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, 2009




OR




[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Commission
file number001-13255





SOLUTIA
INC.
 (Exact
name of registrant as specified in its charter)
 
 DELAWARE
              43-1781797(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 575
      MARYVILLE CENTRE DRIVE, P.O. BOX 66760,
                ST.
      LOUIS, MISSOURI
              63166-6760(Address
      of principal executive offices)
              (Zip
      Code)
 (314)
674-1000
 (Registrant’s
telephone number, including area code)






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.  YesX
No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes ___    No _X_





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check
one):





Large Accelerated Filer X  Accelerated
Filer


Non-Accelerated Filer      Small
Reporting Company


(Do not check if smaller reporting
company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes
NoX





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
Court.  XYes     ___No





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Class
            Outstanding
      at
              September 30, 2009Common Stock, $0.01 par
    value
            121,446,776  shares





PART
I. FINANCIAL INFORMATION





Item
1.  FINANCIAL STATEMENTS





SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF OPERATIONS


(Dollars
and shares in millions, except per share amounts)


(Unaudited)





SuccessorThree
      Months Ended
              September 30, 2009
            
            
            Three
      Months Ended
              September 30, 2008Net
      Sales
            
            $
            448
            
            
            $
            587Cost
      of goods sold
            
            
            312
            
            
            
            431Gross
      Profit
            
            
            136
            
            
            
            156Selling,
      general and administrative expenses
            
            
            53
            
            
            
            75Research,
      development and other operating expenses, net
            
            
            8
            
            
            
            3Operating
      Income
            
            
            75
            
            
            
            78Interest
      expense
            
            
            (31
            )
            
            
            (42
            )Other
      income (loss), net
            
            
            (1
            )
            
            
            4Income
      from Continuing Operations Before Income Tax Expense
            
            
            43
            
            
            
            40Income
      tax expense
            
            
            12
            
            
            
            17Income
      from Continuing Operations
            
            
            31
            
            
            
            23Loss
      from Discontinued Operations, net of tax
            
            
            --
            
            
            
            (28
            )Net
      Income (Loss)
            
            
            31
            
            
            
            (5
            )Net
      Income attributable to noncontrolling interest
            
            
            2
            
            
            
            2Net
      Income (Loss) attributable to Solutia
            
            $
            29
            
            
            $
            (7
            )Basic
      and Diluted Income (Loss) per Share:Income
      from Continuing Operations attributable to Solutia
            
            $
            0.24
            
            
            $
            0.28Loss
      from Discontinued Operations
            
            
            --
            
            
            
            (0.37
            )Net
      Income (Loss) attributable to Solutia
            
            $
            0.24
            
            
            $
            (0.09
            )





SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME (LOSS)


(Dollars
in millions)


(Unaudited)





SuccessorThree
      MonthsEnded
              September
      30,2009
            
            
            Three
      MonthsEnded
              September
      30,2008Net
      Income (Loss)
            
            $
            31
            
            
            $
            (5
            )Other
      Comprehensive Income (Loss):Currency
      translation adjustments
            
            
            28
            
            
            
            (62
            )Pension
      settlement charge
            
            
            6
            
            
            
            --Unrealized
      gain on derivative instruments
            
            
            --
            
            
            
            (13
            )Actuarial
      loss arising during the three months ended September 30,
    2009
            
            
            (8
            )
            
            
            --Amortization
      of net actuarial gain
            
            
            (1
            )
            
            
            --Comprehensive
      Income (Loss)
            
            
            56
            
            
            
            (80
            )Comprehensive Income attributable to noncontrolling interest
            
            
            2
            
            
            
            2Comprehensive
      Income (Loss) attributable to Solutia
            
            $
            54
            
            
            $
            (82
            )





See accompanying Notes to
Consolidated Financial Statements.











1





SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF OPERATIONS


(Dollars
and shares in millions, except per share amounts)


(Unaudited)





Successor
            
            
            Successor
            
            
            PredecessorNine
      MonthsEnded
              September
      30,2009
            
            
            Seven
      MonthsEnded
              September
      30,2008
            
            
            Two
      MonthsEnded
              February
      29,2008Net
      Sales
            
            $
            1,197
            
            
            $
            1,346
            
            
            $
            335Cost
      of goods sold
            
            
            858
            
            
            
            1,063
            
            
            
            241Gross
      Profit
            
            
            339
            
            
            
            283
            
            
            
            94Selling,
      general and administrative expenses
            
            
            157
            
            
            
            164
            
            
            
            42Research,
      development and other operating expenses, net
            
            
            14
            
            
            
            4
            
            
            
            3Operating
      Income
            
            
            168
            
            
            
            115
            
            
            
            49Interest
      expense (a)
            
            
            (98
            )
            
            
            (107
            )
            
            
            (21
            )Other
      income (loss), net
            
            
            (3
            )
            
            
            13
            
            
            
            3Reorganization
      items, net
            
            
            --
            
            
            
            --
            
            
            
            1,433Income
      from Continuing Operations Before Income Tax Expense
            
            
            67
            
            
            
            21
            
            
            
            1,464Income
      tax expense
            
            
            15
            
            
            
            17
            
            
            
            214Income
      from Continuing Operations
            
            
            52
            
            
            
            4
            
            
            
            1,250Income
      (Loss) from Discontinued Operations, net of tax
            
            
            (169
            )
            
            
            (52
            )
            
            
            204Net Income
      (Loss)
            
            
            (117
            )
            
            
            (48
            )
            
            
            1,454Net
      Income attributable to noncontrolling interest
            
            
            3
            
            
            
            5
            
            
            
            --Net
      Income (Loss) attributable to Solutia
            
            $
            (120
            )
            
            $
            (53
            )
            
            $
            1,454Basic
      and Diluted Income (Loss) per Share:Income
      (Loss) from Continuing Operations attributable to Solutia
            
            $
            0.48
            
            
            $
            (0.01
            )
            
            $
            11.96Income
      (Loss) from Discontinued Operations
            
            
            (1.65
            )
            
            
            (0.78
            )
            
            
            1.95Net
      Income (Loss) attributable to Solutia
            
            $
            (1.17
            )
            
            $
            (0.79
            )
            
            $
            13.91





(a)
            Predecessor
      excludes unrecorded contractual interest expense of $5 in the two months
      ended February 29, 2008.





SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME (LOSS)


(Dollars
in millions)


(Unaudited)





Successor
            
            
            Successor
            
            
            PredecessorNine
      MonthsEnded
              September
      30,2009
            
            
            Seven
      MonthsEnded
              September
      30,2008
            
            
            Two
      MonthsEnded
              February
      29,2008Net
      Income (Loss)
            
            $
            (117
            )
            
            $
            (48
            )
            
            $
            1,454Other
      Comprehensive Income (Loss):Currency
      translation adjustments
            
            
            47
            
            
            
            (40
            )
            
            
            32Unrealized
      gain (loss) on derivative instruments
            
            
            4
            
            
            
            (9
            )
            
            
            --Pension
      settlement charge
            
            
            26
            
            
            
            --
            
            
            
            --Amortization
      of prior service gain
            
            
            --
            
            
            
            --
            
            
            
            (3
            )Amortization
      of net actuarial loss
            
            
            1
            
            
            
            --
            
            
            
            2Actuarial
      loss arising during the two months ended February 29, 2008, net of tax of
      $2
            
            
            --
            
            
            
            --
            
            
            
            (64
            )Actuarial
      loss arising during the nine months ended September 30,
    2009
            
            
            (8
            )
            
            
            --
            
            
            
            --Prior
      service gain arising during the two months ended
              February
      29, 2008
            
            
            --
            
            
            
            --
            
            
            
            109Fresh-start
      accounting adjustment
            
            
            --
            
            
            
            --
            
            
            
            (30
            )Comprehensive
      Income (Loss)
            
            
            (47
            )
            
            
            (97
            )
            
            
            1,500Comprehensive
      Income attributable to noncontrolling interest
            
            
            3
            
            
            
            5
            
            
            
            --Comprehensive
      Income (Loss) attributable to Solutia
            
            $
            (50
            )
            
            $
            (102
            )
            
            $
            1,500





See
      accompanying Notes to Consolidated Financial
  Statements.





2


SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF FINANCIAL POSITION


(Dollars
in millions, except per share amounts)


(Unaudited)




September
      30,
                2009
              
              
              December
      31,
                2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
              
              $
              111
              
              
              $
              32Trade
      receivables, net of allowances of $1 in 2009 and $0 in
2008
              
              
              268
              
              
              
              227Miscellaneous
      receivables
              
              
              88
              
              
              
              110Inventories
              
              
              273
              
              
              
              341Prepaid
      expenses and other assets
              
              
              55
              
              
              
              85Assets
      of discontinued operations
              
              
              6
              
              
              
              490Total
      Current Assets
              
              
              801
              
              
              
              1,285Property, Plant and Equipment,net of accumulated depreciation of $111 in 2009 and $56 in
      2008
              
              
              931
              
              
              
              952Goodwill
              
              
              511
              
              
              
              511Identified
      Intangible Assets, net
              
              
              814
              
              
              
              823Other
      Assets
              
              
              151
              
              
              
              163Total
      Assets
              
              $
              3,208
              
              
              $
              3,734LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              139
              
              
              $
              170Accrued
      liabilities
              
              
              203
              
              
              
              259Short-term
      debt, including current portion of long-term debt
              
              
              31
              
              
              
              37Liabilities
      of discontinued operations
              
              
              58
              
              
              
              302Total
      Current Liabilities
              
              
              431
              
              
              
              768Long-Term
      Debt
              
              
              1,167
              
              
              
              1,359Postretirement
      Liabilities
              
              
              443
              
              
              
              465Environmental
      Remediation Liabilities
              
              
              262
              
              
              
              279Deferred
      Tax Liabilities
              
              
              189
              
              
              
              202Other
      Liabilities
              
              
              107
              
              
              
              132Commitments
      and Contingencies (Note 9)Shareholders’ Equity:Common
      stock at $0.01 par value; (500,000,000 shares authorized, 121,864,293 and
      94,392,772 shares issued in 2009 and 2008, respectively)
              
              
              1
              
              
              
              1Additional
      contributed capital
              
              
              1,608
              
              
              
              1,474Treasury
      shares, at cost (417,517 in 2009 and 77,132 in 2008)
              
              
              (2
              )
              
              
              --Accumulated
      other comprehensive loss
              
              
              (216
              )
              
              
              (286
              )Accumulated
      deficit
              
              
              (788
              )
              
              
              (668
              )Total
      Shareholders’ Equity attributable to Solutia
              
              
              603
              
              
              
              521Equity
      attributable to non-controlling interest
              
              
              6
              
              
              
              8Total
      Shareholders’ Equity
              
              
              609
              
              
              
              529Total
      Liabilities and Shareholders’ Equity
              
              $
              3,208
              
              
              $
              3,734


See
accompanying Notes to Consolidated Financial Statements.








3


SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF CASH FLOWS


(Dollars
in millions)


(Unaudited)




Successor
            
            
            Successor
            
            
            PredecessorNine
      Months Ended
              September 30, 2009
            
            
            Seven
      Months Ended
              September 30, 2008
            
            
            Two
      Months Ended
              February 29, 2008INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
              OPERATING
      ACTIVITIES:Net
      income (loss)
            
            $
            (117
            )
            
            $
            (48
            )
            
            $
            1,454Adjustments
      to reconcile net income (loss) to net cash provided by (used in)
      operations:Net
      income attributable to noncontrolling interest
            
            
            (3
            )
            
            
            (5
            )
            
            
            --(Income)
      Loss from discontinued operations, net of tax
            
            
            169
            
            
            
            52
            
            
            
            (204
            )Depreciation
      and amortization
            
            
            78
            
            
            
            64
            
            
            
            11Revaluation
      of assets and liabilities, net of tax
            
            
            --
            
            
            
            --
            
            
            
            (1,383
            )Discharge
      of claims and liabilities, net of tax
            
            
            --
            
            
            
            --
            
            
            
            100Other
      reorganization items, net
            
            
            --
            
            
            
            --
            
            
            
            52Pension
      obligation related expense less than contributions
            
            
            (24
            )
            
            
            (39
            )
            
            
            (18
            )Other
      postretirement benefit obligation related expense less than
              contributions
            
            
            (8
            )
            
            
            --
            
            
            
            (6
            )Deferred
      income taxes
            
            
            3
            
            
            
            (22
            )
            
            
            5Amortization
      of deferred debt issuance costs
            
            
            15
            
            
            
            10
            
            
            
            --Loss
      (gain) on sale of assets
            
            
            5
            
            
            
            (8
            )
            
            
            --Other
      charges (gains) including restructuring expenses
            
            
            19
            
            
            
            67
            
            
            
            (2
            )Changes
      in assets and liabilities:Income
      taxes payable
            
            
            4
            
            
            
            14
            
            
            
            5Trade
      receivables
            
            
            (42
            )
            
            
            14
            
            
            
            (24
            )Inventories
            
            
            66
            
            
            
            (19
            )
            
            
            (34
            )Accounts
      payable
            
            
            (18
            )
            
            
            21
            
            
            
            31Environmental
      remediation liabilities
            
            
            (14
            )
            
            
            (7
            )
            
            
            (1
            )Restricted
      cash for environmental remediation and other legacy
    payments
            
            
            24
            
            
            
            12
            
            
            
            --Other
      assets and liabilities
            
            
            (34
            )
            
            
            19
            
            
            
            (2
            )Cash
      Provided by (Used in) Continuing Operations before Reorganization
      Activities
            
            
            123
            
            
            
            125
            
            
            
            (16
            )Reorganization
      Activities:Establishment
      of VEBA retiree trust
            
            
            --
            
            
            
            --
            
            
            
            (175
            )Establishment
      of restricted cash for environmental remediation and other legacy
      payments
            
            
            --
            
            
            
            --
            
            
            
            (46
            )Payment
      for allowed secured and administrative claims
            
            
            --
            
            
            
            --
            
            
            
            (79
            )Professional
      service fees
            
            
            --
            
            
            
            (30
            )
            
            
            (31
            )Other
      reorganization and emergence related payments
            
            
            --
            
            
            
            --
            
            
            
            (17
            )Cash
      Used in Reorganization Activities
            
            
            --
            
            
            
            (30
            )
            
            
            (348
            )Cash
      Provided by (Used in) Operations – Continuing Operations
            
            
            123
            
            
            
            95
            
            
            
            (364
            )Cash
      Provided by (Used in) Operations – Discontinued Operations
            
            
            58
            
            
            
            (122
            )
            
            
            (48
            )Cash
      Provided by (Used in) Operations
            
            
            181
            
            
            
            (27
            )
            
            
            (412
            )INVESTING
      ACTIVITIES:Property,
      plant and equipment purchases
            
            
            (27
            )
            
            
            (52
            )
            
            
            (15
            )Acquisition
      and investment payments
            
            
            (2
            )
            
            
            (2
            )
            
            
            --Investment
      proceeds and property disposals
            
            
            3
            
            
            
            53
            
            
            
            --Cash
      Used in Investing Activities – Continuing Operations
            
            
            (26
            )
            
            
            (1
            )
            
            
            (15
            )Cash
      Provided by (Used in) Investing Activities – Discontinued
      Operations
            
            
            16
            
            
            
            (27
            )
            
            
            (14
            )Cash
      Used in Investing Activities
            
            
            (10
            )
            
            
            (28
            )
            
            
            (29
            )FINANCING
      ACTIVITIES:Net
      change in lines of credit
            
            
            (13
            )
            
            
            28
            
            
            
            --Proceeds
      from long-term debt obligations
            
            
            70
            
            
            
            --
            
            
            
            1,600Net
      change in long-term revolving credit facilities
            
            
            (181
            )
            
            
            (3
            )
            
            
            190Proceeds
      from stock issuances
            
            
            119
            
            
            
            422
            
            
            
            250Proceeds
      from short-term debt obligations
            
            
            22
            
            
            
            --
            
            
            
            --Payment
      of short-term debt obligations
            
            
            (15
            )
            
            
            --
            
            
            
            (966
            )Payment
      of long-term debt obligations
            
            
            (83
            )
            
            
            (434
            )
            
            
            (366
            )Payment
      of debt obligations subject to compromise
            
            
            --
            
            
            
            --
            
            
            
            (221
            )Debt
      issuance costs
            
            
            (4
            )
            
            
            (1
            )
            
            
            (136
            )Purchase
      of treasury shares
            
            
            (2
            )
            
            
            --
            
            
            
            --Other,
      net
            
            
            (5
            )
            
            
            (2
            )
            
            
            --Cash
      Provided by (Used in) Financing Activities
            
            
            (92
            )
            
            
            10
            
            
            
            351INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            79
            
            
            
            (45
            )
            
            
            (90
            )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
            
            
            32
            
            
            
            83
            
            
            
            173End
      of period
            
            $
            111
            
            
            $
            38
            
            
            $
            83SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      payments for interest
            
            $
            83
            
            
            $
            85
            
            
            $
            43Cash
      payments for income taxes, net of refunds
            
            
            9
            
            
            
            15
            
            
            
            4





See
accompanying Notes to Consolidated Financial Statements.










SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY


(Dollars
in millions)







Equity
      attributable to SolutiaCommon
              Stock
            
            
            Additional
      Contributed Capital
            
            
            Treasury
              Stock
            
            
            Accumulated
      Other Comprehensive Loss
            
            
            Accumulated
              Deficit
            
            
            Equity
      Attributable to Noncontrolling Interest
            
            
            Total
      Shareholders’
              EquityBeginning
      Balance – January 1, 2009
            
            $
            1
            
            
            $
            1,474
            
            
            $
            --
            
            
            $
            (286
            )
            
            $
            (668
            )
            
            $
            8
            
            
            $
            529Comprehensive
      income:Net
      loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (159
            )
            
            
            --
            
            
            
            (159
            )Currency
      translation adjustments
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (37
            )
            
            
            --
            
            
            
            --
            
            
            
            (37
            )Unrealized
      gain on derivative instruments
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            4
            
            
            
            --
            
            
            
            --
            
            
            
            4Amortization
      of net actuarial loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            2
            
            
            
            --
            
            
            
            --
            
            
            
            2Dividends
      attributable to noncontrolling interest
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (2
            )
            
            
            (2
            )Treasury
      stock purchases
            
            
            --
            
            
            
            --
            
            
            
            (1
            )
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1
            )Share-based
      compensation expense
            
            
            --
            
            
            
            6
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            6Ending
      Balance – March 31, 2009
            
            
            1
            
            
            
            1,480
            
            
            
            (1
            )
            
            
            (317
            )
            
            
            (827
            )
            
            
            6
            
            
            
            342Comprehensive
      income:Net
      income
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            10
            
            
            
            1
            
            
            
            11Currency
      translation adjustments
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            56
            
            
            
            --
            
            
            
            --
            
            
            
            56Pension
      settlement charge
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            20
            
            
            
            --
            
            
            
            --
            
            
            
            20Issuance
      of common stock
            
            
            --
            
            
            
            119
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            119Treasury
      stock purchases
            
            
            --
            
            
            
            --
            
            
            
            (1
            )
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1
            )Share-based
      compensation expense
            
            
            --
            
            
            
            5
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            5Ending
      Balance – June 30, 2009
            
            
            1
            
            
            
            1,604
            
            
            
            (2
            )
            
            
            (241
            )
            
            
            (817
            )
            
            
            7
            
            
            
            552Comprehensive
      income:Net
      income
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            29
            
            
            
            2
            
            
            
            31Currency
      translation adjustments
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            28
            
            
            
            --
            
            
            
            --
            
            
            
            28Pension
      settlement charge
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            6
            
            
            
            --
            
            
            
            --
            
            
            
            6Actuarial
      loss arising during the year
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (8
            )
            
            
            --
            
            
            
            --
            
            
            
            (8
            )Amortization
      of net actuarial gain
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1
            )
            
            
            --
            
            
            
            --
            
            
            
            (1
            )Dividends
      attributable to noncontrolling interest
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (3
            )
            
            
            (3
            )Share-based
      compensation expense
            
            
            --
            
            
            
            4
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            4Ending
      Balance – September 30, 2009
            
            $
            1
            
            
            $
            1,608
            
            
            $
            (2
            )
            
            $
            (216
            )
            
            $
            (788
            )
            
            $
            6
            
            
            $
            609





See
accompanying Notes to Consolidated Financial Statements.


5
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


1.  Background
and Basis for Presentation





Unless
the context requires otherwise, the terms “Solutia”, “Company”, “we”, “us” and
“our” in this report refer to Solutia Inc. and its subsidiaries.  The
accompanying consolidated financial statements have not been audited but have
been prepared in conformity with accounting principles generally accepted in the
United States (“U.S. GAAP”) for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X.
 Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements.  Therefore,
this Report on Form 10-Q should be read in conjunction with Solutia’s Report on
Form 10-K for the fiscal year ended December 31, 2008, as recast July 27, 2009
and October 5, 2009 on Form 8-K to reflect (i) our retrospective application of
the presentation of noncontrolling interests as provided by the Financial
Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”)
810 Consolidation,
adopted on January 1, 2009, (ii) presentation of our Integrated Nylon business
as discontinued operations in accordance with the terms of the definitive sale
agreement between us and an affiliate of S.K. Capital Partners II, L.P.
(“Buyer”), a New York-based private equity firm, and (iii) presentation of
condensed consolidating financial statements pursuant to Rule 3-10 of Regulation
S-X “Financial Statements of
Guarantors and Issuers of Guaranteed Securities Registered or Being
Registered.”  In the opinion of management, these unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods reported.  Financial information for the first nine
months of fiscal year 2009 should not be annualized because of the seasonality
of our business.





On
December 17, 2003, we and our 14 U.S. subsidiaries filed voluntary petitions for
Chapter 11 protection (the “Chapter 11 Case”).  Our subsidiaries
outside the U.S. were not included in the Chapter 11 filing.  The filing
was made to restructure our balance sheet, to streamline operations and to
reduce costs, in order to allow us to continue operations as a viable going
concern.  On February 28, 2008 (the “Effective Date”), we
consummated our reorganization under Chapter 11 of the U.S. Bankruptcy Code and
emerged from bankruptcy pursuant to our Fifth Amended Joint Plan of
Reorganization which was confirmed by the U.S. Bankruptcy Court for the Southern
District of New York on November 29, 2007 (the
“Plan”).





The
consolidated financial statements for the period in which we were in bankruptcy
were prepared in accordance with ASC 852 Reorganizations (“ASC 852”).
 The consolidated financial statements were also prepared 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.  In accordance with ASC 852, we adopted fresh-start
accounting as of the Effective Date.  However, due to the proximity of
the Effective Date to the February month end, for accounting convenience
purposes, we have reported the effects of fresh-start accounting as if they
occurred on February 29, 2008.  The financial information set forth in
this report, unless otherwise expressly set forth or as the context otherwise
indicates, reflects the consolidated results of operations and financial
condition of Solutia Inc. and its subsidiaries for the periods following March
1, 2008 (“Successor”), and of Solutia Inc. and its subsidiaries for the periods
through February 29, 2008 (“Predecessor”).





Management
has evaluated subsequent events through October 27, 2009, the date which the
financial statements were issued, and has concluded that no material events or
transactions took place which would require disclosure, except those discussed
in Note 17 – Subsequent Events.








2.  Recently
Issued and Adopted Accounting Standards





In June
2009, the FASB issued the ASC to serve as the sole source of authoritative
United States accounting and reporting standards applicable for all
non-governmental entities, with the exception of the Securities and Exchange
Commission ("SEC") and its staff. The ASC changes the referencing of financial
reporting standards but is not intended to change U.S. GAAP.  This
standard is effective for interim or annual financial reporting periods ending
after September 15, 2009. As the ASC did not alter existing U.S. GAAP, it did
not have any impact on our consolidated financial statements.





6
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


In
May 2009, the FASB issued guidance referenced in ASC 855 Subsequent Events(“ASC
855”).  ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued and requires the disclosure of the date through
which these events are evaluated.  This statement is effective for
interim and annual periods ending after June 15, 2009 and accordingly, we
adopted this guidance effective April 1, 2009.





In April
2009, the FASB issued guidance, referenced in ASC 825 Financial Instruments (“ASC
825”), which amends U.S. GAAP to require entities to disclose the fair value of
financial instruments in all interim financial statements.  The
additional requirements of ASC 825 also require disclosure of the method(s) and
significant assumptions used to estimate the fair value of those financial
instruments.  Previously, these disclosures were required only in
annual financial statements.  The additional requirements of ASC 825
are effective for interim reporting periods ending after June 15,
2009.  The adoption of the additional requirements of ASC 825 did not
have any financial impact on our consolidated financial statements and the
interim disclosures can be found at Note 11 – Fair Value of Financial
Instruments.





In March
2008, the FASB issued guidance, referenced in ASC 815 Derivatives and Hedging(“ASC
815”), which requires enhanced disclosures about a company’s derivative
instruments and hedging activities and was effective for fiscal years beginning
after November 15, 2008.  The adoption of ASC 815 on January 1, 2009
did not have any financial impact on our consolidated financial statements and
the additional disclosures can be found at Note 10 – Derivatives and Risk
Management.





In
February 2008, the FASB issued guidance, referenced in ASC 820 Fair Value Measurements and
Disclosures(“ASC 820”), which delayed the effective date of accounting
for nonfinancial assets and liabilities to fiscal years beginning after November
15, 2008.  Accordingly, on January 1, 2009, we adopted the additional
requirements of ASC 820 which can be found at Note 3 –
Divestitures.





In
December 2007, the FASB issued guidance, referenced in ASC 810 Consolidation, which
established new accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary through the
use of disclosures that clearly identify and distinguish between the interests
of the parent and the interests of the noncontrolling owners. This guidance is
effective for fiscal years beginning on or after December 15, 2008 with early
adoption prohibited.  We have retrospectively
adopted this guidance effective January 1, 2009 and as a result, have
reclassified our noncontrolling interest in a joint venture for prior periods on
the Consolidated Statement of Financial Position from Other Liabilities to a
separate line item in the equity section.  The income
attributable to the noncontrolling interest was also reclassified from Other
Income (Loss), net on the Consolidated Statement of Operations and Consolidated
Statement of Comprehensive Income (Loss) to a separate line item.





3.  Divestitures





On June 1, 2009, we sold
substantially all the assets and certain liabilities, including environmental
remediation liabilities and pension liabilities of active employees, of our
Integrated Nylon business to the Buyer.  During the nine months ended
September 30, 2009, we realized a loss of $76 on this transaction.





During the first quarter of 2009, in
accordance with U.S. GAAP, long-lived assets held for sale with a carrying
amount of $48 were written down to their fair value of zero, resulting in a $31
loss, net of tax, which was included in income (loss) from discontinued
operations, net of tax.  The fair value of these long-lived assets was
developed using the sales agreement, which is a Level 2 fair value measurement
as defined by U.S. GAAP under the fair value hierarchy.





A summary
of the net sales and income (loss) from discontinued operations related to our
Integrated Nylon business is as follows:





7
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


SuccessorThree
      MonthsEnded
              September
      30,2009
            
            
            Three
      MonthsEnded
              September
      30,2008Operating
      results:Net
      sales
            
            $
            --
            
            
            $
            506Loss
      before income tax expense
            
            $
            --
            
            
            $
            (27
            )Income
      tax expense
            
            
            --
            
            
            
            1Loss
      from discontinued operations, net of tax
            
            $
            --
            
            
            $
            (28
            )










Successor
            
            
            PredecessorNine
      MonthsEnded
              September
      30,2009
            
            
            Seven
      MonthsEnded
              September
      30,2008
            
            
            Two
      MonthsEnded
              February
      29,2008Operating
      results:Net
      sales
            
            $
            370
            
            
            $
            1,174
            
            
            $
            318Income
      (Loss) before income tax expense
            
            $
            (187
            )
            
            $
            (51
            )
            
            $
            204Income
      tax expense (benefit)
            
            
            (17
            )
            
            
            1
            
            
            
            --Income
      (Loss) from discontinued operations, net of tax
            
            $
            (170
            )
            
            $
            (52
            )
            
            $
            204






The
operating results of our Integrated Nylon business reflect adjustments to our
LIFO Inventory reserve associated with this business and interest expense
associated with debt which would be repaid using sales proceeds which were not
previously allocated to the results of this business.  Conversely,
certain corporate expenses and reorganization items, net are excluded from the
operating results which had previously been allocated to Integrated
Nylon.





The carrying amounts of all assets and
liabilities associated with our Integrated Nylon business have been classified
as current in the Consolidated Statement of Financial Position and consist of
the following:





SuccessorSeptember
      30,
              2009
            
            
            December
      31,
              2008Assets:Trade
      receivables, net
            
            $
            --
            
            
            $
            75Miscellaneous
      receivables
            
            
            6
            
            
            
            15Inventories
            
            
            --
            
            
            
            336Prepaid
      expenses and other assets
            
            
            --
            
            
            
            15Property,
      plant and equipment, net
            
            
            --
            
            
            
            41Other
      assets
            
            
            --
            
            
            
            8Assets
      of discontinued operations
            
            $
            6
            
            
            $
            490Liabilities:Accounts
      payable
            
            $
            29
            
            
            $
            101Accrued
      liabilities
            
            
            29
            
            
            
            54Environmental
      remediation liabilities
            
            
            --
            
            
            
            9Deferred
      revenue
            
            
            --
            
            
            
            54Other
      liabilities
            
            
            --
            
            
            
            3Postretirement
      liabilities
            
            
            --
            
            
            
            81Liabilities
      of discontinued operations
            
            $
            58
            
            
            $
            302





Prior to
the sale of our Integrated Nylon business, Lyondell Chemical Company
(“Lyondell”), a guest at the Integrated Nylon Alvin, Texas plant under various
operating agreements which expire in December 2010, declared bankruptcy and
provided to us notice of its intention to exit the facility and terminate its
operating agreements early without consideration for the contractually agreed to
early exit penalties.  In response, we have withheld payment on
certain trade payables to subsidiaries of Lyondell asserting these liabilities
partially offset damages associated with the rejection of these
contracts.  Included in liabilities of discontinued operations are $29
of accounts payable associated with the receipt of raw materials prior to
Lyondell’s filing for Chapter 11 bankruptcy. Furthermore, in conjunction
with the sale of the Integrated Nylon business, we have agreed to reimburse the
Buyer for indirect residual costs incurred by them resulting from Lyondell’s
early exit.





8
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


On August
28, 2009, we entered into an agreement to sell the North American portion of our
plastic products business to Orion Investment Group for $2 (“Plastic Products
Sale”) effective August 1, 2009.  Therefore, operating results and
cash flows related to the North America plastic products business are not
included in our Consolidated Statement of Operations or Consolidated Statement
of Cash Flows after July 31, 2009.  We recognized a loss of $5 in
Research, development and other operating expenses, net related to the Plastic
Products Sale during the third quarter of 2009 in Unallocated and
Other.
 
 We sold
our resins, additives and adhesives business to UCB S.A. on January 31,
2003.  During the nine months ended September 30, 2009, changes
related to tax audits from 2000 through 2004 for our 100% owned subsidiary,
Solutia Deutschland GmbH, resulted in a reduction in previously unrecognized tax
benefits of $1.  Accordingly, an income tax benefit equal to this
amount was recognized in income (loss) from discontinued operations, net of tax
during the nine months ended September 30, 2009.


4.  Share-Based
Compensation





Stock
Options





We did
not grant any options to purchase shares of common stock to employees under our
2007 Management Long-Term Incentive Plan (“2007 Management Plan”) or to our
non-employee directors under our 2007 Non-Employee Director Stock Compensation
Plan (“2007 Director Plan”) during the nine months ended September 30,
2009.





A summary
of stock option information as of September 30, 2009 is as follows:





Options
            
            
            Weighted-Average
              Exercise Price
            
            
            Weighted-Average
              Remaining
              Contractual Life
            
            
            Aggregate
              Intrinsic
              Value (a)Vested
      or Expected to Vest at September 30, 2009
            
            
            1,946,638
            
            
            $
            17.29
            
            
            
            8.4
            
            
            $
            --Exercisable
      at September 30, 2009
            
            
            704,873
            
            
            $
            17.29
            
            
            
            8.4
            
            
            $
            --





(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 our
      common stock as of the reporting date. If the exercise price of the
      underlying awards is higher than the quoted market price of our common
      stock as of the reporting date, the intrinsic value of the award is
      $0.





During
the three and nine months ended September 30, 2009, we recognized $1 and $5 of
compensation expense related to our stock options, respectively, of which $1 was
allocated to discontinued operations during the nine months ended September 30,
2009.  For the three and seven months ended September 30, 2008, we
recognized $1 and $2 of compensation expense related to our stock options,
respectively, of which $1 was allocated to discontinued operations for the seven
months ended September 30, 2008.  Pre-tax unrecognized compensation
expense for stock options, net of estimated forfeitures, was $5 as of September
30, 2009 which will be recognized as expense over a remaining weighted-average
period of 1.1 years.





Restricted Stock
Awards





We
granted 2,412,859 shares of restricted stock awards with a weighted-average
grant date fair value of $8.09 per share to certain employees under our 2007
Management Plan during the nine months ended September 30,
2009.  Approximately two thirds of the shares granted during the nine
months ended September 30, 2009 vest upon completion of a service condition and
the remaining one third of the shares vest based upon the attainment of certain
performance and market conditions.  The service condition shares vest
40 percent in both July 2010 and 2011 and 20 percent in July
2012.  The performance and market condition shares vest in February
2012 if attainment of the performance and market conditions is
achieved.





9
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


During
the three and nine months ended September 30, 2009 we recognized $3 and $10 of
compensation expense related to our restricted stock awards, respectively, of
which $1 was allocated to discontinued operations for the nine months ended
September 30, 2009.  For the three and seven months ended September
30, 2008, we recognized $3 and $6 of compensation expense, respectively, of
which $1 for both periods was related to discontinued operations.  Pre-tax
unrecognized compensation expense for restricted stock awards, net of estimated
forfeitures, was $23 as of September 30, 2009 which will be recognized as
expense over a remaining weighted-average period of 1.7
years.




Other Stock
Awards
 
 During
the third quarter 2009, our independent directors each received 8,134 shares, or
56,938 shares in aggregate, as the annual equity retainer portion of their 2009
director compensation.  For the three and nine months ended September
30, 2009, we recognized less than $1 of compensation expense on these
awards.
 5.  Goodwill
and Other Intangible Assets





In
connection with the adoption of fresh-start accounting, goodwill and certain
intangible assets including (i) amortizable customer relationships, unpatented
technology, contract-based intangible assets, trade names and patents and (ii)
indefinite-lived trademarks not subject to amortization were recorded at their
estimated fair value on February 29, 2008.





Goodwill
by reportable segment as of September 30, 2009 and December 31, 2008 is as
follows:





BalanceSaflex
            
            $
            205CPFilms
            
            
            159Technical
      Specialties
            
            
            147Total
            
            $
            511





Intangible
assets are summarized in aggregate as follows:




Successor
                September 30, 2009
              
              
              Successor
                December 31, 2008Estimated
                Useful
                Life
      in
                Years
              
              
              Gross
                Carrying
                Value
              
              
              Accumulated
                Amortization
              
              
              Net
                Carrying
                Value
              
              
              Estimated
                Useful
                Life
      in
                Years
              
              
              Gross
                Carrying
                Value
              
              
              Accumulated
                Amortization
              
              
              Net
                Carrying
                ValueAmortizable
      intangible assets:Customer
      relationships
              
              23
      to 27
              
              
              $
              492
              
              
              $
              (29
              )
              
              $
              463
              
              
              23
      to 27
              
              
              $
              486
              
              
              $
              (15
              )
              
              $
              471Technology
              
              5
      to 26
              
              
              
              202
              
              
              
              (16
              )
              
              
              186
              
              
              5
      to 26
              
              
              
              199
              
              
              
              (9
              )
              
              
              190Trade
      names
              
              
              25
              
              
              
              14
              
              
              
              (1
              )
              
              
              13
              
              
              
              25
              
              
              
              13
              
              
              
              (--
              )
              
              
              13Patents
              
              
              13
              
              
              
              5
              
              
              
              --
              
              
              
              5
              
              
              
              13
              
              
              
              4
              
              
              
              (--
              )
              
              
              4Non
      amortizable intangible assets:Trademarks
              
              
              
              
              
              
              147
              
              
              
              --
              
              
              
              147
              
              
              
              
              
              
              
              145
              
              
              
              --
              
              
              
              145Total
      Identified Intangible Assets
              
              
              
              
              
              $
              860
              
              
              $
              (46
              )
              
              $
              814
              
              
              
              
              
              
              $
              847
              
              
              $
              (24
              )
              
              $
              823








During
the three and nine months ended September 30, 2009 we recognized $7 and $22 of
amortization expense for intangible assets.  Amortization expense is
allocated to cost of goods sold and selling, general and administrative expenses
in the Consolidated Statement of Operations as follows:





SuccessorThree
      MonthsEnded
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September30, 2009Cost
      of goods sold
            
            $
            2
            
            
            $
            7Selling,
      general and administrative expenses
            
            $
            5
            
            
            $
            15





We expect
amortization expense for intangible assets to total approximately $29 for the
year ending December 31, 2009 and $30 for each of the years ending December 31,
2010 through 2013.





6.  Detail
of Certain Balance Sheet Accounts





Components
of inventories were as follows:





10
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


SuccessorInventories
            
            September
      30,
              2009
            
            
            December
      31,
              2008Finished
      goods
            
            $
            152
            
            
            $
            195Goods
      in process
            
            
            53
            
            
            
            59Raw
      materials and supplies
            
            
            68
            
            
            
            87Inventories,
      at FIFO cost
            
            
            273
            
            
            
            341Excess
      of FIFO over LIFO cost
            
            
            --
            
            
            
            --Total
      Inventories
            
            $
            273
            
            
            $
            341





Components
of property, plant, and equipment were as follows:





SuccessorProperty,
      Plant and Equipment
            
            September
      30,
              2009
            
            
            December
      31,
              2008Land
            
            $
            34
            
            
            $
            34Leasehold
      improvements
            
            
            10
            
            
            
            9Buildings
            
            
            213
            
            
            
            203Machinery
      and equipment
            
            
            753
            
            
            
            727Construction
      in progress
            
            
            32
            
            
            
            35Total
      property, plant and equipment
            
            
            1,042
            
            
            
            1,008Less
      accumulated depreciation
            
            
            (111
            )
            
            
            (56
            )Total
      Property, Plant, and Equipment, Net
            
            $
            931
            
            
            $
            952





Components
of accrued liabilities were as follows:





SuccessorAccrued
      Liabilities
            
            September
      30,
              2009
            
            
            December
      31,
              2008Wages
      and benefits
            
            $
            32
            
            
            $
            57Foreign
      currency and interest rate hedge agreements
            
            
            5
            
            
            
            36Restructuring
      reserves
            
            
            18
            
            
            
            19Environmental
      remediation liabilities
            
            
            34
            
            
            
            30Accrued
      income taxes payable
            
            
            26
            
            
            
            15Accrued
      selling expenses
            
            
            17
            
            
            
            16Other
            
            
            71
            
            
            
            86Total
      Accrued Liabilities
            
            $
            203
            
            
            $
            259





7.  Income
Taxes





Income
Tax Expense





We
recorded income tax expense of $12 and $15 for the three and nine months ended
September 30, 2009, respectively, and income tax expense of $214 in the two
months ended February 29, 2008 and $17 in the three and seven months ended
September 30, 2008.





Our
income tax expense or benefit is affected by changes in unrecognized tax
benefits and the mix of income and losses in the tax jurisdictions in which we
operate.  This results in significant differences in our effective tax
rate versus the U.S. statutory rate.  Furthermore, for each of the
periods presented, we recorded a valuation allowance against the tax benefit in
some jurisdictions in which we experienced losses, predominantly the
U.S.





Unrecognized
Tax Benefits





The total
amount of unrecognized tax benefits at September 30, 2009 and December 31, 2008
was $156 and $157, respectively.  Included in the balances at
September 30, 2009 and December 31, 2008 were $55 and $63, respectively, of
unrecognized tax benefits that, if recognized, would affect the effective tax
rate.  The decrease in the amounts is mainly the result of
developments in case law changing the technical merits of a tax position and
closure of tax audits, partially offset by tax positions related to events in
the current year and currency fluctuations.





11
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


We file
income tax returns in the U.S. and various states and foreign
jurisdictions.  With few exceptions, we are no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities
for years before 2002.  It is reasonably possible that within the next
12 months as a result of the resolution of federal, state and foreign
examinations and appeals, and the expiration of various statutes of limitation
that the unrecognized tax benefits that would affect the effective tax rate will
decrease by up to $18 and the unrecognized tax benefits that would not affect
the effective tax rate will decrease by up to $7.





8.  Restructuring
Costs





In an
effort to maintain competitiveness across our businesses and the geographic
areas in which we operate and to enhance the efficiency and cost effectiveness
of our support operations, we periodically initiate certain restructuring
activities which result in charges for costs associated with exit or disposal
activities, severance and/or impairment of long-lived assets.  A
summary of these activities for the periods presented are as
follows:




General
Corporate
  In the fourth quarter of 2008, we
initiated a general corporate restructuring targeted to increase the efficiency
and cost effectiveness of our support operations.  Throughout 2009,
this project has expanded in scope to include a reduction in operational
personnel in order to more appropriately match our organization with current
production levels.  A summary of the employee reduction charges
associated with this project during the three and nine months ended September
30, 2009 and cumulative charges through September 30, 2009 are as
follows:





Saflex
            
            
            CPFilms
            
            
            Technical
      Specialties
            
            
            Unallocated
      and Other
            
            
            TotalThree Months Ended September 30,
      2009:Cost
      of goods sold
            
            $
            1
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            1Selling,
      general and administrative expenses
            
            
            1
            
            
            
            1
            
            
            
            --
            
            
            
            1
            
            
            
            3Total
            
            $
            2
            
            
            $
            1
            
            
            $
            --
            
            
            $
            1
            
            
            $
            4Nine Months Ended September 30,
      2009:Cost
      of goods sold
            
            $
            3
            
            
            $
            1
            
            
            $
            --
            
            
            $
            1
            
            
            $
            5Selling,
      general and administrative expenses
            
            
            9
            
            
            
            3
            
            
            
            1
            
            
            
            7
            
            
            
            20Research,
      development and other operating
              expenses,
      net
            
            
            1
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1Total
            
            $
            13
            
            
            $
            4
            
            
            $
            1
            
            
            $
            8
            
            
            $
            26Cumulative through September 30,
      2009:Cost
      of goods sold
            
            $
            3
            
            
            $
            1
            
            
            $
            --
            
            
            $
            1
            
            
            $
            5Selling,
      general and administrative expenses
            
            
            9
            
            
            
            3
            
            
            
            1
            
            
            
            10
            
            
            
            23Research,
      development and other operating
              expenses,
      net
            
            
            1
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1Total
            
            $
            13
            
            
            $
            4
            
            
            $
            1
            
            
            $
            11
            
            
            $
            29





We expect to incur an additional $6 in charges to be
shared by all our segments to cover the cost of impacted headcount
reductions.
 
 Trenton
Sheet Facility Closure
 
 In an
effort to balance our North America production with customer demand, in the
fourth quarter of 2008, we announced plans to idle our SAFLEX® plastic
interlayer manufacturing line at our facility in Trenton, Michigan (“Trenton
Facility”) in 2009.  A summary of the charges associated with this
project during the nine months ended September 30, 2009 and cumulative charges
through September 30, 2009 as recorded in cost of goods sold are as
follows:


Impairment
      of Long-Lived Assets
              
              
              Employment
                Reductions
              
              
              Other
      Restructuring Costs
              
              
              TotalNine Months Ended September 30,
      2009:Charges
      taken
              
              $
              --
              
              
              $
              4
              
              
              $
              1
              
              
              $
              5Cumulative through September 30,
      2009:Charges
      taken
              
              $
              8
              
              
              $
              6
              
              
              $
              1
              
              
              $
              15




We do not expect to incur any
additional restructuring charges for this project.




12
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Ruabon
Facility Closure
 
 Due to overcapacity within the
industry, a disadvantaged cost position and increasing pressure from Far Eastern
producers, we ceased the manufacturing of certain rubber chemicals at our
facility in Ruabon, Wales, United Kingdom (“Ruabon Facility”) in the third and
fourth quarters of 2008 with an expected final closure of the plant in
2014.  A summary of the charges and changes in estimates associated
with this project during the nine months ended September 30, 2009 and cumulative
charges through September 30, 2009 as recorded in cost of goods sold are as
follows:
 
 Future
                Contractual
                Payments
              
              
              Employment
                Reductions
              
              
              Other
      Restructuring Costs
              
              
              TotalNine Months Ended September 30,
      2009:Charges
      taken
              
              $
              --
              
              
              $
              2
              
              
              $
              --
              
              
              $
              2Changes
      in estimates (a)
              
              
              (5
              )
              
              
              --
              
              
              
              --
              
              
              
              (5
              )Total
              
              $
              (5
              )
              
              $
              2
              
              
              $
              --
              
              
              $
              (3
              )Cumulative through September 30,
      2009:Charges
      taken
              
              $
              10
              
              
              $
              9
              
              
              $
              3
              
              
              $
              22Changes
      in estimates (a)
              
              
              (5
              )
              
              
              --
              
              
              
              --
              
              
              
              (5
              )Total
              
              $
              5
              
              
              $
              9
              
              
              $
              3
              
              
              $
              17
 
 (a)
              We
      reduced the future contractual payment reserve by $5 due to a
      renegotiation of the lease and operating agreement with our third party
      operator.  The new lease and operating agreement, which is
      effective from September 1, 2009 through December 31, 2013, reduced the
      services to be provided and increased certain fees allowing the contract
      to provide an economic
benefit.




To complete the closure process,
we expect to incur an additional $7 in charges as an increase to cost of goods
sold within our Technical Specialties reportable segment for other restructuring
costs including decontamination and demolition.


Restructuring
Summary





A summary
of all restructuring activity during the three and nine months ended September
30, 2009 is as follows:





Future
              Contractual
              Payments
            
            
            Employment
              Reductions
            
            
            Other
      Restructuring Costs
            
            
            TotalSuccessorBalance
      at December 31, 2008
            
            $
            10
            
            
            $
            10
            
            
            $
            --
            
            
            $
            20Charges taken
            
            
            --
            
            
            
            22
            
            
            
            --
            
            
            
            22Amounts utilized
            
            
            (2
            )
            
            
            (8
            )
            
            
            --
            
            
            
            (10
            )Balance
      at March 31, 2009
            
            
            8
            
            
            
            24
            
            
            
            --
            
            
            
            32Charges taken
            
            
            --
            
            
            
            6
            
            
            
            1
            
            
            
            7Amounts utilized
            
            
            (1
            )
            
            
            (9
            )
            
            
            (1
            )
            
            
            (11
            )Changes in
    estimates
            
            
            (5
            )
            
            
            --
            
            
            
            --
            
            
            
            (5
            )Currency
      fluctuations
            
            
            1
            
            
            
            1
            
            
            
            --
            
            
            
            2Balance
      at June 30, 2009
            
            
            3
            
            
            
            22
            
            
            
            --
            
            
            
            25Charges taken
            
            
            --
            
            
            
            3
            
            
            
            --
            
            
            
            3Amounts utilized
            
            
            (1
            )
            
            
            (6
            )
            
            
            --
            
            
            
            (7
            )Changes in
    estimates
            
            
            --
            
            
            
            1
            
            
            
            --
            
            
            
            1Currency
      fluctuations
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Balance
      at September 30, 2009
            
            $
            2
            
            
            $
            20
            
            
            $
            --
            
            
            $
            22





9.  Commitments
and Contingencies





Litigation





We are a
party to legal proceedings, which have arisen in the ordinary course of business
and involve claims for money damages.





Except
for the potential effect of an unfavorable outcome with respect to our Legacy
Tort Claims Litigation, it is our opinion that the aggregate of all claims and
lawsuits will not have a material adverse impact on our consolidated financial
statements.





Legacy
Tort Claims Litigation





Pursuant
to the Amended and Restated Settlement Agreement effective February 28, 2008,
entered into by Solutia and Monsanto Company (“Monsanto”) in connection with our
emergence from Chapter 11 (the “Monsanto Settlement Agreement”), Monsanto is
responsible to defend and indemnify us for any Legacy Tort Claims as that term
is defined in the agreement, while we retain responsibility for tort claims
arising out of exposure occurring after our spinoff from Pharmacia Corporation
(“Pharmacia”) (the former Monsanto Company which is now a 100% owned subsidiary
of Pfizer, Inc.), which occurred on September 1, 1997 (the “Solutia
Spinoff”).  Solutia or its 100% owned subsidiary, Flexsys, have been
named as defendants in the following actions, and have submitted the matters to
Monsanto as Legacy Tort Claims.  However, to the extent these matters
relate to post Solutia Spinoff exposure or are not within the meaning of “Legacy
Tort Claims” within the Monsanto Settlement Agreement, we would potentially be
liable.  In addition to the below actions, Monsanto has sought
indemnity from us for certain tort and workers’ compensation claims in which
Monsanto has been named a defendant.  We have rejected such demand
pursuant to the Monsanto Settlement Agreement.  There are no pending
legal actions regarding these alleged indemnification rights.





13
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Putnam County. West Virginia
Litigation.In December 2004, a purported class action lawsuit was filed
in the Circuit Court of Putnam County, West Virginia against Flexsys, Pharmacia,
Monsanto and Akzo Nobel (Solutia is not a named defendant) alleging exposure to
dioxin from Flexsys’ Nitro, West Virginia facility, which is now
closed.  The relevant production activities at the facility occurred
during Pharmacia’s ownership and operation of the facility and well prior to the
creation of the Flexsys joint venture between Pharmacia (whose interest was
subsequently transferred to us in the Solutia Spinoff) and Akzo
Nobel.  The plaintiffs are seeking damages for loss of property value,
medical monitoring and other equitable relief.





Beginning
in February 2008, Flexsys, Monsanto, Pharmacia, Akzo Nobel and another third
party were named as defendants in approximately seventy-five individual
lawsuits, and Solutia was named in two individual lawsuits, filed in various
state court jurisdictions by residents or former residents of Putnam
County, West Virginia.  The largely identical complaints allege that
the residents were exposed to potentially harmful levels of dioxin particles
from the Nitro facility.  Plaintiffs did not specify the amount of
their alleged damages in their complaints.





Escambia County, Florida Litigation.In June 2008, a group of approximately fifty property owners and business
owners in the Pensacola, Florida area filed a lawsuit in the Circuit Court for
Escambia County, Florida against Monsanto, Pharmacia, Solutia, and the plant
manager at Solutia's former Pensacola plant, which was included in the sale of
our Integrated Nylon business.  The lawsuit, entitled John Allen, et al. v. Monsanto
Company, et al., alleges that the defendants are responsible for elevated
levels of PCBs in the Escambia River and Escambia Bay due to past and allegedly
continuing releases of PCBs from the Pensacola plant.  The plaintiffs
seek: (1) damages associated with alleged decreased property values caused
by the alleged contamination, and (2) remediation of the alleged
contamination in the waterways.  Plaintiffs did not specify the amount
of their alleged damages in their complaint.





St. Clair County, Illinois
Litigation.In February 2009, a purported class action lawsuit
was filed in the Circuit Court of St. Clair County, Illinois against Solutia,
Pharmacia, Monsanto and two other unrelated defendants alleging the
contamination of their property from PCBs, dioxins, furans, and other alleged
hazardous substances emanating from the defendants’ facilities in Sauget,
Illinois (including our W.G. Krummrich site in Sauget, Illinois).  The
proposed class is comprised of residents who live within a two-mile radius of
the Sauget facilities.  The plaintiffs are seeking damages for medical
monitoring and the costs associated with remediation and removal of alleged
contaminants from their property.





In
addition to the purported class action lawsuit, nine additional individual
lawsuits have been filed since February 2009 against the same defendants
(including Solutia) comprised of claims from over two hundred individual
residents of Illinois who claim they suffered illnesses and/or injuries as well
as property damages as a result of the same PCB’s, dioxins, furans, and other
alleged hazardous substances allegedly emanating from the defendants’ facilities
in Sauget.  The plaintiffs have not identified a specific amount of
alleged damages in their complaints.





Upon
assessment of the terms of the Monsanto Settlement Agreement and other defenses
available to us, we believe the probability of an unfavorable outcome to us on
the Putnam County, West Virginia, Escambia County, Florida, and St. Clair
County, Illinois litigation against us is remote and, accordingly, we have not
recorded a loss contingency.  Nonetheless, if it were subsequently
determined these matters are not within the meaning of “Legacy Tort Claims,” as
defined in the Monsanto Settlement Agreement, or other defenses to us were
unsuccessful, it is reasonably possible we would be liable for an amount which
cannot be estimated but which could have a material adverse effect on our
consolidated financial statements.





14
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Solutia
Inc. Employees’ Pension Plan Litigation





Starting in October 2005, separate
purported class action lawsuits were filed by current or former participants in
our U.S. Pension Plan (the “U.S. Plan”), which were ultimately consolidated in
September 2006 into a single case.  The Consolidated Class Action
Complaint alleged three separate causes of action against the U.S. Plan: (1) the
U.S. Plan violates ERISA by terminating interest credits on prior plan accounts
at the age of 55; (2) the U.S. Plan is improperly backloaded in violation of
ERISA; and (3) the U.S. Plan is discriminatory on the basis of
age.  In September 2007, the court dismissed the plaintiffs’ second
and third claims, and by consent of the parties, certified a class action
against the U.S. Plan only with respect to plaintiffs’ claim that the U.S. Plan
violates ERISA by allegedly terminating interest credits on prior plan accounts
at the age of 55.  On June 11, 2009, the United States District Court
for the Southern District of Illinois entered a summary judgment in favor of the
U.S. Plan on the sole remaining claim against the U.S. Plan.  The
District Court entered its final appealable judgment in the case on September
29, 2009.





Environmental
Liabilities





In the
ordinary course of business, we are subject to numerous environmental laws and
regulations covering compliance matters or imposing liability for the costs of,
and damages resulting from, cleaning up sites, past spills, disposals and other
releases of hazardous substances.  We have incurred, and we may in the
future incur, liabilities to investigate and clean up waste or contamination at
our current facilities, properties adjacent to our current facilities or
facilities operated by third parties at where we may have disposed of waste or
other materials.  Under some circumstances, the scope of our liability
may extend to damages to natural resources for which we have accrued $2,
exclusive of the balances noted below.  In almost all cases, our
potential liability arising from historical contamination is based on operations
and other events occurring at our facilities or as a result of their operation
prior to the Solutia Spinoff.





Further,
under terms of the Monsanto Settlement Agreement and our Plan, we have agreed to
share responsibility with Monsanto for the environmental remediation at certain
locations outside our plant boundaries in Anniston, Alabama, and Sauget,
Illinois which were also incurred prior to the Solutia Spinoff (the “Shared
Sites”).  Under this cost-sharing arrangement, we are responsible for
the funding of environmental liabilities at the Shared Sites from the Effective
Date up to a total of $325.  Thereafter, if needed, we and Monsanto
will share responsibility equally.





Reserves
for environmental remediation that we believe to be probable and estimable are
recorded appropriately as current and long-term liabilities in the Consolidated
Statement of Financial Position.  These reserves include liabilities
expected to be paid out within fifteen years.  The amounts charged to
pre-tax earnings for environmental remediation and related charges are included
in cost of goods sold and are summarized below:





TotalSuccessorBalance
      at December 31, 2008
            
            $
            309Net charges
taken
            
            
            1Amounts utilized
    (a)
            
            
            (5
            )Currency
      fluctuations
            
            
            (1
            )Balance
      at March 31, 2009
            
            
            304Net charges
taken
            
            
            3Amounts utilized
    (a)
            
            
            (7
            )Currency
      fluctuations
            
            
            1Balance
      at June 30, 2009
            
            
            301Net charges
taken
            
            
            3Amounts utilized
    (a)
            
            
            (8
            )Currency
      fluctuations
            
            
            --Balance
      at September 30, 2009
            
            $
            296Environmental
      Remediation Liabilities, current
            
            $
            34Environmental
      Remediation Liabilities, long-term
            
            
            262Balance
      at September 30, 2009
            
            $
            296




(a)
            For
      the nine months ended September 30, 2009, allowable expenditures of $20
      were reimbursed to us by a special purpose entity established with
      proceeds of stock issued by us on the Effective
  Date.


15
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)








In
addition to accrued environmental liabilities, there are costs which have not
met the definition of probable, and accordingly, are not recorded in the
Consolidated Statement of Financial Position.  These loss
contingencies are monitored regularly for a change in fact or circumstance that
would require an accrual adjustment.  These matters involve
significant unresolved issues, including the interpretation of applicable laws
and regulations, the outcome of negotiations with regulatory authorities and
alternative methods of remediation. Because of these uncertainties, the
potential liability for existing environmental remediation may range up to two
times the amount recorded.


Except as
noted below, we believe that these matters, when ultimately resolved, which may
be over an extended period of time, will not have a material adverse effect on
our Consolidated Statement of Financial Position, but could have a material
adverse effect on our Consolidated Statement of Operations in any given
period.  Our significant sites are described in more detail
below:





Anniston,
Alabama:   On Aug. 4, 2003, the U.S. District Court for
the Northern District of Alabama approved a Revised Partial Consent Decree,
pursuant to which Pharmacia and Solutia are obligated to perform, among other
things, residential cleanup work and a remedial investigation/feasibility study
(“RI/FS”) as a result of PCB contamination from our Anniston plant, which
occurred prior to the Solutia Spinoff.  The residential cleanup is
proceeding and should be completed within the next two years.  Some
level of remediation of non-residential properties and creek floodplains and/or
sediment will be required in the future and we have accrued for this liability
based upon our understanding of the level and extent of contamination in these
areas, the remedial effort likely to be required by various governmental
organizations and estimated costs associated with similar remediation
projects.  We may recover some of our investigation and remediation
costs from parties, against whom we filed a cost recovery action in July 2003
but because the eventual outcome of these proceedings is uncertain, our
environmental liability at September 30, 2009 does not incorporate this
potential reimbursement.  State and Federal Natural Resource Damage
Trustees have asserted a claim for potential natural resource damage and advised
us that they are preparing to undertake an assessment as to the nature and
extent of such damages.  As of September 30, 2009, we have accrued
$116 for all environmental remediation projects in the Anniston, Alabama area
which represents our best estimate of the final cost
liability.  Timing of the remediation will not be established until we
complete the RI/FS, a Record of Decision is issued by the United States
Environmental Protection Agency (“USEPA”), and a consent decree is negotiated
and entered by the court to cover the selected remediation, which will take
several years.





Sauget,
Illinois:  A number of industries, including our W.G. Krummrich
Plant, have operated and disposed of wastes in Sauget,
Illinois.  Areas of contamination from these industrial operations,
which for our W.G. Krummrich Plant occurred prior to the Solutia Spinoff, have
been classified as part of either the Sauget Area 1 Sites or the Sauget Area 2
Sites.  We are conducting a RI/FS for the Sauget Area 1 Sites under an
Administrative Order on Consent issued on January 21, 1999.  Although
an extensive removal action for one of the Sauget Area 1 Sites was conducted
under a Unilateral Administrative Order issued on May 31, 2000, the cost and
timing of any additional required remedial actions will be established only
after we complete the RI/FS, a Record of Decision is issued by the USEPA, and a
consent decree is negotiated and entered by the court to cover the selected
remediation, which is expected within the next two years.  We have an
agreement with two other potentially responsible parties (“PRPs”) to enter into
an allocation proceeding upon issuance of the Record of Decision to resolve our
respective shares of the liability for the Sauget Area 1 Sites.  We,
in coordination with 19 other PRPs, are also required to conduct a RI/FS for the
Sauget Area 2 Sites under an Administrative Order on Consent issued effective
November 24, 2000.  We submitted the revised RI report and are
preparing the FS report with other PRPs based on interim allocations and have
agreed, upon issuance of the Record of Decision, to participate in an allocation
proceeding to fully resolve each PRP’s share of the liability for the
investigation and remediation costs.  An interim groundwater remedy
has been installed pursuant to a Unilateral Administrative Order issued on
October 3, 2002.  We anticipate that the USEPA will issue a Record of
Decision sometime in mid-2010.  Our ultimate exposure at these sites
will depend on the final remedial actions to be taken and on the level of
contribution from other PRPs.  In addition, several PRPs, including
Solutia and Pharmacia, received in June 2009 from the U.S. Department of the
Interior, on behalf of various federal and state natural resource trustees, a
notice of intent to perform and an invitation to cooperate in a natural resource
damage assessment for the Sauget Industrial Corridor.  Our best
estimate of the ultimate cost of all remedial measures that will be required at
the Sauget, Illinois area sites is $78 which we have accrued as of September 30,
2009.





16
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


W. G.
Krummrich Site:  We entered into a Consent Order under the U.S.
Resource Conservation and Recovery Act of 1976, as amended, effective May 3,
2000, to investigate and remediate soil and groundwater contamination from our
manufacturing operations at the W.G. Krummrich Plant, which occurred prior to
the Solutia Spinoff.  We conducted an extensive corrective measures
study and a Final Decision was issued by the USEPA in February 2008 setting out
the required corrective measures to be completed.  Due to the
complexity of the contamination issues at this site, certain of the corrective
measures will be performed in phases with the final remediation approach and
timing for some of the corrective measures being determined only after
investigation and pilot testing phases are completed.  Our best
estimate of the ultimate cost of all corrective measures that will be required
at the W.G. Krummrich Site is $24 which we have accrued as of September 30,
2009.





We also
have accruals for remedial obligations at several of our current or former
manufacturing sites which we have owned or operated since the Solutia
Spinoff.  Our best estimate of the ultimate cost of all corrective
measures that will be required at these sites is $78 which we have accrued as of
September 30, 2009.





Environmental
Agency Enforcement Actions





On March 3, 2009, the USEPA issued a
Notice of Violation (“NOV”), Administrative Order (“AO”) and Reporting
Requirement (“RR”) to us concerning alleged violations of the Clean Air Act
arising out of an inspection conducted of the Indian Orchard
Plant.  The NOV describes the USEPA’s findings alleging violations of
the plant’s Title V and state operating permits related to emissions of volatile
organic compounds.  The AO orders us to comply with its Title V permit
and the National Emission Standards for Hazardous Air Pollutants, Subpart OOO
(Amino/Phenolic Resins), Subpart UU (Equipment Leaks), and General
Provisions.  The RR requires us to submit additional information
regarding certain storage vessels and associated equipment.  On March
23, 2009, we met with the USEPA to confer on this NOV, AO, and
RR.  The USEPA informed us at the meeting that it has not yet made any
decisions as to whether it will take enforcement action or what type of action
it will take with respect to this matter.  We have not received
further communication from the USEPA on this matter.  The amount of a
potential loss, if any, is not currently estimable.





10.  Derivatives
and Risk Management





Our
business operations give rise to market risk exposures that result from changes
in foreign currency exchange rates, interest rates and certain commodity
prices.  To manage the volatility relating to these exposures, we
periodically enter into various derivative transactions that enable us to
alleviate the adverse effects of financial market risk.  The changes
in fair value of these hedging instruments are offset in part or in whole by
corresponding changes in the fair value or cash flows of the underlying
exposures being hedged.  Our approved policies and procedures do not
permit the purchase or holding of any derivative financial instruments for
trading purposes, and management of counterparty credit risk is through
diversification and credit rating reviews of the firms with whom we
transact.





Foreign Currency Exchange
Rate Risk





We
manufacture and sell our products in a number of countries throughout the world
and, as a result, are exposed to movements in foreign currency exchange
rates.  We are exposed to this risk both on an intercompany and a
third-party basis.  We use foreign currency derivative instruments to
manage the volatility associated with foreign currency purchases of materials
and other assets and liabilities created in the normal course of
business.  We also enter into certain foreign currency derivative
instruments primarily to protect against exposure related to intercompany
financing transactions.  These risks are managed primarily through the
use of forward exchange contracts and purchased options with maturities of
less than 18 months.





17
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


We have
chosen not to designate these instruments as hedges to allow the changes in the
fair value of these instruments to largely offset the re-measurement of the
underlying assets and liabilities in the Consolidated Statement of
Operations.  We had currency forward and option contracts to purchase
and sell $185 of currencies as of September 30, 2009 comprised principally of
the Euro, British Pound-Sterling, U.S. Dollar, and Malaysian
Ringgit.





Interest Rate
Risk





Interest
rate risk is primarily related to changes in interest expense from floating rate
debt.  To limit our exposure to this risk, in 2008 we entered into
interest rate swap agreements related to our $1.2 billion senior secured
term loan facility (“Term Loan”).  The interest rate swap agreements
have declining total notional amounts of $800 to $150 which are effective
from April 2010 through February 2014.  The terms of the interest rate
swap agreements require us to pay interest utilizing fixed interest rates
ranging from 4.65 percent to 4.85 percent and receive interest utilizing 1-Month
LIBOR, with a floor of 3.50 percent.  Through February 2009, we
designated the interest rate swap agreements as cash flow
hedges.  Because of significant declines in interest rates and the
significant difference between the prime and LIBOR rates, we could no longer
assert that we would always choose the 1-Month LIBOR on our Term
Loan.  Subsequent effectiveness testing on a historical and
prospective basis comparing our interest rate swap agreements to the available
interest rate options on our Term Loan concluded the relationships were not
highly effective.  Therefore, we discontinued hedge accounting in
February 2009 and all prospective mark-to-market gains or losses are recognized
in interest expense on the Consolidated Statement of Operations.





Commodity Price
Risk





Certain
raw materials and energy resources we use are subject to price volatility caused
by weather, crude oil prices, supply conditions, political and economic
variables and other unpredictable factors.  Over 90 percent of our
natural gas usage in the U.S. was attributable to the operations of our
Integrated Nylon business, which we sold in the second quarter of
2009.  Therefore, although from time to time we use forward and option
contracts to manage a portion of the volatility related to anticipated energy
purchases with maturities up to 12 months, we settled all outstanding contracts
to purchase natural gas in the second quarter 2009 in conjunction with the sale
of our Integrated Nylon business.





At
September 30, 2009, we did not have any derivatives designated as hedging
instruments.  Our derivatives not designated as hedging instruments,
recorded at their respective fair values at September 30, 2009, are summarized
as follows:





Asset Derivatives
            
            Liability DerivativesConsolidated
      Statement of Financial Position Presentation
            
            Fair Value
            
            Consolidated
      Statement of Financial Position Presentation
            
            Fair ValueDerivative
      not designated as hedging instruments:Interest
      rate contracts
            Miscellaneous
      Receivables
            
            $
            --
            
            Accrued
      Liabilities
            
            $
            4Other
      Assets
            
            
            --
            
            Other
      Liabilities
            
            
            16Total interest rate
      contracts
            
            
            
            --
            
            
            
            
            20Foreign
      exchange contracts
            Miscellaneous
      Receivables
            
            
            3
            
            Accrued
      Liabilities
            
            
            1Total
            
            
            $
            3
            
            
            
            $
            21





For the nine months ended
September 30, 2009, we recognized a gain of $4 in other comprehensive income
(loss) for the period in which our interest rate contracts were designated as
cash flow hedging instruments. During the twelve months following September
30, 2009, we expect a reclassification of $5 into earnings of the $22
accumulated losses on our interest rate contracts as of September 30,
2009.





A summary of the effect of
our derivative instruments on the Consolidated Statement of Operations is as
follows:








18
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)




Amount
      of Gain (Loss) Recognized in
              Consolidated Statement of
      OperationsPresentation
      of Gain (Loss) Recognized in Consolidated Statement of Operations
            
            Three
      Months Ended
              September 30, 2009
            
            
            Nine
      Months Ended
              September 30, 2009Derivatives
      not designated as hedging instruments:Interest
      rate contracts
            Interest
      expense
            
            $
            (3
            )
            
            $
            1Foreign
      exchange contracts
            Other
      income (loss), net
            
            
            1
            
            
            
            17Commodity
      contracts
            Income
      (Loss) from Discontinued Operations, net of tax
            
            
            --
            
            
            
            (1
            )Total
            
            
            $
            (2
            )
            
            $
            17





11.  Fair
Value of Financial Instruments





The
following table presents our assets and liabilities that are measured at fair
value on a recurring basis and are categorized using the fair value hierarchy.
The fair value hierarchy has three levels based on the reliability of the inputs
used to determine fair value.





Fair Value Measurements at September 30,
      2009Total
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level 1)
            
            
            Significant
      Other Observable Inputs
              (Level 2)
            
            
            Significant
      Unobservable Inputs
              (Level 3)Assets:Restricted
      cash (a)
            
            $
            4
            
            
            $
            4
            
            
            $
            --
            
            
            $
            --Derivatives
      – Foreign Exchange (b)
            
            
            3
            
            
            
            --
            
            
            
            3
            
            
            
            --Total
            
            $
            7
            
            
            $
            4
            
            
            $
            3
            
            
            $
            --Liabilities:Derivatives
      – Foreign Exchange (b)
            
            $
            1
            
            
            $
            --
            
            
            $
            1
            
            
            $
            --Derivatives
      – Interest Rates (c)
            
            
            20
            
            
            
            --
            
            
            
            20
            
            
            
            --Total
            
            $
            21
            
            
            $
            --
            
            
            $
            21
            
            
            $
            --





(a)
            Includes
      cash invested in money market funds restricted for funding of
      environmental remediation and other legacy liabilities.(b)
            Includes
      foreign currency forward contracts which are valued using an income
      approach based on the present value of the forward rate less the contract
      rate multiplied by the notional amount.(c)
            Includes
      interest rate swaps which are valued using counterparty quotes, which use
      discounted cash flows and the then-applicable forward interest
      rates.





The
recorded amounts of cash, trade receivables, accounts payable and short-term
debt approximate their fair values at September 30, 2009 due to the short
maturity of these instruments. The estimated fair value of our long-term
debt at September 30, 2009 is $1,194.  The fair value of our assets
and liabilities previously stated are estimated by the use of estimates obtained
from brokers.





12.  Pension
Plans and Other Postretirement Benefits





In
preparation for the sale of our Integrated Nylon business, we divided our U.S.
Plan into the following three plans, effective February 28, 2009: (i) Nylon
Pension Plan; (ii) Solutia Pension Plan; and (iii) Solutia Union Pension
Plan.  The Nylon Pension Plan covers all active employees of the
Integrated Nylon business.  In accordance with the terms of the sale
agreement as further described in Note 3 – Divestitures, the Nylon Pension Plan
was assumed by the Buyer at the completion of the sale.





As a
result of the division of the U.S. Plan into three plans, we were required to
perform a funded analysis in accordance with the Pension Protection Act of 2006
(“PPA”).  The result of this analysis is the Solutia Pension Plan will
be prohibited by the PPA from paying out lump sum benefits, until such time as
the plan assets rise above the 60 percent funding level for up to half a lump
sum or above the 80 percent funding level for a full lump sum.  For
participants in the Solutia Union Pension Plan, the lump sum restrictions in the
PPA do not apply until January 1, 2010.





19
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Components of Net Periodic Benefit
Cost





For the three months ended September
30, 2009 and 2008, along with the nine months ended September 30, 2009, the
seven months ended September 30, 2008 and the two months ended February 29, 2008
our pension and healthcare and other benefit costs for continuing operations
were as follows:





Pension BenefitsSuccessorThree
      MonthsEnded
              September 30, 2009
            
            
            Three MonthsEnded
              September 30, 2008Service
      costs for benefits earned
            
            $
            1
            
            
            $
            2Interest
      costs on benefit obligation
            
            
            15
            
            
            
            15Assumed
      return on plan assets
            
            
            (15
            )
            
            
            (16
            )Net
      actuarial loss
            
            
            1
            
            
            
            --Settlement
      charges
            
            
            6
            
            
            
            --Total
            
            $
            8
            
            
            $
            1





Pension BenefitsSuccessor
            
            
            PredecessorNine
      MonthsEnded
              September 30, 2009
            
            
            Seven
      MonthsEnded
              September 30, 2008
            
            
            Two
      MonthsEnded
              February 29, 2008Service
      costs for benefits earned
            
            $
            2
            
            
            $
            3
            
            
            $
            1Interest
      costs on benefit obligation
            
            
            45
            
            
            
            37
            
            
            
            11Assumed
      return on plan assets
            
            
            (44
            )
            
            
            (41
            )
            
            
            (13
            )Net
      actuarial loss
            
            
            2
            
            
            
            --
            
            
            
            2Settlement
      charges
            
            
            6
            
            
            
            --
            
            
            
            1Total
            
            $
            11
            
            
            $
            (1
            )
            
            $
            2





Healthcare and Other
    BenefitsSuccessorThree
      MonthsEnded
              September 30, 2009
            
            
            Three
      MonthEnded
              September 30, 2008Service
      costs for benefits earned
            
            $
            1
            
            
            $
            1Interest
      costs on benefit obligation
            
            
            4
            
            
            
            4Assumed
      return on plan assets
            
            
            (2
            )
            
            
            (2
            )Net
      actuarial gain
            
            
            (2
            )
            
            
            (1
            )Total
            
            $
            1
            
            
            $
            2





Healthcare and Other
    BenefitsSuccessor
            
            
            PredecessorNine
      MonthsEnded
              September 30, 2009
            
            
            Seven
      MonthsEnded
              September 30, 2008
            
            
            Two
      MonthsEnded
              February 29, 2008Service
      costs for benefits earned
            
            $
            3
            
            
            $
            3
            
            
            $
            1Interest
      costs on benefit obligation
            
            
            11
            
            
            
            9
            
            
            
            4Assumed
      return on plan assets
            
            
            (4
            )
            
            
            (4
            )
            
            
            --Prior
      service gains
            
            
            --
            
            
            
            --
            
            
            
            (3
            )Net
      actuarial gain
            
            
            (5
            )
            
            
            (1
            )
            
            
            --Total
            
            $
            5
            
            
            $
            7
            
            
            $
            2





Settlements





As a
result of the assumption of the Nylon Pension Plan by the Buyer, we recognized a
settlement charge of $20 which was recorded in income (loss) from discontinued
operations, net of tax during the nine months ended September 30,
2009.  For the nine months ended September 30, 2009, we recorded a
settlement charge of $6 resulting from the significant amount of lump sum
distributions in the U.S. associated with a reduction of salaried personnel
prior to February 28, 2009 and union personnel throughout 2009.  Both
reductions were driven by restructuring activities as more fully discussed in
Note 8 – Restructuring Costs.  For the two months ended February 29,
2008, we recorded a pension settlement charge of $1 resulting from the
significant amount of lump sum distributions from our Belgium retirement
plan.





20
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Employer Contributions





According
to Internal Revenue Service funding rules, we expect to make approximately $26
in pension contributions to our Solutia and Solutia Union Pension Plans in
2009.  We made $20 of these required 2009 contributions during the
nine months ended September 30, 2009.  We also expect to be required
to fund approximately $10 in pension contributions to our foreign pension plans
in 2009, of which $8 was made during the nine months ended September 30,
2009.





13.  Capital
Stock





In the
second quarter 2009 we completed a public offering (“Stock Offering”) of
24,738,641 shares of common stock, including the over-allotment option as
exercised by the underwriters of the offering, for $5.00 per
share.  Net proceeds were $119, after deducting underwriting discounts
and commissions.





During
the third quarter 2009, our Board of Directors approved a net operating loss
shareholder rights plan (“Rights Plan”) which is intended to avoid an ownership
change within the meaning of Section 382 of the Internal Revenue Code and
thereby preserve our ability to utilize certain net operating loss carryforwards
and other tax benefits.  Our adoption of the Rights Plan effectively
attaches one right (“Right”) to each outstanding share of our common stock, to
stockholders of record at the close of business on July 28, 2009.  If
the Rights are triggered, each Right may entitle the holder of the Right to
purchase our common stock at a discount to its market price, subject to certain
exceptions as set forth in the Rights Plan.





During
the third quarter 2009, our independent directors each received 8,134 shares, or
56,938 shares in aggregate, as the annual equity retainer portion of their 2009
director compensation.





14.  Debt
Obligations





On the
Effective Date, we entered into certain financing agreements to borrow up to
$2.05 billion from a syndicate of lenders (“Financing
Agreements”).  The Financing Agreements consisted of (i) a $450 senior
secured asset-based revolving credit facility (“Revolver”) which was voluntarily
reduced to $400 in the third quarter 2009, (ii) our Term Loan and (iii) a $400
senior unsecured bridge facility which was subsequently retired in
2008.  On May 5, 2009 $74 of senior unsecured term debt, due 2011, at
a price of 95 percent of its original principal amount was issued by our 100%
owned German subsidiary, Flexsys Verkauf GmbH (the “Senior Term
Loan”).  Net proceeds, after incorporating the original issue discount
and debt issuance fees, of $66, were used to pay down our
Revolver.  On June 25, 2009, we subsequently repaid the Senior Term
Loan utilizing a portion of the $119 of proceeds from our Stock
Offering.





We had
short-term borrowings of $19 and $25 at September 30, 2009 and December 31,
2008, respectively, comprised of short-term debt and other lines of
credit.





Our
long-term debt consisted of the following as of September 30, 2009 and December
31, 2008:





SuccessorSeptember
      30,
              2009
            
            
            December
      31,
              2008Term
      Loan, due 2014
            
            $
            1,179
            
            
            $
            1,188Revolver,
      due 2013
            
            
            --
            
            
            
            183Total principal
      amount
            
            
            1,179
            
            
            
            1,371Less
      current portion of long-term debt
            
            
            (12
            )
            
            
            (12
            )Total
            
            $
            1,167
            
            
            $
            1,359





21
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Maximum
availability under the Revolver is limited to the lesser of $400 or the amount
of our borrowing base, as defined, but generally calculated as a percentage of
allowable inventory and trade receivables.  In addition to outstanding
borrowings, availability is further reduced by outstanding letters of
credit.  Availability under the Revolver was $114 and $193 as of
September 30, 2009 and December 31, 2008, respectively.  The weighted
average interest rate on our total debt outstanding was 7.2 percent and 7.7
percent at September 30, 2009 and December 31, 2008, respectively. Our
weighted average interest rate on short-term debt outstanding was 3.2
percent and 4.2 percent at September 30, 2009 and December 31, 2008,
respectively.





The
Revolver bears interest, at our option, at LIBOR or the prime rate plus an
applicable margin.  As of September 30, 2009, the applicable margin
for the LIBOR and prime rate loans in the Revolver were 1.75 percent and 0.75
percent, respectively.  The Term Loan bears interest at our option, at
LIBOR with a floor of 3.50 percent through the fourth anniversary of the
Effective Date plus 5.00 percent, or at the prime rate plus 4.00
percent. Interest for the Revolver and Term Loan is payable (i) with
respect to LIBOR loans, on the last day of each relevant interest period
(defined as one, two, three or six months or other periods available to all
lenders under each facility) and, in the case of any interest period longer than
three months, on each successive date three months after the first day of such
interest period, and (ii) with respect to prime rate loans, quarterly in
arrears.





Our
current subsidiaries CPFilms Inc., Flexsys America L.P., Flexsys America Co.,
Monchem International, Inc., Solutia Business Enterprises Inc., Solutia
Inter-America, Inc., Solutia Overseas, Inc., Solutia Systems, Inc., S E
Investment LLC and future subsidiaries as defined by the Financing Agreements,
subject to certain exceptions (“Guarantors”) are guarantors of our obligations
under the Financing Agreements.  The Financing Agreements and the
related guarantees are secured by liens on substantially all of our and the
Guarantors’ present and future assets.





We are
required to make mandatory repayments of the Financing Agreements in connection
with asset sales and certain other events subject to certain
exceptions.  We are required to pay 1 percent of the principal of the
Term Loan annually via quarterly payments.  In addition, on an annual
basis and subject to our leverage position at December 31st of
each year, we are required to repay the Term Loan with a portion of excess cash
flow generated during the year, as defined in the Financing
Agreements.  If net leverage is less than 3.0x or greater than or
equal to 3.0x, then we are required to repay 25 percent or 50 percent,
respectively, of excess cash flow generated during the year.  Excess
cash flow is generally defined as EBITDA less interest, capital expenditures,
taxes, and amortization of debt, plus or minus working capital changes and other
adjustments.  Any portion of the Term Loan that is repaid through
mandatory prepayments or voluntarily prepaid may not be
reborrowed.  Furthermore, voluntary prepayments or amendments to the
Term Loan are subject to a prepayment premium or fee of 2 percent after the
first anniversary and prior to the second anniversary of the Effective Date and
1 percent after the second anniversary and prior to the third anniversary of the
Effective Date.  We are not subject to any prepayment premiums or fees
for amendments after the third anniversary of the Effective Date.





The
Financing Agreements include a number of customary covenants and events of
default, including the maintenance of certain financial covenants that restrict
our ability to, among other things, incur additional debt; make certain
investments; pay dividends, repurchase stock, sell certain assets or merge with
or into other companies; enter into new lines of business; make capital
expenditures; and prepay, redeem or exchange our debt.  The financial
covenants are (i) total leverage ratio, (ii) fixed charge coverage ratio and
(iii) a capital expenditure cap as defined by the Financing
Agreements.  We were in compliance with all applicable covenants as of
September 30, 2009. 
 See Note
17 – Subsequent Events for additional information on our debt
agreements.


15.  Segment
Data





We are 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.  Our operations are managed and reported in three
reportable operating segments, consisting of Saflex, CPFilms and Technical
Specialties.





The
Saflex reportable segment is a global manufacturer of performance films for
laminated safety glass.  The CPFilms reportable segment is a
manufacturer of performance films for after-market applications which add
functionality to glass.  The Technical Specialties reportable segment
is a global manufacturer of specialty products such as chemicals for the rubber
industry, heat transfer fluids and aviation hydraulic fluids.  The
major products by reportable segment are as follows:





22
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)





Reportable
      Segment
            
            ProductsSaflex
            
            ·SAFLEX®
      plastic interlayer
              ·Specialty
      intermediate Polyvinyl Butyral resin and plasticizerCPFilms
            
            ·LLUMAR®,
      VISTA®, GILA® and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS® professional
      and retail window films
              ·Other
      enhanced polymer films for industrial customersTechnical
      Specialties
            
            ·CRYSTEX®
      insoluble sulphur
              ·SANTOFLEX®
      antidegradants
              ·SANTOCURE®
      and PERKACIT® primary and ultra accelerators
              ·THERMINOL®
      heat transfer fluids
              ·SKYDROL®
      aviation hydraulic fluids
              ·SKYKLEEN®
      brand of aviation solvents





The
performance of our operating segments is evaluated based on segment profit,
defined as earnings before interest expense, income taxes, depreciation and
amortization less net income attributable to noncontrolling interests and
reorganization items, net (“EBITDA”).  Segment profit includes
selling, general and administrative, research, development and other operating
expenses, gains and losses from asset dispositions and restructuring charges,
net income attributable to noncontrolling interests and other income and expense
items that can be directly attributable to the segment.  Certain
operations, expenses and other items that are managed outside the reportable
segments are reported as Unallocated and Other.  Unallocated and Other
is comprised of corporate expenses, adjustments to our LIFO valuation reserve,
adjustments to our environmental remediation liabilities, equity earnings from
affiliates, other income and expense items including currency gains/losses,
gains and losses from asset dispositions and restructuring charges that are not
directly attributable to the reportable segments in addition to operating
segments that do not meet the quantitative threshold for determining reportable
segments.  There were no inter-segment sales in the periods presented
below.





Segment
data for the three months ended September 30, 2009 and 2008, along with segment
data for the nine months ended September 30, 2009, seven months ended September
30, 2008 and the two months ended February 29, 2008, respectively are as
follows:





SuccessorThree
      MonthsEnded
              September 30, 2009
            
            
            Three
      MonthsEnded
              September 30, 2008Net
              Sales
            
            
            Profit
              (Loss)
            
            
            Net
              Sales
            
            
            Profit
              (Loss)Reportable
      Segments:Saflex
            
            $
            182
            
            
            $
            45
            
            
            $
            221
            
            
            $
            36CPFilms
            
            
            53
            
            
            
            11
            
            
            
            63
            
            
            
            15Technical
      Specialties
            
            
            209
            
            
            
            72
            
            
            
            294
            
            
            
            74Reportable
      Segment Totals
            
            
            444
            
            
            
            128
            
            
            
            578
            
            
            
            125Unallocated
      and Other
            
            
            4
            
            
            
            (29
            )
            
            
            9
            
            
            
            (17
            )Total
            
            
            448
            
            
            
            99
            
            
            
            587
            
            
            
            108Reconciliation
      to Consolidated Totals:Depreciation and
      amortization
            
            
            
            
            
            
            (27
            )
            
            
            
            
            
            
            (28
            )Interest
expense
            
            
            
            
            
            
            (31
            )
            
            
            
            
            
            
            (42
            )Net income attributable to noncontrolling interest
            
            
            
            
            
            
            2
            
            
            
            
            
            
            
            2Consolidated
      Totals:Net
      Sales
            
            $
            448
            
            
            
            
            
            $
            587Income
      from Continuing  Operations Before Income Tax
      Expense
            
            
            
            
            
            $
            43
            
            
            
            
            
            
            $
            40





23
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Successor
            
            
            PredecessorNine
      MonthsEnded
              September 30, 2009
            
            
            Seven
      MonthsEnded
              September 30, 2008
            
            
            Two
      MonthsEnded
              February 29, 2008Net
              Sales
            
            
            Profit
              (Loss)
            
            
            Net
              Sales
            
            
            Profit
              (Loss)
            
            
            Net
              Sales
            
            
            Profit
              (Loss)Reportable
      Segments:Saflex
            
            $
            475
            
            
            $
            99
            
            
            $
            509
            
            
            $
            55
            
            
            $
            125
            
            
            $
            16CPFilms
            
            
            141
            
            
            
            24
            
            
            
            157
            
            
            
            34
            
            
            
            39
            
            
            
            9Technical
      Specialties
            
            
            566
            
            
            
            190
            
            
            
            657
            
            
            
            125
            
            
            
            164
            
            
            
            40Reportable
      Segment Totals
            
            
            1,182
            
            
            
            313
            
            
            
            1,323
            
            
            
            214
            
            
            
            328
            
            
            
            65Unallocated
      and Other
            
            
            15
            
            
            
            (73
            )
            
            
            23
            
            
            
            (27
            )
            
            
            7
            
            
            
            (2
            )Total
            
            
            1,197
            
            
            
            240
            
            
            
            1,346
            
            
            
            187
            
            
            
            335
            
            
            
            63Reconciliation
      to Consolidated Totals:Depreciation and
      amortization
            
            
            
            
            
            
            (78
            )
            
            
            
            
            
            
            (64
            )
            
            
            
            
            
            
            (11
            )Interest
expense
            
            
            
            
            
            
            (98
            )
            
            
            
            
            
            
            (107
            )
            
            
            
            
            
            
            (21
            )Reorganization items,
      net
            
            
            
            
            
            
            --
            
            
            
            
            
            
            
            --
            
            
            
            
            
            
            
            1,433Net income attributable to noncontrolling interest
            
            
            
            
            
            
            3
            
            
            
            
            
            
            
            5
            
            
            
            
            
            
            
            --Consolidated
      Totals:Net
      Sales
            
            $
            1,197
            
            
            
            
            
            $
            1,346
            
            
            
            
            
            $
            335Income
      from Continuing  Operations Before Income Tax
      Expense
            
            
            
            
            
            $
            67
            
            
            
            
            
            
            $
            21
            
            
            
            
            
            
            $
            1,464





16.  Earnings
(Loss) Per Share





The
following table presents the net income (loss) used in the basic and diluted
earnings (loss) per share calculation and reconciles weighted-average number of
shares used in the basic earnings (loss) per share calculation to the
weighted-average number of shares used to compute diluted earnings (loss) per
share.





SuccessorThree
      Months Ended
              September 30, 2009
            
            
            Three
      Months Ended
              September 30, 2008Consolidated
      Statement of Operations Results:Income
      from Continuing Operations
            
            $
            31
            
            
            $
            23Net
      Income attributable to noncontrolling interest
            
            
            2
            
            
            
            2Income
      from Continuing Operations attributable to Solutia
            
            $
            29
            
            
            $
            21Loss
      from Discontinued Operations, net of tax
            
            
            --
            
            
            
            (28
            )Net
      Income (Loss) attributable to Solutia
            
            $
            29
            
            
            $
            (7
            )Weighted-average
      number of shares outstanding used for basic earnings (loss) per
      share
            
            
            118.4
            
            
            
            76.0Non-vested
      restricted shares
            
            
            0.2
            
            
            
            --Stock
      options
            
            
            --
            
            
            
            --Warrants
            
            
            --
            
            
            
            --Weighted-average
      number of shares outstanding and common equivalent shares used for diluted
      earnings (loss) per share
            
            
            118.6
            
            
            
            76.0








24


SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Successor
            
            
            PredecessorNine
      Months Ended
              September 30, 2009
            
            
            Seven
      Months Ended
              September 30, 2008
            
            
            Two
      Months Ended
              February 29, 2008Consolidated
      Statement of Operations Results:Income
      from Continuing Operations
            
            $
            52
            
            
            $
            4
            
            
            $
            1,250Net
      Income attributable to noncontrolling interest
            
            
            3
            
            
            
            5
            
            
            
            --Income
      (Loss) from Continuing Operations attributable to Solutia
            
            $
            49
            
            
            $
            (1
            )
            
            $
            1,250Income
      (Loss) from Discontinued Operations, net of tax
            
            
            (169
            )
            
            
            (52
            )
            
            
            204Net
      Income (Loss) attributable to Solutia
            
            $
            (120
            )
            
            $
            (53
            )
            
            $
            1,454Weighted-average
      number of shares outstanding used for basic earnings (loss) per
      share
            
            
            102.4
            
            
            
            66.8
            
            
            
            104.5Non-vested
      restricted shares
            
            
            0.2
            
            
            
            --
            
            
            
            --Stock
      options
            
            
            --
            
            
            
            --
            
            
            
            --Warrants
            
            
            --
            
            
            
            --
            
            
            
            --Weighted-average
      number of shares outstanding and common equivalent shares used for diluted
      earnings (loss) per share
            
            
            102.6
            
            
            
            66.8
            
            
            
            104.5





During
the three and nine months ended September 30, 2009, 0.6 and 1.2 million shares
of restricted stock, 2.3 and 2.5 million stock options, and 4.5 million
warrants, respectively, were outstanding and could potentially dilute basic
earnings per share in the future, but were not included in the computation of
diluted earnings per share for the period because they were
antidilutive.




17.  Subsequent
Events
 
 On October 15, 2009, we issued
$400 of senior unsecured notes, due 2017 (“Notes”). The Notes were issued at par
bearing interest at 8.75 percent.   We also amended our Revolver
and Term Loan to provide greater operational and strategic flexibility in
addition to increasing our liquidity and covenant cushion.
 
 Our current subsidiaries CPFilms Inc.,
Flexsys America L.P., Flexsys America Co., Monchem International, Inc., Solutia
Business Enterprises Inc., Solutia Inter-America, Inc., Solutia Overseas, Inc.,
Solutia Systems, Inc., S E Investment LLC and future subsidiaries as defined by
the Financing Agreements, subject to certain exceptions (“Guarantors”) are
guarantors of the Notes.
 
 Net proceeds were partially used
to pay down $300 of principal on our Term Loan with remaining proceeds, after
incorporating all transaction fees, of $79 added to cash to be used for general
corporate purposes.  In conjunction with the prepayment on our Term
Loan, we will incur a charge of approximately $32 in the fourth quarter of 2009
for the write-off of deferred debt issuance costs and the incurrence of
prepayment penalties.


18.Condensed Consolidating Financial
Statements





In
conjunction with the issuance of senior unsecured notes fully and
unconditionally guaranteed by the Guarantors, described further in Note 17 –
Subsequent Events, we are providing condensed consolidating financial statements
in accordance with SEC Regulation S-X Rule 3-10 “Financial Statements of Guarantors
and Issuers of Guaranteed Securities Registered or Being
Registered.”The Guarantors fully guarantee the senior
unsecured notes on a joint and several basis.
 
 The following condensed
consolidating financial statements present, in separate columns, financial
information for:  Solutia on a parent-only basis carrying its
investment in subsidiaries under the equity method; Guarantors on a combined
basis, carrying investments in subsidiaries which do not guarantee the debt (the
“Non-Guarantors”) under the equity method; Non-Guarantors on a combined basis;
eliminating entries; and consolidated totals as of September 30, 2009 and
December 31, 2008 and for the three and nine months ended September 30, 2009,
the three and seven months ended September 30, 2008 and the two months ended
February 29, 2008.  The eliminating entries 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.


25








SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)










Condensed
Consolidating Statement of Operations


Three
Months Ended September 30, 2009





Parent-Only
              Solutia
            
            
            Guarantors
            
            
            Non-
              Guarantors
            
            
            Eliminations
            
            
            Consolidated
      SolutiaNet
      Sales
            
            $
            113
            
            
            $
            95
            
            
            $
            397
            
            
            $
            (157
            )
            
            $
            448Cost
      of goods sold
            
            
            95
            
            
            
            62
            
            
            
            319
            
            
            
            (164
            )
            
            
            312Gross
      Profit
            
            
            18
            
            
            
            33
            
            
            
            78
            
            
            
            7
            
            
            
            136Selling,
      general, and administrative expenses
            
            
            24
            
            
            
            10
            
            
            
            19
            
            
            
            --
            
            
            
            53Research,
      development and other operating expenses, net
            
            
            7
            
            
            
            1
            
            
            
            --
            
            
            
            --
            
            
            
            8Operating
      Income (Loss)
            
            
            (13
            )
            
            
            22
            
            
            
            59
            
            
            
            7
            
            
            
            75Equity
      earnings from affiliates
            
            
            61
            
            
            
            24
            
            
            
            --
            
            
            
            (85
            )
            
            
            --Interest
      expense
            
            
            (32
            )
            
            
            --
            
            
            
            (36
            )
            
            
            37
            
            
            
            (31
            )Other
      income (loss), net
            
            
            13
            
            
            
            18
            
            
            
            17
            
            
            
            (49
            )
            
            
            (1
            )Income
      from Continuing Operations Before Income Tax Expense
            
            
            29
            
            
            
            64
            
            
            
            40
            
            
            
            (90
            )
            
            
            43Income
      tax expense
            
            
            --
            
            
            
            --
            
            
            
            12
            
            
            
            --
            
            
            
            12Income from
      Continuing Operations
            
            
            29
            
            
            
            64
            
            
            
            28
            
            
            
            (90
            )
            
            
            31Income from
      discontinued operations, net of tax
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Net
      Income
            
            
            29
            
            
            
            64
            
            
            
            28
            
            
            
            (90
            )
            
            
            31Net
      Income attributable to noncontrolling interest
            
            
            --
            
            
            
            --
            
            
            
            2
            
            
            
            --
            
            
            
            2Net
      Income attributable to Solutia
            
            $
            29
            
            
            $
            64
            
            
            $
            26
            
            
            $
            (90
            )
            
            $
            29








26
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Condensed
Consolidating Statement of Operations


Three
Months Ended September 30, 2008





Parent-Only
              Solutia
            
            
            Guarantors
            
            
            Non-
              Guarantors
            
            
            Eliminations
            
            
            Consolidated
      SolutiaNet
      Sales
            
            $
            139
            
            
            $
            132
            
            
            $
            549
            
            
            $
            (233
            )
            
            $
            587Cost
      of goods sold
            
            
            120
            
            
            
            80
            
            
            
            454
            
            
            
            (223
            )
            
            
            431Gross
      Profit
            
            
            19
            
            
            
            52
            
            
            
            95
            
            
            
            (10
            )
            
            
            156Selling,
      general, and administrative expenses
            
            
            36
            
            
            
            16
            
            
            
            23
            
            
            
            --
            
            
            
            75Research,
      development and other operating expenses, net
            
            
            4
            
            
            
            1
            
            
            
            (2
            )
            
            
            --
            
            
            
            3Operating
      Income (Loss)
            
            
            (21
            )
            
            
            35
            
            
            
            74
            
            
            
            (10
            )
            
            
            78Equity
      earnings from affiliates
            
            
            131
            
            
            
            111
            
            
            
            --
            
            
            
            (242
            )
            
            
            --Interest
      expense
            
            
            (42
            )
            
            
            --
            
            
            
            (55
            )
            
            
            55
            
            
            
            (42
            )Other
      income (loss), net
            
            
            (2
            )
            
            
            17
            
            
            
            41
            
            
            
            (52
            )
            
            
            4Reorganization
      items, net
            
            
            (39
            )
            
            
            (34
            )
            
            
            73
            
            
            
            --
            
            
            
            --Income
      from Continuing Operations Before Income Tax Expense
            
            
            27
            
            
            
            129
            
            
            
            133
            
            
            
            (249
            )
            
            
            40Income
      tax expense
            
            
            --
            
            
            
            --
            
            
            
            24
            
            
            
            (7
            )
            
            
            17Income
      from Continuing Operations
            
            
            27
            
            
            
            129
            
            
            
            109
            
            
            
            (242
            )
            
            
            23Income
      (Loss)  from discontinued operations, net of tax
            
            
            (34
            )
            
            
            --
            
            
            
            6
            
            
            
            --
            
            
            
            (28
            )Net
      Income (Loss)
            
            
            (7
            )
            
            
            129
            
            
            
            115
            
            
            
            (242
            )
            
            
            (5
            )Net
      Income attributable to noncontrolling interest
            
            
            --
            
            
            
            --
            
            
            
            2
            
            
            
            --
            
            
            
            2Net
      Income (Loss) attributable to Solutia
            
            $
            (7
            )
            
            $
            129
            
            
            $
            113
            
            
            $
            (242
            )
            
            $
            (7
            )











27


SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)





Condensed
Consolidating Statement of Operations


Nine
Months Ended September 30, 2009





Parent-Only
              Solutia
            
            
            Guarantors
            
            
            Non-
              Guarantors
            
            
            Eliminations
            
            
            Consolidated
      SolutiaNet
      Sales
            
            $
            297
            
            
            $
            265
            
            
            $
            1,060
            
            
            $
            (425
            )
            
            $
            1,197Cost
      of goods sold
            
            
            260
            
            
            
            169
            
            
            
            867
            
            
            
            (438
            )
            
            
            858Gross
      Profit
            
            
            37
            
            
            
            96
            
            
            
            193
            
            
            
            13
            
            
            
            339Selling,
      general, and administrative expenses
            
            
            73
            
            
            
            29
            
            
            
            55
            
            
            
            --
            
            
            
            157Research,
      development and other operating expenses, net
            
            
            10
            
            
            
            2
            
            
            
            2
            
            
            
            --
            
            
            
            14Operating
      Income (Loss)
            
            
            (46
            )
            
            
            65
            
            
            
            136
            
            
            
            13
            
            
            
            168Equity
      earnings from affiliates
            
            
            129
            
            
            
            30
            
            
            
            --
            
            
            
            (159
            )
            
            
            --Interest
      expense
            
            
            (90
            )
            
            
            (1
            )
            
            
            (125
            )
            
            
            118
            
            
            
            (98
            )Other
      income (loss), net
            
            
            30
            
            
            
            50
            
            
            
            53
            
            
            
            (136
            )
            
            
            (3
            )Income
      from Continuing Operations Before Income Tax Expense
            
            
            23
            
            
            
            144
            
            
            
            64
            
            
            
            (164
            )
            
            
            67Income
      tax expense
            
            
            --
            
            
            
            --
            
            
            
            15
            
            
            
            --
            
            
            
            15Income
      from Continuing Operations
            
            
            23
            
            
            
            144
            
            
            
            49
            
            
            
            (164
            )
            
            
            52Loss
      from discontinued operations, net of tax
            
            
            (143
            )
            
            
            (11
            )
            
            
            (15
            )
            
            
            --
            
            
            
            (169
            )Net
      Income (Loss)
            
            
            (120
            )
            
            
            133
            
            
            
            34
            
            
            
            (164
            )
            
            
            (117
            )Net
      Income attributable to noncontrolling interest
            
            
            --
            
            
            
            --
            
            
            
            3
            
            
            
            --
            
            
            
            3Net
      Income (Loss) attributable to Solutia
            
            $
            (120
            )
            
            $
            133
            
            
            $
            31
            
            
            $
            (164
            )
            
            $
            (120
            )





28
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Condensed
Consolidating Statement of Operations


Seven
Months Ended September 30, 2008





Parent-Only
              Solutia
            
            
            Guarantors
            
            
            Non-
              Guarantors
            
            
            Eliminations
            
            
            Consolidated
      SolutiaNet
      Sales
            
            $
            319
            
            
            $
            299
            
            
            $
            1,248
            
            
            $
            (520
            )
            
            $
            1,346Cost
      of goods sold
            
            
            298
            
            
            
            187
            
            
            
            1,097
            
            
            
            (519
            )
            
            
            1,063Gross
      Profit
            
            
            21
            
            
            
            112
            
            
            
            151
            
            
            
            (1
            )
            
            
            283Selling,
      general, and administrative expenses
            
            
            71
            
            
            
            39
            
            
            
            54
            
            
            
            --
            
            
            
            164Research,
      development and other operating (income) expenses, net
            
            
            3
            
            
            
            2
            
            
            
            (1
            )
            
            
            --
            
            
            
            4Operating
      Income (Loss)
            
            
            (53
            )
            
            
            71
            
            
            
            98
            
            
            
            (1
            )
            
            
            115Equity
      earnings from affiliates
            
            
            185
            
            
            
            124
            
            
            
            --
            
            
            
            (309
            )
            
            
            --Interest
      expense
            
            
            (108
            )
            
            
            --
            
            
            
            (114
            )
            
            
            115
            
            
            
            (107
            )Other
      income, net
            
            
            15
            
            
            
            32
            
            
            
            87
            
            
            
            (121
            )
            
            
            13Reorganization
      items, net
            
            
            (28
            )
            
            
            (44
            )
            
            
            72
            
            
            
            --
            
            
            
            --Income
      from Continuing Operations Before Income Tax Expense
            
            
            11
            
            
            
            183
            
            
            
            143
            
            
            
            (316
            )
            
            
            21Income
      tax expense
            
            
            --
            
            
            
            --
            
            
            
            24
            
            
            
            (7
            )
            
            
            17Income
      from Continuing Operations
            
            
            11
            
            
            
            183
            
            
            
            119
            
            
            
            (309
            )
            
            
            4Income
      (Loss)  from discontinued operations, net of tax
            
            
            (64
            )
            
            
            (1
            )
            
            
            13
            
            
            
            --
            
            
            
            (52
            )Net
      Income (Loss)
            
            
            (53
            )
            
            
            182
            
            
            
            132
            
            
            
            (309
            )
            
            
            (48
            )Net
      Income attributable to noncontrolling interest
            
            
            --
            
            
            
            --
            
            
            
            5
            
            
            
            --
            
            
            
            5Net
      Income (Loss) attributable to Solutia
            
            $
            (53
            )
            
            $
            182
            
            
            $
            127
            
            
            $
            (309
            )
            
            $
            (53
            )











29
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)











Condensed
Consolidating Statement of Operations


Two
Months Ended February 29, 2008





Parent-Only
              Solutia
            
            
            Guarantors
            
            
            Non-
              Guarantors
            
            
            Eliminations
            
            
            Consolidated
      SolutiaNet
      Sales
            
            $
            102
            
            
            $
            79
            
            
            $
            301
            
            
            $
            (147
            )
            
            $
            335Cost
      of goods sold
            
            
            76
            
            
            
            47
            
            
            
            256
            
            
            
            (138
            )
            
            
            241Gross
      Profit
            
            
            26
            
            
            
            32
            
            
            
            45
            
            
            
            (9
            )
            
            
            94Selling,
      general, and administrative expenses
            
            
            18
            
            
            
            9
            
            
            
            15
            
            
            
            --
            
            
            
            42Research,
      development and other operating expenses, net
            
            
            3
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            3Operating
      Income
            
            
            5
            
            
            
            23
            
            
            
            30
            
            
            
            (9
            )
            
            
            49Equity
      earnings from affiliates
            
            
            913
            
            
            
            377
            
            
            
            --
            
            
            
            (1,290
            )
            
            
            --Interest
      expense
            
            
            (16
            )
            
            
            (2
            )
            
            
            (18
            )
            
            
            15
            
            
            
            (21
            )Other
      income (loss), net
            
            
            (7
            )
            
            
            2
            
            
            
            14
            
            
            
            (6
            )
            
            
            3Reorganization
      items, net
            
            
            381
            
            
            
            524
            
            
            
            528
            
            
            
            --
            
            
            
            1,433Income
      from Continuing Operations Before Income Tax Expense
            
            
            1,276
            
            
            
            924
            
            
            
            554
            
            
            
            (1,290
            )
            
            
            1,464Income
      tax expense
            
            
            27
            
            
            
            14
            
            
            
            173
            
            
            
            --
            
            
            
            214Income
      from Continuing Operations
            
            
            1,249
            
            
            
            910
            
            
            
            381
            
            
            
            (1,290
            )
            
            
            1,250Income
      (Loss) from discontinued operations, net of tax
            
            
            205
            
            
            
            --
            
            
            
            (1
            )
            
            
            --
            
            
            
            204Net
      Income
            
            
            1,454
            
            
            
            910
            
            
            
            380
            
            
            
            (1,290
            )
            
            
            1,454Net
      Income attributable to noncontrolling interest
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Net
      Income attributable to Solutia
            
            $
            1,454
            
            
            $
            910
            
            
            $
            380
            
            
            $
            (1,290
            )
            
            $
            1,454




















30


SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)
  Condensed
Consolidating Balance Sheet
 September
30, 2009


Parent-Only
                  Solutia
                
                
                Guarantors
                
                
                Non-
                  Guarantors
                
                
                Eliminations
                
                
                Consolidated
                  SolutiaASSETSCurrent
      Assets:Cash
      and cash equivalents
                
                $
                45
                
                
                $
                39
                
                
                $
                27
                
                
                $
                --
                
                
                $
                111Trade
      receivables, net
                
                
                --
                
                
                
                73
                
                
                
                195
                
                
                
                --
                
                
                
                268Intercompany
      receivables
                
                
                140
                
                
                
                610
                
                
                
                290
                
                
                
                (1,040
                )
                
                
                --Miscellaneous
      receivables
                
                
                17
                
                
                
                2
                
                
                
                69
                
                
                
                --
                
                
                
                88Inventories
                
                
                64
                
                
                
                42
                
                
                
                200
                
                
                
                (33
                )
                
                
                273Prepaid
      expenses and other current assets
                
                
                26
                
                
                
                2
                
                
                
                21
                
                
                
                6
                
                
                
                55Assets
      of discontinued operations
                
                
                6
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                6Total
      Current Assets
                
                
                298
                
                
                
                768
                
                
                
                802
                
                
                
                (1,067
                )
                
                
                801Property,
      Plant and Equipment, net
                
                
                183
                
                
                
                143
                
                
                
                605
                
                
                
                --
                
                
                
                931Investments
      in Affiliates
                
                
                2,318
                
                
                
                375
                
                
                
                304
                
                
                
                (2,997
                )
                
                
                --Goodwill
                
                
                150
                
                
                
                191
                
                
                
                170
                
                
                
                --
                
                
                
                511Identified
      Intangible Assets, net
                
                
                196
                
                
                
                324
                
                
                
                294
                
                
                
                --
                
                
                
                814Intercompany
      Advances
                
                
                195
                
                
                
                529
                
                
                
                1,316
                
                
                
                (2,040
                )
                
                
                --Other
      Assets
                
                
                102
                
                
                
                5
                
                
                
                45
                
                
                
                (1
                )
                
                
                151Total
      Assets
                
                $
                3,442
                
                
                $
                2,335
                
                
                $
                3,536
                
                
                $
                (6,105
                )
                
                $
                3,208LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
                
                $
                33
                
                
                $
                15
                
                
                $
                91
                
                
                $
                --
                
                
                $
                139Intercompany
      payables
                
                
                753
                
                
                
                50
                
                
                
                237
                
                
                
                (1,040
                )
                
                
                --Accrued
      liabilities
                
                
                82
                
                
                
                7
                
                
                
                121
                
                
                
                (7
                )
                
                
                203Short-term
      debt, including current portion of long-term debt
                
                
                12
                
                
                
                --
                
                
                
                19
                
                
                
                --
                
                
                
                31Intercompany
      short-term debt
                
                
                16
                
                
                
                --
                
                
                
                848
                
                
                
                (864
                )
                
                
                --Liabilities
      of discontinued operations
                
                
                58
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                58Total
      Current Liabilities
                
                
                954
                
                
                
                72
                
                
                
                1,316
                
                
                
                (1,911
                )
                
                
                431Long-Term
      Debt
                
                
                1,167
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                1,167Intercompany
      Long-Term Debt
                
                
                44
                
                
                
                23
                
                
                
                1,109
                
                
                
                (1,176
                )
                
                
                --Postretirement
      Liabilities
                
                
                361
                
                
                
                3
                
                
                
                79
                
                
                
                --
                
                
                
                443Environmental
      Remediation Liabilities
                
                
                244
                
                
                
                1
                
                
                
                17
                
                
                
                --
                
                
                
                262Deferred
      Tax Liabilities
                
                
                20
                
                
                
                11
                
                
                
                158
                
                
                
                --
                
                
                
                189Other
      Liabilities
                
                
                49
                
                
                
                6
                
                
                
                52
                
                
                
                --
                
                
                
                107Shareholders’
      Equity:Common
      stock
                
                
                1
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                1Additional
      contributed capital
                
                
                1,608
                
                
                
                2,219
                
                
                
                799
                
                
                
                (3,018
                )
                
                
                1,608Treasury
      stock
                
                
                (2
                )
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                (2
                )Accumulated
      other comprehensive loss
                
                
                (216
                )
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                (216
                )Accumulated
      deficit
                
                
                (788
                )
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                (788
                )Total
      Shareholders’ Equity attributable to Solutia
                
                
                603
                
                
                
                2,219
                
                
                
                799
                
                
                
                (3,018
                )
                
                
                603Equity
      attributable to noncontrolling interest
                
                
                --
                
                
                
                --
                
                
                
                6
                
                
                
                --
                
                
                
                6Total
      Shareholders’ Equity
                
                
                603
                
                
                
                2,219
                
                
                
                805
                
                
                
                (3,018
                )
                
                
                609Total
      Liabilities and Shareholders’ Equity
                
                $
                3,442
                
                
                $
                2,335
                
                
                $
                3,536
                
                
                $
                (6,105
                )
                
                $
                3,208





31
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)
  Condensed
Consolidating Balance Sheet
 December
31, 2008


Parent-Only
                Solutia
              
              
              Guarantors
              
              
              Non-
                Guarantors
              
              
              Eliminations
              
              
              Consolidated
                SolutiaASSETSCurrent
      Assets:Cash
      and cash equivalents
              
              $
              --
              
              
              $
              1
              
              
              $
              31
              
              
              $
              --
              
              
              $
              32Trade
      receivables, net
              
              
              --
              
              
              
              66
              
              
              
              161
              
              
              
              --
              
              
              
              227Intercompany
      receivables
              
              
              41
              
              
              
              405
              
              
              
              207
              
              
              
              (653
              )
              
              
              --Miscellaneous
      receivables
              
              
              12
              
              
              
              2
              
              
              
              96
              
              
              
              --
              
              
              
              110Inventories
              
              
              85
              
              
              
              54
              
              
              
              230
              
              
              
              (28
              )
              
              
              341Prepaid
      expenses and other current assets
              
              
              29
              
              
              
              1
              
              
              
              49
              
              
              
              6
              
              
              
              85Assets
      of discontinued operations
              
              
              345
              
              
              
              63
              
              
              
              82
              
              
              
              --
              
              
              
              490Total
      Current Assets
              
              
              512
              
              
              
              592
              
              
              
              856
              
              
              
              (675
              )
              
              
              1,285Property,
      Plant and Equipment, net
              
              
              198
              
              
              
              150
              
              
              
              604
              
              
              
              --
              
              
              
              952Investments
      in Affiliates
              
              
              2,149
              
              
              
              353
              
              
              
              436
              
              
              
              (2,938
              )
              
              
              --Goodwill
              
              
              150
              
              
              
              191
              
              
              
              170
              
              
              
              --
              
              
              
              511Identified
      Intangible Assets, net
              
              
              202
              
              
              
              332
              
              
              
              289
              
              
              
              --
              
              
              
              823Intercompany
      Advances
              
              
              214
              
              
              
              510
              
              
              
              1,440
              
              
              
              (2,164
              )
              
              
              --Other
      Assets
              
              
              118
              
              
              
              5
              
              
              
              40
              
              
              
              --
              
              
              
              163Total
      Assets
              
              $
              3,543
              
              
              $
              2,133
              
              
              $
              3,835
              
              
              $
              (5,777
              )
              
              $
              3,734LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              81
              
              
              $
              12
              
              
              $
              77
              
              
              $
              --
              
              
              $
              170Intercompany
      payables
              
              
              429
              
              
              
              1
              
              
              
              222
              
              
              
              (652
              )
              
              
              --Accrued
      liabilities
              
              
              88
              
              
              
              13
              
              
              
              170
              
              
              
              (12
              )
              
              
              259Short-term
      debt, including current portion of long-term debt
              
              
              14
              
              
              
              --
              
              
              
              23
              
              
              
              --
              
              
              
              37Intercompany
      short-term debt
              
              
              3
              
              
              
              --
              
              
              
              633
              
              
              
              (636
              )
              
              
              --Liabilities
      of discontinued operations
              
              
              298
              
              
              
              --
              
              
              
              4
              
              
              
              --
              
              
              
              302Total
      Current Liabilities
              
              
              913
              
              
              
              26
              
              
              
              1,129
              
              
              
              (1,300
              )
              
              
              768Long-Term
      Debt
              
              
              1,351
              
              
              
              --
              
              
              
              8
              
              
              
              --
              
              
              
              1,359Intercompany
      Long-Term Debt
              
              
              5
              
              
              
              23
              
              
              
              1,511
              
              
              
              (1,539
              )
              
              
              --Postretirement
      Liabilities
              
              
              384
              
              
              
              3
              
              
              
              78
              
              
              
              --
              
              
              
              465Environmental
      Remediation Liabilities
              
              
              264
              
              
              
              1
              
              
              
              14
              
              
              
              --
              
              
              
              279Deferred
      Tax Liabilities
              
              
              37
              
              
              
              11
              
              
              
              154
              
              
              
              --
              
              
              
              202Other
      Liabilities
              
              
              68
              
              
              
              8
              
              
              
              56
              
              
              
              --
              
              
              
              132Shareholders’
      Equity:Common
      stock
              
              
              1
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1Additional
      contributed capital
              
              
              1,474
              
              
              
              2,061
              
              
              
              877
              
              
              
              (2,938
              )
              
              
              1,474Accumulated
      other comprehensive loss
              
              
              (286
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (286
              )Accumulated
      deficit
              
              
              (668
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (668
              )Total
      Shareholders’ Equity attributable to Solutia
              
              
              521
              
              
              
              2,061
              
              
              
              877
              
              
              
              (2,938
              )
              
              
              521Equity
      attributable to noncontrolling interest
              
              
              --
              
              
              
              --
              
              
              
              8
              
              
              
              --
              
              
              
              8Total
      Shareholders’ Equity
              
              
              521
              
              
              
              2,061
              
              
              
              885
              
              
              
              (2,938
              )
              
              
              529Total
      Liabilities and Shareholders’ Equity
              
              $
              3,543
              
              
              $
              2,133
              
              
              $
              3,835
              
              
              $
              (5,777
              )
              
              $
              3,734


32


SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Condensed
Consolidating Statement of Cash Flows


Nine
Months Ended September 30, 2009







Parent-Only
                Solutia
              
              
              Guarantors
              
              
              Non-
                Guarantors
              
              
              Eliminations
              
              
              Consolidated
      SolutiaCash
      Provided by (Used in) Operations
              
              $
              (197
              )
              
              $
              185
              
              
              $
              193
              
              
              $
              --
              
              
              $
              181INVESTING
      ACTIVITIES:Property,
      plant and equipment purchases
              
              
              (18
              )
              
              
              (2
              )
              
              
              (13
              )
              
              
              --
              
              
              
              (33
              )Acquisition
      and investment payments
              
              
              (1
              )
              
              
              (1
              )
              
              
              --
              
              
              
              --
              
              
              
              (2
              )Investment
      proceeds and property disposals
              
              
              24
              
              
              
              --
              
              
              
              1
              
              
              
              --
              
              
              
              25Cash
      Provided by (Used in) Investing Activities
              
              
              5
              
              
              
              (3
              )
              
              
              (12
              )
              
              
              --
              
              
              
              (10
              )FINANCING
      ACTIVITIES:Net
      change in lines of credit
              
              
              (2
              )
              
              
              --
              
              
              
              (11
              )
              
              
              --
              
              
              
              (13
              )Proceeds
      from short-term debt obligations
              
              
              --
              
              
              
              --
              
              
              
              22
              
              
              
              --
              
              
              
              22Payments
      of short-term debt obligations
              
              
              --
              
              
              
              --
              
              
              
              (15
              )
              
              
              --
              
              
              
              (15
              )Proceeds
      from long-term debt obligations
              
              
              --
              
              
              
              --
              
              
              
              70
              
              
              
              --
              
              
              
              70Payments
      of long-term debt obligations
              
              
              (9
              )
              
              
              --
              
              
              
              (74
              )
              
              
              --
              
              
              
              (83
              )Net
      change in long-term revolving credit facility
              
              
              (175
              )
              
              
              --
              
              
              
              (6
              )
              
              
              --
              
              
              
              (181
              )Debt
      issuance costs
              
              
              --
              
              
              
              --
              
              
              
              (4
              )
              
              
              --
              
              
              
              (4
              )Proceeds
      from stock issuance
              
              
              119
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              119Purchase
      of treasury shares
              
              
              (2
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (2
              )Other,
      net
              
              
              --
              
              
              
              --
              
              
              
              (5
              )
              
              
              --
              
              
              
              (5
              )Changes
      in investments and advances from (to) affiliates
              
              
              306
              
              
              
              (144
              )
              
              
              (162
              )
              
              
              --
              
              
              
              --Cash
      Provided by (Used in) Financing Activities
              
              
              237
              
              
              
              (144
              )
              
              
              (185
              )
              
              
              --
              
              
              
              (92
              )Increase
      (Decrease) in Cash and Cash Equivalents
              
              
              45
              
              
              
              38
              
              
              
              (4
              )
              
              
              --
              
              
              
              79CASH
      AND CASH EQUIVALENTS:Beginning
      of year
              
              
              --
              
              
              
              1
              
              
              
              31
              
              
              
              --
              
              
              
              32End
      of period
              
              $
              45
              
              
              $
              39
              
              
              $
              27
              
              
              $
              --
              
              
              $
              111













33





SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)





Condensed
Consolidating Statement of Cash Flows


Seven
Months Ended September 30, 2008








Parent-Only
                Solutia
              
              
              Guarantors
              
              
              Non-
                Guarantors
              
              
              Eliminations
              
              
              Consolidated
      SolutiaCash
      Provided by (Used in) Operations
              
              $
              (261
              )
              
              $
              112
              
              
              $
              122
              
              
              $
              --
              
              
              $
              (27
              )INVESTING
      ACTIVITIES:Property,
      plant and equipment purchases
              
              
              (40
              )
              
              
              (7
              )
              
              
              (31
              )
              
              
              --
              
              
              
              (78
              )Acquisition
      and investment payments
              
              
              --
              
              
              
              (2
              )
              
              
              --
              
              
              
              --
              
              
              
              (2
              )Investment
      proceeds and property disposals
              
              
              52
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              52Cash
      Provided by (Used in) Investing Activities
              
              
              12
              
              
              
              (9
              )
              
              
              (31
              )
              
              
              --
              
              
              
              (28
              )FINANCING
      ACTIVITIES:Net
      change in lines of credit
              
              
              --
              
              
              
              5
              
              
              
              23
              
              
              
              --
              
              
              
              28Proceeds
      from stock issuance
              
              
              422
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              422Payments
      of long-term debt obligations
              
              
              (434
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (434
              )Net
      change in long-term revolving credit facility
              
              
              (4
              )
              
              
              --
              
              
              
              1
              
              
              
              --
              
              
              
              (3
              )Debt
      issuance costs
              
              
              --
              
              
              
              --
              
              
              
              (1
              )
              
              
              --
              
              
              
              (1
              )Other,
      net
              
              
              --
              
              
              
              --
              
              
              
              (2
              )
              
              
              --
              
              
              
              (2
              )Changes
      in investments and advances from (to) affiliates
              
              
              253
              
              
              
              (116
              )
              
              
              (137
              )
              
              
              --
              
              
              
              --Cash
      Provided by (Used in) Financing Activities
              
              
              237
              
              
              
              (111
              )
              
              
              (116
              )
              
              
              --
              
              
              
              10Decrease
      in Cash and Cash Equivalents
              
              
              (12
              )
              
              
              (8
              )
              
              
              (25
              )
              
              
              --
              
              
              
              (45
              )CASH
      AND CASH EQUIVALENTS:Beginning
      of year
              
              
              12
              
              
              
              9
              
              
              
              62
              
              
              
              --
              
              
              
              83End
      of period
              
              $
              --
              
              
              $
              1
              
              
              $
              37
              
              
              $
              --
              
              
              $
              38



















34





SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)





Condensed
Consolidating Statement of Cash Flows


Two
Months Ended February 29, 2008




Parent-Only
                Solutia
              
              
              Guarantors
              
              
              Non-
                Guarantors
              
              
              Eliminations
              
              
              Consolidated
      SolutiaCash
      Provided by (Used In) Operations
              
              $
              (328
              )
              
              $
              52
              
              
              $
              (136
              )
              
              $
              --
              
              
              $
              (412
              )INVESTING
      ACTIVITIES:Property,
      plant and equipment purchases
              
              
              (18
              )
              
              
              (3
              )
              
              
              (8
              )
              
              
              --
              
              
              
              (29
              )Cash
      Used In Investing Activities
              
              
              (18
              )
              
              
              (3
              )
              
              
              (8
              )
              
              
              --
              
              
              
              (29
              )FINANCING
      ACTIVITIES:Proceeds
      from long-term debt obligations
              
              
              1,600
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,600Net
      change in long-term revolving credit facilities
              
              
              190
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              190Proceeds
      from stock issuance
              
              
              250
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              250Payment
      of short-term debt obligations
              
              
              (951
              )
              
              
              --
              
              
              
              (15
              )
              
              
              --
              
              
              
              (966
              )Payment
      of long-term debt obligations
              
              
              --
              
              
              
              --
              
              
              
              (366
              )
              
              
              --
              
              
              
              (366
              )Payment
      of debt obligations subject to compromise
              
              
              (221
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (221
              )Debt
      issuance costs
              
              
              (135
              )
              
              
              --
              
              
              
              (1
              )
              
              
              --
              
              
              
              (136
              )Changes
      in investments and advances from (to) affiliates
              
              
              (374
              )
              
              
              (48
              )
              
              
              422
              
              
              
              --
              
              
              
              --Cash
      Provided by (Used In) Financing Activities
              
              
              359
              
              
              
              (48
              )
              
              
              40
              
              
              
              --
              
              
              
              351Increase
      (Decrease) in Cash and Cash Equivalents
              
              
              13
              
              
              
              1
              
              
              
              (104
              )
              
              
              --
              
              
              
              (90
              )CASH
      AND CASH EQUIVALENTS:Beginning
      of year
              
              
              (1
              )
              
              
              8
              
              
              
              166
              
              
              
              --
              
              
              
              173End
      of year
              
              $
              12
              
              
              $
              9
              
              
              $
              62
              
              
              $
              --
              
              
              $
              83













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, our ability to comply
with the terms of our financing agreements, our ability to reduce our overall
leveraged position, 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. (“U.S. GAAP”); ability to implement cost reduction
initiatives in a timely manner; geopolitical instability; and changes in pension
and other postretirement assumptions.





Overview





We are a
leading global manufacturer and marketer of a variety of high-performance
chemical-based materials that are used in a broad range of consumer and
industrial applications.





We report
our operations in three segments: Saflex, CPFilms and Technical
Specialties.  The major products by reportable segment are as
follows:




Reportable
      Segment
              
              ProductsSaflex
              
              ·SAFLEX®
      plastic interlayer
                ·Specialty
      intermediate Polyvinyl Butyral resin and plasticizerCPFilms
              
              ·LLUMAR®,
      VISTA®, GILA® and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS® professional
      and retail window films
                ·Other
      enhanced polymer films for industrial customersTechnical
      Specialties
              
              ·CRYSTEX®
      insoluble sulphur
                ·SANTOFLEX®
      antidegradants
                ·SANTOCURE®
      and PERKACIT® primary and ultra accelerators
                ·THERMINOL®
      heat transfer fluids
                ·SKYDROL®
      aviation hydraulic fluids
                ·SKYKLEEN®
      brand of aviation solvents







See Note 15 – Segment Data of the
accompanying consolidated financial statements for further information regarding
our reportable segments.





Significant
Developments and Strategic Actions





In the
third quarter of 2009, the following significant development and strategic
actions were initiated or executed:
 
 ·
              We
      announced plans to upgrade our facility in Ghent, Belgium to produce
      SAFLEX® Q series advanced acoustic plastic
      interlayer.  Production is scheduled to begin in 2010 and serve
      the fast growing acoustic glazing architectural market in Europe and
      Asia.
 
 ·
              To
      more closely align our support functions with the operations of the key
      growth market of China, we initiated the relocation of our Asian regional
      headquarters from Singapore to Shanghai,
China.
 
 ·
              Our
      Board of Directors adopted a shareholder rights plan designed to preserve
      the value of our significant United States federal and state net operating
      loss carryforwards ("NOLs") and other related tax assets under Section 382
      of the Internal Revenue Code ("Code").  Section 382 of the Code
      would limit the value of those tax assets upon an "ownership
      change."  An "ownership change" is generally defined as a more
      than 50 percentage point increase in stock ownership, during a rolling
      three-year testing period, by "5% shareholders" as defined in Section 382
      of the Code.  The Rights Plan was adopted to reduce the
      likelihood of this occurring by deterring the acquisition of stock by
      persons or groups that would create such "5%
  shareholders.”
  Throughout the course of 2009,
Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners
Special Situations Fund, L.P. (collectively, the “Harbinger Funds”) have
steadily decreased their ownership interest in the Company.  At the
beginning of 2009, the Harbinger Funds held 32,210,720 shares of our stock or
approximately 34.1 percent of the Company.  Based on the Harbinger
Funds amended Schedule 13D dated October 23, 2009, the Harbinger Funds currently
hold 8,259,053 shares of our stock or approximately 6.9 percent of the
Company (based on 119,086,933 shares outstanding).
 
 Furthermore, on
October 15, 2009, we issued $400 million of senior unsecured notes, due 2017
(“Notes”).  The Notes were issued at par bearing interest at 8.75
percent.  Net proceeds were partially used to pay down $300 million of
principal on our $1.2 billion senior secured term loan facility (“Term
Loan”).  We also amended our $400 million senior secured asset-based
revolving credit facility (“Revolver”) and Term Loan credit agreements which
provide greater operational and strategic flexibility in addition to increasing
our liquidity and covenant cushion.


36


Combined
Quarterly Financial Results of the Predecessor and Successor





Our emergence from
bankruptcy resulted in our adoption of fresh-start accounting on February 29,
2008.  In accordance with U.S. GAAP, the accompanying Consolidated
Statements of Operations and Cash Flows presents the results of operations and
the sources and uses of cash for (i) the two months ended February 29, 2008 of
the Predecessor and (ii) the seven months ended September 30, 2008 of the
Successor.  However, for purposes of management’s discussion and
analysis of the results of operations and the sources and uses of cash in this
Form 10-Q, we have combined the prior year results of operations and sources and
uses of cash for the Predecessor and the Successor.  The results of
operations of the Predecessor and Successor are not comparable due to the change
in basis resulting from the emergence from bankruptcy.  This combined
presentation is being made solely to explain the changes in results of
operations for the periods presented in the financial statements.  We
then compare the combined results of operations and the sources and uses of cash
for the nine months ended September 30, 2008 with the corresponding period in
the current year.
 
 An additional impact to comparability
resulting from our emergence from bankruptcy and the implementation of
fresh-start accounting is the significant change in depreciation and
amortization, as triggered by our requirement to re-measure our tangible and
identifiable intangible assets.  Therefore, management evaluates the
performance of our operating segments based on segment profit, defined as
earnings before interest expense, income taxes, depreciation and amortization
less net income attributable to noncontrolling interests and reorganization
items, net (“EBITDA”).  We believe this financial measure is
useful because it better facilitates period-to-period comparisons of our
performance in addition to comparison of performance with our
peers.
 
 We believe the combined results of
operations for the nine months ended September 30, 2008 provide management and
investors with a more meaningful perspective on our financial and operational
performance and trends than if we did not combine the results of operations of
the Predecessor and the Successor in this manner.





Summary
Results of Operations





The
significant change in the global demand profile in 2009 versus 2008 has impacted
some of the measures used by management to assess performance.  Year
over year comparisons continue to be utilized by management, however, the use of
analysis of results on a sequential basis are also being used extensively in
2009 to understand and assess current year financial
performance.  Discussion of results for 2009 on a year over year basis
is described in the Results of Operations
sections below.  Following is a summary discussion of results on a
sequential basis.
 
 In
the third quarter of 2009, we reported sales of $448 million, a 9 percent
increase as compared to $410 million reported in the second quarter of
2009. This increase was driven primarily by higher sales volumes in both
the Saflex and Technical Specialties reporting segments, experienced across all
major world areas.  Most of these increases were driven by the
automotive sectors within our businesses. Our third quarter of 2009 gross
profit margin was 30.4 percent, an increase from 29.8 percent in the second
quarter.  This increase was due to improved mix, as we experienced
strong sales of CRYSTEX® insoluble sulphur during the third quarter, lower raw
materials and continued controlled spending within the manufacturing
units.  Our selling, general and administrative expenses were $53
million, essentially flat with the second quarter, even though revenues rose by
9 percent as we continue to remain very diligent in regards to discretionary
spending.   This outcome resulted in our operating income
increasing by 14 percent in the third quarter versus the second quarter;
evidence of the favorable impact incremental volumes is having on our income
profile.
 
 From a
cash flow perspective, we generated $33 million of cash from operations during
the quarter, due to the income profile, as well as a $10 million reduction in
our inventory levels.  The inventory reductions have been a focus area
for the Company, and year-to-date we have lowered our inventory balances by
approximately $66 million as of the end of the third quarter.  Based
primarily on our cash flow generation year-to-date, we finished the quarter with
$225 million of liquidity.


Outlook





In the
first quarter of this year, many of our markets had low demand profiles as
significant destocking activities occurred.  As the second quarter of
the year started, the majority of these actions were completed or considerably
diminished, and our demand and resulting sales volume profile improved
sequentially in both the second and third quarters of 2009.  In
particular for the third quarter, we experienced strong volume growth in
comparison to the second quarter 2009 in the automotive sector in all major
world areas, with the most notable improvements experienced in the Saflex and
Technical Specialties reporting segments.  All of our businesses are
impacted in the fourth quarter by seasonality, as manufacturing and sales
activity slows considerably during December.  This trend is most
pronounced in our CPFilms reporting segment.  Partially offsetting
this impact is our view of a continued, gradual increase in underlying
demand.  Accordingly, we are premising fourth quarter volumes to be
lower than the third quarter volume profile.  We do expect, however,
that our revenue profile for the fourth quarter will approximate the revenue
levels experienced in the fourth quarter of 2008.





37


Our cost profile has improved
throughout the year due to cost reduction initiatives enacted late last year and
throughout 2009.  In addition, our improving volume profile has
afforded us the ability to run our manufacturing facilities at higher
utilization rates, while still continuing to lower inventory
balances.  These higher utilization rates have provided cost benefits
as well.  In the fourth quarter, we expect our cost profile to
continue to benefit from earlier actions, although we expect our utilization
rates to decline given the lower volumes and desire to continue to reduce our
working capital investment.




Therefore,
we continue to expect margin expansion in 2009 over 2008 actual results and to
generate cash from operations in 2009 of approximately $170
million.





Critical
Accounting Policies and Estimates





There
were no changes in the nine months ended September 30, 2009 with respect to our
critical accounting policies, as presented in our 2008 Form 10-K, as recast and
filed with the Securities and Exchange Commission (“SEC”) in a Form 8-K on July
27, 2009, to reflect (i) our retrospective application of the presentation
of noncontrolling interests as provided by guidance updated in Accounting
Standards Codification810
- Consolidations,
adopted on January 1, 2009, and (ii) presentation of our Integrated Nylon
business as discontinued operations in accordance with the terms of the
definitive sale agreement between us and an affiliate of S.K. Capital Partners
II, L.P. (“Buyer”).


Results
of Operations—Third Quarter 2009 Compared with Third Quarter 2008





Consolidated
Results





Successor(dollars
      in millions)
            
            Three
      MonthsEnded
              September 30, 2009
            
            
            Three
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Net
      Sales
            
            $
            448
            
            
            $
            587
            
            
            $
            (139
            )
            
            
            (24
            %)Operating
      Income:Reportable
      Segment Profit
            
            $
            128
            
            
            $
            125
            
            
            $
            3
            
            
            
            2
            %Unallocated
      and Other
            
            
            (29
            )
            
            
            (17
            )
            
            
            (12
            )
            
            
            (71
            %)Less:   Depreciation
      and Amortization
            
            
            (27
            )
            
            
            (28
            )Less:   Other
      (Income) Loss and Net Income Attributable to Noncontrolling Interest
      included in Segment Profit and Unallocated and Other
            
            
            3
            
            
            
            (2
            )Operating
      Income
            
            $
            75
            
            
            $
            78
            
            
            $
            (3
            )
            
            
            (4
            %)Net
      Gains (Charges) included in Operating Income
            
            $
            (16
            )
            
            $
            1





The
decrease in net sales as compared to the third quarter 2008 resulted from
decreased sales volumes of $105 million or 18 percent, lower selling prices of
$23 million or 4 percent and the effect of unfavorable exchange rate
fluctuations of $11 million or 2 percent.  Lower sales volumes were
realized by all of our reporting segments due to continued weakness in demand
across the global automotive, construction, and industrial markets related to
the deterioration in the macro-economic environment which began in the fourth
quarter of 2008.  Lower selling prices were experienced by the Saflex
and Technical Specialties reporting segments due to a weakened demand profile of
the global automotive market and increasing price pressure from Far Eastern
producers.  The unfavorable currency impact was driven most notably by
the increased strength of the U.S. dollar versus the Euro, in comparison to the
prior year, due to our strong market positions in Europe by our Saflex and
Technical Specialties reporting segments.





The
decrease in operating income as compared to the third quarter 2008 was a result
of lower net sales, as described above, lower fixed cost absorption and higher
net charges, as further described below in the Summary of Events Affecting
Comparabilitysection, substantially offset by lower raw material and
energy costs of approximately $35 million, effective implementation of cost
containment initiatives which resulted in better plant cost performance and
lower selling, general and administrative expenses.





38


Saflex





Successor(dollars
      in millions)
            
            Three
      MonthsEnded
              September 30, 2009
            
            
            Three
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Net
      Sales
            
            $
            182
            
            
            $
            221
            
            
            $
            (39
            )
            
            
            (18
            %)Segment
      Profit
            
            $
            45
            
            
            $
            36
            
            
            $
            9
            
            
            
            25
            %Charges
      included in Segment Profit
            
            $
            (2
            )
            
            $
            --





The decrease in net sales as
compared to the third quarter 2008 was a result of lower sales volumes of $26
million or 12 percent, lower average selling prices of $7 million or 3 percent
and unfavorable currency exchange rate fluctuations of $6 million or 3
percent. Lower sales volumes were due predominantly to the continued
weakness in demand across the global automotive market which negatively impacted
sales volumes of SAFLEXÒ plastic interlayer
and Polyvinyl Butyral resin, partially offset by higher volumes in the solar
energy market.  Lower selling prices are a result of balancing volumes
with prices to match the weakened demand profile of the global automotive
market.  The unfavorable exchange rate fluctuations occurred primarily
as a result of the increased strength of the U.S. dollar in relation to the Euro
in comparison to the third quarter 2008.





The
increase in segment profit in comparison to the third quarter 2008 was a result
of lower raw material costs of $11 million, implementation of cost containment
initiatives, which resulted in better plant cost performance and lower selling,
general and administrative expenses, substantially offset by lower net sales, as
described above, higher charges and lower fixed cost absorption. Segment
profit in the third quarter 2009 included a $2 million charge related to the
general corporate restructuring.








CPFilms





Successor(dollars
      in millions)
            
            Three
      Months Ended
              September 30, 2009
            
            
            Three
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Net
      Sales
            
            $
            53
            
            
            $
            63
            
            
            $
            (10
            )
            
            
            (16
            %)Segment
      Profit
            
            $
            11
            
            
            $
            15
            
            
            $
            (4
            )
            
            
            (27
            %)Charges
      included in Segment Profit
            
            $
            (1
            )
            
            $
            --





The
decrease in net sales as compared to the third quarter 2008 resulted primarily
from lower sales volumes of $11 million or 17 percent and unfavorable currency
exchange rate fluctuations of $1 million or 2 percent, partially offset by
higher average selling prices of $2 million or 3 percent. The decrease in
sales volumes were experienced across all global markets, except for our
targeted growth market of Asia Pacific, due to the continued impact of the
severe global economic downturn and its effect on the automotive, residential
housing, and commercial construction markets, but was more pronounced in Russia
due to credit issues in the region.





The
decrease in segment results in comparison to the third quarter 2008 resulted
primarily from decreased net sales as described above, higher charges and lower
fixed cost absorption, partially offset by implementation of cost containment
initiatives, which resulted in lower selling, general and administrative
expenses, and lower raw material costs of $1 million. Segment profit in the
third quarter 2009 included a charge of $1 million related to the general
corporate restructuring.








39


Technical
Specialties





Successor(dollars
      in millions)
            
            Three
      MonthsEnded
              September 30, 2009
            
            
            Three
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Net
      Sales
            
            $
            209
            
            
            $
            294
            
            
            $
            (85
            )
            
            
            (29
            %)Segment
      Profit
            
            $
            72
            
            
            $
            74
            
            
            $
            (2
            )
            
            
            (3
            %)Net
      Charges included in Segment Profit
            
            $
            --
            
            
            $
            (1
            )





The
decrease in net sales as compared to the third quarter 2008 resulted from lower
sales volumes of $64 million or 22 percent, lower average selling prices of $18
million or 6 percent and unfavorable currency exchange rate fluctuations of $3
million or 1 percent. Lower sales volumes were experienced by all products
within Technical Specialties due to the severe global economic downturn but this
decrease was most pronounced within SANTOFLEX® antidegradants and other rubber
chemicals products.  Lower average selling prices were experienced by
all rubber chemical products but, on a rate of decline basis, most
significantlyby
SANTOFLEX® antidegradants, SANTOCURE® and PERKACIT® primary and ultra
accelerators and other rubber chemical products, partially offset by higher
average selling prices by THERMINOL® heat transfer fluids and SKYDROL® aviation
hydraulicfluids.  The
unfavorable exchange rate fluctuations occurred primarily as a result of the
strengthening U.S. dollar in relation to the Euro in comparison to the third
quarter 2008.





The
decrease in segment profit in comparison to the third quarter 2008 resulted
primarily from lower net sales and lower fixed cost absorption, substantially
offset by favorable exchange rate fluctuations, implementation of cost
containment initiatives which resulted in better plant cost performance and
lower selling, general and administrative expenses, lower raw material costs of
$23 million and lower net charges. The favorable exchange rate fluctuation
on segment profit is due to a higher percentage of our operating costs
transacted in Euros than net sales in the same currency.  Segment
profit in the third quarter 2008 included $7 million of charges related to the
closure of our manufacturing facility in Ruabon, United Kingdom (“Ruabon
Facility”) substantially offset by a $6 million gain realized upon termination
of a natural gas contract supplying the same facility.





Unallocated
and Other




Successor(dollars
      in millions)
            
            Three
      MonthsEnded
              September 30, 2009
            
            
            Three
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Components
      of Unallocated and OtherOther Operations Segment
      Loss
            
            $
            (6
            )
            
            $
            (3
            )Corporate Expenses
            
            
            (10
            )
            
            
            (17
            )Share-Based Compensation
      Expense
            
            
            (4
            )
            
            
            (3
            )Other Unallocated Income
      (Expense), net
            
            
            (9
            )
            
            
            6Unallocated
      and Other results
            
            $
            (29
            )
            
            $
            (17
            )
            
            $
            (12
            )
            
            
            (71
            %)Net
      Gains (Charges) included in Unallocated and Other
            
            $
            (13
            )
            
            $
            2





Unallocated
and Other results decreased due to higher net charges and losses on foreign
currency, partially offset by lower corporate expenses and a lower segment loss
from other operations.  Net charges included in the results of
Unallocated and Other in the third quarter 2009 are (i) a $6 million loss
resulting from the sale of the North America plastic products business (“Plastic
Products Sale”) recorded in other operations segment loss; (ii) a $6 million net
pension plan settlement charge recorded in other unallocated income (expense),
net; and (iii) a $1 million charge related to the general corporate
restructuring recorded in corporate expenses.  Net gains included in
the results of Unallocated and Other in the third quarter 2008 are (i) a $3
million gain resulting from a surplus land sale recorded in other unallocated
income (expense), net; and (ii) a $1 million charge resulting from the
reallocation of our plastic products business from our manufacturing facility in
Ghent, Belgium to Oradea, Romania.
 
 After consideration of the
aforementioned items in 2009 and 2008, corporate expenses decreased $8 million
due to lower discretionary expenses and the realization of cost reductions
initiated by certain restructuring activities. After consideration of the
aforementioned items in 2009 and 2008, other unallocated income (expense), net
decreased by $6 million primarily due to losses on foreign currency
exposure.  Finally, segment loss from other operations, after
consideration of the loss resulting from the Plastic Products Sale in 2009 and
the relocation costs of the European plastic products business in 2008,
decreased $2 million due to a lack of start up costs at the Oradea, Romania
manufacturing facility in the third quarter of 2008.





40


Interest
Expense





Successor(dollars
      in millions)
            
            Three
      MonthsEnded
              September 30, 2009
            
            
            Three
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Interest
      Expense
            
            $
            31
            
            
            $
            42
            
            
            $
            (11
            )
            
            
            (26
            %)Charges
      included in Interest Expense
            
            $
            --
            
            
            $
            (1
            )





The
decrease in interest expense as compared to the third quarter 2008 resulted
principally from lower debt outstanding with lower interest rates in the third
quarter 2009 than in 2008 and lower charges, partially offset by mark-to-market
losses related to interest rate swap agreements in the third quarter
2009.  Included in our debt to fund our emergence from Chapter 11 was
a $400 million senior unsecured bridge facility (“Bridge”), which was
subsequently repaid late in August 2008. The repayment of the Bridge and no
borrowings outstanding on our Revolver during the third quarter 2009 resulted in
lower average debt outstanding in the third quarter 2009. In addition, the
interest rate on the Bridge was 15.5 percent and the repayment allowed our
weighted average interest rate to decrease to 7.2 percent at September 30,
2009.  In February 2009, we discontinued hedge accounting on our
interest rate swap agreements related to our Term Loan.  The
mark-to-market loss on interest rate swap agreements in the third quarter 2009
was $3 million.  As interest rates fluctuate, mark-to-market gains or
losses on our interest rate swap agreements, which do not affect cash flow, are
recognized in interest expense.  These gains or losses may create
volatility in our Consolidated Statement of Operations.





Interest
expense in the third quarter 2008 includes a charge of $1 million to write-off
unamortized debt issuance costs related to the repayment of the
Bridge.





Income
Tax Expense





Successor(dollars
      in millions)
            
            Three
      MonthsEnded
              September 30, 2009
            
            
            Three
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Income
      Tax Expense
            
            $
            12
            
            
            $
            17
            
            
            $
            (5
            )
            
            
            (29
            %)





Our
income tax expense or benefit is significantly affected by the mix of income and
losses in the tax jurisdictions in which we operate.  In particular,
earnings or losses on U.S. operations are substantially offset by changes in our
NOLs, which are subject to a full valuation allowance, resulting in no income
tax expense or benefit being recognized.  For the three months ended
September 30, 2009, income tax expense decreased $5 million, as compared to the
third quarter 2008, due to lower earnings in ex-U.S. tax
jurisdictions.  Further, our U.S. operations experienced pre-tax
income in the third quarter of 2009 as compared to a pre-tax loss in the third
quarter of 2008 with no income tax expense or benefit recorded in either
period.
 
 As a
result of the issuance of new common stock upon emergence from bankruptcy, we
realized a change of ownership for purposes of Section 382 of the
Code.  We do not currently expect this change to significantly limit
our ability to utilize our NOLs.  If, in the future, we were to
experience a change of ownership as defined by Section 382, the utilization of
our NOLs could be significantly limited.
 
 As
described in Note 13 – Capital Stock to the accompanying consolidated financial
statements, we adopted a NOL shareholder rights plan (“Rights Plan”) which is
intended to avoid an “ownership change” within the meaning of Section 382 of the
Code and thereby preserve our ability to utilize our NOLs and other tax
benefits.  The Rights Plan does not ensure that our NOLs will be
protected from an ownership change as defined in the tax laws, and there can be
no assurance that such an ownership change will not occur.


41


Discontinued
Operations





Successor(dollars
      in millions)
            
            Three
      MonthsEnded
              September 30, 2009
            
            
            Three
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            %
              Increase
              (Decrease)Loss
      from Discontinued Operations, net of tax
            
            $
            --
            
            
            $
            (28
            )
            
            $
            28
            
            N.M.





Loss from
discontinued operations consists of the results of our Integrated Nylon
business.  As described in Note 3 – Divestitures to the accompanying
consolidated financial statements, we sold our Integrated Nylon business on June
1, 2009.





Results
of Operations—Nine Months Ended September 30, 2009 Compared with Combined Nine
Months Ended September 30, 2008





Consolidated
Results





Successor
            
            
            Combined(dollars
      in millions)
            
            Nine
      Months Ended
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September 30, 2008
            
            Increase
              (Decrease)
            
            %
              Increase
              (Decrease)Net
      Sales
            
            $
            1,197
            
            
            $
            1,681
            
            $
            (484
            )
            
            (29
            %)Operating
      Income:Reportable
      Segment Profit
            
            $
            313
            
            
            $
            279
            
            $
            34
            
            
            12
            %Unallocated
      and Other
            
            
            (73
            )
            
            
            (29
            )
            
            (44
            )
            
            (152
            %)Less:   Depreciation
      and Amortization
            
            
            (78
            )
            
            
            (75
            )Less:   Other
      (Income) Loss and Net Income Attributable to Noncontrolling Interest
      included in Segment Profit and Unallocated and Other
            
            
            6
            
            
            
            (11
            )Operating
      Income
            
            $
            168
            
            
            $
            164
            
            $
            4
            
            
            2
            %Net
      Charges included in Operating Income
            
            $
            (17
            )
            
            $
            (67
            )





The
decrease in net sales as compared to the nine months ended September 30, 2008
resulted from decreased sales volumes of $467 million or 28 percent and the
effect of unfavorable exchange rate fluctuations of $46 million or 3 percent,
partially offset by higher selling prices of $29 million or 2
percent. Lower sales volumes were realized by all of our reporting segments
due to continued weakness in demand across the global construction, automotive
and industrial markets related to the deterioration in the macro-economic
environment which began in the fourth quarter of 2008.  The
unfavorable currency impact was driven most notably by the increased strength of
the U.S. dollar versus the Euro, in comparison to the prior year, due to our
strong market positions in Europe by the Saflex and Technical Specialties
reporting segments.  Higher selling prices were experienced primarily
in our Technical Specialties reporting segment as a result of price increases
initiated in the third quarter 2008.


The
increase in operating income as compared to the nine months ended September 30,
2008 resulted from lower net charges as further described below in the Summary of Events Affecting
Comparabilitysection, favorable exchange rate fluctuations, lower raw
material and energy costs of approximately $64 million, effective implementation
of cost containment initiatives which resulted in better plant cost performance
and lower selling, general and administrative expenses, substantially offset by
lower net sales, lower fixed cost absorption, and higher depreciation and
amortization due to fresh-start accounting.





42





Saflex





Successor
            
            
            Combined(dollars
      in millions)
            
            Nine
      MonthsEnded
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Net
      Sales
            
            $
            475
            
            
            $
            634
            
            
            $
            (159
            )
            
            
            (25
            %)Segment
      Profit
            
            $
            99
            
            
            $
            71
            
            
            $
            28
            
            
            
            39
            %Net
      Charges included in Segment Profit
            
            $
            (11
            )
            
            $
            (37
            )





The
decrease in net sales as compared to the nine months ended September 30, 2008
was a result of lower sales volumes of $127 million or 20 percent, unfavorable
currency exchange rate fluctuations of $26 million or 4 percent and lower
average selling prices of $6 million or 1 percent.  Lower sales
volumes were due to the continued weakness in demand across the global
construction and automotive markets as described above, predominantly in Europe,
which negatively impacted sales volumes of SAFLEX® plastic interlayer and
Polyvinyl Butyral resin, partially offset by higher volumes in the solar energy
market.  The unfavorable exchange rate fluctuations occurred primarily
as a result of the strengthening of the U.S. dollar in relation to the Euro in
comparison to the comparable period in 2008.
 
 The
increase in segment profit in comparison to the nine months ended September 30,
2008 resulted from lower net charges, lower raw material costs of $25 million,
and effective implementation of cost containment initiatives, which resulted in
better plant cost performance and lower selling, general and administrative
expenses, partially offset by lower net sales as described above and lower fixed
cost absorption.  Segment profit in the nine months ended September
30, 2009 included (i) $13 million of charges related to the general corporate
restructuring, (ii) a $7 million gain related to the reduction in the 2008
annual incentive plan and (iii) $5 million of charges related to the cessation
of production of SAFLEX® plastic interlayer at our manufacturing facility in
Trenton, Michigan (“Trenton Facility”).  Segment profit in the
comparable period in 2008 included charges of $36 million resulting primarily
from the expensing of the step-up in basis of inventory in accordance with
fresh-start accounting and $1 million of severance and retraining
costs.


CPFilms





Successor
            
            
            Combined(dollars
      in millions)
            
            Nine
      MonthsEnded
              September 30, 2009
            
            
            Nine
      Months Ended
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Net
      Sales
            
            $
            141
            
            
            $
            196
            
            
            $
            (55
            )
            
            
            (28
            %)Segment
      Profit
            
            $
            24
            
            
            $
            43
            
            
            $
            (19
            )
            
            
            (44
            %)Charges
      included in Segment Profit
            
            $
            (4
            )
            
            $
            (10
            )





The
decrease in net sales as compared to the nine months ended September 30, 2008
resulted primarily from lower sales volumes of $56 million or 29 percent, and,
to a lesser extent, unfavorable currency exchange rate fluctuations of $3
million or 1 percent, partially offset by higher average selling prices of $4
million or 2 percent. The decrease in sales volumes were experienced across
all global markets due to the severe global economic downturn and its effect on
the automotive, residential housing, and commercial construction markets, but
was more pronounced in Russia due to credit issues in the
region.


The decrease in segment
results in comparison to the nine months ended September 30, 2008 resulted
primarily from decreased net sales as described above and lower fixed cost
absorption, partially offset by effective implementation of cost containment
initiatives, which resulted in lower selling, general and administrative
expenses, lower raw material costs of $3 million and lower net
charges.  Segment profit in the nine months ended September 30, 2009
included charges of $4 million related to the general corporate restructuring
while segment profit in the comparable period in 2008 included a charge of $10
million resulting from the expensing of the step-up in basis of inventory in
accordance with fresh-start accounting.





43


Technical
Specialties





Successor
            
            
            Combined(dollars
      in millions)
            
            Nine
      Months Ended
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Net
      Sales
            
            $
            566
            
            
            $
            821
            
            
            $
            (255
            )
            
            
            (31
            %)Segment
      Profit
            
            $
            190
            
            
            $
            165
            
            
            $
            25
            
            
            
            15
            %Net
      Gains (Charges) included in Segment Profit
            
            $
            14
            
            
            $
            (27
            )


The
decrease in net sales as compared to the nine months ended September 30, 2008
resulted from lower sales volumes of $271 million or 33 percent and unfavorable
currency exchange rate fluctuations of $15 million or 2 percent, partially
offset by higher average selling prices of $31 million or 4 percent. The
lower sales volumes have been experienced by all products within Technical
Specialties due to the severe global economic downturn but this decrease, on a
rate of decline basis, was more pronounced within SANTOFLEX® antidegradants,
SANTOCURE® and PERKACIT® primary and ultra accelerators and other rubber
chemicals products.  The unfavorable exchange rate fluctuations
occurred primarily as a result of the strengthening U.S. dollar in relation to
the Euro in comparison to the comparable period in 2008. Higher average
selling prices were experienced primarily within CRYSTEX® insoluble sulphur,
THERMINOL® heat transfer fluids and SKYDROL® aviation hydraulic
fluids.  The increase in selling prices is related to our global price
increases initiated in the third quarter 2008.
 
 The
increase in segment profit in comparison to the nine months ended September 30,
2008 resulted primarily from higher net gains, favorable exchange rate
fluctuations, effective implementation of cost containment initiatives, which
resulted in better plant cost performance and lower selling, general and
administrative expenses, and lower raw material costs of $35 million, partially
offset by lower net sales and lower fixed cost absorption.  The
favorable exchange rate fluctuation on segment profit is due to a higher
percentage of our operating costs transacted in Euros than net sales in the same
currency. Segment profit in the nine months ended September 30, 2009
included (i) a $12 million gain related to the reduction in the 2008 annual
incentive plan, (ii) a $3 million net gain related to the closure of the Ruabon
Facility and (iii) a $1 million charge related to the general corporate
restructuring.  Segment profit in the comparable period in 2008
included (i) a charge of $20 million resulting from the expensing of the step-up
in basis of inventory in accordance with fresh-start accounting, (ii) a $13
million of charges related to the closure of the Ruabon Facility, and (iii) a $6
million gain related to the termination of a natural gas purchase contract
associated with the same facility.


Unallocated
and Other





Successor
            
            
            Combined(dollars
      in millions)
            
            Nine
      Months Ended
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Components
      of Unallocated and OtherOther Operations Segment Profit
      (Loss)
            
            $
            (10
            )
            
            $
            1Corporate Expenses
            
            
            (33
            )
            
            
            (40
            )Share-Based Compensation
      Expense
            
            
            (13
            )
            
            
            (6
            )Other Unallocated Income
      (Expense), net
            
            
            (17
            )
            
            
            16Unallocated
      and Other results
            
            $
            (73
            )
            
            $
            (29
            )
            
            $
            (44
            )
            
            
            (152
            )%Net
      Gains (Charges) included in Unallocated and Other
            
            $
            (16
            )
            
            $
            11




Unallocated
and Other results decreased as compared to the nine months ended September 30,
2008 due to higher net charges, losses on foreign currency exposure, higher
charges for environmental remediation projects, higher share-based compensation
expense, lower interest income and lower segment profit from other operations,
partially offset by lower corporate expenses.  Included in the results
of Unallocated and Other in the nine months ended September 30, 2009 is (i) a
charge of $8 million related to the general corporate restructuring with $6
million recorded in corporate expenses and $2 million recorded in other
operations segment profit (loss); (ii) a $6 million loss resulting from the
Plastic Products Sale recorded in other operations segment profit (loss); (iii)
a $6 million net pension plan settlement charge recorded in other unallocated
income (expense), net; and (iv) a $4 million gain related to the reduction in
the 2008 annual incentive plan recorded in corporate expenses. In the
comparable period in 2008, we recorded (i) a $6 million gain resulting from
surplus land sales with $3 million recorded in both other unallocated income
(expense), net and other operations segment profit (loss); (ii) a $3 million
gain related to joint settlements with Monsanto of legacy insurance policies
with insolvent insurance carriers recorded in other unallocated income
(expense), net, (iii) a $4 million gain resulting from the settlement of
emergence related incentive accruals recorded in other unallocated income
(expense), net; and (iv) a $1 million charge resulting from the relocation of
our plastic products business from our manufacturing facility in Ghent, Belgium
to Oradea, Romania recorded in other operations segment profit (loss); and (v) a
$1 million charge resulting from the expensing of the step-up in basis of
inventory in accordance with fresh-start accounting recorded in other operations
segment profit (loss).


44





After consideration of the
aforementioned items in 2009 and 2008, corporate expenses decreased $9 million
primarily due to lower discretionary expenses.  Share-based
compensation expense increased $7 million due to higher share-based compensation
expense on management incentive and director stock compensation plans adopted
upon our emergence from bankruptcy and an additional award granted early in the
third quarter of 2009.  After consideration of the aforementioned items in
2009 and 2008, other unallocated income (expense), net decreased by $17 million
primarily due to losses on foreign currency exposure, higher charges for
environmental remediation projects and lower interest income.  The
higher charges for environmental remediation projects is due to a full year in
2009 of operations and maintenance costs on projects classified as liabilities
subject to compromise prior to our emergence from bankruptcy in February 2008 in
addition to sites increased legal spending on remediation projects in Anniston,
Alabama as we seek recovery from other parties.  After consideration
of the aforementioned items recorded in 2009 and 2008, other operations segment
loss decreased by $2 million as compared to the comparable period in 2008 due to
the severe global economic downturn.
  Interest
Expense





Successor
            
            
            Combined(dollars
      in millions)
            
            Nine
      MonthsEnded
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            
            %
              Increase
              (Decrease)Interest
      Expense
            
            $
            98
            
            
            $
            128
            
            
            $
            (30
            )
            
            
            (23
            %)Charges
      included in Interest Expense
            
            $
            (8
            )
            
            $
            (1
            )





The decrease in interest
expense as compared to the nine months ended September 30, 2008 resulted
principally from lower debt outstanding with lower interest rates in the nine
months ended September 30, 2009 than in 2008, partially offset by higher
charges.  As described above in the Results of Operations—Third Quarter
2009 Compared with Third Quarter 2008section, we repaid the Bridge late
in the third quarter 2008 which had an interest rate of 15.5
percent.  This resulted in lower debt outstanding during the nine
months ended September 30, 2009 and allowed our weighted average interest rate
to decrease to 7.2 percent at September 30, 2009.
 
 Interest
expense in the nine months ended September 30, 2009 includes charges of $8
million to write-off unamortized debt issuance costs and debt discount related
to the repayment of the German term loan.  Interest expense in the
nine months ended September 30, 2008 includes a charge of $1 million to
write-off unamortized debt issuance costs related to the repayment of the
Bridge.





Reorganization
Items, net





Successor
            
            
            Combined(dollars
      in millions)
            
            Nine
      MonthsEnded
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            %
              Increase
              (Decrease)Reorganization
      Items, net
            
            $
            --
            
            
            $
            1,433
            
            
            $
            (1,433
            )
            N.M.





Reorganization
items, net are presented separately in the Consolidated Statement of Operations
and represent items of income, expense, gain, or loss that are realized or
incurred by us because we were in reorganization under Chapter 11 of the U.S.
Bankruptcy Code.  We did not record any charges in reorganization
items in the nine months ended September 30, 2009 due to our emergence from
Chapter 11 on February 28, 2008.





45


Income
Tax Expense





Successor
            
            
            Combined(dollars
      in millions)
            
            Nine
      MonthsEnded
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            %
              Increase
              (Decrease)Income
      Tax Expense
            
            $
            15
            
            
            $
            231
            
            
            $
            (216
            )
            (94
            %)





Our
income tax expense or benefit is significantly affected by the mix of income and
losses in the tax jurisdictions in which we operate.  For the nine
months ended September 30, 2009, income tax expense decreased $216 million, as
compared to the same period in 2008.  Of this decrease, approximately
$202 million is attributable to our emergence from bankruptcy and the effect of
adopting fresh-start accounting on February 29, 2008, $4 million is attributable
to lower earnings in ex-U.S. tax jurisdictions and the remaining $10 million
decrease is due to a reduction in unrecognized tax benefits.
 
 As a
result of the issuance of new common stock upon emergence from bankruptcy, we
realized a change of ownership for purposes of Section 382 of the
Code.  We do not currently expect this change to significantly limit
our ability to utilize our NOLs.  If, in the future, we were to
experience a change of ownership as defined by Section 382, it could impose
significant limitations on our ability to utilize our NOLs.
 
 As
described in Note 13 – Capital Stock to the accompanying consolidated financial
statements, we adopted a Rights Plan which is intended to avoid an “ownership
change” within the meaning of Section 382 of the Code and thereby preserve our
ability to utilize our NOLs and other tax benefits.  The Rights Plan
does not ensure that our NOLs will be protected from an ownership change as
defined in the tax laws, and there can be no assurance that such an ownership
change will not occur.


Discontinued
Operations





Successor
            
            
            Combined(dollars
      in millions)
            
            Nine
      MonthsEnded
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)
            
            %
              Increase
              (Decrease)Integrated
      Nylon business
            
            $
            (170
            )
            
            $
            152Other
            
            
            1
            
            
            
            --Income
      (Loss) from Discontinued Operations, net of tax
            
            $
            (169
            )
            
            $
            152
            
            
            $
            (321
            )
            
            
            (211
            %)Reorganization
      items included in income (loss) from discontinued
    operations
            
            $
            --
            
            
            $
            212





Income
(Loss) from discontinued operations consists of the results of our Integrated
Nylon and other previously divested businesses.





As
described in Note 3 – Divestitures to the accompanying consolidated financial
statements, we sold our Integrated Nylon business on June 1, 2009 and recorded a
loss on the sale in the nine months ended September 30, 2009 of $76
million.  The reorganization items included in the results of
Integrated Nylon included primarily the elimination of the LIFO reserve of $204
million and the expensing of the step-up in basis of the inventory of $7
million.





46


Summary
of Events Affecting Comparability





Charges
and gains recorded in the nine months ended September 30, 2009 and 2008 and
other events affecting comparability have been summarized and described in the
table and accompanying footnotes below (dollars in millions):





2009
Events





Increase/(Decrease)
            
            Saflex
            
            
            CPFilms
            
            
            Technical
      Specialties
            
            
            Unallocated/Other
            
            
            ConsolidatedImpact
      on:Cost
      of goods sold
            
            $
            (2
            )
            
            $
            --
            
            
            $
            (3
            )
            
            $
            (1
            )
            
            $
            (6
            )
            (a)3
            
            
            
            1
            
            
            
            --
            
            
            
            1
            
            
            
            5
            
            (b)5
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            5
            
            (c)--
            
            
            
            --
            
            
            
            (3
            )
            
            
            --
            
            
            
            (3
            )
            (d)--
            
            
            
            --
            
            
            
            --
            
            
            
            4
            
            
            
            4
            
            (e)--
            
            
            
            --
            
            
            
            --
            
            
            
            1
            
            
            
            1
            
            (f)Selling,
      general and administrative expenses
            
            
            (4
            )
            
            
            --
            
            
            
            (9
            )
            
            
            (3
            )
            
            
            (16
            )
            (a)9
            
            
            
            3
            
            
            
            1
            
            
            
            7
            
            
            
            20
            
            (b)--
            
            
            
            --
            
            
            
            --
            
            
            
            2
            
            
            
            2
            
            (e)Research,
      development and other operating expenses
            
            
            (1
            )
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1
            )
            (a)1
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1
            
            (b)--
            
            
            
            --
            
            
            
            --
            
            
            
            5
            
            
            
            5
            
            (g)Operating
      Income Impact
            
            
            (11
            )
            
            
            (4
            )
            
            
            14
            
            
            
            (16
            )
            
            
            (17
            )Interest
      expense
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (8
            )
            
            
            (8
            )
            (h)Pre-tax
      Income Statement Impact
            
            $
            (11
            )
            
            $
            (4
            )
            
            $
            14
            
            
            $
            (24
            )
            
            
            (25
            )Income
      tax impact
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3
            )
            (i)After-tax
      Income Statement Impact
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (22
            )






(a)
              Gain
      related to the reduction in the 2008 annual incentive plan ($23 million
      pre-tax and $20 million after-tax).(b)
              Severance
      and retraining costs related to the general corporate restructuring ($26
      million pre-tax and $21 million after-tax).(c)
              Charges
      related to the closure of the SAFLEX® plastic interlayer production line
      at the Trenton Facility ($5 million pre-tax and
  after-tax).(d)
              Net
      gains related to the closure of the Ruabon Facility ($3 million pre-tax
      and $2 million after-tax).(e)
              Net
      pension plan settlements, as more fully described in Note 12 to the
      accompanying consolidated financial statements ($6 million pre-tax and
      after-tax).(f)
              Impairment
      of intangible assets related to the Plastic Products Sale ($1 million
      pre-tax and after-tax).(g)
              Loss
      on the Plastic Products Sale ($5 million pre-tax and
      after-tax).(h)
              Charges
      related to the repayment of the German term loan to write-off unamortized
      debt issuance costs and debt discount ($8 million pre-tax and $6 million
      after-tax).(i)
              Income
      tax expense has been provided on gains and charges at the tax rate in the
      jurisdiction in which they have been or will be
  realized.











47







2008
Events





Increase/(Decrease)
            
            Saflex
            
            
            CPFilms
            
            
            Technical
      Specialties
            
            
            Unallocated/Other
            
            
            ConsolidatedImpact
      on:Cost
      of goods sold
            
            $
            36
            
            
            $
            10
            
            
            $
            20
            
            
            $
            1
            
            
            $
            67
            
            (a)--
            
            
            
            --
            
            
            
            13
            
            
            
            --
            
            
            
            13
            
            (b)--
            
            
            
            --
            
            
            
            (6
            )
            
            
            --
            
            
            
            (6
            )
            (c)--
            
            
            
            --
            
            
            
            --
            
            
            
            (3
            )
            
            
            (3
            )
            (d)1
            
            
            
            --
            
            
            
            --
            
            
            
            1
            
            
            
            2
            
            (e)Research,
      development and other operating expenses
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (6
            )
            
            
            (6
            )
            (f)Operating
      Income Impact
            
            
            (37
            )
            
            
            (10
            )
            
            
            (27
            )
            
            
            7
            
            
            
            (67
            )Interest
      expense
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1
            )
            
            
            (1
            )
            (g)Other
      income (loss), net
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            4
            
            
            
            4
            
            (h)Reorganization
      Items, net
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,433
            
            
            
            1,433
            
            (i)Pre-tax
      Income Statement Impact
            
            $
            (37
            )
            
            $
            (10
            )
            
            $
            (27
            )
            
            $
            1,443
            
            
            
            1,369Income
      tax impact
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            187
            
            (j)After-tax
      Income Statement Impact
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,182







(a)
              Charges
      resulting from the step-up in basis of inventory in accordance with
      fresh-start accounting ($67 million pre-tax and $52 million
      after-tax).(b)
              Charges
      related to the closure of the Ruabon Facility ($13 million pre-tax and
      after-tax).(c)
              Gain
      related to the termination of a natural gas purchase contract related to
      the closure of the Ruabon Facility ($6 million pre-tax and
      after-tax).(d)
              Gain
      resulting from settlements of legacy insurance policies with insolvent
      insurance carriers ($3 million pre-tax and after-tax).(e)
              Restructuring
      costs related principally to severance and retraining costs ($2 million
      pre-tax and after-tax).(f)
              Gain
      resulting from surplus land sales ($6 million pre-tax and
      after-tax).(g)
              Unamortized
      debt issuance costs associated with the repayment of the Bridge ($1
      million pre-tax and after-tax).(h)
              Gain
      resulting from the settlement of emergence related incentive accruals ($4
      million pre-tax and after-tax).(i)
              Reorganization
      items, net consist of the following:  $104 million charge on the
      settlement of liabilities subject to compromise, $1,589 million gain from
      fresh-start accounting adjustments, and $52 million of professional fees
      for services provided by debtor and creditor professionals directly
      related to our reorganization proceedings ($1,433 million pre-tax and
      $1,231 million after-tax).(j)
              Income
      tax expense has been provided on gains and charges at the tax rate in the
      jurisdiction in which they have been or will be
  realized.





Financial
Condition and Liquidity




As of
September 30, 2009, our total liquidity was $225 million, which was comprised of
$111 million in cash and $114 million in availability under our
Revolver.  Our Revolver is limited to the lesser of the amount of the
borrowing base, as defined, but generally calculated as a percentage of
allowable inventory and trade receivables or $400 million. During the third
quarter of 2009, we voluntarily reduced the maximum availability under our
Revolver from $450 million to $400 million.  As of September 30, 2009,
our borrowing base was $158 million with availability reduced by required
letters of credit of $44 million.   There were no borrowings
outstanding at September 30, 2009.





For the
remainder of 2009, our anticipated use of cash includes fulfillment of our
financial, pension, environmental, restructuring and tax obligations, in
addition to certain capital expenditures necessary to satisfy our maintenance
and safety requirements. Capital expenditure use of cash is estimated to
range between $40 million and $50 million for the twelve months ended
2009.  To the extent required to fund certain seasonal demands of our
operations, an additional use of cash may be to fund working capital although
management has instituted significant monitoring procedures and, as a result,
expects this use of cash to be minimal. Other sources of liquidity may
include additional lines of credit, financing other assets, customer receivables
and/or asset sales, all of which are allowable, with certain limitations, under
our existing credit agreements.





48


On
October 15, 2009, we issued the Notes with net proceeds, after incorporating all
transaction fees, of $379 million.  We used a portion of the net
proceeds to repay $300 million of our Term Loan, which was subject to a 2
percent prepayment penalty.   The remaining net proceeds were
used to enhance our liquidity position.  We also amended our Revolver
and Term Loan credit agreements in order to provide us with greater operational
and strategic flexibility.  Among other things, the aforementioned
amendment increases our Leverage Ratio to 4.50, as of September 30,
2009.





In
summary, we expect that our cash on hand, coupled with future cash flows from
operations and other sources of liquidity, including our Revolver, will provide
sufficient liquidity to allow us to meet our projected cash
requirements.  However, common with other companies with similar
exposure to global economic and financial events, one or more financial
institutions may cease to be able to fulfill their funding obligations and we
may not be able to access substitute capital.  Also, we may experience
a decline in the demand for our products, which could impact our ability to
generate cash from operations.





Debt
Covenants





Our Term
Loan and Revolver (“Financing Agreements”) include a number of customary
covenants and events of default, including the maintenance of certain financial
covenants that restrict our ability to, among other things, incur additional
debt; make certain investments; pay dividends, repurchase stock, sell certain
assets or merge with or into other companies; enter into new lines of business;
make capital expenditures; and prepay, redeem or exchange our
debt.  The financial covenants for all measurement periods for the
year ended December 31, 2009 are (i) Leverage
Ratio:  limitation of maximum leverage ratio comprised of gross
debt to trailing twelve-month continuing operations Adjusted EBITDA or earnings
from continuing operations before interest, income taxes, depreciation and
amortization, reorganization items, non-cash share-based compensation expense
and unusual gains and charges (as that term is defined in the Financing
Agreements); (ii) Fixed
Charge Ratio:  maintenance of a minimum fixed charge coverage
ratio comprised of trailing twelve-month (“TTM”) continuing operations Adjusted
EBITDA, as reduced by TTM continuing operations capital expenditures, to Fixed
Charges (as defined in the Financing Agreements, as the sum of cash interest
expense, net, TTM cash income taxes and annualized debt amortization under our
Term Loan) ratio; and iii) Maximum Capital Expenditures.  Below is a
summary of our actual performance under these financial covenants as of
September 30, 2009 along with a summary of the contractually agreed to financial
covenants for the remaining measurement period in 2009.





September 30, 2009
            
            
            December 31, 2009Actual
            
            
            Covenant
            
            
            CovenantMax
      Leverage Ratio
            
            
            3.51
            
            
            
            4.50
            
            
            
            4.50Min
      Fixed Charge Ratio
            
            
            2.12
            
            
            
            1.15
            
            
            
            1.15Max
      Capital Expenditures
            
            n.a
            
            
            n.a.
            
            
            $
            252





As
provided by the Amendments, the Leverage Ratio covenant
increased from 4.25 to 4.50 as of the third quarter of 2009.  The
Leverage Ratio and the
Fixed Charge Ratio
covenants are consistent throughout 2010 at 4.50 and 1.35,
respectively.





Cash
Flows - Continuing Operations





Our cash
flows from continuing operations attributable to operating, investing and
financing activities, as reflected in the Consolidated Statement of Cash Flows,
are summarized in the following table:








49










Successor
            
            
            CombinedCash
      Flow Summary – Continuing Operations
              (dollars
      in millions)
            
            Nine
      MonthsEnded
              September 30, 2009
            
            
            Nine
      MonthsEnded
              September 30, 2008
            
            
            Increase
      (Decrease)Cash
      provided by operating activities before reorganization
    items
            
            $
            123
            
            
            $
            109
            
            
            $
            14Cash
      used in reorganization activities
            
            
            --
            
            
            
            (378
            )
            
            
            378Cash
      provided by (used in) operating activities
            
            
            123
            
            
            
            (269
            )
            
            
            392Cash
      used in investing activities
            
            
            (26
            )
            
            
            (16
            )
            
            
            (10
            )Cash
      provided by (used in) financing activities
            
            
            (92
            )
            
            
            361
            
            
            
            (453
            )Net
      change in cash for period attributable to continuing
      operations
            
            $
            5
            
            
            $
            76
            
            
            $
            (71
            )





Operating
activities:  Cash
provided by operating activities was $123 million for the first nine months of
2009, a $392 million increase as compared to the $269 million used in operations
for the comparable period in 2008.  The increase is primarily attributable
to a lack of reorganization activities in 2009 which required a cash usage of
$378 million in 2008, primarily to facilitate our emergence from bankruptcy.
 Cash provided by operating activities before reorganization items
increased $14 million as compared to the $109 million provided by operations for
the comparable period in 2008.  This increase was due to lower payments on
interest expense, taxes, environmental remediation liabilities and our
postretirement obligations, lower working capital requirements as partially
offset by higher cash payments on restructuring
activities.  Furthermore, the first nine months of 2008 includes cash
payments on our annual incentive plan which was significantly reduced for the
comparable period in 2009.   Required contributions to our U.S.
pension plans, which can fluctuate based upon minimum funding requirements,
decreased $20 million in 2009 and payments on our U.S. other postretirement
obligations were $7 million lower in 2009.  The lower payments on
other postretirement obligations was due to reimbursement to us by a fund
established at our emergence from bankruptcy restricted to pay certain
liabilities assumed by us upon our spinoff from Pharmacia (“Legacy Liabilities”)
in addition to lower cash requirements on other postretirement obligations which
are not included within the definition of Legacy Liabilities.  The
reduction in other postretirement obligation payments is expected to continue
indefinitely as the balance remaining in this restricted fund at September 30,
2009, attributable to pre-spin other post retirement obligations, is $176
million, which effectively defeases the corresponding Legacy
Liability.  We will, however, continue to remain liable for payments
on other postretirement obligations which are not included within the definition
of Legacy Liabilities.


Investing
activities:  Cash used in investing activities was $26 million
for the first nine months of 2009, a $10 million increase as compared to $16
million used in investing activities for the comparable period in 2008. In
the second quarter of 2008, we sold our corporate headquarters building which
provided $43 million of cash.   For the first nine months in
2009, the majority of growth related capital projects were ceased in reaction to
the global economic slowdown first experienced by us in the fourth quarter of
2008, which resulted in a reduction of $40 million in property, plant and
equipment purchases for the first nine months of 2009 as compared to the
comparable period in 2008.





Financing
activities:  Cash used in financing activities was $92 million
for the first nine months in 2009, compared with $361 million of cash provided
by financing activities in 2008. During the first nine months of 2009 we
used $119 million in cash provided by the sale of common stock, along with
proceeds received on the sale of our Integrated Nylon business and cash provided
by operations, to fully repay our Revolver along with $9 million on our Term
Loan.  On February 28, 2008, as more fully described in Note 1 –
Background and Basis of Presentation in the accompanying consolidated financial
statements, we emerged from bankruptcy.  This event required a
complete recapitalization of our debt and equity structure and, after repayment
of all debt obligations outstanding at that time, resulted in net proceeds of
$351 million.  Of this amount, $250 million was used to establish
certain funds restricted for future payments related to Legacy Liabilities and
the remainder was used to pay certain secured and administrative claims and to
provide additional liquidity for operations.





Working
Capital – Continuing Operations
 
 Working
capital used for continuing operations is summarized as
follows:





50


Successor
              
              
              SuccessorWorking Capital – Continuing
      Operations
                (dollars
      in millions)
              
              September 30, 2009
              
              
              December 31, 2008
              
              
              Increase
                (Decrease)Cash
      and cash equivalents
              
              $
              111
              
              
              $
              32Trade
      receivables, net
              
              
              268
              
              
              
              227Inventories
              
              
              273
              
              
              
              341Other
      current assets
              
              
              143
              
              
              
              195Total
      current assets
              
              $
              795
              
              
              $
              795Accounts
      payable
              
              $
              139
              
              
              $
              170Accrued
      liabilities
              
              
              203
              
              
              
              259Short-term
      debt, including current maturities of long-term debt
              
              
              31
              
              
              
              37Total
      current liabilities
              
              $
              373
              
              
              $
              466Working
      Capital
              
              $
              422
              
              
              $
              329
              
              $
              93





Our
working capital used for continuing operations increased $93 million primarily
as a result of higher cash and lower short-term debt reflecting our 2009 focus
on preserving and enhancing our liquidity position. Our other working
capital requirements increased slightly to fund certain seasonal demands of our
businesses, partially offset by a $23 million reduction in the 2008 annual
incentive plan liability.





From time
to time, beginning with the month subsequent to our emergence from bankruptcy,
we sell trade receivables without recourse to third parties.  In
accordance with U.S. GAAP, trade receivables were removed from our Consolidated
Statement of Financial Position and reflected as cash provided by operating
activities in the Consolidated Statement of Cash Flows at the time of sale to
the third party.  Uncollected trade receivables sold under these
arrangements and removed from the Consolidated Statement of Financial Position
were $6 million and $20 million at September 30, 2009 and December 31, 2008,
respectively.  The average monthly amounts of trade receivables sold
were $10 million for the nine months ended September 30,
2009.  Discounts (losses) on sales of trade receivables were less than
$1 million.  These losses primarily represented the costs of funds and
were included as a reduction in operating income.





Cash
Flows - Discontinued Operations





Successor
            
            
            CombinedCash
      Flow Summary – Discontinued Operations
              (dollars
      in millions)
            
            Nine MonthsEnded
              September 30, 2009
            
            
            Nine MonthsEnded
              September 30, 2008
            
            
            Increase
              (Decrease)Cash
      provided by (used in) operating activities
            
            $
            58
            
            
            $
            (170
            )
            
            $
            228Cash
      provided by (used in) investing activities
            
            
            16
            
            
            
            (41
            )
            
            
            57Net
      change in cash for period attributable to discontinued
operations
            
            $
            74
            
            
            $
            (211
            )
            
            $
            285





On June
1, 2009, we sold our Integrated Nylon business for $50 million in cash, subject
to adjustment for changes in working capital, a two percent equity stake in the
new company and $4 million in deferred cash.  Throughout 2009,
including the period from the point we entered into the sale agreement and up to
the date the sale closed, we aggressively worked to monetize the working capital
balances historically required by this business, which resulted in cash provided
by operating activities for discontinued operations of $58 million as compared
to cash used in operating activities of $170 million for the nine months ended
September 30, 2008; an increase of $228 million.  Because the working
capital balances of the business at close were less than anticipated, a working
capital adjustment of $20 million was offset against the sales price resulting
in our receipt of $30 million of gross proceeds.  Cash provided by
investing activities increased $57 million in the nine months ended September
30, 2009 as compared to the comparable period in 2008, in part, due to the
receipt of these funds as offset by $5 million in costs to sell this
business.  A reduction in cash used for capital expenditures accounts
for the remaining increase in cash provided by investing
activities.





During
the fourth quarter of 2009, the payment of retained liabilities associated
with certain pre-divestiture restructuring activities, compensation agreements,
transition services, indirect cost guarantees at one of our former Integrated
Nylon manufacturing facilities and settlement of the final working capital
adjustment with the Buyer, could total up to a net of $15 million.  It
is unlikely a resolution of the Lyondell proceedings discussed in Note 3 –
Divestitures to the accompanying consolidated financial statements will be
completed in 2009 due to the inherent complexities of bankruptcy
proceedings.





51


Pension
Funding





According
to current Internal Revenue Service funding rules, we will make
contributions to our Solutia and Solutia Union Pension Plans of approximately
$26 million in 2009.  Approximately $20 million of these required
contributions were made in the nine months ended September 30,
2009.  We also expect to fund approximately $10 million in pension
contributions to our foreign pension plans in 2009, of which $8 million was
contributed in the nine months ended September 30, 2009.  Actual
contributions to the plans may differ as a result of a variety of factors,
including future changes in actuarial assumptions, legislative changes to
pension funding laws, market conditions and whether we choose to contribute our
common stock rather than cash to the plans.





Contingencies





See Note
9 – Commitments and Contingencies to the accompanying consolidated financial
statements for a summary of our contingencies as of September 30,
2009.








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, 2009 that affect the disclosures presented in the
information appearing under “Derivative Financial Instruments” as presented in
our 2008 Form 10-K, as recast and filed with the SEC in a Form 8-K on July 27,
2009, to reflect (i) our retrospective application of the presentation of
noncontrolling interests as provided by the Accounting Standards
Codification 810Consolidations, adopted on January 1,
2009, and(ii) presentation of our Integrated Nylon business as
discontinued operations in accordance with the terms of the definitive sale
agreement between us and the Buyer.





Item
4.  CONTROLS AND PROCEDURES





During
the period covered by this Form 10-Q, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our 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, our disclosure controls and procedures are effective
in timely accumulating and communicating to them material information relating
to us and our consolidated subsidiaries that is required to be included in our
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, our disclosure controls and procedures are effective to provide reasonable
assurance that we record, process, summarize, and report the required disclosure
information within the specified time periods.  Further, there were no
changes in our 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, 2009 that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.


52


PART
II.  OTHER INFORMATION








ITEM
1.  LEGAL PROCEEDINGS





Information
required by this item is incorporated herein by reference to Note 9 included in
Part I, Item 1. Financial Statements (unaudited) – Notes to Consolidated
Financial Statements.  Also please refer to Note 16 to the
Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008.





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





(c )
Purchases of Equity Securities by the Issuer




Period
              
              Total
      Number of Shares Purchased (1)
              
              
              Average
      Price Paid Per Share (2)
              
              
              Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              
              
              Approximate
      Dollar Value (in millions) that May Yet Be Purchased Under the Plans or
      ProgramsJuly
      1-31, 2009
              
              
              1,288
              
              
              $
              8.97
              
              
              
              0
              
              
              $
              0August
      1-31, 2009
              
              
              1,432
              
              
              $
              10.25
              
              
              
              0
              
              
              $
              0September
      1 -30, 2009
              
              
              6,696
              
              
              $
              11.39
              
              
              
              0
              
              
              $
              0Total
              
              
              9,416
              
              
              $
              10.89
              
              
              
              0
              
              
              $
              0





(1)
            Shares
      surrendered to the Company by an employee to satisfy individual tax
      withholding obligations upon vesting of previously issued shares of
      restricted common stock.


(2)
            Average
      price paid per share reflects the closing price of Solutia common stock on
      the business date the shares were surrendered by the employee stockholder
      to satisfy individual tax withholding obligations upon vesting of
      restricted common stock.





ITEM
6.  EXHIBITS





See
      the Exhibit Index at page 55 of this
report.





SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)





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.
                RegistrantDated:
      October 27, 2009
              By:
              /s/ TIMOTHY
      J. SPIHLMANName: 
      Timothy J. SpihlmanTitle: 
      (Vice President and Controller)
                (On
      behalf of the Registrant and as
                Principal
      Accounting Officer)










54
 
 SOLUTIA
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)








EXHIBIT
INDEX





These
Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.





EXHIBIT
              NUMBER
            
            DESCRIPTION3.1
            
            Second
      Amended and Restated Certificate of Incorporation of Solutia Inc.
      (incorporated by reference to Exhibit 3.1 to Solutia's Form 8-K filed on
      March 4, 2008)3.2
            
            Amended
      and Restated Bylaws of Solutia Inc. (incorporated by reference to Exhibit
      3.2 to Solutia's Form 8-K filed on March 4, 2008)3.3
            
            Certificate
      of Designation, Preferences and Rights of Series A Participating Preferred
      Stock. (incorporated by reference to Exhibit 3.1 to Solutia’s Form 8-K
      filed on July 27, 2009)4.1
            
            382
      Rights Agreement, dated as of July 27, 2009, between Solutia Inc.
      and  American Stock Transfer & Trust Company, LLC, which
      includes the Form of Certificate of Designation, Preferences and Rights of
      Series A Participating Preferred Stock as Exhibit A and the Summary of
      Rights as Exhibit C.  (incorporated by reference to Exhibit 3.1
      to Solutia’s Current Report on Form 8-K  filed on July 27,
      2009)4.2
            
            Indenture
      dated October 15, 2009 by and between Solutia, the subsidiary guarantors
      parties thereto and the Trustee. (incorporated by reference to Exhibit 4.1
      to Solutia’s Form 8-K filed October 16, 2009)4.3
            
            First
      Supplemental Indenture to the Indenture dated October 15, 2009, by and
      between Solutia, the subsidiary guarantors parties there and the Trustee.
      (incorporated by reference to Exhibit 4.2 to Solutia’s Form 8-K filed
      October 16, 2009)10.1
            
            First
      Amendment dated as of  May 29, 2009, to the Credit Agreement,
      dated as of February 28, 2008, among  Solutia Inc., Solutia
      Europe SPRL/BVBA, Flexsys SA/NV, and Citibank, N.A., as administrative
      agent for the lenders. (incorporated by reference to Exhibit 10.1 to
      Solutia’s Form 8-K filed October 16, 2009)10.2
            
            Second
      Amendment dated as of October 15, 2009, to the Credit Agreement, dated as
      of February 28, 2008, to Credit Agreement dated as of May 29, 2009
      among  Solutia Inc., Solutia Europe SPRL/BVBA, Flexsys SA/NV,
      and Citibank, N.A., as administrative agent for the lenders. (incorporated
      by reference to Exhibit 10.2 to Solutia’s Form 8-K filed October 16,
      2009)10.3
            
            First
      Amendment, dated as of October 15, 2009, to the Credit Agreement, dated as
      of February 28, 2008 among Solutia Inc., the lending institutions party
      thereto and Citibank, N.A., as administrative agent for the lenders.
      (incorporated by reference to Exhibit 10.3 to Solutia’s Form 8-K filed
      October 16, 2009)31.1
            
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
            
            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
  200232.2
            
            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






55