-----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, HN1UH1zbq+fa15Ck0ZRjO6FpZdFrGPMA3SNnz1eC/CCIJZUW7EV3g+xffeCBKzmx NPxuqPc8fkewe/+E6bqfdg== 0001068800-06-001385.txt : 20061107 0001068800-06-001385.hdr.sgml : 20061107 20061107170147 ACCESSION NUMBER: 0001068800-06-001385 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061107 DATE AS OF CHANGE: 20061107 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: 061194609 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 SEPTEMBER 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 SEPTEMBER 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) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2006 2005 2006 2005 ---- ---- ---- ---- NET SALES ......................................................... $ 738 $ 661 $2,181 $2,105 Cost of goods sold................................................. 635 584 1,874 1,825 ------ ------ ------ ------ GROSS PROFIT....................................................... 103 77 307 280 Marketing expenses................................................. 33 34 101 100 Administrative expenses............................................ 24 22 68 68 Technological expenses............................................. 11 11 35 33 Amortization expense............................................... -- 1 1 1 ------ ------ ------ ------ OPERATING INCOME................................................... 35 9 102 78 Equity earnings from affiliates.................................... 7 13 28 48 Interest expense (a)............................................... (29) (20) (79) (64) Other income, net.................................................. 4 2 11 7 Loss on debt modification.......................................... -- -- (8) -- Reorganization items, net.......................................... (19) (15) (51) (35) ------ ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAX EXPENSE............................ (2) (11) 3 34 Income tax expense................................................. 4 5 11 18 ------ ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS........................... (6) (16) (8) 16 Income from Discontinued Operations, net of tax.................... 50 1 58 4 ------ ------ ------ ------ NET INCOME (LOSS).................................................. $ 44 $ (15) $ 50 $ 20 ====== ====== ====== ====== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Income (Loss) from Continuing Operations........................... $(0.06) $(0.15) $(0.08) $ 0.15 Income from Discontinued Operations................................ 0.48 0.01 0.56 0.04 ------ ------ ------ ------ Net Income (Loss).................................................. $ 0.42 $(0.14) $ 0.48 $ 0.19 ====== ====== ====== ====== 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 September 30, 2006 and 2005, and $24 for the nine months ended September 30, 2006 and 2005. See accompanying Notes to Condensed Consolidated Financial Statements.
1 SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (DOLLARS IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2006 2005 2006 2005 ---- ---- ---- ---- NET INCOME (LOSS)................................................ $ 44 $ (15) $ 50 $ 20 OTHER COMPREHENSIVE INCOME (LOSS): Net unrealized gain (loss) on derivative instruments, net of tax (1) 4 (2) 4 Currency translation adjustments ................................ (34) (1) (22) (8) ------ ------ ------ ------ COMPREHENSIVE INCOME (LOSS)...................................... $ 9 $ (12) $ 26 $ 16 ====== ====== ====== ====== See accompanying Notes to Condensed Consolidated Financial Statements.
2 SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2006 2005 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents................................................. $ 154 $ 107 Trade receivables, net of allowances of $8 in 2006 and $7 in 2005......... 325 246 Miscellaneous receivables ................................................ 77 95 Inventories............................................................... 302 254 Prepaid expenses and other assets......................................... 32 34 Assets of discontinued operations......................................... -- 69 ------- ------- TOTAL CURRENT ASSETS...................................................... 890 805 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $2,567 in 2006 and $2,482 in 2005.................................... 781 770 INVESTMENTS IN AFFILIATES................................................. 198 205 GOODWILL.................................................................. 89 76 IDENTIFIED INTANGIBLE ASSETS, net ........................................ 31 28 OTHER ASSETS.............................................................. 109 100 ------- ------- TOTAL ASSETS.............................................................. $ 2,098 $1,984 ======= ======= LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable ......................................................... $ 221 $ 218 Accrued liabilities ...................................................... 238 223 Short-term debt .......................................................... 650 300 Liabilities of discontinued operations.................................... 2 26 ------- ------- TOTAL CURRENT LIABILITIES ................................................ 1,111 767 LONG-TERM DEBT ........................................................... 203 247 OTHER LIABILITIES ........................................................ 263 248 ------- ------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,577 1,262 LIABILITIES SUBJECT TO COMPROMISE ........................................ 1,949 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...................................... (117) (93) Accumulated deficit....................................................... (1,004) (1,054) ------- ------- TOTAL SHAREHOLDERS' DEFICIT............................................... (1,428) (1,454) ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $ 2,098 $ 1,984 ======= ======= See accompanying Notes to Condensed Consolidated Financial Statements.
3 SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------- 2006 2005 ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income..................................................................... $ 50 $ 20 Adjustments to reconcile net income to Cash From Operations: Income from discontinued operations, net of tax........................... (58) (4) Depreciation and amortization............................................. 83 84 Restructuring expenses and other charges (gains).......................... 3 3 Amortization of deferred credits.......................................... (6) (6) Other, net................................................................ (2) (3) Deferred Income Taxes..................................................... 2 7 Equity earnings from affiliates........................................... (28) (48) Changes in assets and liabilities: Income taxes payable................................................. 1 (16) Trade receivables.................................................... (80) 7 Inventories.......................................................... (43) (6) Accounts payable..................................................... 12 (19) Other assets and liabilities......................................... 60 4 Liabilities subject to compromise: Pension plan liabilities....................................... (153) 22 Other postretirement benefits liabilities...................... (45) (35) Other liabilities subject to compromise........................ (9) (18) ----- ----- CASH USED IN OPERATING ACTIVITIES - CONTINUING OPERATIONS...................... (213) (8) CASH PROVIDED BY OPERATING ACTIVITIES - DISCONTINUED OPERATIONS................ 2 6 ----- ----- CASH USED IN OPERATING ACTIVITIES.............................................. (211) (2) ----- ----- INVESTING ACTIVITIES: Property, plant and equipment purchases........................................ (75) (47) Acquisition and investment payments............................................ (16) -- Investment and property disposals.............................................. 5 4 ----- ----- CASH USED IN INVESTING ACTIVITIES - CONTINUING OPERATIONS...................... (86) (43) CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES - DISCONTINUED OPERATIONS...... 69 (4) ----- ----- CASH USED IN INVESTING ACTIVITIES.............................................. (17) (47) ----- ----- FINANCING ACTIVITIES: Net change in short-term debt obligations...................................... 350 -- Payments on long-term debt obligations......................................... (51) -- Net change in cash collateralized letters of credit............................ -- 17 Deferred debt issuance costs................................................... (17) (1) Other financing activities..................................................... (7) -- ----- ----- CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING OPERATIONS.................. 275 16 ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 47 (33) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR.............................................................. 107 115 ----- ----- END OF PERIOD.................................................................. $ 154 $ 82 ===== ===== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for reorganization items......................................... $ (46) $ (48) ===== ===== See accompanying Notes to Condensed Consolidated Financial Statements.
4 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1. NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS Nature of Operations Solutia Inc., together with its subsidiaries (referred to herein as "Solutia" or the "Company"), is a global manufacturer and marketer of a variety of high-performance chemical-based materials. Solutia is a world leader in performance films for laminated safety glass and after-market applications; 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 100% owned subsidiary of the former Monsanto Company (now known as Pharmacia Corporation, a 100% 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 included 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 CONDENSED 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. The DIP credit facility, as amended, currently consists of: (a) a $650 million fully-drawn term loan; and (b) a $175 million borrowing-based revolving credit facility, which includes a $150 million letter of credit subfacility. 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-petition 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 adjourned, and the Bankruptcy Court has not yet rescheduled the hearing. 6 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) If confirmed, the Plan will provide Solutia with significant relief from the Legacy Liabilities Solutia was required to assume in the Solutia Spinoff. These Legacy Liabilities included: (1) retiree medical, retiree life insurance and retiree disability benefits ("Retiree Welfare Benefits") for those individuals who retired or became disabled prior to the Solutia Spinoff ("Pre-Spin Retirees"); (2) environmental remediation costs related to activities of the chemicals business of Pharmacia that occurred prior to the Solutia Spinoff; and (3) toxic tort litigation costs relating to chemical exposure associated with the activities of Pharmacia that occurred prior to the Solutia Spinoff. 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 10). 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, to make certain changes, including the elimination of company-provided medical benefits for certain groups of retirees that also are eligible for Medicare coverage. In accordance with such rights, on October 18, 2006, Solutia and the Retirees' Committee submitted a joint stipulation to the Bankruptcy Court seeking its approval authorizing the Debtors, pursuant to Section 1114(e)(1)(B) of the Bankruptcy Code and the terms of the Forsberg settlement and post-settlement plan, to 7 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) terminate effective January 1, 2007 medical benefits for certain retirees who are Medicare eligible, and if not Medicare eligible, to terminate medical benefits on the earlier (a) the date such retirees or participants become Medicare eligible if such date is on or after January 1, 2007 or (b) October 19, 2016. On October 30, 2006, an objection to this stipulation was filed. If the objection is not consensually resolved, this matter will be scheduled for hearing by the Bankruptcy Court. 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 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 a distribution on the basis of several legal theories. 8 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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. Most recently, on October 4, 2006, the Court entered a Bridge Order extending the exclusivity period to the date upon which the Court makes a final determination on the Debtors' Motion to extend such period. The motion is currently set for hearing on November 16, 2006. Although Solutia expects to receive further extensions of the exclusivity period, no assurance can be given that any such future extension requests will be granted by the Bankruptcy Court. Moreover, although Solutia has filed the Plan which provides for Solutia's emergence from bankruptcy as a going concern, there can be no assurance that the Plan, or any other plan of reorganization, will be confirmed by the Bankruptcy Court or that any such plan will be implemented successfully. Basis of Presentation - --------------------- 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 condensed consolidated financial statements have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and on a going concern basis, which assumes the continuity of operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business. Continuation of the Company as a going concern is contingent upon, among other things, Solutia's ability (i) to comply with the terms and conditions of its DIP financing; (ii) to obtain confirmation of a plan of reorganization under the U.S. Bankruptcy Code; (iii) to return to profitability; (iv) to generate sufficient cash flow from operations; and (v) to obtain financing sources to meet the Company's future obligations. These matters create uncertainty about the Company's ability to continue as a going concern. The condensed consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. Additionally, a confirmed plan of reorganization could materially change amounts reported in the condensed consolidated financial statements, which do not give effect to all adjustments of the carrying value of assets and liabilities that are necessary as a consequence of reorganization under Chapter 11. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods reported. Such adjustments are of a normal, recurring nature. In addition, footnote disclosures which would substantially duplicate the disclosures in the audited consolidated financial statements have been omitted in the accompanying unaudited condensed consolidated financial statements. The results of operations for the three and nine month periods ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year. Condensed Consolidating Financial Statements - -------------------------------------------- Condensed consolidating financial statements for Solutia and subsidiaries in reorganization and subsidiaries not in reorganization as of September 30, 2006 and December 31, 2005, and for the three and nine months ended September 30, 2006 and September 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 CONSENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES................................. $ 614 $248 $(124) $ 738 Cost of goods sold........................ 550 212 (127) 635 ------------------------------------------------------------------ GROSS PROFIT.............................. 64 36 3 103 Marketing, administrative and technological expenses.................. 53 15 -- 68 Amortization expense...................... (1) 1 -- -- ------------------------------------------------------------------ OPERATING INCOME.......................... 12 20 3 35 Equity earnings (loss) from affiliates.... 64 (1) (56) 7 Interest expense.......................... (22) (7) -- (29) Other income, net......................... 10 -- (6) 4 Reorganization items, net................. (19) -- -- (19) ------------------------------------------------------------------ INCOME (LOSS) BEFORE INCOME TAXES......... 45 12 (59) (2) Income tax expense........................ 3 2 (1) 4 ------------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS.............................. 42 10 (58) (6) Income from discontinued operations, net of tax.............................. 2 48 -- 50 ------------------------------------------------------------------ NET INCOME ............................... $ 44 $ 58 $ (58) $ 44 ================================================================== CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES................................. $1,804 $723 $(346) $2,181 Cost of goods sold........................ 1,613 623 (362) 1,874 ------------------------------------------------------------------ GROSS PROFIT.............................. 191 100 16 307 Marketing, administrative and technological expenses.................. 161 43 -- 204 Amortization expense...................... -- 1 -- 1 ------------------------------------------------------------------ OPERATING INCOME.......................... 30 56 16 102 Equity earnings (loss) from affiliates.... 116 (3) (85) 28 Interest expense.......................... (61) (18) -- (79) Other income, net......................... 27 3 (19) 11 Loss on debt modification................. (8) -- -- (8) Reorganization items, net................. (51) -- -- (51) ------------------------------------------------------------------ INCOME BEFORE INCOME TAXES................ 53 38 (88) 3 Income tax expense ....................... 4 8 (1) 11 ------------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS.............................. 49 30 (87) (8) Income from discontinued operations, net of tax.............................. 1 57 -- 58 ------------------------------------------------------------------ NET INCOME................................ $ 50 $ 87 $ (87) $ 50 ==================================================================
10 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES................................. $ 538 $222 $ (99) $ 661 Cost of goods sold........................ 501 188 (105) 584 ------------------------------------------------------------------ GROSS PROFIT.............................. 37 34 6 77 Marketing, administrative and technological expenses.................. 53 15 (1) 67 Amortization expense...................... 1 -- -- 1 ------------------------------------------------------------------ OPERATING INCOME (LOSS)................... (17) 19 7 9 Equity earnings (loss) from affiliates.... 25 (1) (11) 13 Interest expense.......................... (14) (6) -- (20) Other income, net......................... 9 1 (8) 2 Reorganization items, net................. (16) 1 -- (15) ------------------------------------------------------------------ INCOME (LOSS) BEFORE INCOME TAXES ........ (13) 14 (12) (11) Income tax expense ....................... 1 4 -- 5 ------------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS.............................. (14) 10 (12) (16) Income (loss) from discontinued operations, net of tax.................. (1) 2 -- 1 ------------------------------------------------------------------ NET INCOME (LOSS)......................... (15) 12 (12) (15) ================================================================== CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES................................. $1,733 $674 $(302) $2,105 Cost of goods sold........................ 1,578 569 (322) 1,825 ------------------------------------------------------------------ GROSS PROFIT.............................. 155 105 20 280 Marketing, administrative and technological expenses.................. 158 44 (1) 201 Amortization expense...................... 1 -- -- 1 ------------------------------------------------------------------ OPERATING INCOME (LOSS)................... (4) 61 21 78 Equity earnings (loss) from affiliates.... 89 (3) (38) 48 Interest expense.......................... (46) (18) -- (64) Other income, net......................... 19 8 (20) 7 Reorganization items, net................. (33) (2) -- (35) ------------------------------------------------------------------ INCOME BEFORE INCOME TAXES ............... 25 46 (37) 34 Income tax expense ....................... 3 15 -- 18 ------------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS......... 22 31 (37) 16 Income (loss) from discontinued operations, net of tax.................. (2) 6 -- 4 ------------------------------------------------------------------ NET INCOME................................ 20 37 (37) 20 ==================================================================
11 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2006
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ ASSETS Current assets ................................... $ 548 $ 423 $ (81) $ 890 Property, plant and equipment, net................ 661 120 -- 781 Investment in subsidiaries and affiliates......... 469 218 (489) 198 Goodwill and identified intangible assets, net.... 100 20 -- 120 Other assets...................................... 59 50 -- 109 ----------------------------------------------------------------------- TOTAL ASSETS................................... $ 1,837 $ 831 $(570) $ 2,098 ======================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities .............................. $ 1,014 $158 $ (61) $ 1,111 Long-term debt.................................... -- 203 -- 203 Other liabilities................................. 193 70 -- 263 ----------------------------------------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE....... 1,207 431 (61) 1,577 LIABILITIES SUBJECT TO COMPROMISE................. 2,058 -- (109) 1,949 TOTAL SHAREHOLDERS' EQUITY (DEFICIT).............. (1,428) 400 (400) (1,428) ----------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)....................................... $ 1,837 $831 $(570) $ 2,098 ======================================================================= 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............................... $ 644 $ 176 $(53) $ 767 Long-term debt.................................... -- 247 -- 247 Other liabilities................................. 201 47 -- 248 ----------------------------------------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE....... 845 470 (53) 1,262 LIABILITIES SUBJECT TO COMPROMISE ................ 2,280 -- (104) 2,176 TOTAL SHAREHOLDERS' EQUITY (DEFICIT).............. (1,454) 311 (311) (1,454) ----------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)....................................... $ 1,671 $ 781 $(468) $ 1,984 =======================================================================
12 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ Net Cash Provided by (Used in) Operating Activities...................................... $(254) $ 43 $ -- $(211) Net Cash Provided by (Used in) Investing Activities...................................... (72) 55 -- (17) Net Cash Provided by (Used in) Financing Activities...................................... 347 (72) -- 275 ----------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents......... 21 26 -- 47 Cash and Cash Equivalents: Beginning of year............................... 18 89 -- 107 ----------------------------------------------------------------------- End of period................................... $ 39 $115 $ -- $ 154 ======================================================================= CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ Net Cash Provided by (Used in) Operating Activities...................................... $ (42) $ 40 $ -- $ (2) Net Cash Used in Investing Activities............. (34) (13) -- (47) Net Cash Provided by (Used in) Financing Activities...................................... 32 (16) -- 16 ----------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents..................................... (44) 11 -- (33) Cash and Cash Equivalents: Beginning of year............................... 50 65 -- 115 ----------------------------------------------------------------------- End of period................................... $ 6 $ 76 $ -- $ 82 =======================================================================
2. SIGNIFICANT ACCOUNTING POLICIES Financial Statement Presentation The condensed consolidated financial statements have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and on a going concern basis, which assumes the continuity of operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business. However, as a result of the Chapter 11 bankruptcy proceedings, such realization of assets and satisfaction of liabilities are subject to a significant number of uncertainties that have not been reflected in the condensed consolidated financial statements. Basis of Consolidation The condensed consolidated financial statements include the accounts of Solutia and its majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Companies in which Solutia has a significant interest but not a controlling interest are accounted for under the equity method of accounting and included in Investments in Affiliates in the Condensed Consolidated Statement of Financial Position. Solutia's proportionate share of these companies' net earnings or losses is reflected in Equity Earnings (Loss) from Affiliates in the Condensed Consolidated Statement of Operations. In accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 46, Consolidation of Variable Interest Entities, 13 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) as amended, variable interest entities in which Solutia is the primary beneficiary are consolidated within the condensed consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements which affect revenues and expenses during the period reported. Estimates are adjusted when necessary to reflect actual experience. Significant estimates were used to account for restructuring reserves, environmental reserves, self-insurance reserves, employee benefit plans, intangible assets, income taxes, asset impairments and contingencies. Actual results, particularly with respect to those matters affected by the Chapter 11 bankruptcy proceedings, could materially differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased. Inventory Valuation Inventories are stated at cost or market, whichever is less. Actual cost is used to value raw materials and supplies. Standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard cost includes direct labor and raw materials, and manufacturing overhead based on normal capacity. The cost of inventories in the United States, excluding supplies (74 percent as of September 30, 2006, and 73 percent as of December 31, 2005) is determined by the last-in, first-out ("LIFO") method, which generally reflects the effects of inflation or deflation on cost of goods sold sooner than other inventory cost methods. The cost of inventories outside the United States, as well as supplies inventories in the United States, is determined by the first-in, first-out ("FIFO") method. Property, Plant and Equipment Property, plant and equipment are recorded at cost. The cost of plant and equipment is depreciated over 5 to 35 years for buildings and improvements and 3 to 15 years for machinery and equipment, by the straight-line method. Periodically, Solutia conducts a complete shutdown of certain manufacturing units ("turnaround") to perform necessary inspections, repairs and maintenance. Costs associated with significant turnarounds, which include estimated costs for material, labor, supplies and contractor assistance, are accrued ratably during the period between each planned activity, which generally occur every 2 to 3 years. Intangible Assets Intangible assets that have finite useful lives are amortized on a straight-line basis over their useful lives, generally periods ranging from 5 to 20 years. Goodwill and indefinite-lived intangible assets are assessed annually for impairment in the fourth quarter, or more frequently if changes in circumstances indicate they may not be recoverable. Impairment of Long-Lived Assets Impairment tests of long-lived assets are made when conditions indicate a possible loss. Impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset value is written down to its fair value based upon market prices or, if not available, upon discounted cash value, at an appropriate discount rate. 14 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Environmental Remediation Costs for remediation of waste disposal sites are accrued in the accounting period in which the obligation is probable and when the cost is reasonably estimable. Environmental liabilities are not discounted, and they have not been reduced for any claims for recoveries from third parties. In those cases where third-party indemnitors have agreed to pay any amounts and management believes that collection of such amounts is probable, the amounts are reflected as receivables in the condensed consolidated financial statements. Self-Insurance and Insurance Recoveries Solutia maintains self-insurance reserves to reflect its estimate of uninsured losses. Self-insured losses are accrued based upon estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry, Solutia's historical experience and certain case specific reserves as required, including estimated legal costs. The maximum extent of the self-insurance provided by Solutia is dependent upon a number of factors including the facts and circumstances of individual cases and the terms and conditions of the commercial policies. Solutia has purchased commercial insurance in order to reduce its exposure to workers' compensation, product, general, automobile and property liability claims. Policies for periods prior to the spinoff are shared with Pharmacia. This insurance has varying policy limits and deductibles. Insurance recoveries are estimated in consideration of expected losses, coverage limits and policy deductibles. When recovery from an insurance policy is considered probable, a receivable is recorded. Revenue Recognition Solutia's primary revenue-earning activities involve producing and delivering goods. Revenues are considered to be earned when Solutia has completed the process by which it is entitled to such revenues. The following criteria are used for revenue recognition: persuasive evidence that an arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured. In the case of the Pharmaceutical Services business, revenues are primarily recorded as services are rendered. Allowance for Doubtful Accounts The provisions for losses on uncollectible trade receivables are determined primarily on the basis of past collection experience applied to ongoing evaluations of Solutia's receivables and evaluations of the risks of uncollectibility. Distribution Costs Solutia includes inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and the other costs of its distribution network in Cost of Goods Sold in the Condensed Consolidated Statement of Operations. Shipping and Handling Costs Amounts billed for shipping and handling are included in Net Sales and the costs incurred for these activities are included in Cost of Goods Sold in the Condensed Consolidated Statement of Operations. 15 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Derivative Financial Instruments In accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, all derivatives, whether designated for hedging relationships or not, are recognized in the Condensed Consolidated Statement of Financial Position at their fair value. Currency forward and option contracts are used to manage currency exposures for financial instruments denominated in currencies other than the entity's functional currency. Solutia has chosen not to designate these instruments as hedges and to allow the gains and losses that arise from marking the contracts to market to be included in Other Income, net in the Condensed Consolidated Statement of Operations. Natural gas forward and option contracts are used to manage some of the exposure for the cost of natural gas. These market instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in Accumulated Other Comprehensive Loss in the Condensed Consolidated Statement of Financial Position to the extent effective, and reclassified into Cost of Goods Sold in the Condensed Consolidated Statement of Operations in the period during which the hedged transaction affects earnings. The mark-to-market gains or losses on ineffective portions of hedges are recognized in Cost of Goods Sold immediately. Income Taxes Solutia accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities at enacted rates. Solutia determines the appropriateness of valuation allowances in accordance with the "more likely than not" recognition criteria outlined in SFAS No. 109, Accounting for Income Taxes. Currency Translation The local currency has been used as the functional currency for nearly all worldwide locations. The financial statements for most of Solutia's ex-U.S. operations are translated into U.S. dollars at current or average exchange rates. Unrealized currency translation adjustments are included in Accumulated Other Comprehensive Loss in the Condensed Consolidated Statement of Financial Position. Earnings (Loss) per Share Basic earnings (loss) per share is a measure of operating performance that assumes no dilution from securities or contracts to issue common stock. Diluted earnings (loss) per share is a measure of operating performance by giving effect to the dilution that would occur if securities or contracts to issue common stock were exercised or converted. Stock Option Plans 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 16 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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. 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 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. In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans ("SFAS No. 158"). SFAS No. 158 requires the recognition of the funded status of pension and other postretirement benefit plans on the balance sheet. The overfunded or underfunded status would be recognized as an asset or liability on the balance sheet with changes occurring during the current year reflected through the comprehensive income portion of equity. Further, SFAS No. 158 requires the unrecognized transition asset or obligation, gains or losses, and prior service costs to be recognized as a component of other comprehensive income, net of tax. The Statement will also require the measurement of the funded status of a plan to match that of the date of the Company's fiscal-year-end financial statements, eliminating the use of earlier measurement dates previously permissible. The portions of SFAS No. 158 relating to the recognition of the funded status of a plan and the unrecognized components of net periodic benefit cost are effective for fiscal years ending after December 15, 2006 (i.e., effective December 31, 2006 for Solutia). Solutia is currently evaluating the financial impact of SFAS No. 158 on the consolidated financial statements. In September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting For Planned Major Maintenance Activities ("FSP AUG AIR-1"), that eliminates the acceptability of the accrue-in-advance method of accounting for planned major maintenance activities. This staff position is effective for fiscal years beginning after December 15, 2006 (i.e., effective January 1, 2007 for Solutia) and requires retrospective application to all prior period results presented. The Company has been accruing for certain major maintenance activities associated with periodic major overhauls and maintenance of equipment under the accrue-in-advance method. Solutia is currently evaluating the financial impact of FSP AUG AIR-1 on the consolidated financial statements. 3. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET Liabilities Subject to Compromise Under Chapter 11 of the U.S. Bankruptcy Code, certain claims against Solutia in existence prior to the filing of the petitions for relief under the federal bankruptcy laws are stayed while Solutia continues business operations as a debtor-in-possession. These estimated claims are reflected in the Condensed Consolidated Statement of Financial Position as Liabilities Subject to Compromise as of September 30, 2006 and December 31, 2005 and are summarized in the table below. Such claims remain subject to future adjustments. Adjustments may result from 17 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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 September 30, 2006 and December 31, 2005, as applicable. The amounts subject to compromise consisted of the following items:
SEPTEMBER 30, DECEMBER 31, 2006 2005 ---- ---- Postretirement benefits (a)............................... $ 900 $1,098 Litigation reserves (b)................................... 111 136 Accounts payable (c)...................................... 116 118 Environmental reserves (d)................................ 81 82 Other miscellaneous liabilities........................... 73 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................... $1,949 $2,176 ====== ====== (a) Postretirement benefits include Solutia's domestic (i) qualified pension plan liabilities of $348 and $501 as of September 30, 2006 and December 31, 2005, respectively; (ii) non-qualified pension plan liabilities of $19 as of both September 30, 2006 and December 31, 2005; and (iii) other postretirement benefits liabilities of $533 and $578 as of September 30, 2006 and December 31, 2005, respectively. Pursuant to a bankruptcy court order, Solutia made payments with respect to other postretirement obligations of approximately $70 in the nine months ended September 30, 2006. Solutia also made $161 of contributions to its qualified pension plan pursuant to IRS funding requirements in the nine months ended September 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 September 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 10). Pursuant to a bankruptcy court order, Solutia made a scheduled payment of $5 in the third quarter 2006 with respect to the Anniston litigation settlement reached in 2003. (c) Pursuant to bankruptcy court orders, Solutia settled certain accounts payable liabilities subject to compromise in the nine months ended September 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 10 for further disclosure with respect to ongoing legal proceedings concerning environmental liabilities subject to compromise. 18 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (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 nine months ended September 30, 2006 was approximately $24. (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 $25 in the nine months ended September 30, 2006, and the accrued interest related to these notes was included in Accrued Liabilities classified as not subject to compromise as of September 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 ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2006 2005 2006 2005 ---- ---- ---- ---- Professional fees (a) ........................ $(13) $(13) $(40) $(37) Severance and employee retention costs (b)... (1) (2) (4) (10) Adjustments to allowed claim amounts (c) ..... -- 1 2 (10) Settlements of pre-petition claims (d) ....... -- -- -- 29 Other ........................................ (5) (1) (9) (7) ---- ---- ---- ---- TOTAL REORGANIZATION ITEMS, NET .............. $(19) $(15) $(51) $(35) ==== ==== ==== ==== (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.
4. 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 19 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) granted may not exceed 10 years. At September 30, 2006, approximately 2,187,693 shares from the 2000 Plan and 2,235,314 shares from the 1997 Plan remained available for grants. During the nine months ended September 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 September 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 September 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 nine months ended September 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 nine months ended September 30, 2006. Accordingly, no compensation cost with respect to such activities was recognized in the Condensed Consolidated Statement of Operations in the nine months ended September 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 Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows associated with these unvested options was less than $1 during the nine months ended September 30, 2006. Additionally, there was less than $1 of total unrecognized compensation cost related to these unvested options as of September 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 Condensed Consolidated 20 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Statement of 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 nine months ended September 30, 2005. A summary of Solutia's stock option plans for the nine months ended September 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) --------------------------------------------------------------------- Granted............................. -- 0.00 -- -- Exercised........................... -- 0.00 -- -- Expired............................. (660,957) 17.43 -- -- --------------------------------------------------------------------- Outstanding at September 30, 2006..... 13,047,744 $15.60 1.6 $(197) ===================================================================== Exercisable at September 30, 2006..... 12,884,944 $15.73 1.5 $(197) (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.
5. ACQUISITION AND DIVESTITURE Discontinued Operations On May 23, 2006, Solutia's 100% 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. Closing of the sale occurred on August 22, 2006 and included the transfer of all economic benefits and liabilities of the pharmaceutical services business from August 1, 2006 through the closing date. Under the terms of the agreement, Dishman purchased 100 percent of the stock of the pharmaceutical services business, as well as certain other assets used in the pharmaceutical services business, for $77, subject to certain purchase price adjustments. Dishman also assumed substantially all of the liabilities relating to the pharmaceutical services business, other than certain liabilities that arose prior to the closing of the transaction and liabilities under certain employment agreements. SESA 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 pharmaceutical services business or solicit for employment certain employees of the pharmaceutical services business and their current affiliates. The pharmaceutical services business was a component of the Performance Products segment prior to the classification as discontinued operations. Solutia recorded a gain on the sale of the pharmaceutical services business of $49. Further, Solutia used $51 of the proceeds from the sale to pay down SESA's (euro) 200 million credit facility entered into on July 26, 2006 and closed on August 1, 2006 (as described in Note 12). 21 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The carrying amounts of assets and liabilities from discontinued operations have been classified as current in the Condensed Consolidated Statement of Financial Position and consisted of the following:
SEPTEMBER 30, DECEMBER 31, 2006 2005 ---- ---- ASSETS: Trade receivables............................................ $ -- $ 7 Miscellaneous receivables.................................... -- 1 Inventories.................................................. -- 13 Prepaid expenses and other assets............................ -- 1 Property, plant and equipment, net........................... -- 34 Identified intangible assets, net............................ -- 7 Other assets................................................. -- 6 ----- ----- Assets of discontinued operations................... $ -- $ 69 ===== ===== LIABILITIES: Accounts payable............................................. $ -- $ 4 Accrued liabilities.......................................... 2 17 Other liabilities............................................ -- 5 ----- ----- Liabilities of discontinued operations.............. $ 2 $ 26 ===== =====
The operating results of the pharmaceutical services business have been reported separately as discontinued operations, net of tax, in the Condensed Consolidated Statement of Operations for each period presented. Net sales and income from discontinued operations are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2006 2005 2006 2005 ---- ---- ---- ---- Net sales .................................... $ 5 $ 15 $ 42 $ 51 Income (loss) before income taxes............. 50 1 54 5 Income tax expense (benefit).................. -- -- (4) 1 ---- ---- ---- ---- INCOME FROM DISCONTINUED OPERATIONS........... $ 50 $ 1 $ 58 $ 4 ==== ==== ==== ====
Solutia recorded a gain on the sale of the pharmaceutical services business of $49. The gain on sale was exempt from tax outside the United States and no gain was realized for United States tax purposes. 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 100% 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 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. 22 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The allocation of purchase price to the assets acquired and liabilities 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. 6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Goodwill of $89 and $76 at September 30, 2006 and December 31, 2005, respectively, was allocated to the Performance Products segment. This $13 increase in goodwill as of September 30, 2006 was a result of the Quimica acquisition (as further described in Note 5), 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:
SEPTEMBER 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 $ (7) $ 5 $ 8 $ (6) $ 2 Trademarks...................... 26 -- 26 26 -- 26 ----------------------------------- ------------------------------------ TOTAL IDENTIFIED INTANGIBLE ASSETS.......................... $ 38 $ (7) $ 31 $ 34 $ (6) $ 28 =================================== ====================================
There were no changes to amortizable lives or methods during the nine months ended September 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. 7. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30, DECEMBER 31, INVENTORIES 2006 2005 ---- ---- Finished goods................................................ $ 242 $ 236 Goods in process.............................................. 168 131 Raw materials and supplies.................................... 98 93 ----- ----- Inventories, at FIFO cost..................................... 508 460 Excess of FIFO over LIFO cost................................. (206) (206) ----- ----- TOTAL INVENTORIES............................................. $ 302 $ 254 ===== =====
Inventories at FIFO approximate current cost. 23 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, ACCRUED LIABILITIES 2006 2005 ---- ---- Wages and benefits............................................ $ 54 $ 54 Accrued rebates and sales returns/allowances.................. 16 22 Accrued interest.............................................. 10 23 Other......................................................... 153 124 ----- ----- TOTAL ACCRUED LIABILITIES..................................... $ 233 $ 223 ===== =====
8. INVESTMENT IN AFFILIATE At September 30, 2006, Solutia participated in one principal 50/50 joint venture 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Net sales.................................................. $150 $159 $466 $493 Gross profit .............................................. 35 48 128 160 Operating income .......................................... 21 23 81 84 Net income ................................................ 15 14 55 60
9. RESTRUCTURING RESERVES Solutia recorded approximately $1 of decommissioning and dismantling costs in Reorganization Items, net, primarily in the Integrated Nylon segment during the three months ended September 30, 2006, and Solutia recorded approximately $3 of future contractual payments in Reorganization Items, net related to the termination of a third party manufacturing agreement within the Performance Products segment. In addition, Solutia recorded approximately $2 of severance and retraining costs in the three months ended September 30, 2006 in Reorganization Items, net and Marketing and Administrative expenses involving headcount reductions. Solutia also recorded approximately $1 of asset write-downs in Reorganization Items, net within the Performance Products segment. Solutia recorded approximately $3 of decommissioning and dismantling costs in the nine months ended September 30, 2006 primarily as a result of the shut-down of its acrylic fibers business in 2005, and approximately $3 of asset write-downs. Solutia also recorded approximately $3 of future contractual payments related to the termination of a third party manufacturing agreement. These costs were all recorded within Reorganization Items, net with approximately $4 in the Integrated Nylon segment and approximately $5 in the Performance Products segment. In addition, Solutia recorded approximately $5 of severance and retraining costs in the nine months ended September 30, 2006 with approximately $3 in Reorganization Items, net, and approximately $2 in Marketing and Administrative expenses involving headcount reductions recorded throughout the organization. 24 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) A summary of restructuring activity during the three and nine months ended September 30, 2006 is as follows:
FUTURE DECOMMISSIONING/ CONTRACTUAL EMPLOYMENT ASSET WRITE- DISMANTLING PAYMENTS 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 Charges taken...................... 1 3 2 1 7 Amounts utilized................... (1) -- (2) (1) (4) ---------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 2006........ $ 1 $ 3 $ 1 $ -- $ 5 ============================================================================
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. 10. 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 September 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. Legal proceeding activities are currently being funded by Monsanto for these matters. Monsanto's funding of these legal activities may give rise to a claim against Solutia which Monsanto may assert in Solutia's bankruptcy case. 25 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Following is a summary of legal proceedings that Solutia or its equity affiliate continue to manage that could result in an outcome that is material to the condensed 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 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 were submitted by the parties in August 2006. The Bankruptcy Court has not yet made 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 the 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. Solutia and the Unsecured Creditors' Committee have intervened in this adversary proceeding as neutral parties due to the importance of this proceeding with respect to Solutia's bankruptcy case. On September 14, 2006, the Court ruled that while the Equity Committee did not have standing to pursue these claims on behalf of the Debtors, it had standing to pursue its own objections to the claims of Monsanto and Pharmacia. On October 17, 2006, the Bankruptcy Court entered an Order adjourning this adversary proceeding until December 13, 2006 and allowing the Equity Committee, Pharmacia, and Monsanto to submit this matter to mediation in a good faith effort to reach a consensual resolution of the issues between the parties. All proceedings related to this adversary proceeding have been stayed until November 30, 2006, unless the parties agree to extend such date further. 26 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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 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/A 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 27 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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, and the $20 letter of credit securing the appeal bond was released. Based upon this ruling, Solutia recognized a gain in its Condensed 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. In September 2006, the parties tentatively reached a global settlement in which Flexsys will pay approximately (CAD) $2.4 to resolve all four pending class actions in Canada. The settlement must still be approved by the courts. Solutia is not a named defendant in any of these cases. 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 28 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) consolidated complaint alleged that from December 16, 1998 to October 10, 2002, Solutia's accounting practice of incorporating Flexsys' results into Solutia's financial reports violated federal securities laws by misleading investors as to Solutia's actual results and causing inflated prices to be paid by purchasers of Solutia's publicly traded securities during the period. The plaintiffs 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' 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 (the "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. The Scharringhausen plaintiffs voluntarily dismissed their case on April 24, 2006. None of the Debtors, and 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 Hammond and Davis plaintiffs have consolidated their actions, and their counsel are cooperating in the representation of the putative class. On September 1, 2006, the Court consolidated the Hammond and Davis actions with cash balance pension plan cases pending in the Southern District of Illinois against Monsanto Company and the Monsanto Company Pension Plan (Walker et al. v. The Monsanto Pension Plan, et al.) and the Pharmacia Cash Balance Pension Plan, Pharmacia Corporation, Pharmacia and Upjohn, Inc., and Pfizer Inc. (Donaldson v. Pharmacia Cash Balance Pension Plan, et al.). A consolidated class action complaint was filed by all of the plaintiffs on September 4, 2006, in which the plaintiffs alleged three separate causes of action against the Pension Plan: (1) the Pension Plan allegedly violates ERISA by terminating interest credits at the age of 55; (2) the Pension Plan was allegedly improperly backloaded in violation of ERISA; and (3) the Pension Plan was allegedly discriminatory on the basis of age. 29 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The Pension Plan moved to dismiss all of the pending actions in the consolidated case for plaintiffs' failure to exhaust administrative remedies and failure to join Solutia as a necessary and indispensable party and those motions are pending. Motions for class certification are due to be filed by the end of 2006. The Pension Plan intends to continue to vigorously defend itself against any and all claims asserted in the consolidated litigation. 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' 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. Briefs have been submitted; the appeal is still pending and oral argument is expected to be heard as early as the fourth quarter of 2006. 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. 30 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) On July 31, 2006, the District Court entered its order regarding FMC's motion for summary judgment, by 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 has set this matter for a bench trial to begin on April 3, 2007. 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 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. Texas Commission on Environmental Quality Administrative Enforcement Proceeding. On August 11, 2006, the Executive Director of the Texas Commission on Environmental Quality commenced an administrative enforcement proceeding against Solutia by filing a petition with the Texas Commission on Environmental Quality. The petition alleges certain violations of the State of Texas air quality program. The Executive Director requests that an administrative penalty, the amount of which is immaterial, be assessed and that Solutia undertake corrective actions to ensure compliance with the Texas Health and Safety Code and the rules of the Commission in connection with alleged self-reported unauthorized emission events and deviations of air permits. Solutia answered the petition on September 1, 2006, asserted affirmative defenses and requested a contested enforcement case hearing. Solutia is pursuing settlement discussions with the Commission. No date has yet been set for a hearing. 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 September 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 Condensed Consolidated Statement of Financial Position because, irrespective of the bankruptcy proceedings, Solutia will be required to comply with environmental requirements in the conduct of its business, regardless of when the underlying environmental contamination occurred. However, Solutia ultimately intends to seek recovery against other potentially responsible parties at certain of these locations. 31 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Solutia had an accrued liability of $81 as of September 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 Condensed Consolidated Statement of Financial Position as of both September 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. 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 condensed consolidated financial position, liquidity and profitability of Solutia. 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-petition claims not currently reflected in the condensed consolidated financial statements may be identified through the proof of claim reconciliation process. The amount of pre-petition claims ultimately allowed by the bankruptcy court with respect to contingent claims may be materially different from the amounts reflected in the condensed consolidated financial statements. Generally, claims against Debtors arising from actions or omissions prior to their filing date may be subject to compromise in connection with 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 Condensed Consolidated Statement of Financial Position. 32 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Components of Net Periodic Benefit Cost For the three and nine months ended September 30, 2006 and 2005, Solutia's pension and healthcare and other benefit costs were as follows:
PENSION BENEFITS ---------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2006 2005 2006 2005 ---- ---- ---- ---- Service costs for benefits earned........ $ 1 $ 2 $ 3 $ 5 Interest costs on benefit obligation..... 16 18 48 53 Assumed return on plan assets............ (15) (17) (45) (50) Prior service costs ..................... -- -- -- 1 Recognized net loss...................... 3 4 6 10 Curtailment and settlement net charges .. -- 7 -- 7 ---- ---- ---- ---- TOTAL.................................... $ 5 $ 14 $ 12 $ 26 ==== ==== ==== ==== HEALTHCARE AND OTHER BENEFITS ----------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2006 2005 2006 2005 ---- ---- ---- ---- Service costs for benefits earned........ $ 1 $ 1 $ 3 $ 4 Interest costs on benefit obligation..... 8 9 23 26 Prior service costs ..................... (3) (3) (8) (8) Recognized net loss...................... 1 4 3 11 Curtailment gain......................... -- (4) -- (4) ---- ---- ---- ---- TOTAL.................................... $ 7 $ 7 $ 21 $ 29 ==== ==== ==== ====
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. Approximately $161 of these required 2006 contributions were made in the nine months ended September 30, 2006. Solutia also expects to be required to fund approximately $5 in pension contributions for its foreign pension plans in 2006. 12. DEBT OBLIGATIONS DIP Amendments 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, 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. 33 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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. Euronotes Refinancing On July 26, 2006, Solutia's indirect 100% 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") guaranteed by SESA and CPFilms Vertriebs GmbH, a subsidiary of SESA. Closing of the Facility Agreement occurred on August 1, 2006. SESA used the proceeds of the Facility Agreement 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 sale of its pharmaceutical services business as described in Note 5. 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 275 basis points. 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 Facility Agreement consists of a (euro) 160 million term loan and a (euro) 40 million term loan. The (euro) 40 million term loan was repaid from the proceeds of the sale of Solutia's pharmaceutical services business (as further described in Note 5). The Facility Agreement is secured by substantially all of the assets of SESA and its subsidiaries. The Facility Agreement also contains other customary terms and conditions, including certain financial covenants relating to the performance of SESA and its subsidiaries. On September 15, 2006, the parties amended the Facility Agreement to reflect certain non-material modifications to the Facility Agreement. 34 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 13. 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 interlayer Nylon intermediate "building block" chemicals Polyvinyl butyral for KEEPSAFE(R) and KEEPSAFE MAXIMUM(R) laminated window glass Nylon resins and polymers, including VYDYNE(R) and ASCEND(R) LLUMAR(R), VISTA(R), GILA(R) and FORMULA ONE(R) professional and retail window films Carpet fibers, including the WEAR-DATED(R) and ULTRON(R) brands THERMINOL(R) heat transfer fluids Industrial nylon fibers 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
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, 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. 35 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Segment data from continuing operations for the three and nine months ended September 30, 2006 and 2005 are as follows:
THREE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------- 2006 2005 ----------------- ----------------- NET PROFIT NET PROFIT SALES (LOSS) SALES (LOSS) ----- ------ ----- ------ SEGMENT: Performance Products................ $291 $ 31 $277 $ 36 Integrated Nylon.................... 447 14 384 (10) ---- ---- ---- ---- SEGMENT TOTALS...................... 738 45 661 26 RECONCILIATION TO CONSOLIDATED TOTALS: Corporate expenses.............. (13) (16) Equity earnings from affiliates. 7 13 Interest expense................ (29) (20) Other income, net............... 2 -- Reorganization items, net....... (14) (14) CONSOLIDATED TOTALS: ---- ---- NET SALES....................... $738 $661 ==== ---- ==== ---- LOSS BEFORE INCOME TAXES $ (2) $(11) ==== ==== NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------- 2006 2005 ----------------- ----------------- NET PROFIT NET PROFIT SALES (LOSS) SALES (LOSS) ----- ------ ----- ------ SEGMENT: Performance Products.................. $ 885 $ 119 $ 843 $ 105 Integrated Nylon...................... 1,296 4 1,262 3 ------ ----- ------ ----- SEGMENT TOTALS........................ 2,181 123 2,105 108 RECONCILIATION TO CONSOLIDATED TOTALS: Corporate expenses................ (26) (41) Equity earnings from affiliates... 28 46 Interest expense.................. (79) (64) Other income, net................. 5 1 Loss on debt modification......... (8) -- Reorganization items, net......... (40) (16) CONSOLIDATED TOTALS: ------ ------ NET SALES......................... $2,181 $2,105 ====== ----- ====== ----- INCOME BEFORE INCOME TAXES........ $ 3 $ 34 ===== =====
36 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS CPFilms Inc., Monchem International, Inc., Monchem, Inc., Solutia Systems, Inc., Solutia Investments, LLC and Solutia Business Enterprises, Inc., 100% 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 100% 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 September 30, 2006 and December 31, 2005, and for the three and nine months ended September 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. 37 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2006
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES................................ $565 $49 $248 $(124) $738 Cost of goods sold....................... 524 26 213 (128) 635 ------------------------------------------------------------------------- GROSS PROFIT............................. 41 23 35 4 103 Marketing expenses....................... 20 5 8 -- 33 Administrative expenses.................. 16 2 6 -- 24 Technological expenses................... 8 1 2 -- 11 Amortization expense..................... -- -- -- -- -- ------------------------------------------------------------------------- OPERATING INCOME (LOSS).................. (3) 15 19 4 35 Equity earnings from affiliates.......... 83 53 -- (129) 7 Interest expense......................... (21) -- (18) 10 (29) Other income, net........................ 4 4 11 (15) 4 Reorganization items, net................ (19) -- -- -- (19) ------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES ....... 44 72 12 (130) (2) Income tax expense ..................... 2 -- 3 (1) 4 ------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS............................. 42 72 9 (129) (6) Income from discontinued operations, net of tax................. 2 -- 48 -- 50 ------------------------------------------------------------------------- NET INCOME............................... $ 44 $72 $ 57 $(129) $ 44 ========================================================================= CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME THREE MONTHS ENDED SEPTEMBER 30, 2006 PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME............................... $ 44 $ 72 $ 57 $(129) $ 44 OTHER COMPREHENSIVE LOSS: Net unrealized loss on derivative instruments, net of tax................ (1) -- -- -- (1) Currency translation adjustments......... (34) (35) (36) 71 (34) ------------------------------------------------------------------------- COMPREHENSIVE INCOME..................... $ 9 $ 37 $ 21 $ (58) $ 9 =========================================================================
38 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2005
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES................................ $489 $49 $223 $(100) $661 Cost of goods sold....................... 478 23 189 (106) 584 ------------------------------------------------------------------------- GROSS PROFIT............................. 11 26 34 6 77 Marketing expenses....................... 20 6 8 -- 34 Administrative expenses.................. 13 2 7 -- 22 Technological expenses................... 10 1 -- -- 11 Amortization expense..................... 1 -- -- -- 1 ------------------------------------------------------------------------- OPERATING INCOME (LOSS).................. (33) 17 19 6 9 Equity earnings (loss) from affiliates... 47 11 (1) (44) 13 Interest expense......................... (15) -- (12) 7 (20) Other income, net........................ 2 6 9 (15) 2 Reorganization items, net................ (15) -- -- -- (15) ------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES ....... (14) 34 15 (46) (11) Income tax expense ...................... -- -- 5 -- 5 ------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS............................. (14) 34 10 (46) (16) Income (loss) from discontinued operations, net of tax................. (1) -- 2 -- 1 ------------------------------------------------------------------------- NET INCOME (LOSS)........................ $ (15) $34 $ 12 $ (46) $(15) ========================================================================= CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) THREE MONTHS ENDED SEPTEMBER 30, 2005 PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME (LOSS)........................ $(15) $34 $12 $(46) $(15) OTHER COMPREHENSIVE INCOME (LOSS): Net unrealized gain on derivative instruments, net of tax................ 4 -- 1 (1) 4 Currency translation adjustments......... (1) (1) (2) 3 (1) ------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS).............. $(12) $33 $11 $(44) $(12) =========================================================================
39 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2006
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................................. $1,646 $154 $727 $(346) $2,181 Cost of goods sold......................... 1,534 76 626 (362) 1,874 ------------------------------------------------------------------------- GROSS PROFIT............................... 112 78 101 16 307 Marketing expenses......................... 58 19 24 -- 101 Administrative expenses.................... 45 7 16 -- 68 Technological expenses..................... 30 2 3 -- 35 Amortization expense....................... -- -- 1 -- 1 ------------------------------------------------------------------------- OPERATING INCOME (LOSS).................... (21) 50 57 16 102 Equity earnings (loss) from affiliates..... 179 81 (3) (229) 28 Interest expense........................... (61) -- (41) 23 (79) Other income, net.......................... 14 12 26 (41) 11 Loss on debt modification.................. (8) -- -- -- (8) Reorganization items, net.................. (51) -- -- -- (51) ------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE .......... 52 143 39 (231) 3 Income tax expense ........................ 3 -- 9 (1) 11 ------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS............................... 49 143 30 (230) (8) Income from discontinued operations, net of tax................... 1 -- 57 -- 58 ------------------------------------------------------------------------- NET INCOME................................. $ 50 $143 $ 87 $(230) $50 ========================================================================= CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30, 2006 PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME................................. $ 50 $143 $ 87 $(230) $ 50 OTHER COMPREHENSIVE LOSS: Net unrealized loss on derivative instruments, net of tax.................. (2) -- -- -- (2) Currency translation adjustments........... (22) (26) (26) 52 (22) ------------------------------------------------------------------------- COMPREHENSIVE INCOME....................... $ 26 $117 $ 61 $(178) $ 26 =========================================================================
40 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2005
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................................. $1,589 $141 $678 $(303) $2,105 Cost of goods sold......................... 1,511 64 573 (323) 1,825 ------------------------------------------------------------------------- GROSS PROFIT............................... 78 77 105 20 280 Marketing expenses......................... 58 18 24 -- 100 Administrative expenses.................... 43 6 19 -- 68 Technological expenses..................... 30 2 1 -- 33 Amortization expense....................... 1 -- -- -- 1 ------------------------------------------------------------------------- OPERATING INCOME (LOSS).................... (54) 51 61 20 78 Equity earnings (loss) from affiliates..... 157 35 (3) (141) 48 Interest expense........................... (47) -- (38) 21 (64) Other income, net.......................... 1 17 30 (41) 7 Reorganization items, net.................. (33) -- (2) -- (35) ------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES ................ 24 103 48 (141) 34 Income tax expense ........................ 2 -- 16 -- 18 ------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS.......... 22 103 32 (141) 16 Income (loss) from discontinued operations, net of tax................... (2) -- 6 -- 4 ------------------------------------------------------------------------- NET INCOME................................. $ 20 $103 $ 38 $(141) $ 20 ========================================================================= CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30, 2005 PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME................................. $ 20 $103 $ 38 $(141) $20 OTHER COMPREHENSIVE INCOME (LOSS): Net unrealized loss on derivative instruments, net of tax.................. 4 -- -- -- 4 Currency translation adjustments........... (8) (11) (17) 28 (8) ------------------------------------------------------------------------- COMPREHENSIVE INCOME....................... $ 16 $ 92 $ 21 $(113) $16 =========================================================================
41 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2006 PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents........................... $ 25 $ 13 $ 116 $ -- $ 154 Trade receivables, net.............................. 8 182 135 -- 325 Intercompany receivables............................ 116 758 114 (988) -- Miscellaneous receivables........................... 49 1 27 -- 77 Inventories......................................... 171 30 117 (16) 302 Prepaid expenses and other current assets........... 20 -- 9 3 32 Assets of discontinued operations................... -- -- -- -- -- ---------------------------------------------------------------------- TOTAL CURRENT ASSETS................................ 389 984 518 (1,001) 890 PROPERTY, PLANT AND EQUIPMENT, NET.................. 579 82 120 -- 781 INVESTMENTS IN AFFILIATES........................... 2,436 262 11 (2,511) 198 GOODWILL............................................ -- 72 17 -- 89 IDENTIFIED INTANGIBLE ASSETS, NET................... 1 26 4 -- 31 INTERCOMPANY ADVANCES............................... 128 1,238 952 (2,318) -- OTHER ASSETS........................................ 59 -- 50 -- 109 ---------------------------------------------------------------------- TOTAL ASSETS........................................ $ 3,592 $2,664 $1,672 $(5,830) $ 2,098 ====================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable.................................... $ 170 $ 6 $ 46 $ (1) $ 221 Intercompany payables............................... 111 11 139 (261) -- Accrued liabilities................................. 160 15 63 -- 238 Short-term debt..................................... 650 -- -- -- 650 Intercompany short-term debt........................ 1 -- 191 (192) -- Liabilities of discontinued operations.............. -- -- 2 -- 2 ---------------------------------------------------------------------- TOTAL CURRENT LIABILITIES........................... 1,092 32 441 (454) 1,111 LONG-TERM DEBT...................................... -- -- 203 -- 203 INTERCOMPANY LONG-TERM DEBT......................... -- -- 635 (635) -- OTHER LIABILITIES................................... 192 1 70 -- 263 ---------------------------------------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE......... 1,284 33 1,349 (1,089) 1,577 LIABILITIES SUBJECT TO COMPROMISE................... 3,736 411 21 (2,219) 1,949 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) 2,220 302 (2,522) (113) Accumulated other comprehensive loss................ (117) -- -- -- (117) Accumulated deficit................................. (1,004) -- -- -- (1,004) ---------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT)................ (1,428) 2,220 302 (2,522) (1,428) ---------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 3,592 $2,664 $1,672 $(5,830) $ 2,098 ======================================================================
42 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 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 ======================================================================
43 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2006
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH PROVIDED BY (USED IN) OPERATIONS.............. $(259) $ 5 $ 43 $ -- $(211) ---------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment purchases............ (50) (4) (24) -- (78) Acquisition, net of cash acquired.................. (23) -- 7 -- (16) Property disposals and investment proceeds......... 5 -- 72 -- 77 ---------------------------------------------------------------------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.... (68) (4) 55 -- (17) ---------------------------------------------------------------------- FINANCING ACTIVITIES: Net change in short-term debt obligations.......... 350 -- -- -- 350 Payments on long-term debt obligations............. -- -- (51) -- (51) Deferred debt issuance costs....................... (8) -- (9) -- (17) Other financing activities......................... -- -- (7) -- (7) Changes in investments and advances from (to) affiliates.................................. 9 (3) (6) -- -- ---------------------------------------------------------------------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.... 351 (3) (73) -- 275 ---------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 24 (2) 25 -- 47 CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR.................................. 1 15 91 -- 107 ---------------------------------------------------------------------- END OF PERIOD...................................... $ 25 $13 $116 $ -- $ 154 ======================================================================
44 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2005
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH PROVIDED BY (USED IN) OPERATIONS............... $(103) $ 59 $ 42 $ -- $ (2) ---------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment purchases............. (30) (7) (14) -- (51) Other investing activities.......................... 3 -- 1 -- 4 ---------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES................... (27) (7) (13) -- (47) ---------------------------------------------------------------------- FINANCING ACTIVITIES: Net change in cash collateralized letters of credit. 17 -- -- -- 17 Changes in investments and advances from (to) affiliates........................................ 72 (55) (17) -- -- Deferred debt issuance costs........................ (1) -- -- -- (1) ---------------------------------------------------------------------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........................................ 88 (55) (17) -- 16 ---------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... (42) (3) 12 -- (33) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR................................... 43 7 65 -- 115 ---------------------------------------------------------------------- END OF PERIOD....................................... $ 1 $ 4 $ 77 $ -- $ 82 ======================================================================
45 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 Third Quarter 2006 Events Reorganization Strategy - ----------------------- In the third 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 Chapter 11 and making changes to its asset portfolio, as explained below. Solutia also continues to pursue a reallocation of legacy liabilities in the Chapter 11 proceeding through negotiations with the other constituents in the Chapter 11 case. Solutia will also be working in 2006 to establish a proper capital structure upon emergence from Chapter 11. However, as a result of the numerous uncertainties and complexities inherent in Solutia's Chapter 11 proceedings, its ability and timing of emergence from Chapter 11 are subject to significant uncertainty. PERFORMANCE ENHANCEMENT Solutia benefited in the third quarter of 2006 from several actions implemented earlier in the Chapter 11 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 12 to the accompanying condensed consolidated financial statements, on July 26, 2006, SSI entered into a (euro) 200 million Facility Agreement (the "Facility Agreement") that closed on August 1, 2006. SESA used the proceeds of the Facility Agreement to refinance all of its (euro) 200 million of 10 percent Euronotes due 2008 (the "Euronotes") on August 1, 2006. Solutia expects that this new financing will result in significant interest savings for Solutia, as well as allow Solutia greater flexibility in executing its reorganization strategy. PORTFOLIO EVALUATION Solutia's 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 2005 and continued these efforts in the third quarter 2006 with the closing of the sale of its pharmaceutical services business to Dishman pursuant to a Stock and Asset Purchase Agreement dated as of May 23, 46 2006 between SESA and Dishman. Closing of the sale occurred on August 22, 2006 and included the transfer of all economic benefits and liabilities of the pharmaceutical services business from August 1, 2006 through the closing date. Under the terms of the agreement, Dishman purchased 100 percent of the stock of the pharmaceutical services business, for $77 million. See Note 5 to the accompanying condensed consolidated financial statements for additional information regarding the 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 setting forth the treatment various constituencies in the Chapter 11 Cases will receive under the Plan. See Note 1 to the accompanying condensed 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 condensed 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 - Third Quarter 2006 Compared with Third Quarter 2005 Net sales and operating income of Solutia for the three months ended September 30, 2006 and 2005 are as follows:
(dollars in millions) 2006 2005 ---- ---- Net Sales.................................................................... $ 738 $ 661 ======= ======= Operating Income: Performance Products Segment Profit...................................... $ 31 $ 36 Integrated Nylon Segment Profit (Loss) .................................. 14 (10) Less: Corporate Expenses............................................ (13) (16) Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense and Reorganization Items included in Segment Profit......... 3 (1) ------- ------- Operating Income............................................................. $ 35 $ 9 ======= ======= Charges included in Operating Income......................................... $ (1) $ (3) ======= =======
The $77 million, or 12 percent, increase in net sales as compared to the third quarter 2005 was primarily a result of higher average selling prices of approximately 8 percent, higher sales volumes of approximately 3 percent, and favorable currency exchange rate fluctuations of approximately 1 percent. The $26 million increase in operating income as compared to the third quarter 2005 resulted primarily from higher net sales, favorable manufacturing variances resulting from 2005 results being negatively impacted by Hurricanes Katrina and Rita and lower net charges, which are described in greater detail in the Results of Operations section below, partially offset by higher raw material and energy costs of approximately $55 million. 47 Results of Operations - Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2005 Net sales and operating income of Solutia for the nine months ended September 30, 2006 and 2005 are as follows:
(dollars in millions) 2006 2005 ---- ---- Net Sales.................................................................... $ 2,181 $ 2,105 ======= ======= Operating Income: Performance Products Segment Profit...................................... $ 119 $ 105 Integrated Nylon Segment Profit ......................................... 4 3 Less: Corporate Expenses............................................ (26) (41) Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense and Reorganization Items included in Segment Profit (Loss).......... 5 11 ------- ------- Operating Income............................................................. $ 102 $ 78 ======= ====== Gains (Charges) included in Operating Income................................. $ 10 $ (3) ======= =======
The $76 million, or 4 percent, increase in net sales as compared to the nine months ended September 30, 2005 was primarily a result of higher average selling prices of approximately 7 percent, partially offset by lower sales volumes of approximately 3 percent. The $24 million increase in operating income as compared to the nine months ended September 30, 2005 resulted primarily from higher net sales, favorable manufacturing variances resulting from 2005 results being negatively impacted by Hurricanes Katrina and Rita, and higher net gains, which are described in greater detail in the Results of Operations section below, partially offset by higher raw material and energy costs of approximately $110 million and unfavorable manufacturing variances resulting principally from manufacturing interruptions. Financial Information Summarized financial information concerning Solutia and subsidiaries in reorganization and subsidiaries not in reorganization as of and for the three and nine months ended September 30, 2006 is presented as follows:
SOLUTIA AND SUBSIDIARIES NOT SOLUTIA AND SUBSIDIARIES IN IN SUBSIDIARIES (dollars in millions) REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ Three Months Ended September 30, 2006: - -------------------------------------- Net Sales................................. $ 614 $ 248 $ (124) $ 738 Operating Income.......................... 12 20 3 35 Net Income................................ 44 58 (58) 44 Nine Months Ended September 30, 2006: - ------------------------------------- Net Sales................................. $1,804 $ 723 $ (346) $2,181 Operating Income.......................... 30 56 16 102 Net Income................................ 50 87 (87) 50 As of September 30, 2006: - ------------------------- Total Assets.............................. $1,837 $ 831 $ (570) $2,098 Liabilities not Subject to Compromise..... 1,207 431 (61) 1,577 Liabilities Subject to Compromise......... 2,058 -- (109) 1,949 Total Shareholders' Equity (Deficit)...... (1,428) 400 (400) (1,428)
48 CRITICAL ACCOUNTING POLICIES AND ESTIMATES There were no changes in the nine months ended September 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--THIRD QUARTER 2006 COMPARED WITH THIRD QUARTER 2005
PERFORMANCE PRODUCTS THREE MONTHS ENDED SEPTEMBER 30, -------------------------- (dollars in millions) 2006 2005 ---- ---- Net Sales................................................ $ 291 $ 277 ======= ======= Segment Profit .......................................... $ 31 $ 36 ======= ======= Charges and Reorganization Items included in Segment Profit............................................. $ (6) $ -- ======= =======
The $14 million, or 5 percent, increase in net sales as compared to the third quarter 2005 resulted primarily from higher selling prices of approximately 5 percent and favorable currency exchange rate fluctuations of approximately 2 percent, partially offset by lower sales volumes of approximately 2 percent. Higher average selling prices were experienced in SAFLEX(R) and VANCEVA(R) plastic interlayer products, THERMINOL(R) heat transfer fluids, and LLUMAR(R) and VISTA(R) professional film products. Lower sales volumes were experienced in LLUMAR(R) professional film products and DEQUEST(R) water treatment chemicals. The $5 million, or 14 percent, decrease in segment profit in comparison to the third quarter 2005 resulted primarily from higher charges of $6 million consisting primarily of reorganization items related to contract termination costs and asset write-downs. After consideration of these charges, the increase in profit was due to higher sales, partially offset by higher raw material and energy costs.
INTEGRATED NYLON THREE MONTHS ENDED SEPTEMBER 30, -------------------------- (dollars in millions) 2006 2005 ---- ---- Net Sales................................................ $ 447 $ 384 ======= ======= Segment Profit (Loss).................................... $ 14 $ (10) ======= ======= Charges and Reorganization Items included in Segment Profit (Loss).................................... $ (1) $ -- ======= =======
The $63 million, or 16 percent, increase in net sales as compared to the third quarter 2005 resulted primarily from higher average selling prices of approximately 9 percent and higher sales volumes of approximately 7 percent. Average selling prices increased in carpet fibers, nylon plastics and polymers, and intermediate chemicals in response to the escalating cost of raw materials. Sales volumes increased in intermediate chemicals and nylon plastics and polymers, partially offset by decreases in carpet fibers and industrial nylon fibers. Sales volumes increased as a result of third quarter 2005 sales volumes being negatively impacted by Hurricanes Katrina and Rita, as well as capacity increases in the third quarter 2006 in the nylon plastics and polymers business as a result of the reconfiguration of existing idle assets. The $24 million increase in segment profit as compared to the third quarter 2005 resulted primarily from higher net sales and favorable manufacturing variances, partially offset by higher raw material costs of approximately $50 million. Favorable manufacturing variances were a result of good operating performance in the current year as well as third quarter 2005 operations being negatively impacted by the aforementioned hurricanes. 49 Segment profit in the third quarter 2006 included $1 million of decommissioning and dismantling charges associated with the shutdown of the acrylic fibers and nylon industrial fibers businesses in the second quarter 2005. Segment loss in the third quarter 2005 included $2 million of decontamination costs incurred as part of the shutdown of the acrylic fibers business, offset by a $2 million gain on the sale of the acrylic fibers assets.
CORPORATE EXPENSES THREE MONTHS ENDED SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Corporate Expenses........................................................... $ 13 $ 16 ======= ======= Gains (Charges) included in Corporate Expenses........................... $ -- $ (3) ======= =======
With the exception of a $3 million charge in 2005, corporate expenses remained consistent in comparing the three months ended September 30, 2006 and 2005, respectively. The $3 million loss resulted from curtailment and settlement activities as a result of amendments to Solutia's pension and postretirement plans.
EQUITY EARNINGS FROM AFFILIATES THREE MONTHS ENDED SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Equity Earnings from Affiliates not included in Reportable Segment Profit...... $ 7 $ 13 ======= ======= Charges included in Equity Earnings from Affiliates............................ $ (1) $ (1) ======= =======
Equity earnings from affiliates decreased by $6 million in the third quarter 2006 compared to the third quarter 2005. This decline was primarily a result of the sale of the Astaris joint venture in the fourth quarter 2005 and lower selling prices at the Flexsys joint venture in the third quarter 2006 in comparison to the third quarter 2005.
INTEREST EXPENSE THREE MONTHS ENDED SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Interest Expense............................................................. $ 29 $ 20 ======= ======= Charges included in Interest Expense..................................... $ (3) $ -- ======= =======
The $9 million, or 45 percent, increase in interest expense in the third quarter 2006 compared to the third quarter 2005 resulted principally from higher debt outstanding during the third quarter 2006 than in the comparable period of 2005. In addition, the third quarter 2006 results included a $3 million charge related to the refinancing of SESA's Euronotes.
REORGANIZATION ITEMS, NET THREE MONTHS ENDED SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Reorganization Items, net.................................................... $ (19) $ (15) ======= ======
Reorganization items, net are presented separately in the Condensed Consolidated Statement of Operations and represent items of income, expense, gain, or loss that are realized or incurred by Solutia because it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items incurred in the third quarter 2006 included $13 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 50 employees approved by the bankruptcy court; and $5 million of other reorganization charges primarily involving costs incurred with the shut-down of certain non-strategic businesses. Reorganization items incurred in the third 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; $1 million net gain for adjustments to record certain pre-petition claims at estimated amounts of the allowed claims; and $1 million of other reorganization charges primarily involving costs incurred with exiting the acrylic fibers operations.
INCOME TAX EXPENSE THREE MONTHS ENDED SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Income Tax Expense .......................................................... $ 4 $ 5 ===== =====
Solutia's income tax expense in the third 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 September 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 SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Income from Discontinued Operations, net of tax.............................. $ 50 $ 1 ===== =====
Income from discontinued operations consists of the results of Solutia's pharmaceutical services business. As described in Note 5 to the accompanying condensed consolidated financial statements, on May 23, 2006, SESA agreed to sell its pharmaceutical services business to Dishman. Closing of the sale occurred on August 22, 2006. Included in the results of discontinued operations for the three months ended September 30, 2006 is a gain on the sale of $49 million. RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2005
PERFORMANCE PRODUCTS NINE MONTHS ENDED SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Net Sales.................................................................. $ 885 $ 843 ======= ======= Segment Profit ............................................................ $ 119 $ 105 ======= ======= Charges and Reorganization Items included in Segment Profit............ $ (9) $ (7) ======= =======
The $42 million, or 5 percent, increase in net sales as compared to the nine months ended September 30, 2005 resulted primarily from higher sales volumes of approximately 3 percent and an increase in average selling prices of approximately 3 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) 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 51 VANCEVA(R) plastic interlayer products, THERMINOL(R) heat transfer fluids, and LLUMAR(R) and VISTA(R) professional film products. The unfavorable exchange rate fluctuations occurred primarily as a result of a stronger U.S. dollar in relation to the Euro in comparison to the nine months ended September 30, 2005. The $14 million, or 13 percent, increase in segment profit in comparison to the nine months ended September 30, 2005 resulted principally from higher net sales, favorable manufacturing variances resulting from improved capacity utilization, and benefits related to 100 percent ownership in Quimica, partially offset by higher raw material costs. Segment profit in 2006 included $5 million for contract termination costs and certain asset write-downs, $3 million of severance and retraining costs, and $1 million for restructuring charges. Segment profit in the nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, ------------------------ (dollars in millions) 2006 2005 ---- ---- Net Sales.................................................................. $ 1,296 $ 1,262 ======= ======= Segment Profit............................................................. $ 4 $ 3 ======= ======= Charges and Reorganization Items included in Segment Profit............ $ (4) $ (11) ======= =======
The $34 million, or 3 percent, increase in net sales as compared to the nine months ended September 30, 2005 resulted primarily from higher average selling prices of approximately 9 percent, partially offset by lower sales volumes of approximately 6 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 carpet fibers, partially offset by higher sales volumes in intermediate chemicals and nylon plastics and polymers. The $1 million increase in the segment profit in comparison to the nine months ended September 30, 2005 resulted primarily from higher net sales, partially offset by unfavorable manufacturing costs and higher raw material costs of approximately $95 million. 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, during the first quarter of this year. Partially offsetting this impact is favorable manufacturing variances experienced in the third quarter 2006, as compared to the third quarter 2005 due to third quarter 2005 operations being negatively impacted by Hurricanes Katrina and Rita. Segment profit in 2006 included approximately $3 million of decommissioning and dismantling costs primarily due to the shut-down of the 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 $4 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, and a $2 million gain from the sale of certain acrylic fibers assets.
CORPORATE EXPENSES NINE MONTHS ENDED SEPTEMBER 30, ------------------------ (dollars in millions) 2006 2005 ---- ---- Corporate Expenses........................................................... $ 26 $ 41 ======= ======= Gains (Charges) included in Corporate Expenses........................... $ 11 $ (3) ======= =======
With the exception of $11 million of net gains recorded in 2006 and $3 million of charges recorded in 2005, corporate expenses remained consistent in comparing the nine months ended September 30, 2006 to the comparable period in 2005, with benefits from cost reduction measures offsetting inflationary increases in corporate 52 expenses. The net gains include a $20 million 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 10 of the accompanying condensed 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. The $3 million charge recorded in 2005 resulted from curtailment and settlement activities as a result of amendments to Solutia's pension and postretirement plans.
EQUITY EARNINGS FROM AFFILIATES NINE MONTHS ENDED SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Equity Earnings from Affiliates not included in Reportable Segment Profit.... $ 28 $ 46 ------- ------- Equity Earnings from Affiliates included in Reportable Segment Profit........ $ -- $ 2 ------- ------- Equity Earnings from Affiliates.............................................. $ 28 $ 48 ======= ======= Gains (Charges) included in Equity Earnings from Affiliates............. $ (2) $ 5 ======= =======
Equity earnings from affiliates decreased by $20 million in comparison to the nine months ended September 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 nine months ended September 30, 2006 in comparison to the same period in 2005. In addition, results in the nine months ended September 30, 2006 included a $2 million restructuring charge from the Flexsys joint venture, while the results for the nine months ended September 30, 2005 included a non-operational gain of $5 million in the Flexsys joint venture.
INTEREST EXPENSE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Interest Expense............................................................. $ 79 $ 64 ======= ======= Gains (Charges) included in Interest Expense............................ $ (4) $ -- ======= =======
The $15 million, or 23 percent, increase in interest expense in 2006 in comparison to the nine months ended September 30, 2005 resulted principally from higher debt outstanding in the nine months ended September 30, 2006 than in the comparable period of 2005. In addition, results in the nine months ended September 30, 2006 included a $3 million charge related to SESA's Euronotes refinancing and a $1 million charge related to the amendment of the DIP facility.
REORGANIZATION ITEMS, NET NINE MONTHS ENDED SEPTEMBER 30, ------------------------ (dollars in millions) 2006 2005 ---- ---- Reorganization Items, net.................................................... $ (51) $ (35) ======= =======
Reorganization items, net are presented separately in the Condensed Consolidated Statement of Operations and represent items of income, expense, gain, or loss that are realized or incurred by Solutia because it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items incurred in the nine months ended September 30, 2006 included: $40 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; $9 million of other reorganization charges primarily involving costs incurred with exiting certain non-strategic businesses; $4 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; and a $2 million net gain from adjustments to record certain pre-petition claims at estimated amounts of the allowed claims. Reorganization items 53 incurred in the nine months ended September 30, 2005 included: $37 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; a $29 million net gain representing the difference between the settlement amount of certain pre-petition obligations and the corresponding amounts previously recorded; $10 million of net charges for adjustments to record certain pre-petition claims at estimated amounts of the allowed claims; $10 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; and $7 million of other reorganization charges primarily involving costs incurred with the exit from the acrylic fibers business.
INCOME TAX EXPENSE NINE MONTHS ENDED SEPTEMBER 30, ------------------------ (dollars in millions) 2006 2005 ---- ---- Income Tax Expense........................................................... $ 11 $ 18 ======= =======
Solutia's income tax expense in the nine months ended September 30, 2006 and 2005 was primarily a result of foreign income taxes. The decrease in income tax expense is due to tax benefits realized from utilization of Flexsys tax losses in certain foreign jurisdictions, as well as the loss incurred due to the environmental provision booked in the first quarter related to a non-US operating site. 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 nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, ------------------------- (dollars in millions) 2006 2005 ---- ---- Income from Discontinued Operations, net of tax.............................. $ 58 $ 4 ======= =======
Income from discontinued operations consists of the results of Solutia's pharmaceutical services business. As described in Note 5 to the accompanying condensed consolidated financial statements, on May 23, 2006, SESA agreed to sell its pharmaceutical services business to Dishman. Closing of the sale occurred on August 22, 2006. Included in the results of discontinued operations for the nine months ended September 30, 2006 is a gain on the sale of $49 million as well as a tax gain of $5 million. The tax gain resulted from the reversal of a valuation allowance established as a result of the merger of CarboGen and AMCIS subsidiaries of the pharmaceutical services business into one legal entity. SUMMARY OF EVENTS AFFECTING COMPARABILITY Charges and gains recorded in the nine months ended September 30, 2006 and 2005, and other events affecting comparability have been summarized in the tables below (dollars in millions). 54
2006 -------------------------------------------------------------------- PERFORMANCE INTEGRATED CORPORATE/ INCREASE/(DECREASE) PRODUCTS NYLON OTHER CONSOLIDATED ------------------ -------- ----- ----- ------------ IMPACT ON: Cost of goods sold.......................... $ -- $ -- $ 9 $ 9 (a) -- -- (20) (20) (b) 1 -- -- 1 (c) Marketing and administrative expenses....... 1 -- -- 1 (c) -------------------------------------------------------------------- OPERATING INCOME IMPACT..................... (2) -- 11 9 Interest expense ........................... -- -- (1) (1) (d) -- -- (3) (3) (e) Equity earnings from affiliates............. -- -- (2) (2) (f) Loss on debt modification................... -- -- (8) (8) (d) Reorganization items, net................... (7) (4) (40) (51) (g) -------------------------------------------------------------------- PRE-TAX INCOME STATEMENT IMPACT............. $ (9) $ (4) (43) $(56) ==================================================== Income tax impact........................... (3) (h) ---------------- AFTER-TAX INCOME STATEMENT IMPACT........... $(53) ================ 2006 EVENTS - ----------- a) Environmental charge in the first quarter 2006 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) 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 10 of the accompanying condensed consolidated financial statements ($20 million pre-tax and after-tax). c) Restructuring costs related principally to severance and retraining costs ($2 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) Solutia refinanced its Euronotes in July 2006 and recorded early extinguishment costs at the time of refinancing ($3 million pre-tax and $2 million after-tax). See the Financial Condition and Liquidity section below for further description of the Euronotes refinancing. f) Restructuring charges at Flexsys, Solutia's 50 percent owned joint venture ($2 million pre-tax and after-tax). g) Reorganization items, net consist of the following: $40 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; $9 million of other reorganization charges primarily involving costs incurred with exiting certain non-strategic businesses; $4 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; and a $2 million net gain from adjustments to record certain pre-petition claims at estimated amounts of the allowed claims. ($51 million pre-tax and after-tax) h) With the exception of items (a), (c) and (e) 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.
55
2005 ------------------------------------------------------------------ PERFORMANCE INTEGRATED CORPORATE/ INCREASE/(DECREASE) PRODUCTS NYLON OTHER CONSOLIDATED ------------------- -------- ----- ----- ------------ IMPACT ON: Cost of Goods Sold...................... $ -- $ -- $ 3 $ 3 (a) ------------------------------------------------------------------ OPERATING INCOME IMPACT................. -- -- (3) (3) Equity earnings from affiliates......... -- -- 5 5 (b) Reorganization items, net............... $ (7) (11) 17 (35) (c) ------------------------------------------------------------------ PRE-TAX INCOME STATEMENT IMPACT......... $ (7) $(11) $(15) (33) =================================================== Income tax impact....................... -- (d) --------------- AFTER-TAX INCOME STATEMENT IMPACT....... $(33) =============== 2005 EVENTS ----------- a) Net pension and other postretirement benefit plan curtailments and settlements as a result of amendments to Solutia's pension and postretirement plans ($3 million pre-tax and after-tax - see note d) below). b) Non-operational gain in the Flexsys joint venture ($5 million pre-tax and after-tax - see note d) below). c) Reorganization items, net consist of the following: $37 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; a $29 million net gain representing the difference between the settlement of amount of certain pre-petition obligations and the corresponding amounts previously recorded; $10 million of net charges for adjustments to record certain pre-petition claims at estimated amounts of the allowed claims; $10 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; and $7 million of other reorganization charges primarily involving costs incurred with the exit from the acrylic fibers business. ($35 million pre-tax and after-tax - see note d) below). d) The above items are considered to have like pre-tax and after-tax impact, as the tax benefit realized from the charges is offset by the increase in valuation allowance for U.S. deferred tax assets resulting from uncertainty as to their recovery as a result of Solutia's Chapter 11 filing.
FINANCIAL CONDITION AND LIQUIDITY As discussed in Note 1 to the accompanying condensed consolidated financial statements, Solutia is operating as a debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code. As a result of the uncertainty surrounding Solutia's current circumstances, it is difficult to predict 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 nine months ended September 30, 2006. Cash used in continuing operations was $213 million in the nine months ended September 30, 2006, a change of $205 million from $8 million used in continuing operations for the comparable period of 2005. This year over year increase in cash used in operations was primarily attributable to higher pension contributions of approximately $161 million and increases in working capital items, including an $80 million increase in trade receivables resulting from higher net sales and an increase in days sales outstanding due to a shift in sales mix within Integrated Nylon of lower carpet and higher plastic and polymers sales, partially offset primarily by receipt of a dividend from Flexsys. 56 Capital spending increased $28 million to $75 million in the nine months ended September 30, 2006, compared to $47 million in the comparable period of 2005. The expenditures in the nine months ended September 30, 2006 were primarily to fund certain strategic initiatives in the Performance Products and Integrated Nylon segments, as well as various capital improvements and certain cost reduction projects. Net cash used for the acquisition of Quimica (as described in Note 5 to the accompanying condensed 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 nine months ended September 30, 2005. Net proceeds provided by the divestiture of the pharmaceutical services business (as described in Note 5 to the accompanying condensed consolidated financial statements) totaled $69 million. Solutia used $51 million of the proceeds from the sale to pay down SESA's (euro) 200 million credit facility entered into on July 26, 2006 and closed on August 1, 2006 (as described in Note 12 to the accompanying condensed consolidated financial statements). Total debt of $1,521 million as of September 30, 2006, including $668 million subject to compromise and $853 million not subject to compromise, increased by $306 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 nine months ended September 30, 2006, of which $300 million resulted from the March 2006 amendment to the DIP facility (as described below), partially offset by $51 million payment on SESA's (euro) 200 million credit facility (as described above). In addition, as a result of the Chapter 11 filing, Solutia was in default on all its debt agreements as of September 30, 2006, with the exception of its DIP credit facility and the Facility Agreement. Solutia's working capital decreased by $259 million to $(221) million at September 30, 2006, compared to $38 million at December 31, 2005. The change was primarily a result of higher short-term debt from additional DIP borrowings as well as a decrease of $45 million related to the sale of the pharmaceutical services business as noted above, partially offset by higher cash on-hand and an increase in trade receivables resulting from higher net sales. Solutia had a shareholders' deficit of $1,428 million at September 30, 2006 compared to $1,454 million at December 31, 2005. The $26 million decrease in shareholders' deficit resulted primarily from the $50 million net income; partially offset by the $24 million increase in accumulated other comprehensive loss in the nine months ended September 30, 2006. The weighted average interest rate on Solutia's total debt outstanding was approximately 8.4 percent at September 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 8.9 percent at September 30, 2006 compared to 9.8 percent at December 31, 2005. The reductions in the weighted average rate are primarily due to the refinancing of the Euronotes as described below. 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 nine months ended September 30, 2006 and 2005 was approximately $24 million. At September 30, 2006, Solutia's total liquidity was $259 million in the form of $105 million of availability under the DIP credit facility and approximately $154 million of cash on-hand, of which $115 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. Approximately $161 million of these required 2006 contributions were made in the nine months ended September 30, 2006. 57 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 On July 26, 2006, Solutia's indirect 100% owned subsidiary SSI, 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 Facility Agreement occurred on August 1, 2006. SESA used the proceeds of the Facility Agreement 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. The Facility Agreement has a five-year term, with a termination date of July 31, 2011 and an adjustable rate structure of EURIBOR plus 275 basis points. 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 Facility Agreement consists of a (euro) 160 million term loan and a (euro) 40 million term loan. The (euro) 40 million term loan was repaid from the proceeds of the sale of Solutia's pharmaceutical services business during the third quarter 2006 (as further described in Note 5 to the accompanying condensed consolidated financial statements). The Facility Agreement is secured by substantially all of the assets of SESA and its subsidiaries. The Facility Agreement also contains other customary terms and conditions, including certain financial covenants relating to the performance of SESA and its subsidiaries. On September 15, 2006, the parties amended the Facility Agreement to reflect certain non-material modifications to the Facility Agreement. PENNDOT Letter of Credit As a result of the favorable ruling in the PENNDOT litigation matter described in Note 10 to the accompanying condensed consolidated financial statements, in August 2006, Monsanto 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 10 to the accompanying condensed consolidated financial statements for a summary of Solutia's contingencies as of September 30, 2006. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS There have been no material changes in market risk exposures during the nine months ended September 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. 58 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. The Chief Executive Officer and Chief Financial Officer also concluded that, as of the end of the period covered by this Form 10-Q, Solutia's disclosure controls and procedures are effective to provide reasonable assurance that Solutia records, processes, summarizes, and reports the required disclosure information within the specified time periods. Further, 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 September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 59 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"), Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the "First Quarter 10-Q) and Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (the "Second 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 were submitted by the parties in August 2006. The Bankruptcy Court has not yet made a ruling in the JPM Proceeding. Equity Committee Adversary Proceeding. As described in the 2005 Form 10-K, First Quarter 10-Q and Second 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. Solutia and the Unsecured Creditors' Committee have intervened in this adversary proceeding as neutral parties due to the importance of this proceeding with respect to Solutia's bankruptcy case. On September 14, 2006, the Court ruled that while the Equity Committee did not have standing to pursue these claims on behalf of the Debtors, it had standing to pursue its own objections to the claims of Monsanto and Pharmacia. On October 17, 2006, the Bankruptcy Court entered an Order adjourning this adversary proceeding until December 13, 2006 and allowing the Equity Committee, Pharmacia, and Monsanto to submit this matter to mediation in a good faith effort to reach a consensual resolution of the issues between the parties. All proceedings related to this adversary proceeding have been stayed until November 30, 2006, unless the parties agree to extend such date further. FLEXSYS RELATED LITIGATION - -------------------------- As described in the 2005 Form 10-K and the First Quarter 10-Q, 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. Canadian actions against Flexsys. As described in the 2005 Form 10-K, purported class actions have been filed in a number of Canadian provinces against Flexsys and other rubber chemical producers on behalf of purchasers of rubber chemicals and products containing rubber chemicals in the various provinces alleging that collusive sales and marketing activities of the defendants damaged the plaintiff classes. The parties have tentatively reached a global settlement in which Flexsys will pay approximately (CAD) $2.4 million to resolve all four pending class actions in Canada. The settlement must be approved by the courts. 60 CASH BALANCE PLAN LITIGATION - ---------------------------- As described in the 2005 Form 10-K, First Quarter 10-Q, and Second Quarter 10-Q, since October 2005, three cases have been filed by participants in the Solutia Inc. Employees' Pension Plan (the "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. The Scharringhausen plaintiffs voluntarily dismissed their case on April 26, 2006. None of the Debtors, and no individual or entity other than the Pension Plan, has been named as a defendant in any of these cases. The Hammond and Davis plaintiffs have consolidated their actions, and their counsel are cooperating in the representation of the putative class. On September 1, 2006, the Court consolidated the Hammond and Davis actions with cash balance pension plan cases pending in the Southern District of Illinois against Monsanto Company and the Monsanto Company Pension Plan (Walker et al. v. The Monsanto Pension Plan, et al.) and the Pharmacia Cash Balance Pension Plan, Pharmacia Corporation, Pharmacia and Upjohn, Inc., and Pfizer Inc. (Donaldson v. Pharmacia Cash Balance Pension Plan, et al.). A consolidated class action complaint was filed by all of the plaintiffs on September 4, 2006, in which the plaintiffs alleged three separate cause of action against the Pension Plan: (1) the Pension Plan allegedly violates ERISA by terminating interest credits at the age of 55; (2) the Pension Plan was allegedly improperly backloaded in violation of ERISA; and (3) the Pension Plan was allegedly discriminatory on the basis of age. The Pension Plan moved to dismiss all of the pending actions in the consolidated case for plaintiffs' failure to exhaust administrative remedies and failure to join Solutia as a necessary and indispensable party, and those motions are pending. Motions for class certification are due to be filed by the end of 2006. The Pension Plan intends to continue to vigorously defend itself against any and all claims asserted in the consolidated litigation. SOLUTIA INC. V. FMC CORPORATION - ------------------------------- 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, by 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 has set this matter for a bench trial to begin on April 3, 2007. 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. 61 TEXAS COMMISSION ON ENVIRONMENTAL QUALITY ADMINISTRATIVE ENFORCEMENT PROCEEDING - ------------------------------------------------------------------------------- On August 11, 2006 the Executive Director of the Texas Commission on Environmental Quality commenced an administrative enforcement proceeding against Solutia by filing a petition with the Texas Commission on Environmental Quality. The petition alleges certain violations of the State of Texas air quality program. The Executive Director requests that an administrative penalty, the amount of which is immaterial, be assessed and that Solutia undertake corrective actions to ensure compliance with the Texas Health and Safety Code and the rules of the Commission in connection with alleged self-reported unauthorized emission events and deviations of air permits. Solutia answered the petition on September 1, 2006, asserted affirmative defenses and requested a contested enforcement case hearing. Solutia is pursuing settlement discussions with the Commission. No date has yet been set for a hearing. ITEM 6. EXHIBITS See the Exhibit Index at page 64, of this report. 62 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: November 7, 2006 63 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.1 Amendment to Share and Asset Purchase Agreement entered into on August 22, 2006 between Solutia Europe S.A./N.V. and Dishman Pharmaceuticals & Chemicals Ltd.* 10.2 (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 (incorporated by reference to Exhibit 10.1 of Solutia's Form 10-Q for the quarter ended June 30, 2006) and amendment and restatement thereof dated September 15, 2006 filed herewith 10.3 2006 Solutia Annual Incentive Program (incorporated by reference to Exhibit 10.1 of Solutia's Form 8-K filed on September 28, 2006) 11 Omitted--Inapplicable; see "Condensed Consolidated Statement of Operations" on page 1 31(a) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31(b) Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *Confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, for portions of these exhibits that contain confidential commercial and financial information. 64 EX-10.1 2 ex10p1.txt Exhibit 10.1 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 AMENDMENT TO SHARE AND ASSET PURCHASE AGREEMENT THIS AMENDMENT TO SHARE AND ASSET PURCHASE AGREEMENT (this "Amendment"), dated as of August 22, 2006, is entered into by and between --------- SOLUTIA EUROPE S.A./N.V., a Belgian corporation (societe anonyme/naamloze vennootschap) (the "Seller") and DISHMAN PHARMACEUTICALS & CHEMICALS LIMITED, ------ a company organized under the laws of the Republic of India (the "Buyer"). ----- WHEREAS, the Seller and the Buyer have entered into that certain Share and Asset Purchase Agreement dated as of May 23, 2006 (the "Purchase -------- Agreement") pursuant to which the Buyer has agreed to purchase the outstanding - --------- shares of capital stock of Amcis AG ("Amcis") and CarboGen AG ("CarboGen") and ----- -------- certain other assets of the Seller and its Affiliates; WHEREAS, as contemplated in Section 5.4(e) of the Purchase Agreement CarboGen merged into Amcis with the surviving entity being CARBOGEN AMCIS AG; and WHEREAS, the parties hereto desire to amend the Agreement; NOW, THEREFORE, in consideration of the foregoing premises, and the covenants, representations and warranties set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged and accepted; the parties hereto hereby agree as follows: 1. DEFINITIONS. Capitalized terms used herein without definition ----------- shall have their respective meanings assigned in the Purchase Agreement. 2. NEW DEFINITIONS. Section 1.1 of the Purchase Agreement is hereby --------------- amended by adding the following new definitions in their proper alphabetical order: "CarboGen Amcis" means CARBOGEN AMCIS AG, a company -------------- organized under the laws of Switzerland and a successor-in-interest (by merger) to CarboGen and Amcis. "Effective Time" means 00:01 a.m. on August 1, 2006 -------------- in Brussels, Belgium. "Interim Period" means a period commencing at the -------------- Effective Time and ending at the Closing Time. "Reimbursement Costs" means the following (without ------------------- duplication): (i) all liabilities incurred with respect to any Transferred Employee, any person who would have been a Transferred Employee if the Closing had occurred at the Effective Time and Specified Employee who is employed after the Effective Time (collectively, the "Employees"), such --------- liabilities to include, without limitation, salary and other cash compensation, income and employment tax withholdings, the cost of all employee benefits (including, without limitation, matching and other employer contributions to any retirement plan, severance benefits, the costs of providing health and other welfare benefits, and fringe benefits), automobile allowances, business expenses (including travel expenses), liabilities incurred under any labor or employment law, workers' compensation costs, and the proportional share of office expenses (as reasonably determined by the Seller), in each case incurred by Seller or any of its Affiliates (other than CarboGen Amcis) with respect to the Employees with respect to the Interim Period; (ii) the aggregate amount to be paid by Seller and its affiliates (other than CarboGen Amcis) pursuant to Section 5.11(h); (iii) the aggregate amount of the Fees (as defined in the Transition Services Agreement) that would have been payable pursuant to the Transition Services Agreement with respect to the Interim Period had the Seller commenced provision of Services (as defined therein) thereunder on August 1, 2006; (iv) all amounts paid or payable by Seller or any of its Affiliates (other than CarboGen Amcis) with respect to any Assumed Contract (including Microsoft Licenses and licenses with Saratoga, in each case that are Transferred Assets) and other Transferred Assets with respect to the Interim Period; (v) $7,155.52, which amount represents the pro rata amount paid by Seller and its Affiliates with respect to licenses pursuant to certain Oracle License and Services Agreement between Oracle Corporate and SOI, dated as of May 10, 2004 that are Transferred Assets with respect to the period from August 1, 2006 through May 12, 2007; (vi) a portion of insurance premiums paid by Seller and its Affiliates (other than CarboGen Amcis) with respect to insurance policies applicable to CarboGen Amcis during the period from August 1, 2006 through August 22, 2006; and (vii) all other expenses (including capital investment) of the Seller or any of its Affiliates incurred with respect to the Interim Period with respect to the Shares, the Business, the Transferred Assets, the US Business and Employees "****** Specified Employee" means ****** set forth ---------------------- in Part II of Schedule 1.5 of the Disclosure Schedule. "UK Specified Employees" means the individuals set ---------------------- forth in Part I of Schedule 1.5 of the Disclosure Schedule. "US Business" means the business of SOI consisting ----------- solely of the services to be performed by US Business Employees, the employment agreements of such US Business Employees and the assets held by or in the name of SOI set forth in Schedule 1.3 of the Disclosure Schedule. ------------ 3. NEW DEFINITIONAL CROSS REFERENCES. Section 1.2 of the Purchase --------------------------------- Agreement is hereby amended by adding the following cross-references for definitions in their proper alphabetical order: Additional Dividend Amount 2.5(b)(i)(A) Cash Dividend Amount 5.4(b) CS Loan Agreement 5.4(c) Effective Time Cash Balance 5.4(b) Employee 1.1 Estimated Reimbursement Costs 2.4(f)(i) Final Reimbursement Costs 2.4(f)(ii) Social Security Payment 5.11(a)(iv)
4. CLOSING TIME. The definition of "Closing Time" in Section 1.1 of ------------ the Purchase Agreement is hereby amended and restated in its entirety to read as follows: "Closing Time" means 00:01 a.m. on the Closing Date ------------ in Brussels, Belgium. 5. FINAL WORKING CAPITAL STATEMENT. The definition of "Final Working ------------------------------- Capital Statement" in Section 1.1 of the Purchase Agreement is hereby amended and restated in its entirety as follows: "Final Working Capital Statement" means the net ------------------------------- working capital statement that sets forth the Working Capital as of the Effective 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). 6. MICROSOFT LICENSES. The definition of "Microsoft Licenses" in ------------------ Section 1.1 of the Purchase Agreement is hereby amended and restated in its entirety as follows: "Microsoft Licenses" means the license ------------------ confirmations (and the following 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: (i) 390 Microsoft Desktop Professional Licenses, (ii) 6 Microsoft Windows Server Licenses, and (iii) 3 Microsoft Exchange Server Enterprise licenses. 7. PRE-CLOSING WORKING CAPITAL STATEMENT. The definition of ------------------------------------- "Pre-Closing Working Capital Statement" in Section 1.1 of the Purchase Agreement is hereby amended and restated in its entirety as follows: "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 Effective Time, prepared by the Seller in accordance with Section 2.4(a). 8. WORKING CAPITAL. The definition of "Working Capital" in Section --------------- 1.1 of the Purchase Agreement is hereby amended by (i) deleting the word "and" after clause (iii) hereof and (ii) adding the following new clause (v) after clause (iv) thereof: and (v) any payables or accruals in connection with the Social Security Payment by CarboGen Amcis described in the second to last sentence of Section 5.11(a)(vi). 9. AUSTRALIAN CONTRACTS. The Purchase Agreement is hereby amended by -------------------- adding the following new Section 2.2(d) after Section 2.2(c) of the Purchase Agreement: (d) notwithstanding the foregoing, the Australian Contracts that are Transferred Assets shall be sold, transferred and assigned to CarboGen Amcis prior to the Closing and CarboGen Amcis shall assume and agree to pay, perform and discharge all Assumed Liabilities with respect to such Transferred Assets. From and after the Closing the Buyer shall cause CarboGen Amcis to pay, perform and discharge such Assumed Liabilities. 10. SECTION 2.2(b). Section 2.2(b) of the Purchase Agreement is -------------- hereby amended and restated as follows: (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 ----------- Effective 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 Effective 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 and not required to be indemnified by the Buyer pursuant to Section 6.03 (such Liabilities with respect to the Transferred Assets to be assumed by the Buyer pursuant to this Section 2.2(b), the "Assumed Liabilities"); ------------------- 11. SECTION 2.4. Section 2.4 of the Purchase Agreement is hereby ----------- amended as follows: (a) The heading to Section 2.4 is hereby amended and restated as follows: "Working Capital Adjustment/Reimbursement Costs." ---------------------------------------------- (b) Section 2.4(a) of the Purchase Agreement is hereby amended by deleting the reference to "five Business Days" in the first sentence thereof and replacing such reference with a reference to "two Business Days". (c) Section 2.4 of the Purchase Agreement is hereby amended by inserting the following new Section 2.4(f) after the existing Section 2.4(e): (f) Reimbursement Costs. ------------------- (i) No later than two Business Days prior to the Closing, the Seller shall prepare and deliver to the Buyer a good faith estimate of the Reimbursement Costs that have not been reimbursed by the Buyer or its Affiliates (including CarboGen Amcis) to Seller or its Affiliates (other than CarboGen Amcis) prior to Closing (the "Estimated --------- Reimbursement Costs"). ------------------- (ii) Within thirty (30) days following the Closing Date, the Seller shall deliver to the Buyer an invoice setting forth the actual Reimbursement Costs and documentations reasonably evidencing such Reimbursement Costs that have not been reimbursed by the Buyer or its Affiliates (including CarboGen Amcis) to Seller or its Affiliates (other than CarboGen Amcis) (the "Final Reimbursement Costs"). ------------------------- (iii) Within seven (7) Business Days after receipt of the Final Reimbursement Costs, 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: (A) if the Final Reimbursement Costs exceed the Estimated Reimbursement Costs, the Buyer shall pay to the Seller an amount equal to such excess; and (B) if the Estimated Reimbursement Costs exceed the Final Reimbursement Costs, the Seller shall pay to the Buyer an amount equal to such excess. (iv) All amounts to be paid pursuant to Section 2.4(f)(iii) 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(f)(iii) concurrently with such payment. (v) In the event there is any dispute between the Seller and the Buyer with respect to the Final Reimbursement Costs and such dispute is not resolved within seven (7) days after the delivery by Seller of the Final Reimbursement Costs pursuant to Section 2.4(f)(ii), such dispute shall be resolved by the Independent Accounting Firm as set forth in Section 2.4(c) as if the amount in dispute was the Final Working Capital Value and payments to be made, if any, pursuant to Section 2.4(f)(iii), notwithstanding any provision to the contrary in Section 2.4(f)(iii), shall be made within three Business Days after the final resolution of all such disputes. 12. SECTION 2.5(a). Section 2.5(a) of the Purchase Agreement is -------------- hereby amended by deleting the words "Gibson, Dunn & Crutcher LLP, 47 Avenue des Perdix, 1410 Waterloo, Brussels, Belgium" and adding the words "Gibson, Dunn & Crutcher LLP, Avenue Louise 480, 1050 Brussels, Belgium, Brussels, Belgium" in lieu thereof. 13. SECTION 2.5(b)(i). Section 2.5(b)(i) of the Purchase Agreement is ----------------- hereby amended and restated in its entirety to read as follows: (i) the Buyer shall deliver to the Seller an amount equal to the sum of the following amounts in immediately available funds in U.S. Dollars by wire transfer to a bank account designated in writing by the Seller to the Buyer at least five Business Days prior to the Closing Date: (A) an amount equal to the Estimated Purchase Price minus $1,330,026 (the "Additional ---------- Dividend Amount"); --------------- (B) $296,000 as additional purchase price; and (C) the Estimated Reimbursement Costs. 14. SECTIONS 2.5(b)(vi) AND (vii). Sections 2.5(b)(vi) and (vii) of ----------------------------- the Purchase Agreement are hereby amended and restated in their entirety to read as follows: (vi) the Buyer shall deliver to the Seller evidence, reasonably satisfactory to the Seller, that each of the signatories of the Buyer and each of its relevant Affiliates is authorized to execute, deliver and perform this Agreement and the Ancillary Agreements executed or to be executed by the Buyer or any Affiliate of the Buyer; (vii) the Seller shall deliver to the Buyer evidence, reasonably satisfactory to the Buyer, that each of the relevant Affiliates of the Seller, as applicable, is 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 15. SECTION 2.5(c). Section 2.5(c) of the Purchase Agreement is -------------- hereby amended and restated in its entirety to read as follows: (c) The economic benefit (Nutzen) and the risk (Gefahr) with regard to the Shares and the Transferred Assets and the Business shall be for the Buyer as of and after the Effective Time. The Buyer shall assume the Assumed Liabilities on the Closing Date as set forth in Sections 2.2(a) and (b) and (ii) the Buyer shall indemnify the Seller with respect to (i) all liabilities with respect to the Shares, the Business and the US Business with respect to the Interim Period as set forth in Section 6.3(f) and (ii) all Assumed Liabilities. 16. SECTION 3.20(a). Section 3.20(a) of the Purchase Agreement is --------------- hereby amended by deleting "." at the end of such section and adding the following proviso at the end of thereof: provided, however, that the rights, title and interest of -------- ------- Solutia Australia PTY Limited in and to the Australian Contracts that are Transferred Assets will be sold, transferred and assigned to CarboGen Amcis prior to the Closing. 17. SECTION 5.1. The last paragraph of Section 5.1 is hereby amended ----------- by deleting "or" before clause (e), deleting "." at the end of clause (e) and adding the following at the end thereof: and (f) the entry into an amendment to the Specified Employment Agreement of the ****** Specified Employee mutually acceptable to the Buyer, the Seller and the ****** Specified Employee. Notwithstanding any provision to the contrary in this Agreement or any Ancillary Agreement, Seller shall have no liability for breach of any representation, warranty or covenant in this Agreement or any Ancillary Agreement or any other liability to the extent such liability arises out actions or omission of any employee of Seller or any of its Affiliates, including CarboGen Amcis, taken or omitted to be taken at the instruction or request of the Buyer and Buyer shall indemnify, hold harmless against and reimburse Seller for all Damages incurred by the Seller as a result of any such actions or omissions. 18. SECTION 5.4(b). Section 5.4(b) is hereby amended and restated in -------------- its entirety to read as follows: (b) Immediately prior to the Closing, CarboGen Amcis shall transfer (through a dividend or by other means) to the Seller or one or more of its Affiliates (other than CarboGen Amcis), an amount (the "Cash Dividend Amount") equal to (i) the amount -------------------- of cash or cash equivalents of the Swiss Companies at the Effective Time (the "Effective Time Cash Balance"), PLUS --------------------------- (ii) $1,215,268, which represents all amounts (including principal, interest and other charges, if any) that would have been payable to CarboGen Amcis by the Seller or any of its Affiliates (other than CarboGen Amcis) in satisfaction of any debt or other obligation of the Seller or any of its Affiliates (other than CarboGen Amcis) to CarboGen Amcis pursuant to Section 5.4(a) had such amounts been paid immediately prior to the Effective Time, MINUS (iii) $4,486,588, which represents all amounts (including principal, interest and other charges, if any) that would have been payable by CarboGen Amcis to its Affiliates in satisfaction of any debt or any other obligation of CarboGen Amcis to its Affiliates pursuant to Section 5.4(a) had such amounts been paid immediately prior to the Effective Time, PLUS (iv) the Additional Dividend Amount. 19. SECTION 5.4(c). Section 5.4(c) of the Purchase Agreement is -------------- hereby amended and restated in its entirety to read as follows: (c) On or prior to the Closing the Seller shall satisfy in full or otherwise discharge all Third-Party Debt (other than (i) that certain Loan Agreement dated October 29, 2001 between Amcis (as predecessor in interest to CarboGen Amcis) and Credit Suisse (as amended by that certain letter from Credit Suisse dated October 18, 2004, the "CS Loan Agreement"), (ii) that certain Letter of ----------------- Indemnity, No. 0445-20465, in the amount of CHF 17,000 issued by Amcis to Credit Suisse, and the related Bank Guarantee, (iii) that certain Bank Guarantee Nr. 0446-20631 issued by Credit Suisse in favor of Flint AG in the amount of CHF 1,500,000.--, (iv) that certain Letter of Indemnity No. 0446-20631 dated July 19, 2001 by Amcis for the benefit of the Credit Suisse in the amount of CHF 1,500,000.-- made in connection with the Bank Guarantee by Credit Suisse in favor of Flint AG, each as amended, restated and otherwise modified from time to time in accordance therewith). 20. SECTION 5.9. Section 5.9 of the Purchase Agreement is hereby ----------- amended by adding the following language at the end of such section: In all events, the Buyer shall provide to the Seller a release, in form and substance reasonably satisfactory to the Seller, releasing SOI from its obligations under that certain CS Guarantee (the "Release"), no later than ------- September 30, 2006. In no event shall SOI or any of its Affiliates have any liability to the Buyer with respect to the CS Guarantee and the Buyer, on its own behalf and on behalf of its Affiliates (including, after the Closing, CarboGen Amcis) hereby waives any claims against SOI and/or its Affiliates with respect to the CS Guarantee. All indemnities set forth in Section 6.3(e) are independent indemnities within the meaning of Article 111 of the Swiss Code of Obligations and such indemnities are not limited, neither in time, amount or otherwise. From and after the Closing the Buyer shall ensure that no borrowings, advances or other extensions of credit (including any letters of credits and similar instruments) are made under the CS Loan Agreement until such time as the Seller receives the Release. As promptly after the Closing, but in no event later than ten (10) Business Days after the Closing, the Buyer shall enter into an amendment to the CS Loan Agreement with Credit Suisse, in form and substance satisfactory to the Seller, to reflect that: (i) the aggregate commitment amount under the CS Loan Agreement shall be reduced to CHF 1,517,000.--., (ii) no further borrowings, advances or other extensions of credit (including any letters of credits and similar instruments) shall be permitted pursuant to the CS Loan Agreement until the Seller shall have received the Release, (iii) no further amendments or modifications to the CS Loan Agreement shall be permitted without written consent of SOI or Seller until and unless the Seller shall have received the Release, and (iv) SOI and the Seller shall be third party beneficiaries of such amendment. The Buyer shall deliver an original of such amendment to the Seller within than ten (10) Business Days after the Closing. 21. SECTION 5.11(a)(i). The last sentence of Section 5.11(a)(i) of ------------------ the Purchase Agreement is hereby amended and restated in its entirety to reads as follows: For purposes of this Agreement, a "Transferred Employee -------------------- means (x) all Swiss Business Employees and European Business Employees, in each case except for the Specified Employees, (y) all U.S. Business Employees and UK Specified Employees who accept the offer of employment from the Buyer or one of its Affiliates 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 and (z) the ****** Specified Employee. 22. SECTION 5.11(a)(ii). Section 5.11(a)(ii) of the Purchase ------------------- Agreement is hereby amended and restated in its entirety to read as follows: (ii) Swiss Business Employees. All Swiss ------------------------ Business Employees shall remain employed by the Swiss Companies immediately following the Closing. 23. SECTION 5.11(a)(iv). Section 5.11(a)(iv) of the Purchase ------------------- Agreement is hereby amended and restated in its entirety as follows: (iv) The Seller shall, or shall cause one of its Affiliates to, terminate the Specified Employment Agreements with the UK Specified Employees (or obtain resignation of the UK Specified Employees) immediately prior to Closing; provided that the UK 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 such Specified Employees may agree. Immediately after the Closing the Buyer shall cause CarboGen Amcis to ratify an amendment to the Specified Employment Agreement with the ***** Specified Employee entered into on or about August 11, 2006. 24. SECTION 5.11(a)(vi). The proviso in the last sentence of Section ------------------- 5.11(a)(vi) of the Purchase Agreement is hereby amended and restated in its entirety to read as follows and the following additional sentence is hereby added to at the end of such Section 5.11(a)(vi): provided, however that (i) 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 and (ii) subject to the next sentence of this Section 5.11(a)(vi), the Buyer shall cause CarboGen Amcis to pay the Social Security Contributions to be paid in connection with the payments to the ****** Specified Employee of the ****** (as described in Section 5 of the ****** Specified Employee Agreement as in effect prior to Closing) and the amount of the ****** described in Section 6 of such agreement (the "Social ------ Security Payment"). After the Buyer provides evidence of ---------------- the payment of such Social Security Contributions reasonably satisfactory to the Seller, the Seller shall promptly reimburse the Buyer for the amount so paid. 25. SECTION 5.11(h). Section 5.11 of the Purchase Agreement is hereby --------------- amended by adding the new Section 5.11(h): (h) Initial Wage Payment. Notwithstanding -------------------- any provision to the contrary in this Section 5.11, on or prior to August 31, 2006, the Seller shall pay, or shall cause to be paid, to Transferred Employees (other than Swiss Business Employees) all wages, compensation and other benefits due and payable to such Transferred Employees by Seller and its Affiliates or the Buyer and its Affiliates with respect to the period from August 1, 2006 until August 31, 2006, which amount shall in no event exceed $150,000 in the aggregate; provided, that the Buyer shall have reimbursed the Seller and its Affiliates therefore in full as set forth in Section 2.4(f). 26. SECTION 5.12. Section 5.12 of the Purchase Agreement is hereby ------------ amended by adding the following new sentence at the end of Section 5.12: Notwithstanding the foregoing, the Australian Contracts that are Transferred Assets shall be sold, transferred and assigned to CarboGen Amcis prior to the Closing and CarboGen Amcis shall assume and shall agree to pay, perform and discharge all Assumed Liabilities with respect to such Transferred Assets. From and after the Closing the Buyer shall cause CarboGen Amcis to pay, perform and discharge such Assumed Liabilities. 27. SECTION 5.16. The Purchase Agreement is hereby amended by adding ------------ the following new Section 5.16 after Section 5.15 of the Purchase Agreement: Section 5.16 Directors' Release. As soon as ------------------ practicable after the Closing the Buyer shall cause the shareholders of CarboGen Amcis to hold a shareholders meeting and approve a resolution granting each of the directors of CarboGen Amcis, who resigned in connection with the transactions contemplated by this Agreement, a full release and discharge with respect to such director's activities during the current fiscal year. 28. SECTION 6.2(c). Section 6.2(c) of the Purchase Agreement is -------------- hereby amended and restated in its entirety to read as follows: (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 the Effective Time, 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 and not required to be indemnified by the Buyer pursuant to Section 6.3; or 29. SECTION 6.3. Section 6.3 of the Purchase Agreement is hereby ----------- amended by (i) deleting "or" at the end of Section 6.3(c), (ii) amending and restating Section 6.3(d) as follows and (iii) adding the following new Sections 6.3(e), 6.3(f) and 6.3(g): (d) any Action against the Seller or any of its Affiliates arising out of, or in connection with, (i) the termination of any Specified Employment Agreement by any Affiliate of the Seller or (ii) the amendment to the Specified Employment Agreement with the ****** Specified Employee that is effective as of the Closing (including any Action arising out of, or in connection with, the resignation or termination of any Specified Employee or amendment to the Specified Employment Agreement of the ****** Specified Employee, in each case in connection with the transactions contemplated by this Agreement) (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); (e) that certain guarantee dated as of October 10, 2001, issued by SOI for the benefit of Credit Suisse in connection with the CS Loan Agreement; (f) any event or occurrence, liability or claim of any Person against the Seller or any of its Affiliates with respect to the Shares, the Transferred Employees, the Transferred Assets or the US Business with respect to the Interim Period, including the following: (i) any Damages with respect to Employees that are incurred with respect to the Interim Period, (ii) all Reimbursement Costs to the extent Seller and its Affiliates (other than CarboGen Amcis) have not been reimbursed by the Buyer or its Affiliates; and (iii) any other cost or expense or liability arising out of or relating to the Shares, the Business, the Transferred Assets or the U.S. Business during the Interim Period. 30. SECTION 7.3(a). Section 7.3(a) is hereby amended by deleting the -------------- words "both when made and as of the Closing Date, or in the case" and replacing such words with the words "both when made and as of the Effective Time (except in the case of the representations and warranties set forth in Sections 3.1 through 3.6, 3.12, 3.15, 3.16 and 3.20(a) and (c) (the "Closing ------- Time Representations")) and as of the Closing Time in the case of the Closing - -------------------- Time Representations), provided that in the case". 31. SECTION 9.1. Section 9.1 of the Purchase Agreement is hereby ----------- amended by adding the following sentence at the end of such Section 9.1: Notwithstanding the foregoing, in the event that the Buyer requests the Seller to file or register any of the assignment agreements with respect to any trademarks or patents with any applicable Governmental Authority, the Buyer shall reimburse the Seller for its out-of-pocket costs and expenses associated therewith. 32. SCHEDULE 1.3. Schedule 1.3 of the Disclosure Schedules is hereby ------------ amended and restated in its entirety in the form of Exhibit A hereto. 33. SCHEDULE 1.5. The Purchase Agreement is hereby amended by adding ------------ after Schedule 1.4 of the Disclosure Schedule a new Schedule 1.5 of the Disclosure Schedule in the form of Exhibit B hereto. --------- 34. CLOSING. The parties hereto hereby agree that notwithstanding any ------- provision to the contrary in Section 2.5 of the Purchase Agreement, the Closing shall occur on August 22, 2006. 35. DISHMAN NAME. The Buyer hereby represents and warrants that ------------ "Dishman Pharmaceuticals & Chemicals Ltd" and "Dishman Pharmaceuticals and Chemicals Ltd." are Dishman Pharmaceuticals and Chemicals Limited and the Purchase Agreement and all other documents executed and delivered by any of the aforementioned entities shall be deemed executed and delivered by Dishman Pharmaceuticals and Chemicals Limited and shall represent a valid, binding and enforceable obligation of Dishman Pharmaceuticals and Chemicals Limited. 36. ASSIGNMENT. The Buyer acknowledges that it has assigned its ---------- rights to purchase the Shares to Dishman Pharma Solutions AG and to purchase Transferred Assets by Dishman Pharma Solutions AG, Dishman Europe Limited and Dishman Holland B.V. as set forth in the Bills of Sale and Assignment and Assumption Agreements executed and delivered by such Affiliates of the Buyer as the date hereof. 37. SOCIAL SECURITY PAYMENT. In the event the parties hereto agree on ----------------------- a mutually acceptable alternative with respect to Social Security Payment described in paragraph 24 above, to the extent necessary the parties hereto shall enter into an amendment to the Purchase Agreement to reflect such alternative. 38. EFFECTIVENESS; EFFECT ON PURCHASE AGREEMENT. ------------------------------------------- (a) This Amendment shall become effective upon execution and delivery hereof of all parties hereto. (b) On and after the date hereof, each reference in the Purchase Agreement to "this Agreement", "herein", "hereof" or words of similar import shall mean and be a reference to the Purchase Agreement as amended hereby. (c) Except as specifically amended by this Amendment, the Purchase Agreement shall remain in full force and effect and the Purchase Agreement, as amended by this Amendment, is hereby ratified and confirmed in all respects. 39. GOVERNING LAW. This Amendment and all disputes or controversies ------------- arising out of or relating to this Amendment or the transactions contemplated hereby or thereby shall be governed by, and construed in accordance with, the Laws of Switzerland. 40. COUNTERPARTS. This Amendment 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. 41. FACSIMILE SIGNATURE. This Amendment may be executed by facsimile ------------------- signature and a facsimile signature shall constitute an original for all purposes. 42. HEADINGS. The descriptive headings contained in this Amendment -------- are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. [Signature Pages Follow] IN WITNESS WHEREOF, the Seller and the Buyer have caused this Amendment 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/ Kristel Deroover ------------------------------- Name: Kristel Deroover Title: Proxyholder DISHMAN PHARMACEUTICALS AND CHEMICALS LIMITED By: /s/ J.R. Vyas ------------------------------- Name: J.R. Vyas Title: Managing Director EX-10.2 3 ex10p2.txt Exhibit 10.2 AMENDMENT AND RESTATEMENT AGREEMENT Dated 15 September 2006 for SOLUTIA SERVICES INTERNATIONAL S.C.A./COMM. V.A. arranged by CITIGROUP GLOBAL MARKETS LIMITED with CITIBANK INTERNATIONAL PLC acting as Agent and CITIBANK, N.A. acting as Security Agent RELATING TO A FACILITY AGREEMENT DATED 26 July 2006 Linklaters Ref: SBL/SLG CONTENTS CLAUSE PAGE 1. Definitions and interpretation...................................1 2. Representations..................................................2 3. Amendment........................................................2 4. Transaction expenses.............................................2 5. Miscellaneous....................................................2 6. Governing law....................................................2 THE SCHEDULES SCHEDULE PAGE SCHEDULE 1 The Parties.................................................... SCHEDULE 2 Form of Amended Agreement...................................... THIS AGREEMENT is dated 15 September 2006 and made between: (1) SOLUTIA EUROPE SA/NA (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 guarantors (the "ORIGINAL GUARANTORS"); (4) CITIGROUP GLOBAL MARKETS LIMITED as mandated lead arranged (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: 1. DEFINITIONS AND INTERPRETATION 1.1 DEFINITIONS In this Agreement: "AMENDED AGREEMENT" means the Original Facility Agreement, as amended and restated in the form set out in Schedule 2 (Form of Amended Agreement). "EFFECTIVE DATE" means the date of this Agreement. "ORIGINAL FACILITY AGREEMENT" means the (euro)200,000,000 Facility Agreement dated 26 July 2006 between the Company, the Borrower, the Original Guarantors, the Agent, the Arranger, the Security Agent and the Original Lenders. 1.2 INCORPORATION OF DEFINED TERMS (a) Unless a contrary indication appears, a term defined in the Original Facility Agreement has the same meaning in this Agreement. (b) The principles of construction set out in the Original Facility Agreement shall have effect as if set out in this Agreement. 1.3 CLAUSES In this Agreement any reference to a "Clause" or a "Schedule" is, unless the context otherwise requires, a reference to a Clause of or a Schedule to this Agreement. 1.4 THIRD PARTY RIGHTS A person who is not a party to this Agreement 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. 1.5 DESIGNATION In accordance with the Original Facility Agreement, each of the Company and the Agent designate this Agreement as a Finance Document. - 1 - 2. REPRESENTATIONS Each Obligor makes the Repeating Representations to each Finance Party but as if references in Clause 18 (Representations) of the Original Facility Agreement were instead to this Agreement and, on the Effective Date, to the Amended Agreement. 3. AMENDMENT 3.1 AMENDMENT With effect from the Effective Date the Original Facility Agreement shall be amended and restated in the form set out in Schedule 2 (Form of Amended Agreement). 3.2 CONTINUING OBLIGATIONS The provisions of the Original Facility Agreement and the other Finance Documents shall, save as amended by this Agreement, continue in full force and effect. 4. TRANSACTION EXPENSES The Company shall within three Business Days of demand reimburse the Agent for the amount of all costs and expenses (including legal fees) reasonably incurred by the Agent in connection with the negotiation, preparation, printing and execution of this Agreement and any other documents referred to in this Agreement. 5. MISCELLANEOUS 5.1 INCORPORATION OF TERMS The provisions of Clause 30 (Notices) and Clause 37 (Enforcement) of the Original Facility Agreement shall be incorporated into this Agreement as if set out in full in this Agreement and as if references in those clauses to "this Agreement" are references to this Agreement. 5.2 COUNTERPARTS This Agreement 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 this Agreement. 6. GOVERNING LAW This Agreement is governed by English law. This Agreement has been entered into on the date stated at the beginning of this Agreement. - 2 - SIGNATURES THE COMPANY SOLUTIA SERVICES INTERNATIONAL S.C.A./COMM. V. A. By: KRISTEL DEROOVER Ad-hoc proxy-holder ORIGINAL GUARANTORS SOLUTIA EUROPE SA/NV By: VEERLE HENDRICKX Managing Director CP FILMS VERTRIEBS GmbH By: ARTHUR BOWYER Managing Director ORIGINAL LENDER CITIBANK, N.A. By: DEVEN STHANKIYA THE AGENT CITIBANK INTERNATIONAL PLC By: DEVEN STHANKIYA THE SECURITY AGENT CITIBANK, N.A. By: NIALL CAMPBELL Vice President THE ARRANGER CITIGROUP GLOBAL MARKETS LIMITED By: DEVEN STHANKIYA - 3 - (euro)200,000,000 FACILITY AGREEMENT dated 26 July 2006 (as amended and restated on 15 September 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 Facility 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.................................................30 3. Purpose........................................................31 4. Conditions of Utilisation......................................31 SECTION 3 UTILISATION 5. Utilisation....................................................33 SECTION 4 REPAYMENT, PREPAYMENT AND CANCELLATION 6. Repayment......................................................34 7. Prepayment and cancellation....................................34 SECTION 5 COSTS OF UTILISATION 8. Interest.......................................................43 9. Interest Periods...............................................45 10. Changes to the calculation of interest.........................46 11. Fees...........................................................47 SECTION 6 ADDITIONAL PAYMENT OBLIGATIONS 12. Tax gross-up and indemnities...................................48 13. Increased costs................................................51 14. Other indemnities..............................................52 15. Mitigation by the Lenders......................................54 16. Costs and expenses.............................................54 SECTION 7 GUARANTEE AND SECURITY 17. Guarantee and indemnity........................................55 SECTION 8 REPRESENTATIONS, UNDERTAKINGS AND EVENTS OF DEFAULT 18. Representations................................................60 19. Information undertakings.......................................67 20. Financial covenants............................................74 21. General undertakings...........................................81 22. Events of Default..............................................89 SECTION 9 CHANGES TO PARTIES 23. Changes to the Lenders.........................................93 24. Changes to the Obligors........................................97 -i- SECTION 10 THE FINANCE PARTIES 25. Role of the Facility Agent and the Arranger....................99 26. Conduct of business by the Finance Parties....................105 27. Sharing among the Finance Parties.............................105 SECTION 11 ADMINISTRATION 28. Payment mechanics.............................................107 29. Set-off.......................................................109 30. Notices.......................................................110 31. Calculations and certificates.................................111 32. Partial invalidity............................................112 33. Remedies and waivers..........................................112 34. Amendments and waivers........................................112 35. Counterparts..................................................113 SECTION 12 GOVERNING LAW AND ENFORCEMENT 36. Governing law.................................................114 37. Enforcement...................................................114 THE SCHEDULES SCHEDULE PAGE SCHEDULE 1 The Original Parties........................................... SCHEDULE 2 Conditions precedent........................................... SCHEDULE 3 Requests....................................................... SCHEDULE 4 Mandatory Cost formulae........................................ SCHEDULE 5 Certificates................................................... SCHEDULE 6 Form of Accession Letter....................................... SCHEDULE 7 Form of Compliance Certificate................................. SCHEDULE 8 Disposals...................................................... SCHEDULE 9 Timetables..................................................... SCHEDULE 10 Security Principles........................................... SCHEDULE 11 List of Security Documents.................................... -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 facility agent of the other Finance Parties (the "FACILITY 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; -1- (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 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 Facility 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 Facility 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 Facility 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 Facility 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. -2- "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 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: -3- (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 (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 two Business Days 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 Facility Agent. "COMPLIANCE CERTIFICATE" means a certificate substantially in the form set out in Schedule 7 (Form of Compliance Certificate). -4- "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 Facility 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: (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); -5- (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. "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 Facility 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 -6- (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; 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, -7- 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 Facility 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 Facility Agent and the 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 Facility Agent and the Company. "FINANCE PARTY" means the Facility 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); -8- (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. "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. -9- "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 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 Facility 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 -10- 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 Facility 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. "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 Facility 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 -11- 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 (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 -12- (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. "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; -13- (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; (l) of all or any part of the shares in or assets of CP Films Vertriebs GmbH, provided that the Facility 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 -14- (q) of Cash Equivalent Investments: (i) for Cash; or (ii) in exchange for other Cash Equivalent Investments; (r) pursuant to any Permitted Merger; (s) 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; (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). -15- "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 (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); -16- (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; -17- (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 -18- definition of Permitted Guarantee, exceed (euro)5,000,000 (or its equivalent in another currency or currencies). "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 Facility 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 -19- (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). "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; -20- (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 (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 -21- 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: (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 (including for the avoidance of doubt, any legal mortgage ("wettelijke hypotheek")) 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; -22- (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; (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 Facility 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); -23- (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. "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 Facility 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 Facility 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: -24- (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 (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 -25- the agreed page is replaced or service ceases to be available, the Facility 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). "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: -26- (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). "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 Facility 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 Facility 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. -27- "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 "FACILITY 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 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. -28- (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. -29- 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 -30- (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. 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 Facility 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 Facility 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 Facility 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: -31- (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. 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. -32- SECTION 3 UTILISATION 5. UTILISATION 5.1 DELIVERY OF A UTILISATION REQUEST The Borrower may utilise a Facility by delivery to the Facility 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. -33- 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 Facility Agent upon becoming aware of that event; (b) upon the Facility 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 Facility Agent has notified the Borrower or, if earlier, the date specified by the Lender in the notice delivered to the Facility 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 Facility 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 Facility 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 -34- 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. 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 Facility 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 permanent representative of the statutory manager of the Borrower on a fair value basis and the Borrower shall provide a certificate signed by such permanent representative of the statutory manager to the Facility 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: -35- (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; (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 Facility 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 -36- 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. (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 Facility 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. -37- (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 Facility 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. (g) The Borrower irrevocably authorises the Facility 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 Facility 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 Facility 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 Facility 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 Facility 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 Facility Agent. -38- 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: (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 Facility 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): -39- (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 Facility 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. 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 Facility 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 Facility 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 Facility 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: -40- (i) any Lender becomes a Non-Consenting Lender; or (ii) any Lender becomes a Non-Funding Lender, the Borrower may, if it gives the Facility 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; (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 Facility 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 Facility Agent shall not affect its role as the Facility 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. -41- (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 Facility 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. -42- 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 Facility 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 Facility 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 Facility Agent shall promptly notify the relevant Lenders and the Borrower of the determination of a rate of interest under this Agreement. -43- 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. (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 Facility 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 2:5 2.75 ---------------------------------------------------------------------- Equal to or lower than 2.50 2:5 but higher than 2.0:1 ---------------------------------------------------------------------- Equal to or lower than 2.0:1 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 Facility 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): -44- (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 (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 Facility 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 Facility Agent any amount necessary to put the Facility 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. -45- (b) Each Selection Notice for a Loan is irrevocable and must be delivered to the Facility 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 Facility 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 Facility Agent (acting on the instructions of all the Lenders participating in the relevant Loan). (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 Facility 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 Facility 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 Facility 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: -46- (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 Facility 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 Facility 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 Facility Agent or the Company so requires, the Facility 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. (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 Facility 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 Facility 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. -47- 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 Facility Agent accordingly. Similarly, a Lender shall notify the Facility Agent on becoming so aware in respect of a payment payable to that Lender. If the Facility 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: -48- (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 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 or) 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 Facility 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 Facility 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 Facility 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: -49- (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, 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 Facility Agent of the event which will give, or has given, rise to the claim, following which the Facility Agent shall notify the Company. (d) A Protected Party shall, on receiving a payment from an Obligor under this Clause 12.3, notify the Facility 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 -50- 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 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 Facility 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. -51- 13.2 INCREASED COST CLAIMS (a) A Finance Party intending to make a claim pursuant to Clause 13.1 (Increased Costs) shall notify the Facility Agent of the event giving rise to the claim, following which the Facility Agent shall promptly notify the Company. (b) Each Finance Party shall, as soon as practicable after a demand by the Facility 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; (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. -52- 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 (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 FACILITY AGENT The Company shall promptly indemnify the Facility Agent against any cost, loss or liability incurred by the Facility 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) -53- 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. 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 Facility 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 Facility Agent and the Security Agent for the amount of all costs and expenses (including legal fees) reasonably incurred by the Facility 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. -54- 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: -55- (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; (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. -56- 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 Facility 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; (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 Section 266 (2) A, B and C of the German Commercial Code (Handelsgesetzbuch)) less its reserves for own shares (Section 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 -57- Section 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 Facility Agent shall be deducted from the Guarantor's registered share capital. (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 Facility 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 Facility Agent of an Event of Default, to the Facility 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 Facility 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 SectionSection SS 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 -58- 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 Facility 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 Facility 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. (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. -59- 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: -60- (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; (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. -61- 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) 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. -62- (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 Facility Agent and financial reference periods of the Company consistently applied as at the date of this Agreement. 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, -63- 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 (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 -64- 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 validly licensed to all material Intellectual Property necessary for the conduct of its business as it is being, and is proposed to be, conducted. (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. -65- 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. (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, -66- 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. 19.1 ANNUAL FINANCIAL STATEMENTS The Company shall supply to the Facility 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 Facility Agent (acting on the instructions of any Lender). 19.2 QUARTERLY FINANCIAL STATEMENTS (a) The Company shall supply to the Facility 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 -67- (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 Facility 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 Facility 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: (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. -68- 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 Facility 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 Facility Agent: (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 Facility 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 Facility Agent of a change in accordance with paragraph (b) of this Clause 19.6 the Company and the Facility 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 Facility 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. -69- (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 Facility 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 Facility 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 Facility Agent may reasonably request, about the business, financial performance and prospects of the Group, and such other matters as any Finance Party (through the Facility Agent) may reasonably request. The Facility 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. 19.8 INFORMATION: MISCELLANEOUS The Company shall supply to the Facility Agent (in sufficient copies for all the Lenders, if the Facility 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 -70- 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 Facility Agent) may reasonably request. 19.9 NOTIFICATION OF EVENT OF DEFAULT (a) Each Obligor shall notify the Facility 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 Facility Agent, the Company shall supply to the Facility 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. -71- (b) If requested by the Facility 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 Facility 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 CP Films 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 Facility 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 Facility 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. (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 Facility Agent (the "DESIGNATED WEBSITE") if: (i) the Facility 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 Facility 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 Facility Agent. -72- If any Lender (a "PAPER FORM LENDER") does not agree to the delivery of information electronically then the Facility Agent shall notify the Company accordingly and the Company shall supply the information to the Facility Agent (in sufficient copies for each Paper Form Lender) in paper form. In any event the Company shall supply the Facility Agent with at least one copy in paper form of any information required to be provided by it. (b) The Facility 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 Facility Agent. (c) The Company shall promptly upon becoming aware of its occurrence notify the Facility 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 Facility 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 Facility 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 Facility 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. 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 Facility 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 Facility Agent or any Lender supply, or procure the supply of, such -73- documentation and other evidence as is reasonably requested by the Facility 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 Facility 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 Facility Agent supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Facility Agent (for itself) in order for the Facility 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 Facility Agent, notify the Facility 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 Facility 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 Facility Agent or any Lender supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Facility 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 Facility 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. 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; -74- (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 ------------------------------------------------------------------------------------------------
-75- 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 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). -76- (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 Facility 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 Facility 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 of the Group -77- 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. -78- "DEBT SERVICE" means, in relation to any Relevant Period, the aggregate of: (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); -79- (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 (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. -80- 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. "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 Facility 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, -81- in each case where failure to do so would reasonably be expected to have a Material Adverse Effect. 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 -82- (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. 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 -83- 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. 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. -84- (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 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 Facility 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 Facility 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. -85- (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 Facility Agent or the Security Agent may require acting in accordance with the Security Principles: (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 Facility 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. -86- 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 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 Facility 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 -87- (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 Facility 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 Facility 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 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. -88- 21.27 AMENDMENT TO ARTICLES OF ASSOCIATION OF CP FILMS The Company shall ensure that within 90 days of the date of this Agreement, CP Films Vertriebs GmbH delivers to the Facility 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. 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 Facility 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 Facility 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). -89- (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 Facility 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 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 -90- (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 (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. -91- 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 Facility 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 (iii) declare that all or part of the Utilisations be payable on demand, whereupon they shall immediately become payable on demand by the Facility Agent on the instructions of the Majority Lenders. -92- 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 Facility Agent of written confirmation from the New Lender (in form and substance satisfactory to the Facility 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 Facility 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 Facility 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), -93- 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. (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 Facility 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 Facility 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 Facility 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 -94- (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: (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 Facility 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 Facility 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 Facility 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 Facility 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 Facility 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 -95- (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 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 Facility 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: -96- (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, 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 Facility Agent a duly completed and executed Accession Letter; and (ii) the Facility 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 Facility Agent. (b) The Facility 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 -97- 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. 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. -98- SECTION 10 THE FINANCE PARTIES 25. ROLE OF THE FACILITY AGENT AND THE ARRANGER 25.1 APPOINTMENT OF THE FACILITY AGENT (a) Each other Finance Party appoints the Facility Agent to act as its agent under and in connection with the Finance Documents. (b) Each other Finance Party authorises the Facility Agent to exercise the rights, powers, authorities and discretions specifically given to the Facility 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 Facility 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 FACILITY AGENT (a) The Facility Agent shall promptly forward to a Party the original or a copy of any document which is delivered to the Facility Agent for that Party by any other Party. (b) Except where a Finance Document specifically provides otherwise, the Facility Agent is not obliged to review or check the adequacy, accuracy or completeness of any document it forwards to another Party. (c) If the Facility 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 Facility Agent is aware of the non-payment of any principal, interest, commitment fee or other fee payable to a Finance Party (other than the Facility Agent or the Arranger) under this Agreement, it shall promptly notify the other Finance Parties. (e) The Facility 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 Facility Agent, or the Arranger as a trustee or fiduciary of any other person. (b) Neither the Facility 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. -99- 25.5 BUSINESS WITH THE GROUP The Facility 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. 25.6 RIGHTS AND DISCRETIONS OF THE FACILITY AGENT (a) The Facility 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 Facility 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 Facility Agent may engage, pay for and rely on the advice or services of any lawyers, accountants, surveyors or other experts. (d) The Facility Agent may act in relation to the Finance Documents through its personnel and agents. (e) The Facility 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 Facility 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 Facility Agent shall (i) exercise any right, power, authority or discretion vested in it as Facility 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 Facility 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. -100- (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 Facility 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. (d) In the absence of instructions from the Majority Lenders (or, if appropriate, the Lenders), the Facility Agent may act (or refrain from taking action) as it considers to be in the best interest of the Lenders. (e) The Facility 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 Facility Agent, nor the Arranger: (a) is responsible for the adequacy, accuracy and/or completeness of any information (whether oral or written) supplied by the Facility 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 Facility 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 Facility Agent) may take any proceedings against any officer, employee or agent of the Facility Agent in respect of any claim it might have against the Facility 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 Facility Agent may rely on this Clause 25.9. (c) The Facility 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 Facility Agent if the Facility 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 Facility Agent for that purpose. (d) Nothing in this Agreement shall oblige the Facility 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 Facility Agent and the Arranger that it is solely responsible for any such checks it is -101- required to carry out and that it may not rely on any statement in relation to such checks made by the Facility Agent or the Arranger. 25.10 LENDERS' INDEMNITY TO THE FACILITY 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 Facility 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 Facility Agent (otherwise than by reason of its gross negligence or wilful misconduct) (or in the case of any cost, loss or liability pursuant to Clause 28.10 (Disruption to Payment Systems etc) notwithstanding the Facility Agent's negligence, gross negligence or any other category of liability whatsoever but not including any claim based on the fraud of the Facility Agent) in acting as Facility 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 FACILITY AGENT (a) The Facility Agent may resign and appoint one of its Affiliates acting through an office in the United Kingdom or Belgium as successor by giving notice to the other Finance Parties and the Company. (b) Alternatively the Facility Agent may resign and appoint a successor Facility Agent, provided the successor Facility Agent is (i) a Finance Party or an Affiliate of a Finance Party (after consultation with the Company); or (ii) a successor Facility Agent (which is not a Finance Party or an Affiliate of a Finance Party) acceptable to the Majority Lenders (after consultation with the Company), by giving notice to the other Finance Parties and the Company. (c) If the Facility Agent gives notice of its resignation to the Finance Parties and the Company without appointing a successor Facility Agent, the Majority Lenders (after consultation with the Company) may appoint a successor Facility Agent. (d) If the Majority Lenders have not appointed a successor Facility Agent in accordance with paragraph (c) above within 30 days after notice of resignation was given, the Facility Agent (after consultation with the Company) may appoint a successor Facility Agent (acting through an office in the United Kingdom or Belgium). (e) The retiring Facility Agent shall, at its own cost, make available to the successor Facility Agent such documents and records and provide such assistance as the successor Facility Agent may reasonably request for the purposes of performing its functions as Facility Agent under the Finance Documents. -102- (f) The appointment of the successor Facility Agent shall take effect upon the successor Facility Agent accepting the appointment and the resigning Facility Agent giving notice of his resignation and of the subsequent appointment to the Finance Parties and the Company. (g) The Facility Agent's resignation notice shall only take effect upon the appointment of a successor. (h) Upon the appointment of a successor, the retiring Facility 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. (i) After consultation with the Company, the Majority Lenders may, by notice to the Facility Agent, require it to resign in accordance with paragraph (c) above. In this event, the Facility Agent shall resign in accordance with paragraph (c) above. 25.12 CO-SECURITY FACILITY 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. (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 Facility 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 Facility Agent, it may be treated as confidential to that division or department and the Facility Agent shall not be deemed to have notice of it. 25.14 RELATIONSHIP WITH THE LENDERS (a) The Facility 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. -103- (b) Each Lender shall supply the Facility Agent with any information required by the Facility 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 Facility 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 Facility 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. 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 Facility 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 FACILITY AGENT On the occurrence of an Event of Default which is continuing, any amount payable to the Facility Agent under Clause 14.3 (Indemnity to the Facility Agent), Clause 16 (Costs and expenses) and Clause 25.10 (Lenders' indemnity to the Facility Agent) shall include the cost of utilising the Facility 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 Facility Agent and the Company (each acting reasonably) and notified to the Lenders and is in addition to any fee paid or payable to the Facility Agent under Clause 11 (Fees). 25.18 DEDUCTION FROM AMOUNTS PAYABLE BY THE FACILITY AGENT If any Party owes an amount to the Facility Agent under the Finance Documents, the Facility Agent may, after giving notice to that Party, deduct an amount not exceeding that amount from any -104- payment to that Party which the Facility 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 Facility Agent; (b) the Facility 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 Facility Agent and distributed in accordance with Clause 28 (Payment mechanics), without taking account of any Tax which would be imposed on the Facility Agent in relation to the receipt, recovery or distribution; and (c) the Recovering Finance Party shall, within three Business Days of demand by the Facility Agent, pay to the Facility Agent an amount (the "SHARING PAYMENT") equal to such receipt or recovery less any amount which the Facility 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 Facility 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). -105- 27.3 RECOVERING FINANCE PARTY'S RIGHTS (a) On a distribution by the Facility 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 Facility Agent, pay to the Facility 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. -106- SECTION 11 ADMINISTRATION 28. PAYMENT MECHANICS 28.1 PAYMENTS TO THE FACILITY 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 Facility 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 Facility 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 Facility Agent specifies. 28.2 DISTRIBUTIONS BY THE FACILITY AGENT Each payment received by the Facility 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 Facility 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 Facility 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 Facility 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 Facility Agent under the Finance Documents for another Party, the Facility 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 Facility 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 Facility Agent shall on demand refund the same to the Facility Agent together with interest on that amount from the date of payment to the date of receipt by the Facility Agent, calculated by it to reflect its cost of funds. -107- 28.5 PARTIAL PAYMENTS (a) If the Facility Agent receives a payment that is insufficient to discharge all the amounts then due and payable by an Obligor under the Finance Documents, the Facility Agent shall apply that payment towards the obligations of that Obligor under the Finance Documents in the following order: (i) FIRST, in or towards payment pro rata of any unpaid fees, costs and expenses of the Facility 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 Facility 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 -108- or currency unit of that country designated by the Facility 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 Facility Agent (acting reasonably). (b) If a change in any currency of a country occurs, this Agreement will, to the extent the Facility Agent (acting reasonably and after consultation with the Company) specifies to be necessary, be 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 Facility Agent determines (in its discretion) that a Disruption Event has occurred or the Facility Agent is notified by the Company that a Disruption Event has occurred: (a) Facility 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 Facility Agent may deem necessary in the circumstances; (b) the Facility 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 Facility 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 Facility 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 Facility 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 Facility 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 Facility 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 -109- 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. 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 Facility Agent on or prior to the date on which it becomes a Party; and (c) in the case of the Facility 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 Facility Agent (or the Facility Agent may notify to the other Parties, if a change is made by the Facility 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 Facility 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 Facility 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. -110- 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 Facility Agent shall notify the other Parties. 30.5 ELECTRONIC COMMUNICATION (a) Any communication to be made between the Facility Agent and a Lender under or in connection with the Finance Documents may be made by electronic mail or other electronic means, if the Facility Agent and the relevant Lender: (i) agree that, unless and until notified to the contrary, this is to be an accepted form of communication; (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 Facility 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 Facility Agent only if it is addressed in such a manner as the Facility 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 Facility 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. -111- 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 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 Facility 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); -112- (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 Facility 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 Facility Agent in accordance with the terms of this Agreement, the 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 Facility 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 Facility 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. -113- 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. -114- EX-31.A 4 ex31pa.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: November 7, 2006 /s/ Jeffry N. Quinn --------------------- Jeffry N. Quinn President, Chief Executive Officer and Chairman of the Board EX-31.B 5 ex31pb.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: November 7, 2006 /s/ James M. Sullivan --------------------------- James M. Sullivan Senior Vice President and Chief Financial Officer EX-32.A 6 ex32pa.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 September 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: November 7, 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.B 7 ex32pb.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 September 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: November 7, 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-----