i) retain the books and records relating to the Business and the Transferred Assets for periods prior to the Closing, and (ii) afford the Representatives of the Seller reasonable access (including the right to make, at the Seller's expense, photocopies), during normal business hours, to such books and records but solely to the extent such books and records directly and exclusively relate to this Business and the Transferred Assets; provided, however, that the Buyer shall notify the Seller in writing at least 60 days in advance of destroying any such books and records in order to provide the Seller the opportunity to copy such books and records in accordance with this Section 5.2(b). 27 (c) In order to facilitate the resolution of any claims made against or incurred by the Buyer or the Swiss Companies, for the applicable period specified in the Seller's document retention policy (or, if longer, the period required by applicable Law), the Seller shall (i) retain the books and records relating to the Business and the Transferred Assets relating to periods prior to the Closing which shall not otherwise have been delivered to the Buyer, and (ii) upon reasonable notice, afford the Representatives of the Buyer reasonable access (including the right to make, at the Buyer's expense, photocopies), during normal business hours, to such books and records but solely to the extent such books and records directly and exclusively relate to this Business and the Transferred Assets; provided, however, that the Seller shall notify the Buyer in writing at least 60 days in advance of destroying any such books and records in order to provide the Buyer the opportunity to copy such books and records in accordance with this Section 5.2(c). Section 5.3 Notification of Certain Matters. Until the Closing, each party hereto shall promptly notify the other parties in writing of any fact, change, condition, circumstance or occurrence or nonoccurrence of any event of which it is aware that will or is reasonably likely to result in any of the conditions set forth in Article VII of this Agreement becoming incapable of being satisfied. Section 5.4 Intercompany Arrangements; Cash; Third-Party Debt; Merger. (a) Except for the Transition Services Agreement, all intercompany and intracompany accounts, contracts and obligations between any Swiss Company, on one hand, and the Seller or any of its Affiliates (other than the Swiss Companies), on the other hand, shall be discharged, cancelled, terminated or transferred to the Seller or an Affiliate of the Seller prior to Closing such that, immediately prior to the Closing, no intercompany or intracompany obligation is outstanding between the Seller and its Affiliates (other than the Swiss Companies), on one hand, and any Swiss Company, on the other hand. The parties hereto agree that the Swiss Companies shall retain all receivables, payables and other intercompany obligations between the Swiss Companies. (b) Immediately prior to the Closing, all cash and cash equivalents of the Swiss Companies shall be transferred (through a dividend or by other means) to the Seller or one or more of its Affiliates. (c) On or prior to the Closing the Seller shall satisfy in full or otherwise discharge all Third-Party Debt. (d) The Parties hereto agree that the transactions described in clauses (a) through (c) above shall not change the Purchase Price. (e) On or prior to June 30, 2006, CarboGen may merge into Amcis, whereby Amcis will be the surviving entity. The merger will be effective upon entry in the Commercial Registry, but with the retroactive effect from an accounting and tax perspective as of January 1, 2006. The legal place of business of the surviving entity will be Hauptstrasse 159, Bubendorf, Switzerland. The new name of the surviving entity will be CARBOGENAMCIS AG (or such other name as the Swiss Companies may elect). The share capital of Amcis (in the event that the 28 capital increase occurs prior to the merger) or of the surviving entity (in the event that the capital increase occurs concurrently with, or within ten days after, the merger) will be increased by CHF 1,400,000 to CHF 1,450,000, divided into 2900 registered shares with a par value of CHF 500. The Articles of Association of Amcis will be amended to reflect such share capital increase and will remain in effect, as amended by virtue of the merger and the share capital increase described above, for the surviving entity. The members of the Board of Directors of Amcis immediately before the merger will be members of the Board of Directors of the surviving entity. In the event such merger is consummated prior to the Closing, at the Closing the Seller shall sell, assign, transfer and deliver the outstanding shares of capital stock of the surviving entity (the "New Shares") to the Buyer and the Buyer shall purchase and accept the New Shares. To the extent applicable, from and after the consummation of transactions contemplated by this Section 5.4(e), (i) the references to the Shares in the Purchase Agreement shall be deemed to refer to the New Shares, (ii) the representations and warranties shall be deemed to be modified automatically to reflect the transactions described in this Section 5.4(e) (including the new capital structure) and (iii) no breach of any representation, warranty or covenant shall be deemed to occur to the extent any breach arises out of or in connection with the consummation of the transactions described in this Section 5.4(e). Section 5.5 Resignation or Dismissal of Directors and Auditors. The Seller shall cause, on or prior to the Closing, the resignation or dismissal of all of the directors and auditors of the Swiss Companies, effective as of the Closing Time, whose resignation has been requested by the Buyer in accordance with Section 2.5(b)(iv). Section 5.6 Confidentiality. Each of the parties shall hold, and shall cause its Representatives to hold, in confidence all documents and information furnished to it by or on behalf of the other parties in connection with the transactions contemplated hereby pursuant to the terms of the confidentiality agreement dated March 3, 2006 between the Buyer and the Seller and SOI (the "Confidentiality Agreement"), which shall continue in full force and effect until the Closing Date, at which time such Confidentiality Agreement and the obligations of the parties under this Section 5.6 shall terminate; provided, however, that after the Closing Date the Confidentiality Agreement shall terminate only in respect of that portion of the documents and materials referenced therein exclusively relating to the transactions contemplated by this Agreement. If for any reason this Agreement is terminated prior to the Closing Date, the Confidentiality Agreement shall nonetheless continue in full force and effect in accordance with its terms. Section 5.7 Consents and Filings; Further Assurances. (a) Each of the parties shall use all commercially reasonable efforts to take, or cause to be taken, all appropriate action to do, or cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements as promptly as practicable, including to (i) obtain from Governmental Authorities and other Persons all consents, approvals, authorizations, qualifications and orders as are necessary for the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, and (ii) promptly make all necessary filings and give all necessary notices, and thereafter make any other required submissions, with respect to this Agreement required under applicable Law; provided, however, 29 that in no event shall the Seller or its Affiliates be obligated to pay any additional monies in the aggregate in excess of USD 25,000 under or be required to amend any of their respective agreements or contracts if, in the sole discretion of the Seller, such amendments shall be adverse to the interests of the Seller or any of its Affiliates; provided, further, the preceding provisions shall not limit the obligation (if any) of the Seller or any of its Affiliates to pay amounts required by Law to be paid in connection with any filing or notice to any Governmental Agency required to be made pursuant to this Agreement. In no event shall the Seller or any of its Affiliates be obligated to obtain any consent, approval or waiver from ****** with respect to any ****** Agreement. Each of the parties shall promptly deliver to the others (upon request) a copy of each such filing made, each such notice given or each such consent, approval, authorization, qualification or order obtained during the period between the date of this Agreement and the Closing Date. (b) Without limiting the provisions of Section 5.7(a), (i) the transactions contemplated by this Agreement shall not constitute an assignment or transfer, by operation of law or otherwise, of any agreement or contract which, but for this Section 5.7(b), would be an Assumed Contract, or any rights, privileges and powers of the Seller (or any of its Affiliates party thereto) thereunder if such assignment or transfer, without a necessary consent, approval or waiver by a third party, would be ineffective or would constitute a default under, or other contravention of, the provisions of any such agreement or contract or applicable Laws or give rise to any right of acceleration of any obligation thereunder or any right to termination thereof and such consent, approval or waiver shall not have been obtained prior to the Closing Date, and (ii) the Seller shall not be deemed in breach of its obligations to assign any such Assumed Contract to the Buyer. Without limiting the provisions of Section 5.7(a), in the event any consent, approval or waiver that is required to be obtained has not been obtained prior to Closing, the parties hereto agree to cooperate in seeking a mutually acceptable alternative to obtain the benefit of such Assumed Contract for the Buyer; provided, however, that no such alternative shall involve an actual reduction or an effective reduction to the Purchase Price. For the avoidance of doubt, nothing in this Agreement shall be deemed to require assignment of the Confidentiality Agreements that are not assignable or transferable, without consent of the parties thereto (other than the Seller or any of its Affiliates). (c) Each of the parties shall promptly notify the other parties of any communication it or any of its Affiliates receives from any Governmental Authority relating to the matters that are the subject of this Agreement and permit the other parties to review in advance any proposed communication by such party to any Governmental Authority. No party to this Agreement shall agree to participate in any meeting with any Governmental Authority in respect of any filings, investigation or other inquiry unless it consults with the other parties in advance and, to the extent permitted by such Governmental Authority, gives the other parties the opportunity to attend and participate at such meeting. Subject to the Confidentiality Agreement, the parties will coordinate and cooperate fully with each other in exchanging such information and providing such assistance as the other parties may reasonably request in connection with the foregoing and in seeking early termination of any applicable waiting periods under such U.S. or non-U.S. Law. Subject to the Confidentiality Agreement, the parties will provide each other with copies of all correspondence, filings or communications between them or any of their Representatives, on the one hand, and any Governmental Authority or members of its staff, on the other hand, with respect to this Agreement and the transactions contemplated hereby. 30 Section 5.8 Public Announcements. On and after the date hereof and through the Closing Date, none of the parties shall issue any press release or make any public statement prior to obtaining the other parties' written consent, which consent shall not be unreasonably withheld or delayed, except that no such consent shall be necessary to the extent disclosure may be required by applicable Law or any listing agreement of any party hereto, but nonetheless (i) subject to each party's obligations under Section 5.7(c) above and (ii) subject to prior consultation with each other. After the Closing, the parties shall consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement or the transactions contemplated hereby. Section 5.9 ****** Guarantee; Release of Guarantees. On or prior to the Closing, the Buyer shall execute and deliver to ****** (with a copy to the Seller) the guarantee referred to in Section 7.2(g). The parties hereto agree to cooperate and use their reasonable best efforts to obtain the release of the Seller or its Affiliates that are a party to each of the guarantees, performance bonds, bid bonds and other similar agreements listed in Schedule 5.9 of the Disclosure Schedules (the "Guarantees"). In the event any of the Guarantees are not released prior to or at the Closing, the Buyer will provide the Seller with a guarantee that indemnifies and holds the Seller and its Affiliates that are a party to each such Guarantee harmless for any and all payments required to be made under, or costs incurred in connection with, such Guarantee by the Seller or its Affiliates that are a party to such Guarantee until such Guarantee is released. Section 5.10 Directors' and Officers' Indemnification. The Buyer shall cause the Swiss Companies and the Affiliates of the Buyer not to take any action directly or indirectly to disaffirm or adversely affect the provisions of any agreements disclosed on Schedule 5.10 of the Disclosure Schedules that provide indemnification of and expense reimbursement; provided, however, that the foregoing provisions of this Section 5.10 shall not prevent the Buyer or its Affiliates from terminating such agreements in accordance with their respective terms. Section 5.11 Employees. (a) (i) Identification of Business Employees. Schedule 2 to the Employee Letter is hereby incorporated by reference as if fully set forth in this Section 5.11(a)(i). For purposes of this Agreement, a "Business Employee" shall include any individual who is, on the Closing Date, absent due to vacation, holiday, sickness, short-term disability or other approved leave of absence who is expected to return to work on or before the first anniversary of the date of this Agreement or who has a legal right to return to work, but shall exclude any U.S. Business Employee or European Business Employee who is receiving long-term disability benefits under any Company Plan. For purposes of this Agreement, a "Transferred Employee" means (a) all Swiss Business Employees and European Business Employees, in each case except for the Specified Employees, and (b) all U.S. Business Employees and all Specified Employees who accept the Buyer's offer of employment pursuant to Section 5.11(a)(iv) and (v) and actually commence active employment with the Buyer or its Affiliate on or after the Closing Date. (ii) Swiss Business Employees. All Swiss Business Employees, except for the Specified Employees, shall remain employed by the Swiss Companies immediately following the Closing. 31 (iii) European Business Employees. By virtue of the consummation of the transactions contemplated hereby, the employment contracts of all European Business Employees, except for the Specified Employees, shall automatically transfer to Affiliates of the Buyer, effective as of the Closing, and the Buyer shall cause the relevant Affiliates of the Buyer to assume all liabilities in respect of such employees (including all incentive payments). The parties agree that each employment contract of the European Business Employees, except for the Specified Employment Agreements, shall be transferred to an Affiliate of the Buyer organized in a jurisdiction where the relevant European Business Employee is currently employed. The Buyer shall provide to the Seller a list of each such Affiliate of the Buyer no later than thirty days after the date hereof. The Buyer shall ensure that from and after the Closing, the terms and conditions of employment of each European Business Employee, except for the Specified Employees, with the Affiliate of the Buyer, except as specifically provided in this Section 5.11, shall be the same as applicable to such European Business Employee immediately before the Closing and be consistent with the requirements of the Directive or equivalent rules, as applicable. The Seller and the Buyer shall cooperate, and the Buyer shall cause the Affiliates of the Buyer to which any European Business Employee is transferred to cooperate, in providing European Business Employees with appropriate communication and consultation about their status with respect to this transaction in accordance with the Directive and the relevant domestic legislation of the jurisdiction, in which such employees are employed. The Buyer shall, and shall cause its Affiliates to, provide to the Seller information that is required to be provided to the Business Employee by the Directive and the relevant domestic legislation. For the avoidance of doubt, the employment contracts of the European Business Employees, except for Specified Employment Agreements, will transfer to the relevant Affiliates of the Buyer by virtue of the consummation of the transactions contemplated hereby along with the transfer of other Transferred Assets upon Closing. (iv) Specified Employees. The Seller shall, or shall cause one of its Affiliates to, terminate the Specified Employment Agreements (or obtain resignation of the Specified Employees) immediately prior to Closing, provided that the Specified Employees shall have accepted offers of employment from the Buyer and its Affiliates at the latest immediately prior to Closing with terms of employment specified on Schedule 5.11(a)(iv) of the Disclosure Schedule or on such other terms to which the Specified Employees may agree. (v) U.S. Business Employees. The Buyer shall, or shall cause one of its Affiliates to, offer employment, effective as of the Closing, to each U.S. Business Employee on terms and conditions of employment no less favorable, when taken in the aggregate, than those that apply to such Business Employee immediately before the Closing. Such offers shall also comply with any applicable Law. (vi) Liabilities. Except as specifically provided in this Section 5.11, the Seller and its Affiliates shall remain solely responsible for any Liabilities in respect of (A) any U.S. Business Employee with respect to whom the Buyer or one of its Affiliates complies with the requirements of Section 5.11(a)(v), but who does not become a Transferred Employee, and (B) any U.S. Business Employee with respect to his or her employment or termination of employment with the Seller and its Affiliates before the Closing. For the avoidance of doubt, the Seller shall indemnify and hold harmless the Buyer and its Affiliates with respect to any Liabilities described in the previous sentence. The Buyer and its Affiliates shall be solely 32 responsible for any Liabilities (A) in respect of any Business Employee, arising out of the failure of the Buyer and its Affiliates to comply with their obligations under this Section 5.11, (B) in respect of any Swiss Business Employee or European Business Employee, arising in connection with or as a result of any employment-related claim as a result of the consummation of the transactions contemplated hereby, (C) in respect of any Transferred Employee, with respect to his or her employment with the Buyer and its Affiliates from and after the Closing, (D) otherwise arising out of the employment or termination of employment of any Swiss Business Employee, European Business Employee or any former employee of the Swiss Companies, whether before, upon or after the Closing, (E) otherwise arising from any breach by the Buyer (whether before or after the date of transfer) of the Directive or equivalent domestic legislation of the jurisdiction in which a European Business Employee is employed, and (F) otherwise arising out of the employment or termination of employment of any Transferred Employee with the Buyer or one of its Affiliates (including the Swiss Companies) from and after the Closing. For the avoidance of doubt, the Buyer shall indemnify and hold harmless the Seller and its Affiliates with respect to (i) any Liabilities described in the previous sentence, and (ii) any Damages incurred by the Seller or any of its Affiliates arising out of or related to any failure to provide information to Business Employees regarding the Business Employees or to consult with the Business Employees before Closing to the extent such failure arises out of the failure on the part of the Buyer to provide information or consult with the Business Employees, in each case as required by the Directive and the relevant domestic legislation. Notwithstanding any other provision of this Agreement to the contrary, ******; provided, however that the Buyer shall in all events be solely responsible for any severance-type payments (whether under the Specified Employment Agreements or otherwise) with respect to any Specified Employee. (vii) Confidentiality Agreements; Non-Competition Restriction. The Seller and its Affiliates shall release each Transferred Employee, to the extent applicable, from his or her obligations under any confidentiality agreements or non-competition restriction which he or she may have entered into with the Seller or any of its Affiliates, to the extent (and only to the extent) necessary for the Buyer and its Affiliates to employ such Transferred Employee in the Business. The Transferred Employees' obligations of confidential treatment of the Seller's business information and trade secret technology being transferred to the Buyer and its Affiliates (whether under such agreements or otherwise) shall not be released except for the benefit of the Buyer and its Affiliates as provided in the preceding sentence. (b) Employee Benefit Plans Generally. (i) Plans Generally. Except as otherwise provided in this Section 5.11: (A) effective as of the Closing, the Seller shall cause the Swiss Companies to cease to sponsor or constitute a participating employer in all Company Plans, other than the Acquired Company Plans; (B) the Seller and its Affiliates shall remain solely responsible for any and all Liabilities and obligations with respect to events that occur before Closing under, in connection with or in respect of the Company Plans (other than the Acquired Company Plans), and all rights and entitlements, with respect to events that occur before Closing of all current and former employees under such plans (including the rights and entitlements of the Transferred Employees thereunder other than the severance benefits for European Business Employees), and neither the Buyer nor any of its Affiliates (including, after the Closing Date, the Swiss Companies) shall have any responsibility or obligation in respect of any such plan (other than the Acquired Company Plans) 33 prior to Closing; (C) effective as of the Closing, the Buyer and its Affiliates (including the Swiss Companies) shall be solely responsible for providing benefits to European Business Employees in accordance with the Directive and the relevant domestic legislation and shall be solely responsible for any and all Liabilities and obligations arising under, in connection with or in respect of the Acquired Company Plans, and all rights and entitlements of all current and former employees under such plans (including the rights and entitlements of the Transferred Employees and former employees of the Swiss Companies), and neither the Seller nor any of its Affiliates (other than the Swiss Companies) shall have any responsibility or obligation in respect of any such plan; and (D) from and after the Closing, the Buyer shall, and shall cause its Affiliates to, honor all Acquired Company Plans in accordance with their terms as in effect immediately before the Closing, subject to any amendment or termination thereof that may be permitted by such terms. For purposes hereof, "Acquired Company Plan" means any Company Plan that is sponsored, maintained or contributed to solely by one or more of the Swiss Companies, or to which solely one or more Swiss Companies are required to contribute. (ii) Post-Closing Benefits Generally. For a period of not less than six months following the Closing, the Buyer shall provide, or shall cause to be provided, to each Transferred Employee (except for the Specified Employees) at least base compensation, incentive compensation and employee benefits that are no less favorable, when taken in the aggregate, than those that apply to such Transferred Employee immediately before the Closing. Without limiting any benefits to the European Business Employees described in the foregoing sentence, in respect of European Business Employees, post-closing benefits shall be provided in accordance with the Directive or equivalent rules as applicable. The foregoing shall not be construed to prevent the termination of employment of any Transferred Employee for a reason not connected with the consummation of the transactions contemplated hereby. It is acknowledged that the Buyer and its Affiliates are not required to provide stock options, stock purchase or other equity-based plans to Transferred Employees from and after the Closing. Notwithstanding any other provision of this Agreement to the contrary, (A) if a Transferred Employee is terminated by the Buyer or its Affiliate without cause within six months from the Closing Date, the Buyer shall, or shall cause its Affiliates to, provide severance benefits at least equal to those that would have been provided by the applicable Company Plan that is a severance plan or arrangement as in effect immediately prior to the Closing if it had continued to apply to the Transferred Employee and the Transferred Employee were eligible for benefits thereunder, and (B) without limiting any benefits to which any European Business Employee would be entitled pursuant to clause (A) above, if a European Business Employee is terminated after the Closing Date for a reason connected with the consummation of the transactions contemplated hereby, Buyer shall, or shall cause its Affiliates to, satisfy any legally imposed severance-related obligations to such European Business Employee. (iii) Welfare Benefits for U.S. Business Employees and European Business Employees Generally. Without limiting the generality of the foregoing provisions of this Section 5.11: (A) the Seller and its Affiliates shall be solely responsible for (I) claims for the welfare benefits and for workers' compensation, in each case that are incurred by or with respect to any U.S. Business Employee and European Business Employee (other than under the Acquired Company Plans) before the Closing, (II) claims relating to health continuation coverage required by Section 601 et seq. of the Employee Retirement Income Security Act of 1974, as amended ("COBRA Coverage") attributable to "qualifying events" with respect to any 34 U.S. Business Employee and his or her beneficiaries and dependents that occur upon or before the Closing, (III) claims for welfare benefits and for workers' compensation, in each case that are incurred by or with respect to any U.S. Business Employee who does not become a Transferred Employee, whether reported before, upon or after the Closing, and (IV) claims relating to COBRA Coverage attributable to "qualifying events" with respect to any U.S. Business Employee who does not become a Transferred Employee and his or her beneficiaries and dependents, whether occurring before, upon or after the Closing; and (B) the Buyer and its Affiliates shall be solely responsible for (1) claims for welfare benefits and for workers' compensation, in each case that are incurred by or with respect to any U.S. Business Employee or European Business Employee on or after the Closing Date and with respect to any claims under the Acquired Company Plans, and (2) claims relating to COBRA Coverage attributable to "qualifying events" with respect to any U.S. Business Employee and his or her beneficiaries and dependents that occur after the Closing. (iv) Past Service Credit Generally. For all purposes under the employee benefit plans and arrangements of the Buyer and its Affiliates providing benefits after the Closing to any Transferred Employees (the "New Plans"), each such Transferred Employee shall be credited with his or her years of service with Seller and its Affiliates (including the Swiss Companies) before the Closing, to the same extent as such Transferred Employee was entitled, before the Closing, to credit for such service under any similar Company Plans ("Past Service Credit"), except (A) in the case of U.S Business Employees, for purposes of benefit accrual under New Plans that are defined benefit or cash balance Pension Plans, (B) as provided in Section 5.11(c), (C) to the extent Past Service Credit would result in a duplication of benefits, and (D) to the extent Past Service Credit would contravene applicable Law. For the avoidance of doubt, there shall be no transfer of assets or liabilities from the Pension Plan of SOI in which U.S. Business Employees participate before the Closing to any plan sponsored by the Buyer or its Affiliates. (c) Pension Benefit Transfer for European Business Employees. In the case of European Business Employees, liabilities shall be transferred to the Buyer or its Affiliates, as applicable, only in so far as specified in the Directive and the relevant domestic legislation (including the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005 SI/2005 No. 649 or such legislation that may be in force at the time of transfer) and the Buyer shall only be required to make, or to cause its Affiliates to make, such contributions as are applicable to the extent set out in the legislation. The Seller shall have no liability in relation to pension contributions or benefits after Closing. In the case of a Transferred Employee who requests that his existing contributions be transferred from the applicable Pension Plan of which the European Business Employee was a member while employed by the Seller or any of its Affiliates, such sums will be calculated on an accrued benefit obligation basis at the date of Closing with no liability on the part of the Seller. For the avoidance of any doubt, the pension reserve build up by Solutia Germany in accordance with the applicable pension plan with respect to the European Business Employee employed in Germany, shall transfer, to the Buyer or its respective Affiliate, as applicable, as a liability automatically by virtue of the transactions contemplated hereby, together with such European Business Employee's employment contract. 35 (d) Continuity of Benefits for U.S. and European Business Employees. Without limiting the generality of the foregoing, the following shall apply with respect to the participation of each Transferred Employee who is a U.S. Business Employee or a European Business Employee in any New Plans that the Buyer and its Affiliates choose to offer. The Buyer shall use its best efforts to ensure that each such Transferred Employee shall be eligible to participate effective as of the Closing, without any waiting time, nor any pre-existing condition exclusions or actively-at-work conditions (both for the Transferred Employee and his/her dependents), in such New Plans to the extent coverage under such New Plan replaces coverage under a similar type of Employee Benefit Plan in which such Transferred Employee currently participates (such plans, collectively, the "Old Plans"). In addition, the Buyer shall cause each such New Plan that provides medical, dental, pharmaceutical and/or vision benefits to recognize any eligible expenses incurred by any Transferred Employee and his or her covered dependents under the corresponding Old Plan during 2006 but before the Closing, for purposes of satisfying all deductible, coinsurance and maximum out-of-pocket requirements for the remainder of 2006 under such New Plan. (e) Delayed Commencement of Benefits. Notwithstanding the foregoing provisions of this Section 5.11, if it is not possible for the Buyer to begin providing benefits to U.S. Business Employees and European Business Employees under plans sponsored by the Buyer and its Affiliates as of the Closing, the commencement of such benefits may be delayed past the Closing to the extent and on terms and conditions to be agreed to in good faith by the Seller and the Buyer. (f) Certain Compensation Obligations. Without limiting the generality of the foregoing provisions of this Section 5.11, the Buyer shall, and shall cause its Affiliates to, (i) honor all entitlements of Transferred Employees to vacations and holidays that have accrued but not been taken as of the Closing (and shall make any payments related to vacations and holidays in cash to the extent required by applicable Law), (ii) pay all unpaid compensation of the Transferred Employees accrued through the Closing, including salary, wages, annual bonuses for years ended before the Closing, thirteenth-month bonuses and other bonuses and incentive compensation, social security and tax withholding payments and vacation pay required by applicable Law to be paid in cash, and (iii) pay annual bonus for the year in which the Closing occurs to each Transferred Employee who is eligible to receive an annual bonus under any Company Plan and who meets the service requirements to receive such a bonus, based upon service with the Seller and its Affiliates (including the Swiss Companies) before the Closing and service with the Buyer and its Affiliates (including the Swiss Companies) after the Closing (including the annual bonuses accrued as of the Closing Time). A pro-rata portion of the annual bonuses described in clause (iii) of the preceding sentence (pro-rated based upon the portion of 2006 that occurs before the Closing) shall be based upon the applicable bonus plan of the Seller and its Affiliates (including the Swiss Companies) and performance before the Closing and shall be calculated and paid as set forth in Schedule 3 of the Employee Letter, and the remainder shall be based upon the applicable bonus plan of the Buyer and its Affiliates (including the Swiss Companies) and performance after the Closing. (g) Directive Obligations. In all events, the Buyer shall, and shall cause its Affiliates to, comply with their respective obligations towards the European Business Employees in accordance with the Directive and the relevant domestic legislation. 36 Section 5.12 Transferred Assets. On or prior to the Closing Date, the Buyer shall, and shall cause its Affiliates (as set forth in Section 5.11 above) to, acquire all of the Transferred Assets pursuant to the Bills of Sale and the Assignment and Assumption Agreements and assume and agree to pay, perform and discharge the Assumed Liabilities pursuant to the Assignment and Assumption Agreements. Section 5.13 Transition Services Agreement. The Buyer acknowledges that, as of the Closing Date, neither the Seller nor any of its Affiliates shall have any obligation to provide any support or other services to the Buyer, the Swiss Companies nor any Affiliates thereof relating to the Business other than those services expressly required to be provided pursuant to the Transition Services Agreement in the form attached hereto as Exhibit F (the "Transition Services Agreement"), which agreement shall be entered into by the Seller (and/or one or more of its Affiliates) and the Buyer as of the Closing Date. Section 5.14 Non-Competition. (a) Except with the prior written consent of the Buyer, during the period commencing immediately after the Closing Time and ending on the third anniversary of the Closing Date (unless only a shorter maximum period is permitted by applicable Law, in which case, during such shorter period), the Seller shall not, and shall cause its Affiliates (the Seller together with its Affiliates, the "Restricted Entities") not to: (i) compete with the Business (as such Business is conducted immediately prior to the Closing Date) in the geographic locations in which such Business is conducted immediately prior to the Closing Date (such Business, as so conducted, a "Competing Business"); or (ii) solicit employment for or of any Specified Employee who has accepted an offer of employment offered from the Buyer in connection with this Agreement; provided, however, that this Section 5.14(a)(ii) (A) shall be applicable to a Specified Employee only as long as such Specified Employee remains employed by any of the Swiss Companies or any other Affiliate of the Buyer with which such Specified Employee has accepted an offer in connection with the transactions contemplated by this Agreement, and (B) shall not be applicable to any Specified Employee who initiates contact with any Restricted Entity on an unsolicited basis. (b) Notwithstanding any provision to the contrary in this Section 5.14, any Restricted Entity may: (i) purchase or otherwise acquire by merger, purchase of assets, stock or controlling interest or otherwise any Person or business or engage in any similar merger and acquisition activity with any Person (such acquired Person, the "Acquired Entity"), so long as: (1) a Restricted Entity divests (or enters into an agreement to divest) within one year of such acquisition any portion of such business that would cause non-compliance with Section 5.14(a)(i); or (2) such Person is a De Minimis Business; 37 (ii) acquire, own or manage for the account of third parties through a mutual fund, employee benefit plan, trust account or similar investment pool or vehicle, any class of security of any Person regardless of whether such Person engages in the Competing Business; (iii) hold or make investments not in excess of five percent of the outstanding securities of any corporation if such securities are listed on an internationally recognized securities exchange; or (iv) engage in any rental or leasing of real property (including to any Competing Business or to any Person who conducts any Competing Business). (c) In the event any Affiliate of the Seller ceases to be an Affiliate of the Seller, the provisions of this Section 5.14 shall no longer apply to such Person. (d) In the event SOI or Solutia Investments LLC ceases to be the "beneficial owner" (as determined for purposes of Regulation 13-D under the Exchange Act as currently in effect), directly or indirectly, of securities of the Seller (including any successor by merger of the Seller) representing more than 30% of the combined voting power of the Seller's then outstanding capital stock having ordinary power in the election of directors or SOI or Solutia Investments LLC is acquired by a Person not party to this Agreement (and not affiliated with the Seller) by merger, neither Person that acquires such "beneficial ownership" of the Seller (nor any Affiliate of such Person that is not a Subsidiary of SOI), nor, in the case of a merger, the surviving entity and its Affiliates (other than those Affiliates that would be Subsidiaries of SOI without giving effect to the merger) shall be deemed a Restricted Entity for the purposes of this Section 5.14. (e) For the avoidance of doubt, no shareholder of SOI shall be deemed a Restricted Entity for the purposes of this Section 5.14. (f) Exceptions set forth in any of Sections 5.14(b), (c), (d) or (e) are set forth therein for the avoidance of doubt, as such exceptions cover actions not necessarily restricted by Section 5.14(a), and no inference shall be drawn that the activities described in any such Sections 5.14(b), (c), (d) or (e) are in any way restricted or limited by the restrictions set forth in Section 5.14(a). (g) "De Minimis Business" means: (i) any equity investment by any Restricted Entity in any Person in which (x) the Restricted Entities collectively do not have a right to designate a majority, or such higher amount constituting a controlling number, of the members of the board of directors (or similar governing body) of such Person, (y) the Restricted Entities collectively hold not more than 20% of the outstanding voting securities or similar equity interest, or (z) the Restricted Entities collectively hold not more than 5% of any class of equity securities of a Person whose securities are publicly traded on an internationally recognized securities exchange; provided, in the case of clauses (x), (y) and (z), that no Restricted Entity controls the management of such Person; or 38 (ii) any business activity that would otherwise violate Section 5.14(a)(i) that is carried on by an Acquired Entity but only if, at the time of such acquisition, the revenues derived from that portion of the Acquired Entity (as defined below) that engages in the Competing Business constitutes less than 15% of the annual gross revenues of the Acquired Entity. (h) If, at any time of enforcement of any of the provisions of this Section 5.14, an arbitrator engaged pursuant to Section 9.9 holds that the restrictions stated herein are unreasonable under the circumstances then existing, the parties hereto agree that the maximum period, scope or geographic area of this Section 5.14 shall be limited to those that are reasonable under the circumstances. (i) In the event of a breach by the Seller or any other Restricted Entity of the terms of this Section 5.14, subject to terms and conditions of this Agreement, the Buyer shall be entitled, if it shall so elect, to institute arbitration proceedings described in Sections 9.9(b)-(k) to obtain damages for any such breach, or to institute legal proceedings in any court of competent jurisdiction in Switzerland to enforce the specific performance of such terms by the Seller (or other applicable Restricted Entity) and to enjoin the Seller (or such applicable Restricted Entity) from any further violation of this Section 5.14 as described in Section 9.9(b)-(k). Section 5.15 March Financials. On the date hereof, the Seller shall deliver to the Buyer the unaudited financial statements (composed of the balance sheet and the income statement) of the Swiss Companies for the month ended as of March 31, 2006 (the "March Financials"). ARTICLE VI INDEMNIFICATION Section 6.1 Survival of Representations, Etc. (a) The representations and warranties made by the Seller in this Agreement, or in any other document, certificate, schedule or instrument delivered or executed in connection herewith (including any Ancillary Agreement), shall survive the Closing until and including the date that is twelve months after the date hereof, except that (i) the representations and warranties set forth in (A) Section 3.12 (Social Security Contributions; Company Plans), (B) Section 3.18 (Environmental Matters) and (C) Section 3.22 (Product Liability) shall survive the Closing until and including the date that is five years after the date hereof, and (ii) Section 3.17 (Taxes) shall survive until and including the date that is one month after the expiration of the relevant statute of limitations (Veranlagungsverjahrung) (each of the aforementioned dates, a "Cut-Off Date"); provided, however, that if, at any time prior to or on the Cut-Off Date, any Buyer Indemnified Party (acting in good faith) delivers to the Seller a written notice alleging the existence of an inaccuracy in or a breach of any of such representations and warranties (and setting forth in reasonable detail the basis for such Buyer Indemnified Party's belief that such inaccuracy or breach may exist) and asserting a claim for recovery under Section 6.2 based on such alleged inaccuracy or breach, then the claim asserted in such notice shall survive the Cut-Off Date, until such time as such claim is fully and finally resolved. 39 (b) No statutory examination or notification requirements shall apply to this Agreement. The provisions set forth in this Section 6.1 shall supersede the provisions of Articles 201 and 210 of the Swiss Code (other than Article 210(3) of the Swiss Code), which Articles 201 and 210 (other than Article 210(3)) shall not apply to this Agreement. Section 6.2 Indemnity by the Seller. From and after the Closing Date, the Seller shall indemnify and hold harmless each Buyer Indemnified Party from and against any Damages actually suffered or incurred by any Buyer Indemnified Party to the extent arising out of or resulting from: (a) any breach of any representation or warranty made by the Seller in this Agreement or in any other document, certificate, schedule or instrument that is both required to be delivered and executed and was delivered and executed, in each case, in connection herewith or therewith (including any Ancillary Agreement); (b) any breach of any covenant or obligation of the Seller set forth in this Agreement or any other document, certificate, schedule or instrument that is both required to be delivered and executed and was delivered and executed, in each case, in connection herewith or therewith (including any Ancillary Agreement); (c) (i) with respect to any Assumed Contract that is not an employment agreement, any breach of such Assumed Contracts by the Seller or any of its Affiliates prior to Closing, and (ii) with respect to any Assumed Contract that is an employment agreement, any Liabilities with respect to such Assumed Contracts specifically retained by the Seller pursuant to Section 5.11; or (d) subject to Section 6.4(e), a termination of any Amcis Property Agreement as a result of an exercise by Flint AG or Chemisches Institut Schafer AG of rights under the Investment Agreement and not otherwise available as a matter of law or under the Amcis Property Agreements. Section 6.3 Indemnity by the Buyer. From and after the Closing Date, the Buyer shall indemnify and hold harmless each of the Seller and its Affiliates and the respective Representatives, successors and assigns of each of the foregoing (collectively, the "Seller Indemnified Parties") from and against any Damages actually suffered or incurred by any Seller Indemnified Party to the extent arising out of or resulting from: (a) any breach of any representation or warranty made by the Buyer in this Agreement or in any other document, certificate, schedule or instrument that is both required to be delivered and executed and was delivered and executed, in each case, in connection herewith or therewith (including any Ancillary Agreement); (b) any breach of any covenant or obligations of the Buyer set forth in this Agreement or any other document, certificate, schedule or instrument that is both required to be delivered and executed and was delivered and executed, in each case, in connection herewith or therewith (including any Ancillary Agreement); 40 (c) any claim or cause of action by any Person arising before or after the Closing against any Seller Indemnified Party with respect to the operations of the Swiss Companies, except for claims or causes of action with respect to which the Seller is obligated to indemnify the Buyer Indemnified Parties pursuant to Section 6.2; or (d) any Action against the Seller or any of its Affiliates arising out of, or in connection with, the termination of any Specified Employment Agreement (including any Action arising out of, or in connection with, the resignation or termination of any Specified Employee in connection with the transactions contemplated by this Agreement) by any Affiliate of the Seller (other than in all cases with respect to amount payable by the Seller as set forth in the last sentence of Section 5.11(a)(vi) to the extent payable by the Seller thereunder). Section 6.4 Limitations. (a) Notwithstanding anything to the contrary contained in this Agreement: (i) the Seller shall not be liable for any claim for indemnification pursuant to Section 6.2(a) through (c) unless and until the aggregate amount of indemnifiable Damages which may be recovered from the Seller pursuant to Section 6.2(a) through (c) equals or exceeds USD 750,000, in which case the Seller shall be liable only for the Damages in excess of such amount, (ii) except in the case of fraud or intentional misrepresentation, the maximum liability of the Seller for indemnification pursuant to Section 6.2(a) through (c) for the aggregate amount of all Damages shall in no event exceed USD 15,000,000 and the maximum liability of the Seller for indemnification pursuant to Section 6.2(d) shall in no event exceed ******, (iii) no Damages may be claimed under Section 6.2(a) through (c) by any Buyer Indemnified Party or shall be reimbursable by or shall be included in calculating the aggregate Damages set forth in clause (i) above other than Damages in excess of USD 15,000 resulting from any single claim or aggregated claims arising out of the same facts, events or circumstances, (iv) no party hereto shall have any liability under any provision of this Agreement for any punitive, incidental, consequential, special or indirect damages, including business interruption, loss of future revenue, profits or income, or loss of business reputation or opportunity relating to the breach or alleged breach of this Agreement, any Ancillary Agreement or any other document, certificate, schedule or instrument required to be delivered or executed in connection herewith or therewith; provided, however, that fees payable to the Seller pursuant to the Transition Services Agreement shall not be deemed incidental, consequential, special or indirect damages or be deemed revenue, profit or income, the loss of which is not subject to indemnification pursuant to the Agreement, and (v) in the event the Buyer proceeds with the Closing notwithstanding actual knowledge by the Buyer or any Affiliate of the Buyer at or prior to the Closing of any breach by the Seller of any representation, warranty or covenant in this Agreement, any Ancillary Agreement or any other document, certificate, schedule or instrument required to be delivered or executed in connection herewith or therewith, no Buyer Indemnified Party shall have any claim or recourse against the Seller or its directors, officers, employees, Affiliates, controlling persons or Representatives with respect to such breach, under this Article VI or otherwise. (b) In addition and not in limitation of the foregoing, the Seller shall not be liable for any claim and the Buyer shall not be entitled to bring any claim if and to the extent that (i) the payment or settlement of any kind giving rise to the claim results in a tax benefit to the Swiss Companies or the Buyer (including the net present value (using a 4% discount rate) of any 41 Tax benefit arising in subsequent taxable years), (ii) the matter to which the claim relates was disclosed in this Agreement or in the Disclosure Schedules, (iii) a claim results from or is increased by the passing of, or any change in, after the Closing Date, any Law or established administrative practice of any Governmental Authority including (without prejudice to the generality of the foregoing) any increase in the rates of Taxes or any imposition of Taxes or any withdrawal or relief from Taxes not actually in effect on the Closing Date, (iv) the claim results from a failure of the Buyer or any Swiss Company to mitigate in a reasonable manner damages (including failure to claim from a third party or under any insurance policy), (v) the procedures set forth in Section 6.5 were not complied with by the Buyer or another Buyer Indemnified Person, (vi) as of the Closing Date any of the Swiss Companies have applicable recorded reserves for the relevant Damages, (vii) the Buyer, any other Buyer Indemnified Party or any Swiss Company is entitled to any insurance or other recoveries payable to any Buyer Indemnified Party in connection with the facts giving rise to the right of indemnification, or (viii) the Seller has remedied the relevant breach within 30 days after the receipt by the Seller of a notice from the Buyer with respect to such breach. (c) Notwithstanding any provisions to the contrary in this Agreement, (i) the Buyer acknowledges that the Buyer has not relied in any way on the representations or warranties set forth in any of Sections 3.8(b) and 3.8(e) or the information provided in the March Financials and (ii) the Seller shall have no Liability under this Agreement or otherwise, and the Buyer shall not be entitled to exercise any legal or equitable remedies, in each with respect to any inaccuracy or breach by the Seller of provisions of any of Sections 3.8(b), 3.8(e) or 5.15 or any inaccuracy with respect to the March Financials. (d) Without limiting the foregoing, the Buyer and the Seller shall cooperate with each other with respect to resolving any claim or liability with respect to which one party is obligated to indemnify the other party hereunder, including by making commercially reasonable efforts to mitigate or resolve any such claim or liability. In the event that the Buyer or the Seller shall fail to make such commercially reasonable efforts to mitigate or resolve any claim or liability, then notwithstanding anything else to the contrary contained herein, the other party shall not be required to indemnify any person for any loss, liability, claim, damage or expense that could reasonably be expected to have been avoided if the Buyer or the Seller, as the case may be, had made such efforts. (e) Promptly, but in no event later than five Business Days, after receipt by Buyer or its Affiliates of any termination notice with respect to or related to the Investment Agreement or the Landlord Notice, the Buyer shall forward such notice to the Seller. Neither the Buyer nor its Affiliates shall agree to a termination of any Amcis Property Agreement that could result in an indemnifiable event pursuant to Section 6.2(d) without Seller's prior written consent, which shall not be unreasonably withheld. Section 6.5 Procedures. (a) In order for a Buyer Indemnified Party or Seller Indemnified Party (the "Indemnified Party") to be entitled to any indemnification provided for under this Agreement in respect of, arising out of or involving a loss or a claim or demand made by any Person against the Indemnified Party (a "Third Party Claim"), such Indemnified Party shall deliver notice 42 thereof to the party against whom indemnity is sought (the "Indemnifying Party") promptly after receipt by such Indemnified Party of written notice of the Third Party Claim, describing in reasonable detail the facts giving rise to any claim for indemnification hereunder, the amount or method of computation of the amount of such claim (if known) and such other information with respect thereto as the Indemnifying Party may reasonably request. The failure to provide such notice, however, shall not release the Indemnifying Party from any of its obligations under this Article VI except to the extent that the Indemnifying Party is prejudiced by such failure. (b) The Indemnifying Party shall have the right, upon written notice to the Indemnified Party within 30 days of receipt of notice from the Indemnified Party of the commencement of such Third Party Claim, to assume the defense thereof at the expense of the Indemnifying Party with counsel selected by the Indemnifying Party and reasonably satisfactory to the Indemnified Party. If the Indemnifying Party assumes the defense of such Third Party Claim, the Indemnified Party shall have the right to employ separate counsel and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party. If the Indemnifying Party assumes the defense of any Third Party Claim, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party all witnesses, pertinent records, materials and information in the Indemnified Party's possession or under the Indemnified Party's control relating thereto as is reasonably required by the Indemnifying Party. If the Indemnifying Party assumes the defense of any Third Party Claim, the Indemnified Party shall not admit any liability with respect to, or settle, compromise or discharge, or offer to compromise, settle or discharge, such Third Party Claim without the Indemnifying Party's prior written consent (which consent shall not be unreasonably withheld or delayed) unless the Indemnifying Party withdraws from the defense of such Third Party Claim. If the Indemnified Party assumes the defense of any such claims or proceeding pursuant to this Section 6.5 and proposes to settle such claims or proceeding prior to a final judgment thereon or to forgo any appeal with respect thereto, then the Indemnified Party shall give the Indemnifying Party prompt written notice thereof and the Indemnifying Party shall have the right to participate in the settlement or assume or reassume the defense of such claims or proceeding. (c) In the event any Indemnified Party should have a claim against any Indemnifying Party hereunder that does not involve a Third Party Claim being asserted against or sought to be collected from such Indemnified Party, the Indemnified Party shall deliver notice of such claim promptly to the Indemnifying Party, describing in reasonable detail the facts giving rise to any claim for indemnification hereunder, the amount or method of computation of the amount of such claim (if known) and such other information with respect thereto as the Indemnifying Party may reasonably request. The failure to provide such notice, however, shall not release the Indemnifying Party from any of its obligations under this Article VI except to the extent that the Indemnifying Party is prejudiced by such failure. The Indemnifying Party shall have 30 days after receipt of notice of any claim pursuant to this Section 6.5(c) to (i) agree to the amount or method of determination set forth in such claim and to pay such amount to such Indemnified Party, or (ii) provide the Indemnified Party with notice (a "Dispute Notice") that it disagrees with the amount or method of determination set forth in such claim. If the Indemnifying Party has timely delivered a Dispute Notice, the Indemnifying Party and the Indemnified Party shall, during a period 30 days from the Indemnified Party's receipt of such Dispute Notice, negotiate in good faith to achieve resolution of such dispute and, if not resolved 43 through negotiations, such dispute shall be resolved in accordance with the arbitration provisions set forth in this Agreement. Failure to initiate arbitration procedures by the Indemnified Party within 30 days of failure of good faith negotiation shall foreclose the Indemnified Party with respect to the asserted claim. Section 6.6 Exercise of Remedies by Buyer Indemnified Parties Other Than Buyer. No Buyer Indemnified Party (other than Buyer or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement unless Buyer (or any successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim or the exercise of such other remedy. Section 6.7 Assignment of Claims. If any Buyer Indemnified Party receives any payment from the Seller in respect of any Damages pursuant to Section 6.2 and the Buyer Indemnified Party could have recovered all or a part of such Damages from a third party (a "Potential Contributor") based on the underlying claim asserted against the Seller, the Buyer Indemnified Party shall assign, on a non-recourse basis and without any representation or warranty, such of its rights to proceed against the Potential Contributor as are necessary to permit the Seller to recover from the Potential Contributor the amount of such payment. Any payment received in respect of such claim shall be distributed (i) first to the Buyer Indemnified Party in the amount of any deductible or similar amount required to be paid by the Buyer Indemnified Party prior to the Seller being required to make any payment to the Buyer Indemnified Party, (ii) second to the Seller in an amount equal to the aggregate payments made by the Seller to the Buyer Indemnified Party in respect of such claim, plus costs and expenses incurred in investigating, defending or otherwise incurred in connection with addressing such claim, and (iii) the balance, if any, to the Buyer Indemnified Party. Section 6.8 Exclusivity. Except as specifically set forth in this Agreement (including Section 2.4), effective as of the Closing, in the absence of fraud or intentional misrepresentation herein on the part of the Seller or any of its Representatives in connection with the negotiation, execution or delivery of this Agreement or the consummation of the transactions contemplated hereby, the Buyer, on behalf of itself and the Buyer Indemnified Parties, waives any rights and claims it or any Buyer Indemnified Party may have against the Seller, whether in law or equity, relating to the Swiss Companies and/or the transactions contemplated hereby. The rights and claims waived by the Buyer Indemnified Parties include, without limitation, claims for contribution or other rights of recovery arising out of or relating to any Environmental Laws, claims for breach of contract, breach of representation or warranty, breach of implied covenants, negligent misrepresentation and all other claims for breach of duty. After the Closing, subject to the foregoing, this Article VI will provide the exclusive remedy against the Seller for any breach of any representation, warranty, covenant or other claim arising out of or relating to this Agreement or any other document, certificate, schedule or instrument required to be delivered or executed in connection herewith and therewith and/or the transactions contemplated hereby and thereby and the Buyer shall not make any claim against any Seller Indemnified Party with respect to any document, certificate, schedule or instrument executed or delivered in connection with this Agreement and the Ancillary Agreements or any transactions contemplated hereby and thereby except for any such claims with respect to this Agreement or any document, certificate, schedule or instrument that is required to be delivered and executed in connection herewith and the Ancillary Agreements. 44 Section 6.9 Disclaimer of Implied Warranties. (a) It is the explicit intent and understanding of the Buyer that the Seller or any of its Affiliates or Representatives is not making any representation or warranty whatsoever, oral or written, express or implied, as to the accuracy or completeness of any information regarding the Business, except as expressly set forth in this Agreement, any Ancillary Document or any certificate to be delivered pursuant to Section 7.3(c), and the Buyer is not relying on any statement, representation or warranty, oral or written, express or implied, made by the Seller or such of its Affiliates or Representatives, except for the representations and warranties expressly set forth in this Agreement, any Ancillary Agreement or any certificate to be delivered pursuant to Section 7.3(c). (b) In connection with the Buyer's investigation of the Business, the Buyer has received certain estimates, projections and other forecasts regarding the Business. The Buyer acknowledges that there are uncertainties inherent in attempting to make such estimates, projections and other forecasts, that the Buyer is familiar with such uncertainties and that the Buyer is taking full responsibility for making its own evaluation of the adequacy and accuracy of all estimates, projections and other forecasts so furnished to it (including the reasonableness of the assumptions underlying such estimates, projections and forecasts). Accordingly, the Seller does not make any representation or warranty with respect to such estimates, projections and other forecasts (including the reasonableness of the assumptions underlying such estimates, projections and forecasts). ARTICLE VII CONDITIONS TO CLOSING Section 7.1 General Conditions. The respective obligations of the Buyer and the Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions, any of which may, to the extent permitted by applicable Law, be waived in writing by any party in its sole discretion (provided, that such waiver shall only be effective as to the obligations of such party): (a) No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Law (whether temporary, preliminary or permanent), including any Law that may be administered by the U.S. Department of Treasury's Office of Foreign Assets Controls (OFAC), that is then in effect and that enjoins, restrains, makes illegal or otherwise prohibits the consummation of the transactions contemplated by this Agreement or the Ancillary Agreements. (b) To the extent applicable, any waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired or shall have been terminated. To the extent that the EU Merger Regulation is applicable, the European Commission shall have taken a decision under Article 6(1)(b) of the EU Merger Regulation declaring the purchase of the Shares and the assets contemplated by this Agreement compatible with the common market, or shall have been deemed to have done so under Article 10(6) of the EU Merger Regulation. To the extent applicable, the Buyer shall have obtained all merger, anti-competition or anti-trust clearance or any waiting periods under the 45 relevant merger control, anti-competition or anti-trust Laws shall have duly lapsed or been terminated by the applicable Governmental Authority. Section 7.2 Conditions to the Obligations of the Seller. The obligations of the Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions, any of which may be waived in writing by the Seller in its sole discretion: (a) The representations and warranties of the Buyer contained in this Agreement or any Ancillary Agreement or any schedule, certificate or other document required to be delivered pursuant hereto or thereto or in connection with the transactions contemplated hereby or thereby shall be true and correct in all material respects both when made and as of the Closing Date, or in the case of representations and warranties that are made as of a specified date, such representations and warranties shall be true and correct as of such specified date, except in all cases where the failure to be so true and correct (in each case without giving effect to any limitation or qualification as to "materiality" (including the word "material") or "Material Adverse Effect" set forth therein) would not, individually or in the aggregate, have a material adverse effect on the Buyer's ability to consummate the transactions contemplated by this Agreement. The Buyer shall have performed all obligations and agreements and complied with all covenants and conditions required by this Agreement or any Ancillary Agreement to be performed or complied with by it prior to or at the Closing in all material respects. The Seller shall have received from the Buyer a certificate representing and warranting that the conditions set forth in the preceding sentences have been duly satisfied, signed by a duly authorized officer thereof. (b) The Seller shall have received an executed counterpart of each of the Ancillary Agreements to which the Buyer or any of its Affiliates is a party, signed by each party thereto other than the Seller. (c) The transfer of the Transferred Assets to be transferred by SOI and the entry into the Transition Services Agreement shall have been approved in accordance with the procedures set forth in the Order Establishing Procedures for Non-Core Asset Sales, entered on March 29, 2004 by the U.S. Bankruptcy Court in the Southern District of New York (the "Bankruptcy Court") in Case No. 03-17949 (PCB) and all Encumbrances on the Transferred Assets created by the DIP Agreement shall have been released. (d) (i) Either (A) the terms and conditions of the EUR 200,000,000 10.00 percent Senior Secured Notes due 2008 (the "Euro Notes") of the Seller have been amended with the consent of the holders of the Euro Notes (the "Bondholders") upon the approval and publication of resolutions authorizing the Seller to enter into and consummate the transaction contemplated hereunder adopted at a meeting of the Bondholders conducted in accordance with Article 568 of the Belgian Company Code and the terms and conditions of the Euro Notes, or (B) the obligations of the Seller under the Euro Notes have been discharged or satisfied, (ii) the Encumbrances on the Shares and certain assets of the Swiss Companies created pursuant to Euro Bond Documents shall have been released, and (iii) the Swiss Companies shall have been released from their obligations pursuant to the Euro Bond Documents, including the guarantees provided by the Swiss Companies in connection with the Euro Notes. 46 (e) All consents, approvals or authorizations of, or registrations, declarations or filings (other than the consents, approvals or authorizations, registrations, declarations and filings described in Section 7.1(b)) with, any Governmental Authority required for the consummation of the transactions contemplated by this Agreement shall have been obtained or filed and shall be in full force and effect. (f) The Seller shall have received the amount payable by the Buyer pursuant to Section 2.5(b). (g) The Buyer shall have provided to ****** a guarantee of Amcis' performance under the ****** Supply Agreement, in the form or substantially in the form, of Section 2.6 of the Agreement between ******, Amcis and SOI dated January 1, 2001 and ****** shall have accepted such guarantee in full satisfaction of SOI's obligations pursuant to the ****** Side-Letter. Section 7.3 Conditions to Obligations of the Buyer. The obligations of the Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions, any of which may be waived in writing by the Buyer in its sole discretion: (a) The representations and warranties of the Seller contained in this Agreement or any Ancillary Agreement or any schedule, certificate or other document required to be delivered pursuant hereto or thereto or in connection with the transactions contemplated hereby or thereby (other than in all cases the Specified Provisions) shall be true and correct in all material respects both when made and as of the Closing Date, or in the case of representations and warranties that are made as of a specified date, such representations and warranties shall be true and correct as of such specified date, except in all cases where the failure to be so true and correct (in each case, without giving effect to any limitation or qualification as to "materiality" (including the word "material") or "Material Adverse Effect" set forth therein) would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Seller or the Business. The Seller shall have performed all obligations and agreements and complied with all covenants and conditions required by this Agreement (other than Specified Provisions) or any Ancillary Agreement to be performed or complied with by the Seller prior to or at the Closing in all material respects. The Buyer shall have received from the Seller a certificate representing and warranting that the conditions set forth in the preceding sentences of this Section 7.3(a) have been duly satisfied, signed by a duly authorized officer of the Seller. (b) All consents, approvals or authorizations of, or registrations, declarations or filings (other than the consents, approvals or authorizations, registrations, declarations and filings described in Section 7.1(b)) with, any Governmental Authority required for the consummation of the transactions contemplated by this Agreement shall have been obtained or filed and shall be in full force and effect. (c) The Buyer shall have received an executed counterpart of each of the Ancillary Agreements to which the Seller or any of its Affiliates is a party, signed by each party other than the Buyer. 47 (d) The Encumbrances on the Shares and certain assets of the Swiss Companies created pursuant to the Euro Bond Documents and the Encumbrances of the Transferred Assets created pursuant to the DIP Agreement have been released, and the Swiss Companies shall have been released from their obligations under the guarantees provided by the Swiss Companies in connection with the Euro Notes. (e) The Buyer shall have received a waiver from ****** waiving ******'s right to terminate the ****** Supply Agreement set forth in Section 9.1(c) thereof in the event of a change of ownership or control in connection with the purchase of Amcis Shares contemplated by this Agreement. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER Section 8.1 Termination. This Agreement may be terminated at any time prior to the Closing: (a) by mutual written consent of the Buyer and the Seller; (b) (i) by the Seller, if the Buyer breaches or fails to perform in any respect any of its representations, warranties or covenants contained in this Agreement and such breach or failure to perform (A) would give rise to the failure of a condition set forth in Section 7.2, (B) cannot be or has not been cured within 30 days following delivery of written notice of such breach or failure to perform, and (C) has not been waived by the Seller; or (ii) by the Buyer, if the Seller breaches or fails to perform in any respect any of its representations, warranties or covenants contained in this Agreement and such breach or failure to perform (x) would give rise to the failure of a condition set forth in Section 7.3, (y) cannot be or has not been cured within 30 days following delivery of written notice of such breach or failure to perform, and (z) has not been waived by the Buyer; (c) (i) by the Seller, if any of the conditions set forth in Section 7.1 or Section 7.2 shall have become incapable of fulfillment prior to the Termination Date; or (ii) by the Buyer, if any of the conditions set forth in Section 7.1 or Section 7.3 shall have become incapable of fulfillment prior to the Termination Date; provided, that the right to terminate this Agreement pursuant to this Section 8.1(c) shall not be available if the failure of the party so requesting termination to fulfill any obligation under this Agreement shall have been the cause of the failure of such condition to be satisfied on or prior to such date; (d) by either the Seller or the Buyer if the Closing shall not have occurred by August 31, 2006 (the "Termination Date"); provided, that the right to terminate this Agreement under this Section 8.1(d) shall not be available if the failure of the party so requesting termination to fulfill any obligation under this Agreement shall have been the cause of the failure of the Closing to occur on or prior to such date; or (e) by either the Seller or the Buyer in the event that any Governmental Authority shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such 48 order, decree, ruling or other action shall have become final and nonappealable; provided, that the party so requesting termination shall have complied with Section 5.7. The party seeking to terminate this Agreement pursuant to this Section 8.1 (other than Section 8.1(a)) shall give prompt written notice of such termination to the other parties. Section 8.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party except (a) for the provisions of Sections 3.21 and 4.5 relating to broker's fees and finder's fees, Section 5.6 relating to confidentiality, Section 5.8 relating to public announcements, Article IX and this Section 8.2, and (b) that nothing herein shall relieve any party from liability for any breach of this Agreement or any agreement made as of the date hereof or subsequent thereto pursuant to this Agreement, except that no party hereto shall be liable to the other for any consequential or punitive damages. ARTICLE IX GENERAL PROVISIONS Section 9.1 Fees and Expenses. Except as otherwise provided herein, all fees and expenses incurred in connection with or related to this Agreement and the Ancillary Agreements and the transactions contemplated hereby and thereby shall be paid by the party incurring such fees or expenses, whether or not such transactions are consummated. Section 9.2 Transfer Taxes. Each party shall bear transfer, documentary, registration, value-added and similar Taxes incurred by it in connection with the transactions effectuated pursuant to this Agreement ("Transfer Taxes"); provided, however, to the extent any party hereto (the "Acting Party") undertakes any action that results in any incremental Transfer Taxes to the other party hereto or any of its Affiliates (the "Incurring Party"), the Acting Party shall indemnify and hold harmless the Incurring Party for such incremental Transfer Taxes. The Seller and the Buyer shall cooperate in timely making all filings, returns, responses and forms as may be required in connection with the payment of Transfer Taxes. Each party shall execute and deliver all instruments and certificates reasonably necessary to enable the other party to comply with any filing requirements relating to any such Transfer Taxes and to cooperate with the other party in providing any information and documentation that may be necessary to obtain any exemption from or reduction of any such Transfer Taxes. Section 9.3 Amendment and Modification. This Agreement may not be amended, modified or supplemented in any manner, whether by course of conduct or otherwise, except by an instrument in writing signed on behalf of each party. Section 9.4 Waiver. No failure or delay of any party in exercising any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, or any course of conduct, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the parties hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have hereunder. Any agreement 49 on the part of any party to any such waiver shall be valid only if set forth in a written instrument executed and delivered by a duly authorized officer on behalf of such party. Section 9.5 Notices. All notices and other communications hereunder shall be in writing and shall be deemed duly given (a) on the date of delivery if delivered personally, or if by facsimile, upon written confirmation of receipt by facsimile, (b) on the first Business Day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the earlier of confirmed receipt or the fifth Business Day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered to the addresses set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice: (a) if to the Seller, to: Solutia Europe S.A./N.V. Parc Scientifique - Fleming Rue Laid Burniat, 3 B-1348 Louvain-La-Neuve (Sud) Belgium Attention: Legal Counsel Facsimile: +32 (0) 10-48-1224 with a copy (which shall not constitute notice) to: Solutia Europe S.A./N.V. c/o Solutia Inc. 575 Maryville Center Dr. - 3N St. Louis, Missouri 63141, U.S.A. Attention: General Counsel Facsimile: +1 (314) 674-5588 and Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, New York 10166-0193, U.S.A. Attention: David M. Wilf, Esq. Facsimile: +1 (212) 351-6277 (b) if to the Buyer, to: Dishman Pharmaceuticals & Chemicals Ltd. Bhadr-Raj Chambers, Swastik Cross Roads, Navrangpura, Ahmedabad - 380 009 INDIA Attention: Mr. J.R. Vyas, Managing Director Facsimile: +91 (0) 79 26420198 50 with a copy (which shall not constitute notice) to: KPMG Legal Steinengraben 5 CH-4003 Basel SWITZERLAND Attention: Christian Eich or Peter Goetschi Facsimile: +41 61 286 92 69 Section 9.6 Interpretation. When a reference is made in this Agreement to a Section, Article or Exhibit, such reference shall be to a Section, Article or Exhibit of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement or in any Exhibit are for convenience of reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. All words used in this Agreement will be construed to be of such gender or number, as the circumstances require. Any capitalized terms used in any Exhibit but not otherwise defined therein shall have the meaning as defined in this Agreement. All Exhibits annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth herein. The word "including" and words of similar import when used in this Agreement will mean "including, without limitation", unless otherwise specified. The use of "or" is not intended to be exclusive unless expressly indicated otherwise. Section 9.7 Entire Agreement. This Agreement and the Ancillary Agreements, Exhibits, Schedules and other agreements and instruments delivered in connection herewith constitutes the entire agreement, and supersedes all prior written agreements, arrangements, communications and understandings and all prior and contemporaneous oral agreements, arrangements, communications and understandings among the parties with respect to the subject matter of this Agreement. Notwithstanding any oral agreement of the parties or their Representatives to the contrary, no party to this Agreement shall be under any legal obligation to enter into or complete the transactions contemplated hereby unless and until this Agreement shall have been signed by each of the parties. Section 9.8 No Third-Party Beneficiaries. This Agreement shall be binding upon and inure solely to the benefit of each of the parties and their respective successors and assigns, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature under or by reason of this Agreement, except as provided in Section 5.10 and in Article VI. Section 9.9 Governing Law; Dispute Settlement. (a) This Agreement, the Ancillary Agreements and all disputes or controversies arising out of or relating to this Agreement, the Ancillary Agreements or the transactions contemplated hereby or thereby shall be governed by, and construed in accordance with, the Laws of Switzerland. (b) Any dispute, controversy or claim arising out of or in relation to this Agreement and the Ancillary Agreements (other than the Transition Services Agreement), including the validity, invalidity, breach or termination thereof, shall be settled by a single 51 arbitrator in an arbitration in accordance with the Swiss Rules of International Arbitration (the "Rules") in force on the date when the notice of arbitration is submitted in accordance with the Rules, as modified by the provisions of this Section unless and to the extent otherwise specified in such Ancillary Agreements or in Section 2.4(c). Each party agrees that the award of the arbitrator shall be final and non-appealable and shall be the sole and exclusive remedy between or among them regarding any and all claims, counterclaims, issues and accountings presented to the arbitrator, irrespective of the magnitude thereof. (c) To the extent this Section 9.9 is deemed a separate agreement, independent from this Agreement, and for purposes of the Ancillary Agreements (other than the Transition Services Agreement), Sections 9.5 (Notices), 9.6 (Interpretation), 9.13 (Severability), 6.4(a)(iv) (No Consequential or Punitive Damages) and 9.1 (Expenses) are incorporated in this Section 9.9 by reference. (d) The arbitral proceedings shall be conducted in English. The seat of the arbitration shall be in Zurich, Switzerland. The arbitrator shall be proficient in English and German. (e) Each party agrees to facilitate the arbitration by: (i) making available to each other and to the arbitrator for inspection and extraction all documents, books, records and personnel under their control as the arbitrator shall determine to be relevant to the dispute; (ii) conducting arbitration hearings to the greatest extent possible on successive, contiguous days; and (iii) observing strictly the time periods established by the Rules or by the arbitrator for the submission of evidence and briefs. (f) All papers, documents or evidence, whether written or oral, filed with or presented to the arbitrator shall be deemed by the parties and the arbitrator to be confidential information. No party, expert or arbitrator shall disclose in whole or in part to any other person any confidential information submitted by any other person in connection with any arbitration proceedings, except to the extent (i) required by law or regulation, (ii) reasonably necessary to assist counsel in the arbitration or preparation for arbitration of the dispute, or (iii) that such "confidential" information was previously or subsequently becomes known to the disclosing party without restrictions on disclosure, was independently developed by such disclosing party or becomes publicly known through no fault of the disclosing party. (g) The arbitration award shall be issued in writing and shall include a written explanation in English of the reasons for the award and a full statement of the facts as found and the rules of law applied in reaching his decision. (h) (i) The arbitrator is empowered to render the following awards in accordance with any provision of this Agreement and the Ancillary Agreements (other than the Transition Services Agreement): (A) enjoining a party from performing any act prohibited or compelling a party to perform any act required, by the terms of this Agreement and the Ancillary Agreements (other than the Transition Services Agreement) and any order entered pursuant to this Agreement and the Ancillary Agreements (other than the Transition Services Agreement) or deemed necessary by the arbitrator to resolve disputes arising under or relating to this Agreement, the Ancillary Agreements (other than the Transition Services Agreement) or order; 52 (B) where, and only where, violations of this Agreement or the Ancillary Agreements (other than the Transition Services Agreement) have been found, shortening or lengthening any period established by this Agreement, the Ancillary Agreements (other than the Transition Services Agreement) or order; and (C) ordering such other legal or equitable relief (subject to the limitations on liability set forth herein and therein) or specifying such procedures as the arbitrator deems appropriate, to resolve any dispute submitted to it for arbitration. (ii) Upon determination by the arbitrator that the Buyer is entitled to injunctive relief in respect of a breach by the Seller or any other Restricted Entity of Section 5.14, the Buyer shall be entitled to seek enforcement of the injunctive relief award of the arbitrator in a court of competent jurisdiction in Switzerland. (iii) In addition to Section 9.9(h)(ii), the Buyer shall be entitled to seek injunctive relief (including enforcement thereof) in a court of competent jurisdiction in Switzerland against a breach by the Seller or any other Restricted Entity of Section 5.14. (i) Any monetary award of the arbitrator shall be made and payable in immediately available funds in U.S. Dollars free of any Tax and deductions of any kind. Any such monetary award shall include interest from the date of such award. The arbitrator shall fix an appropriate rate of interest from such date to the date when the award is paid in full. In no event shall the interest rate during such period be lower than the lowest prime, base or equivalent commercial lending rate announced by any member bank of the New York Clearinghouse Association of New York City for 90-day loans for responsible and substantial commercial borrowers. (j) Any decision or award of the arbitrator shall be final and binding upon the parties to the arbitration proceeding. Each party hereby waives to the extent permitted by law all jurisdictional defenses, objections as to venue and any rights to appeal or to review of such award by any court or tribunal, including any rights to challenge before the Swiss Federal Supreme Court pursuant to Article 190 of the Swiss Private International Law Act. Each party agrees that the arbitral award may be found and that a judgment on the arbitration award may be entered in any court having competent jurisdiction over the parties or their assets. (k) The parties hereby agree that for purposes of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the relationship between the parties is commercial in nature, and that any disputes between the parties related to this Agreement or the Ancillary Agreements shall be deemed commercial. Section 9.10 Disclosure Generally. Notwithstanding anything to the contrary contained in the Disclosure Schedules or in this Agreement, the information and disclosures contained in any Disclosure Schedule shall be deemed to be disclosed and incorporated by reference in any other Disclosure Schedule as though fully set forth in such Disclosure Schedule for which applicability of such information and disclosure is reasonably apparent on its face. The fact that any item of information is disclosed in any Disclosure Schedule shall not be construed to mean that such information is required to be disclosed by this Agreement. Such information and the U.S. Dollar or CHF thresholds set forth herein shall not be used as a basis for interpreting the terms "material" or "Material Adverse Effect" or other similar terms in this Agreement. 53 Section 9.11 Assignment; Successors. Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by any party without the prior written consent of the other parties, and any such assignment without such prior written consent shall be null and void; provided, however, that the Buyer may assign its rights (but not its obligations) under this Agreement to any Affiliate of the Buyer without the prior consent of the Seller; and provided, further, that the Seller may assign any of its rights under this Agreement, including the right to receive the Purchase Price, to one or more Affiliates of the Seller without the consent of the Buyer; and provided, still further, that no assignment shall limit the assignor's obligations hereunder. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. Section 9.12 Personal Liability. This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect shareholder of the Seller or the Buyer or any officer, director, employee, Representative or investor of any party hereto. Section 9.13 Severability. Whenever possible, each provision or portion of any provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable Law, but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable Law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or portion of any provision in such jurisdiction, and this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. Section 9.14 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same instrument and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. Section 9.15 Facsimile Signature. This Agreement may be executed by facsimile signature and a facsimile signature shall constitute an original for all purposes. Section 9.16 Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. Section 9.17 Further Assurances. Each party hereto shall execute and cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the Closing) for the purpose of carrying out or evidencing any of the transactions contemplated by this Agreement. Section 9.18 Conversion Methodology. For the purposes of calculating the amounts payable pursuant to this Agreement, amounts denominated in any currency other than U.S. Dollars shall be calculated using the Dollar Equivalent thereof as of the Business Day immediately preceding the date on which such payment is to be made by one party hereto to 54 another party hereto. "Dollar Equivalent" means, with respect to any amount denominated in any currency other than U.S. Dollars, the equivalent of such amount in U.S. Dollars determined by using the rate of exchange quoted by The Wall Street Journal on the date of determination for the spot purchase in the New York foreign exchange market of such amount of U.S. Dollars with such other currency. [The remainder of this page is intentionally left blank.] 55 IN WITNESS WHEREOF, the Seller and the Buyer have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. SOLUTIA EUROPE S.A./N.V. By: /s/ James R. Voss ----------------------------------- Name: James R. Voss Title: DISHMAN PHARMACEUTICALS & CHEMICALS LTD. By: /s/ Jay Vyas ----------------------------------- Name: Jay Vyas Title: EX-31.1 4 ex31p1.txt EXHIBIT 31(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffry N. Quinn, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Solutia Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 2, 2006 /s/ Jeffry N. Quinn ----------------------------- Jeffry N. Quinn President, Chief Executive Officer and Chairman of the Board EX-31.2 5 ex31p2.txt EXHIBIT 31(b) CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James M. Sullivan, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Solutia Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 2, 2006 /s/ James M. Sullivan ------------------------------- James M. Sullivan Senior Vice President and Chief Financial Officer EX-32.1 6 ex32p1.txt EXHIBIT 32(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffry N. Quinn, Chief Executive Officer of Solutia Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 2, 2006 /s/ Jeffry N. Quinn --------------------------------------- Jeffry N. Quinn President, Chief Executive Officer and Chairman of the Board A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Solutia Inc. and will be retained by Solutia Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 7 ex32p2.txt EXHIBIT 32(b) CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, James M. Sullivan, Chief Financial Officer of Solutia Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 2, 2006 /s/ James M. Sullivan ------------------------------ James M. Sullivan Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Solutia Inc. and will be retained by Solutia Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----