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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
---------
SOLUTIA INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
--------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT
CLASS SEPTEMBER 30, 2000
----- ------------------
COMMON STOCK, $0.01 PAR VALUE 103,537,627 SHARES
----------------------------- ------------------
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<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SOLUTIA INC.
STATEMENT OF CONSOLIDATED INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -----------------------
2000 1999 2000 1999
----- ----- ------ ------
<S> <C> <C> <C> <C>
NET SALES ........................................ $ 774 $ 731 $2,454 $2,094
Cost of goods sold ............................... 631 548 1,954 1,613
----- ----- ------ ------
GROSS PROFIT ..................................... 143 183 500 481
Marketing expenses ............................... 39 38 124 108
Administrative expenses .......................... 39 29 133 91
Technological expenses ........................... 21 21 68 58
Amortization expense ............................. 9 1 24 2
----- ----- ------ ------
OPERATING INCOME ................................. 35 94 151 222
Equity earnings from affiliates .................. 13 5 21 26
Interest expense ................................. (22) (11) (63) (30)
Gain on sale of Polymer Modifiers business ....... 73 -- 73 --
Other income (expense)--net ...................... 4 1 -- 10
----- ----- ------ ------
INCOME BEFORE INCOME TAXES ....................... 103 89 182 228
Income taxes ..................................... 25 28 49 73
----- ----- ------ ------
NET INCOME ....................................... $ 78 $ 61 $ 133 $ 155
===== ===== ====== ======
BASIC EARNINGS PER SHARE ......................... $0.75 $0.55 $ 1.24 $ 1.40
===== ===== ====== ======
DILUTED EARNINGS PER SHARE ....................... $0.74 $0.53 $ 1.22 $ 1.34
===== ===== ====== ======
Weighted average equivalent shares (in millions):
Basic ........................................ 104.3 110.3 106.9 111.1
Effect of dilutive securities:
Common share equivalents--common shares
issuable upon exercise of outstanding stock
options .................................. 1.7 4.1 1.7 4.5
----- ----- ------ ------
Diluted ...................................... 106.0 114.4 108.6 115.6
===== ===== ====== ======
</TABLE>
<TABLE>
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ----- -----
<S> <C> <C> <C> <C>
NET INCOME...................................... $ 78 $ 61 $ 133 $ 155
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments................ (49) 7 (114) (19)
---- ---- ----- -----
COMPREHENSIVE INCOME............................ $ 29 $ 68 $ 19 $ 136
==== ==== ===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
<PAGE>
<TABLE>
SOLUTIA INC.
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 23 $ 28
Trade receivables, net of allowance of $8 in 2000 and $12 in 1999.......... 432 483
Miscellaneous receivables and prepaid expenses............................. 131 131
Deferred income tax benefit................................................ 102 101
Inventories................................................................ 363 371
------ ------
TOTAL CURRENT ASSETS....................................................... 1,051 1,114
PROPERTY, PLANT AND EQUIPMENT:
Land....................................................................... 58 68
Buildings.................................................................. 402 436
Machinery and equipment.................................................... 2,645 2,919
Construction in progress................................................... 367 272
------ ------
Total property, plant and equipment........................................ 3,472 3,695
Less accumulated depreciation.............................................. 2,188 2,379
------ ------
NET PROPERTY, PLANT AND EQUIPMENT.......................................... 1,284 1,316
INVESTMENTS IN AFFILIATES.................................................. 369 377
NET GOODWILL............................................................... 403 511
NET IDENTIFIED INTANGIBLE ASSETS........................................... 213 33
LONG-TERM DEFERRED INCOME TAX BENEFIT...................................... 198 232
OTHER ASSETS............................................................... 179 187
------ ------
TOTAL ASSETS............................................................... $3,697 $3,770
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 327 $ 312
Accrued liabilities........................................................ 544 504
Short-term debt............................................................ 522 511
------ ------
TOTAL CURRENT LIABILITIES.................................................. 1,393 1,327
LONG-TERM DEBT............................................................. 778 802
POSTRETIREMENT LIABILITIES................................................. 965 998
OTHER LIABILITIES.......................................................... 538 561
SHAREHOLDERS' EQUITY:
Common stock (authorized, 600,000,000 shares, par value $0.01)
Issued: 118,400,635 shares in 2000 and 1999............................ 1 1
Additional contributed capital......................................... (141) (137)
Treasury stock, at cost (14,863,008 shares in 2000 and 8,859,764
shares in 1999)...................................................... (289) (209)
Unearned ESOP shares....................................................... (12) (18)
Accumulated other comprehensive income..................................... (143) (29)
Reinvested earnings........................................................ 607 474
------ ------
SHAREHOLDERS' EQUITY....................................................... 23 82
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $3,697 $3,770
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
<PAGE>
<TABLE>
SOLUTIA INC.
STATEMENT OF CONSOLIDATED CASH FLOW
(DOLLARS IN MILLIONS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----- -----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income................................................................. $ 133 $ 155
Adjustments to reconcile to Cash From Operations:
Items that did not use (provide) cash:
Deferred income taxes............................................. 6 --
Depreciation and amortization..................................... 139 112
Amortization of deferred credits.................................. (8) (7)
Other............................................................. 17 65
Working capital changes that provided (used) cash:
Trade receivables................................................. 50 (61)
Inventories....................................................... (24) 18
Accounts payable and accrued liabilities.......................... 8 (21)
Other............................................................. (2) 4
Net pretax gains from asset disposals................................. (79) --
Other items........................................................... (65) 16
----- -----
CASH FROM OPERATIONS....................................................... 175 281
----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases.................................... (180) (189)
Acquisition and investment payments, net of cash acquired.................. (109) (203)
Investment and property disposal proceeds.................................. 210 16
----- -----
CASH FROM INVESTING ACTIVITIES............................................. (79) (376)
----- -----
FINANCING ACTIVITIES:
Long-term debt proceeds.................................................... 196 --
Net change in short-term debt.............................................. (201) 76
Treasury stock purchases................................................... (98) (70)
Common stock issued under employee stock plans............................. 2 7
----- -----
CASH FROM FINANCING ACTIVITIES............................................. (101) 13
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... (5) (82)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR.......................................................... 28 89
----- -----
END OF PERIOD.............................................................. $ 23 $ 7
===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
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<PAGE>
SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BASIS OF PRESENTATION
Solutia Inc. and its subsidiaries produce and market a variety of
high-performance chemical-based materials. Solutia's strategic focus is built on
key strengths, including complex manufacturing capabilities, process engineering
expertise, polymer chemistry, fiber technology, technical service, and customer
problem solving. These world-class skills are applied to create solutions and
products for customers in the consumer, household, automotive, and industrial
products industries. Solutia's products and services include Saflex(R) plastic
interlayer; adhesives; window and industrial films; liquid, powder and
waterborne resins; Vydyne(R) and Ascend(TM) nylon polymers; nylon fibers; and
process research and technology services to the pharmaceutical industry.
These financial statements should be read in conjunction with the audited
financial statements and notes to consolidated financial statements included in
Solutia's 1999 Annual Report to shareholders and incorporated by reference in
Solutia's Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 10, 2000.
The accompanying unaudited consolidated financial statements reflect all
adjustments that, in the opinion of management, are necessary to present fairly
the financial position, results of operations, comprehensive income, and cash
flows for the interim periods reported. Such adjustments are of a normal,
recurring nature. The results of operations for the three-month and nine-month
periods ended September 30, 2000, are not necessarily indicative of the results
to be expected for the full year.
2. ACQUISITIONS AND DIVESTITURES
During the third quarter of 2000, Solutia completed the sale of its Polymer
Modifiers business and related manufacturing facilities to Ferro Corporation for
approximately $130 million. As a result of this transaction, Solutia recognized
a $73 million pretax gain ($46 million aftertax). Solutia's results of
operations for the nine months ended September 30, 2000, included net sales of
approximately $93 million and operating income of approximately $16 million,
from the Polymer Modifiers business. During the second quarter of 2000, Solutia
recognized a $15 million pretax gain ($9 million aftertax) on the sale of a
minority interest in P4 Production L.L.C., a phosphorus manufacturing venture.
During the first quarter of 2000, Solutia completed two acquisitions in the
specialty products segment, which provide custom process and technology services
to the global pharmaceutical industry. In the first acquisition, which closed on
February 10, Solutia acquired CarboGen Holdings AG. CarboGen is a leading
independent process research and development firm, serving the global
pharmaceutical industry. In the second acquisition, which closed on March 24,
Solutia purchased AMCIS AG. AMCIS serves the global pharmaceutical industry by
developing production processes and by manufacturing active ingredients for
clinical trials and small-volume commercial drugs. The combined purchase price
for these acquisitions was approximately $118 million, which was financed with
commercial paper and the assumption of debt.
Both of the acquisitions have been accounted for using the purchase method.
The allocations of the purchase price to the assets and liabilities acquired
resulted in current assets of $17 million, non-current assets of $27 million,
goodwill of $57 million, other intangible assets of $41 million, current
liabilities of $21 million, and non-current liabilities of $3 million. Goodwill
is being amortized over its estimated useful life of 20 years and other
intangible assets are being amortized over their estimated useful lives, which
average 18 years.
Results of operations for CarboGen and AMCIS are included in Solutia's
results of operations from the acquisition dates. The results of operations for
the acquired businesses were not material to Solutia's consolidated results of
operations for the three-month and nine-month periods ended September 30, 2000.
On December 22, 1999, Solutia acquired Vianova Resins from Morgan Grenfell
Private Equity Ltd. for approximately 1.2 billion deutsche marks (approximately
$617 million), which was financed with commercial
4
<PAGE>
<PAGE>
paper and the assumption of debt. Vianova Resins was a leading European producer
of resins and additives for coatings and technical applications for the
specialty, industrial and automotive sectors.
The acquisition has been accounted for using the purchase method. The
allocation of the purchase price to the assets and liabilities acquired resulted
in current assets of $192 million, non-current assets of $227 million, goodwill
of $321 million, other intangible assets of approximately $163 million, current
liabilities of $99 million, and non-current liabilities of $187 million.
Goodwill is being amortized over its estimated useful life of 20 years and other
intangible assets are being amortized over their estimated useful lives, which
average 19 years.
3. RESTRUCTURING AND BUSINESS COMBINATION RESERVES
During the second quarter of 2000, Solutia completed plans to integrate
Vianova Resins operations with Solutia's resins business and service
organizations and recorded a liability of $11 million to accrue for costs of
integration, in accordance with Emerging Issues Task Force Issue 95-3,
"Recognition of Liabilities in Connection with a Purchase Business
Combination." The integration plans include employment reductions of
approximately 130 people, primarily from Vianova Resin's service
organizations located in more than 10 countries. In addition, the plans
include amounts to shut down certain Vianova Resins sales offices. The
integration actions are expected to be carried out by the end of the second
quarter of 2001.
The following table summarizes the Vianova Resins integration costs and
amounts utilized to carry out those plans:
<TABLE>
<CAPTION>
EMPLOYMENT SHUTDOWN OF
REDUCTIONS FACILITIES TOTAL
---------- ----------- -----
<S> <C> <C> <C>
Balance at June 30, 2000 $ 10 $ 1 $ 11
Amounts utilized -- -- --
---- --- ----
BALANCE AT SEPTEMBER 30, 2000 $ 10 $ 1 $ 11
==== === ====
</TABLE>
As part of the integration of Vianova Resins with Solutia's resins
businesses, Solutia identified excess production capacity for certain Solutia
resins products that will allow for the consolidation of production facilities.
As a result, Solutia decided to exit operations at the Port Plastics site in
Addyston, Ohio. An $8 million ($5 million aftertax) charge to cost of goods sold
was recorded in the second quarter of 2000 to carry out the exit plan. The
charge included $2 million to write down plant assets to their fair value of
approximately $1 million, $2 million of dismantling costs, and $4 million of
estimated costs for which Solutia is contractually obligated under an operating
agreement. Fair value was determined by discounting future cash flows using an
appropriate discount rate. Under the operating agreement, Solutia is required to
provide 24 months notice of intent to exit and to pay contractually obligated
costs for an additional 18 months thereafter to a third-party operator. The
contractually obligated costs represent direct manufacturing, overhead,
utilities, and severance. The financial impact will not be material to Solutia
as production will be shifted to other production facilities.
The following table summarizes the 2000 restructuring charge and amounts
utilized to carry out those plans:
<TABLE>
<CAPTION>
SHUTDOWN OF ASSET OTHER
FACILITIES IMPAIRMENTS COSTS TOTAL
----------- ----------- ----- -----
<S> <C> <C> <C> <C>
Balance at April 1, 2000 $-- $-- $-- $--
Charges taken 2 2 4 8
Amounts utilized -- (2) -- (2)
--- --- --- ---
Balance at June 30, 2000 2 0 4 6
Amounts utilized -- -- -- --
--- --- --- ---
BALANCE AT SEPTEMBER 30, 2000 $ 2 $ 0 $ 4 $ 6
=== === === ===
</TABLE>
During February 1999, certain equipment critical to Solutia's ammonia
production process failed. Based on an analysis of the economics of purchased
ammonia versus the cost to repair the equipment, Solutia decided to exit the
ammonia business. A $28 million ($18 million aftertax) charge to cost of goods
sold was recorded in the first quarter of 1999 to complete the exit plan. The
charge included $2 million to write down the assets to their
5
<PAGE>
<PAGE>
fair value of approximately $4 million, $4 million of dismantling costs, and
$22 million of estimated costs for which Solutia is contractually obligated
under an operating agreement. The contractually obligated costs represent an
estimate of the direct manufacturing, overhead, and utilities that Solutia is
required to pay to a third-party operator during a 36-month termination period.
During the first quarter of 2000, Solutia entered into an agreement for the
dismantling of those assets by a third-party and as a result, transferred the
liability for dismantling to the third-party. During the third quarter of 2000,
Solutia reached an agreement with the plant operator for the final settlement
of the contractually obligated costs. As a result, Solutia transferred the
liability for the contractually obligated costs to accrued liabilities. For
the quarter ended March 31, 1999, net sales for the ammonia business were
$1 million. Operating income for the same period in 1999 was minimal.
The following table summarizes the 1999 restructuring charge and amounts
utilized to carry out those plans:
<TABLE>
<CAPTION>
SHUTDOWN OF ASSET OTHER
FACILITIES IMPAIRMENTS COSTS TOTAL
----------- ----------- ----- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $-- $-- $ -- $ --
Charges taken 4 2 22 28
Amounts utilized -- (2) (6) (8)
--- --- ---- ----
Balance at December 31, 1999 4 -- 16 20
Amounts utilized (4) -- (3) (7)
--- --- ---- ----
Balance at March 31, 2000 -- -- 13 13
Amounts utilized -- -- (1) (1)
--- --- ---- ----
Balance at June 30, 2000 -- -- 12 12
Amounts utilized -- -- (12) (12)
--- --- ---- ----
BALANCE AT SEPTEMBER 30, 2000 $-- $-- $ -- $ --
=== === ==== ====
</TABLE>
4. INVESTMENT IN AFFILIATES
In April 2000, Astaris LLC, a joint venture between Solutia and FMC
Corporation, started operations to manufacture and market phosphorus chemicals.
Solutia contributed its Phosphorus Derivatives business to the joint venture in
exchange for a 50 percent ownership share. Net assets contributed to the venture
totaled approximately $87 million. Solutia accounts for the joint venture using
the equity method of accounting. During the third quarter of 2000, Solutia
received $85 million from Astaris representating a tax-free distribution and
repayment of working capital loans.
5. ASSET IMPAIRMENT
During the second quarter of 2000, Solutia recorded a $6 million
($4 million aftertax) impairment charge to administrative expenses for the
write down of capitalized software costs related to the formation of the Astaris
joint venture. The software had previously been fully dedicated to Solutia's
Phosphorus Derivatives business. Impairment was indicated by a significant
change in the extent and manner in which Astaris was expected to utilize the
asset under a transition services agreement. As a result, Solutia performed a
review under Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," from which it determined that the asset was impaired. The carrying value of
the asset was written down to its estimated fair value, as determined by
discounting expected future cash flows, using an appropriate discount rate.
6
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<PAGE>
6. INVENTORY VALUATION
The components of inventories as of September 30, 2000, and December 31,
1999, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Finished goods................................................ $244 $260
Goods in process.............................................. 108 121
Raw materials and supplies.................................... 111 109
---- ----
Inventories, at FIFO cost..................................... 463 490
Excess of FIFO over LIFO cost................................. (100) (119)
---- ----
TOTAL......................................................... $363 $371
==== ====
</TABLE>
7. CONTINGENCIES
The former Monsanto Company (now Pharmacia Corporation) is a party to a
number of lawsuits and claims relating to Solutia, for which Solutia assumed
responsibility in the spinoff. In addition, Solutia is a named party to a number
of lawsuits and claims. Solutia intends to defend all suits and claims
vigorously. Such matters arise out of the normal course of business and relate
to product liability; government regulation, including environmental issues;
employee relations; and other issues. Certain of the lawsuits and claims seek
damages in very large amounts. Although the results of litigation cannot be
predicted with certainty, management's belief is that the final outcome of such
litigation will not have a material adverse effect on Solutia's consolidated
financial position, profitability or liquidity in any one year.
8. INCOME TAXES
In July 2000, the German Bundestag approved the Tax Reduction Act. Among
other items, the Tax Reduction Act reduced the corporate tax rate beginning in
January 1, 2001. In accordance with SFAS No. 109, "Accounting for Income Taxes,"
Solutia recognized income of $7 million to Income Taxes to record the net effect
of the change on deferred income tax assets and liabilities.
9. SUBSEQUENT EVENT
On October 12, 2000, the printing ink resins unit and a small phenolics
production unit at Wiesbaden, Germany were severely damaged by an explosion and
fire. No fatalities, serious injuries, or environmental damage resulted from the
incident. Solutia is investigating the cause of the accident and evaluating the
extent of damages. The majority of the losses are expected to be covered by
insurance. However, possible losses not recoverable from insurance could result
in Solutia recognizing expenses related to this incident of approximately
$10 million during the fourth quarter of 2000. Additionally, Solutia may
ultimately recognize a gain related to this event as a result of future
insurance settlements. The results of operations from the production unit at
Wiesbaden, Germany were not material to Solutia's consolidated results of
operations for the three-month and nine-month periods ended September 30, 2000.
7
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10. SEGMENT DATA
Segment data for the three months and the nine months ended September 30,
2000, and 1999, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
INTER- INTER-
SEGMENT SEGMENT
NET SALES SALES PROFIT NET SALES SALES PROFIT
--------- ------- ------ --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
SEGMENT:
Performance Films................................. $174 $ -- $ 44 $190 $ -- $ 50
Specialty Products................................ 199 -- 46 158 1 42
Integrated Nylon.................................. 396 -- 31 384 -- 67
---- ---- ---- ---- ---- ----
SEGMENT TOTALS....................................... 769 -- 121 732 1 159
RECONCILIATION TO CONSOLIDATED TOTALS:
Sales eliminations................................ -- -- (1) (1)
Other revenues.................................... 5 --
Less unallocated service costs:
Cost of goods sold.............................. (17) (12)
Marketing, administrative and technological
expenses...................................... (60) (52)
Amortization expense.............................. (9) (1)
Equity earnings (loss) from affiliates............ 13 5
Interest expense.................................. (22) (11)
Gain on sale of polymer modifiers business........ 73 --
Other income (expense)--net....................... 4 1
CONSOLIDATED TOTALS:
---- ---- ---- ----
NET SALES......................................... $774 $ -- $731 $ --
==== ==== ---- ==== ==== ----
INCOME BEFORE INCOME TAXES........................ $103 $ 89
==== ====
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
INTER- INTER-
SEGMENT SEGMENT
NET SALES SALES PROFIT NET SALES SALES PROFIT
--------- ------- ------ --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
SEGMENT:
Performance Films............................ $ 579 $ -- $ 151 $ 513 $ -- $ 144
Specialty Products........................... 683 -- 152 459 1 120
Integrated Nylon............................. 1,188 1 131 1,126 3 226
------ ---- ----- ------ ---- -----
SEGMENT TOTALS.................................. 2,450 1 434 2,098 4 490
RECONCILIATION TO CONSOLIDATED TOTALS:
Sales eliminations........................... (1) (1) (4) (4)
Other revenues............................... 5 --
Less unallocated service costs:
Cost of goods sold <F1>, <F5>.............. (55) (105)
Marketing, administrative and technological
expenses <F2> (204) (161)
Amortization expense......................... (24) (2)
Equity earnings from affiliates <F3>......... 21 26
Interest expense............................. (63) (30)
Gain on sale of polymer modifiers business... 73 --
Other income (expense)--net <F4>............. -- 10
CONSOLIDATED TOTALS:
------ ---- ------ ----
NET SALES.................................... $2,454 $ -- $2,094 $ --
====== ==== ----- ====== ==== -----
INCOME BEFORE INCOME TAXES................... $ 182 $ 228
===== =====
8
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<PAGE>
<FN>
Segment profit includes only operating expenses directly attributable
to the segment. Unallocated service costs are managed centrally and
primarily include costs of administrative, technology, and engineering and
manufacturing services that are provided to the segments.
<F1> For the nine months ended September 30, 2000, unallocated cost of
goods sold includes restructuring charges related to exiting
operations at the Port Plastics site in Addyston, Ohio ($8 million
pretax, $5 million aftertax). See Note 3.
<F2> For the nine months ended September 30, 2000, unallocated marketing,
administrative, and technological expenses includes a charge
associated with the impairment of certain capitalized software costs
($6 million pretax, $4 million aftertax). See Note 5.
<F3> For the nine months ended September 30, 2000, equity earnings from
affiliates includes Solutia's portion of charges recorded by its
Flexsys and Astaris joint ventures ($15 million aftertax).
<F4> For the nine months ended September 30, 2000, other income (expense)--
net includes charges related to the write down of two Asian
investments based upon indicators that the loss in their values was
other than temporary ($19 million pretax, $11 million aftertax),
period costs related to the formation and startup of the Astaris joint
venture ($8 million pretax, $5 million aftertax), and a gain on the
sale of a minority interest in P4 Production L.L.C., a phosphorus
manufacturing venture ($15 million pretax, $9 million aftertax).
<F5> For the nine months ended September 30, 1999, unallocated cost of
goods sold includes special charges related to exiting Integrated
Nylon's ammonia business ($28 million pretax, $18 million aftertax),
the write down of an Integrated Nylon segment bulk continuous filament
spinning machine ($6 million pretax, $4 million aftertax), and the
anticipated settlement of certain pending property claims litigation
related to the Anniston, Alabama plant site ($29 million pretax,
$18 million aftertax).
</TABLE>
9
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<PAGE>
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 the expected future financial position, results of operations,
profitability, cash flows, liquidity, and effect of changes in accounting due
to recently issued accounting standards. Important factors that could cause
actual results to differ materially from the expectations reflected in the
forward-looking statements herein include, among others, general economic,
business and market conditions, customer acceptance of new products, raw
material and energy pricing, currency fluctuations, and increased competitive
and/or customer pressure.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED WITH
THE THREE MONTHS ENDED SEPTEMBER 30, 1999
Net sales for the third quarter of 2000 increased by 6 percent as compared
with the third quarter of 1999. Excluding the acquisitions of Vianova Resins
Group in December 1999, CarboGen Holdings AG in February 2000, and AMCIS AG in
March 2000, the contribution of the Phosphorus Derivatives business to the
Astaris joint venture in April 2000, and the Polymer Modifiers business that
was sold in August 2000, net sales for the third quarter 2000 were up 2 percent
from the comparable period in 1999. Sales increases reflect higher average
selling prices, partially offset by unfavorable currency exchange rate
fluctuations and lower volumes.
Performance Films
Net sales for the third quarter of 2000 in the Performance Films segment
decreased by 8 percent over the same period of the prior year because of the
sale of the Polymer Modifiers business. Excluding the Polymer Modifiers
business, net sales were essentially flat with the third quarter of 1999. Higher
sales volumes in the CPFilms and the Saflex(R) plastic interlayer businesses
were partially offset by decreased volumes in the adhesives business. The
increase in sales of Saflex(R) plastic interlayer products was driven primarily
by increased demand by European and U.S. automotive glass manufacturers. CPFilms
experienced quarter-over-quarter sales increases in indium tinoxide films, which
is used to make electroluminescent displays, touch screens, and other types of
electronic devices, and increases in domestic sales of window films. Also, to a
lesser extent, businesses in this segment achieved higher average selling prices
than those of the year-ago quarter. Increases in sales volumes and average
selling prices were offset by unfavorable currency exchange rate fluctuations in
the Saflex(R) plastic interlayer business due to the devaluation of the euro in
relation to the U.S. dollar.
Performance Films segment profit for the three-month period ended
September 30, 2000, decreased 12 percent over the three-month period ended
September 30, 1999, because of lower net sales in the segment due to the sale
of the Polymer Modifiers business and, to a lesser extent, increased raw
material costs in the Saflex(R) plastic interlayer business.
Specialty Products
Net sales in the Specialty Products segment for the third quarter of 2000
increased 26 percent over the comparable quarter of 1999 because of the
acquisitions of Vianova, CarboGen, and AMCIS. Excluding the acquisitions and
sales for the Phosphorus Derivatives business, which was contributed to the
Astaris joint venture in April 2000, net sales declined by 7 percent. The
decrease primarily resulted from lower sales volumes of Resimene(R) crosslinkers
and Modaflow(R) flow and leveling agents and, to a lesser extent, loss of sales
from the Scriptsets line of business, which was sold in August 1999. In
addition, unfavorable currency exchange movements due to the devaluation of the
euro in relation to the U.S. dollar negatively affected net sales.
Segment profit for the quarter ended September 30, 2000, increased
10 percent over the year-ago quarter primarily because of higher net sales in
the segment, partially offset by unfavorable sales mix in the Resins and
Additives business.
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Integrated Nylon
The Integrated Nylon segment's net sales for the three-month period ended
September 30, 2000, increased 3 percent from the third quarter of 1999. The
increase was attributable to the effect of higher average selling prices in each
of the segment's businesses, partially offset by volume declines in the carpet
fiber and nylon plastics and polymer businesses. The majority of the increase in
average selling prices occurred in the intermediates, Acrilan(R) acrylic fiber
and carpet fiber businesses. Intermediates' price increases primarily resulted
from formula pricing that passed increased raw material costs on to customers.
Acrilan(R) acrylic fiber products experienced higher average selling prices in
the export markets because of the economic recovery in the Asia Pacific region.
Considerable pricing actions have been taken in the carpet business this quarter
in response to rapidly increasing raw material costs. Carpet fibers sales
volumes decreased as carpet mills were managing inventory levels in response to
lower retail demand. Decreased sales volumes in the nylon plastics and polymer
business resulted from lower shipments of Vydyne(R) nylon molding resins to the
Dow Chemical alliance and lower demand for textile polymers because of financial
difficulties with a Taiwanese textile polymer customer.
Segment profit for Integrated Nylon for the third quarter of 2000 was down
54 percent as compared to the third quarter of 1999. The decline resulted almost
exclusively from higher raw material costs due to the dramatic increase in
petrochemical and natural gas costs over the last several quarters. The costs of
propylene and cyclohexane, two major feedstocks used by the segment, have
increased approximately 70 percent and 50 percent, respectively, compared to the
third quarter of 1999. The petrochemical and natural gas markets remain
extremely volatile and upward pricing pressures continue because of low
worldwide inventory levels and fears of supply disruptions. Elevated
petrochemical and natural gas costs, as well as lower Integrated Nylon volumes,
will continue to adversely affect profitability for the remainder of the year.
Operating Income
Operating income for the third quarter of 2000 declined to $35 million as
compared to $94 million for the third quarter of 1999 because of lower segment
profit discussed above. Additionally, overall lower segment profit was
negatively impacted by higher marketing, administrative, technological, and
amortization expenses. Higher marketing, administrative, technological, and
amortization expenses were associated with the consolidation and integration of
newly acquired companies and other growth programs.
Equity Earnings from Affiliates
The equity earnings from affiliates were $13 million in the third quarter
of 2000 compared to $5 million of earnings in the comparable 1999 quarter. The
increase was primarily due to the formation and startup of the Astaris joint
venture in April 2000.
Sale of Polymer Modifiers Business
In August 2000, Solutia completed the sale of its Polymer Modifiers
business and related manufacturing facilities to Ferro Corporation for
approximately $130 million. As a result of this transaction, Solutia recognized
a $73 million pretax gain ($46 million aftertax). Solutia's results of
operations for the three months ended September 30, 2000, included net sales of
approximately $19 million and operating income of approximately $3 million,
from the Polymer Modifiers business.
Income Taxes
In July 2000, the German Bundestag approved the Tax Reduction Act. Among
other items, the Tax Reduction Act reduced the corporate tax rate beginning in
January 1, 2001. In accordance with SFAS No. 109, "Accounting for Income Taxes,"
Solutia recognized income of $7 million to Income Taxes to record the net
effect of the change on deferred income tax assets and liabilities. Other items
reducing Solutia's overall effective tax rate include effective tax planning
strategies and a greater percentage of after-tax equity earnings from affiliates
in pretax income.
11
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RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net sales for the nine-month period ended September 30, 2000, increased by
17 percent as compared with the nine-month period ended September 30, 1999.
Excluding the acquisitions of CPFilms Inc., Vianova Resins Group, CarboGen
Holdings AG, and AMCIS AG, the contribution of the Phosphorus Derivatives
business to the Astaris joint venture, and the Polymer Modifiers business which
was sold in August 2000, net sales for the first nine months of 2000 were up
4 percent from the comparable period in 1999. Sales increases reflect higher
average selling prices and volumes, partially offset by unfavorable currency
exchange rate fluctuations.
Performance Films
Performance Film's net sales for the first nine months of 2000 increased
13 percent in comparison to the first nine months of 1999 as a result of the
acquisition of CPFilms and higher volumes in the Saflex(R) plastic interlayer
business, partially offset by the loss of sales from the Polymer Modifiers
business. Excluding CPFilms and the Polymer Modifiers businesses, net sales
increased approximately 3 percent. The increase in the Saflex(R) plastic
interlayer business was driven primarily from increased demand by European and
U.S. automotive glass manufacturers. Also, to a lesser extent, businesses in
this segment achieved higher average selling prices than those of the year-ago
period. Partially offsetting the increases in sales volumes and average selling
prices were unfavorable currency exchange rate fluctuations in Saflex(R) plastic
interlayer business due to the devaluation of the euro in relation to the U.S.
dollar.
Performance Film's segment profit for the nine months ended September 30,
2000, increased 5 percent from the comparable year-ago period due to higher net
sales, partially offset by increased raw material costs in the Saflex(R) plastic
interlayer business.
Specialty Products
Net sales in the Specialty Products segment increased 49 percent for the
nine months ended September 30, 2000, over the comparable period of the prior
year because of the acquisitions of Vianova, CarboGen, and AMCIS, partially
offset by the contribution of the Phosphorus Derivatives business to the Astaris
joint venture. Excluding the effects of the acquisitions and the Phosphorus
Derivatives business, net sales declined by 6 percent. Net sales decreased
primarily due to the loss of sales from the Scriptsets line of business, which
was sold in August 1999, and unfavorable currency exchange movements due to the
devaluation of the euro in relation to the U.S. dollar.
Segment profit for the nine-month period ended September 30, 2000,
increased 27 percent as compared to the nine-month period ended September 30,
1999. The profit increase was due to higher net sales from the acquired
companies, partially offset by unfavorable manufacturing variances for
specialty chemicals products.
Integrated Nylon
The Integrated Nylon segment's net sales for the nine months ended
September 30, 2000, increased 6 percent as compared with the nine months ended
September 30, 1999. The increase was attributable to the effects of higher
average selling prices in most of the segment's businesses, partially offset
by lower sales volumes in the nylon plastic and polymers business. The majority
of the segment's price increases were in the carpet fiber and intermediates
businesses, and to a lesser extent, the Acrilan(R) acrylic fiber business.
Considerable pricing actions have been taken in the carpet business this year
in response to rapidly increasing raw material costs. Price increases in the
intermediates business were primarily attributable to contract business with
formula pricing tied to raw material costs. Lower sales volumes for the nylon
plastic and polymers business were primarily the result of lower shipments of
Vydyne(R) nylon molding resins to the Dow Chemical alliance and lower demand
for textile polymers because of financial difficulties with a Taiwanese textile
polymer customer.
Integrated Nylon's segment profit for the nine-month period ended
September 30, 2000, decreased 42 percent from the nine-month period ended
September 30, 1999. The decline resulted almost exclusively from higher raw
material costs due to the sharp increase in petrochemical and natural gas costs
over the last three quarters. The costs of propylene and cyclohexane, two major
feedstocks used by the segment, were up over
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90 percent and 40 percent, respectively, versus the comparable prior-year
period. The petrochemical and natural gas markets remain extremely volatile and
upward pricing pressures continue because of low worldwide inventory levels and
fears of supply disruptions. Elevated petrochemical and natural gas costs, as
well as lower Integrated Nylon volumes, will continue to adversely affect
profitability for the remainder of the year.
Operating Income
Operating income for the first nine months of 2000 declined by 32 percent
as compared to the first nine months of 1999 due to lower segment profit
discussed above and special charges affecting the 2000 and 1999 periods. These
charges are discussed below. Excluding the impact of special charges, overall
lower segment profit was negatively impacted by higher marketing,
administrative, technological, and amortization expenses. Higher spending in
these areas was associated with the consolidation and integration of newly
acquired companies and other growth programs.
During the second quarter of 2000, Solutia recorded a restructuring charge
of $8 million ($5 million aftertax) to cost of goods sold to exit operations at
the Port Plastics site in Addyston, Ohio, as more fully described in Note 3. As
more fully described in Note 5, Solutia recorded an asset impairment charge of
$6 million ($4 million aftertax), to administrative expenses for the write down
of capitalized software costs related to the formation of the Astaris joint
venture.
In February 1999, Integrated Nylon's ammonia unit experienced the failure
of certain equipment critical to the production process. Based on an analysis of
the economics of purchased ammonia and the cost to repair the equipment, Solutia
decided to exit the ammonia business. A $28 million ($18 million aftertax)
special operations charge to cost of goods sold was recorded in the first
quarter of 1999 to complete the exit plan. The charge included $2 million to
write down the assets to fair value, $4 million of dismantling costs, and
$22 million of costs for which Solutia is contractually obligated under an
operating agreement. During the first quarter of 2000, Solutia entered into an
agreement for the dismantling of those assets by a third-party and as a result,
transferred the liability for dismantling to the third-party. During the third
quarter of 2000, Solutia reached an agreement with the plant operator for the
final settlement of the contractually obligated costs. As a result, Solutia
transferred the liability for the contractually obligated costs to accrued
liabilities. For the three months ended March 31, 1999, net sales for the
ammonia business were $1 million. Net income for that period was minimal. See
Note 3 for additional information.
A special operations charge of $6 million ($4 million aftertax) was
recorded in the first quarter of 1999 to write down certain Integrated Nylon
segment assets to their fair values. The charge was due to a review under
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Assets to Be Disposed Of," (SFAS No. 121).
The review stemmed from a historical trend of operating losses and a forecast
that the trend would continue. The SFAS No. 121 review indicated that the
carrying amount of the assets exceeded the identifiable undiscounted cash
flows related to the assets. Fair value of the assets was determined based
on estimates of market prices.
Also during the first quarter of 1999, Solutia recorded a $29 million
($18 million aftertax) charge to cost of goods sold related to the anticipated
settlement of two lawsuits brought against the former Monsanto Company relating
to the alleged discharge of polychlorinated biphenyls ("PCBs") from the
Anniston, Alabama plant site. The anticipated settlement of these cases provided
information that allowed management to estimate more accurately Solutia's
position with respect to such litigation.
Equity Earnings from Affiliates
Equity earnings from affiliates decreased to $21 million in the first nine
months of 2000 from $26 million in the comparable period of 1999. The decrease
was due to special charges recorded by the Flexsys and Astaris joint ventures
during the second quarter of 2000. The Flexsys joint venture recorded charges
associated with the closure and impairment of certain manufacturing operations
in the United Kingdom. Solutia's share of these charges was $13 million
($13 million aftertax). In addition, the Astaris joint venture recorded charges
related to the closure of certain of its production facilities. Solutia's share
of these charges was approximately $2 million ($2 million aftertax). Excluding
these special charges, equity earnings from affiliates increased primarily
because
13
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of the formation and startup of the Astaris joint venture in April 2000,
and to a lesser extent, improved sales volumes at the Flexsys joint venture.
Sale of Polymer Modifiers Business
In August 2000, Solutia completed the sale of its Polymer Modifiers
business and related manufacturing facilities to Ferro Corporation for
approximately $130 million. As a result of this transaction, Solutia recognized
a $73 million pretax gain ($46 million aftertax). Solutia's results of
operations for the nine months ended September 30, 2000, included net sales of
approximately $93 million and operating income of approximately $16 million,
from the Polymer Modifiers business.
Other Income (Expense)--Net
Other income (expense) for the nine months ended September 30, 2000, was
$10 million lower than other income for the same period in 1999. This decline
was attributed to a significant increase in expense that was principally
associated with a charge of $14 million ($8 million aftertax) for the write down
of certain equity-method investments in Asia based upon indicators that the loss
in their values was other than temporary, charges of $5 million ($3 million
aftertax) to accrue for debt payments under certain loan guarantees associated
with one of the Asian equity investments, and charges of $8 million ($5 million
aftertax), associated with the startup and formation of the Astaris joint
venture incurred during the second quarter of 2000. Partially offsetting the
special charges was a $15 million gain ($9 million aftertax) resulting from the
sale of substantially all of Solutia's 40 percent interest in P4 Production
L.L.C., a phosphorus manufacturing venture.
Income Taxes
In July 2000, the German Bundestag approved the Tax Reduction Act. Among
other items, the Tax Reduction Act reduced the corporate tax rate beginning in
January 1, 2001. In accordance with SFAS No. 109, "Accounting for Income Taxes,"
Solutia recognized income of $7 million to Income Taxes to record the net effect
of the change on deferred income tax assets and liabilities. Other items
reducing Solutia's overall effective tax rate include effective tax planning
strategies and a greater percentage of after-tax equity earnings from affiliates
in pretax income.
Summary of Special Charges and Other Events Affecting Comparability
Special charges recorded in the nine-month periods ended September 30, 2000
and 1999, and other events affecting comparability have been summarized in the
table below (dollars in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C> <C> <C>
Cost of goods sold.............................. $ 8 <Fa> $ 63 <Fh>
Marketing, administrative and technological
expenses...................................... 6 <Fb> --
---- ----
OPERATING INCOME................................ (14) (63)
---- ----
(2) <Fb> --
Equity earnings from affiliates................. (13) <Fc>
Gain on sale of Polymer Modifiers business...... 73 <Fd> --
Other income (expense).......................... (8) <Fb> --
15 <Fe>
(14) <Ff>
(5) <Ff>
---- ----
INCOME BEFORE TAXES............................. 32 (63)
Income taxes (benefit).......................... 10 <Fg> (23)
---- ----
NET INCOME (LOSS)............................... $ 22 $(40)
==== ====
<FN>
<Fa> Solutia incurred restructuring charges related to exiting operations
at the Port Plastics site in Addyston, Ohio ($8 million pretax,
$5 million aftertax).
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<Fb> Solutia incurred special operations charges related to the formation
and startup of the Astaris joint venture ($16 million pretax,
$11 million aftertax).
<Fc> Solutia incurred special operations charges associated with the
impairment and closure of certain manufacturing operations in the
United Kingdom for the Flexsys joint venture ($13 million aftertax).
<Fd> Solutia recorded a gain on the sale of its Polymer Modifiers business
and related manufacturing facilities ($73 million pretax, $46 million
aftertax).
<Fe> Solutia recognized a gain on the sale of a minority interest in P4
Production L.L.C., a phosphorus manufacturing venture ($15 million
pretax, $9 million aftertax).
<Ff> Solutia recorded charges to write-down certain investments in Asia
based upon indicators that the loss in their values was other than
temporary ($14 million pretax, $8 million aftertax), and to accrue for
payment of debt obligations associated with one of the investments
($5 million pretax, $3 million aftertax).
<Fg> Amount represents the tax effect of the special charges and other
events affecting comparability. Included in this line is the impact of
a $7 million reduction in income tax expense for changes in the German
tax rates.
<Fh> Solutia recorded special charges related to exiting the Integrated
Nylon's ammonia business, the write-down of an Integrated Nylon segment
bulk continuous filament spinning machine, and the anticipated
settlement of certain pending property claims litigation related to the
Anniston, Alabama plant site ($63 million pretax, $40 million
aftertax).
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Solutia's working capital at September 30, 2000, decreased to negative
$342 million from negative $213 million at December 31, 1999. Working capital
is negative primarily due to increases in short-term debt, which was used to
finance recent acquisitions, treasury stock repurchases, and capital
expenditures. The recent acquisitions include the February 2000 acquisition of
CarboGen and the March 2000 purchase of AMCIS. At September 30, 2000, Solutia
had short-term debt of $522 million.
During February 2000, Solutia completed the issuance of EUR 200 million
($196 million) of notes, due February 2005. Proceeds from the notes were used
primarily to refinance outstanding commercial paper, and also for general
corporate purposes.
Solutia continued to reinvest in itself through share repurchases. Shares
repurchased during 2000 totaled 7.0 million shares at a cost of $98 million. On
April 26, 2000, the Board of Directors authorized the repurchase of up to
15 million additional shares of Solutia common stock. The unused portion of this
authorization gives Solutia the authority to repurchase 12.8 million shares of
its common stock.
During the third quarter of 2000, Solutia received approximately
$119 million of proceeds associated with the sale of its Polymer Modifiers
business and related manufacturing facilities. Solutia also received
$85 million from its 50 percent-owned joint venture Astaris during the third
quarter of 2000, representing a tax-free distribution and repayment of working
capital loans. Additionally, during the third quarter of 2000, Solutia paid
approximately $23 million for the settlement of a class action suit on behalf of
all property owners in a specified area along waterways near Solutia's Anniston,
Alabama plant, which was expensed during the first quarter of 1999.
Solutia believes that its cash flow from operations and available borrowing
capacity provide sufficient resources to finance its operations and planned
capital needs for the next 12 months. Solutia has an $800 million, five-year
revolving credit facility and a $300 million, 364-day multi-currency revolving
credit agreement in place.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activity." SFAS
No. 133 provides comprehensive and consistent standards for the recognition and
measurement of derivative and hedging activities. It requires that derivatives
be recorded on the Statement of Consolidated Financial Position at fair value
and establishes criteria for hedges of changes in the fair value of assets,
liabilities or firm commitments, hedges of variable cash flows of forecasted
transactions, and hedges of foreign currency exposures of net investments in
foreign operations. Changes in the fair value of derivatives that do not meet
the criteria for hedges are to be recognized in the Statement of Consolidated
Income. During June of 1999, FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133," to defer the effective date of SFAS No. 133 by one
year. The standard will now be effective for Solutia beginning January 1, 2001.
During June of 2000, FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an Amendment of
FASB Statement No. 133." SFAS No. 138 amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and certain hedging
activities. Solutia does not expect the adoption of SFAS No. 133 as amended by
SFAS No. 138, to have a material effect on its consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101)
which provides guidance related to revenue recognition. SAB 101 allows companies
to report any changes in revenue recognition related to adopting its provisions
as an accounting change at the time of implementation in accordance with APB
Opinion No. 20, "Accounting Changes." Companies must adopt the new guidance no
later than the fourth quarter of fiscal year 2000. Solutia does not expect the
adoption of SAB 101 to have a material effect on its consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
There have been no material changes in market risk exposures during the
first nine months of 2000 that affect the disclosures presented in Item 7A of
Solutia's Annual Report on Form 10-K for the year ended December 31, 1999.
16
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Solutia's Annual Report on Form 10-K for the year ended December 31, 1999,
described a number of cases brought in Harris County (Texas) District Court on
behalf of individuals who owned homes or lived in subdivisions near the Brio
site, attended school near the site or used nearby recreational baseball fields.
On October 10, 2000, Solutia reached a tentative agreement to settle one action
brought on behalf of 74 plaintiffs for $625,000. Court approval of the
settlement is required for those plaintiffs who are minors.
On September 20, 2000, and October 3, 2000, Solutia was served with a total
of three complaints naming Solutia and the former Monsanto Company (now
Pharmacia Corporation) as defendants in actions filed in Circuit Court for
Calhoun County, Alabama on behalf of 5 plaintiffs who allegedly own properties
near the Anniston plant. Plaintiffs claim to have suffered unspecified personal
injuries and damage to their properties as a result of the alleged release of
PCBs and other harmful chemicals from the plant. Plaintiffs seek compensatory
and punitive damages in unspecified amounts. Solutia is vigorously defending
these actions, and believes that it has meritorious defenses, including lack of
any physical injury or property damage to plaintiffs, lack of any imminent or
substantial endangerment to health or the environment and lack of any negligence
or improper conduct on the part of Solutia or the former Monsanto Company.
Solutia's Annual Report on Form 10-K for the year ended December 31, 1999,
described the Pennsylvania Department of General Services et al. v. United
States Mineral Products Company case, pending in Commonwealth Court in
Philadelphia, Pennsylvania. On August 23, 2000, the jury in that matter returned
a verdict of $90,000,000 against Solutia. Following Pennsylvania law, the trial
court reduced the verdict by 50% to reflect the settlement reached between the
Commonwealth and the manufacturer of the ductwork which contained PCBs. The
Commonwealth is entitled to prejudgment interest, the amount of which has not
yet been determined. Solutia intends to vigorously pursue its post-trial and
appellate remedies.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit Index at page 19 of this report.
(b) Solutia did not file any reports on Form 8-K during the quarter ended
September 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOLUTIA INC.
------------------------------------------
(Registrant)
/s/ JAMES M. SULLIVAN
-------------------------------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: October 27, 2000
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EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2 Omitted - Inapplicable
3 Omitted - Inapplicable
4 Omitted - Inapplicable
10 Omitted - Inapplicable
11 Omitted - Inapplicable, see "Statement of Consolidated Income"
on page 1
15 Omitted - Inapplicable
18 Omitted - Inapplicable
19 Omitted - Inapplicable
22 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
27 Financial Data Schedule
99 Computation of Ratio of Earnings to Fixed Charges
19
