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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
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SOLUTIA INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10300 OLIVE BOULEVARD, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 674-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
$.01 PAR VALUE COMMON STOCK NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 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. /X/ YES / / NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES
OF THE REGISTRANT: APPROXIMATELY $3.2 BILLION AS OF THE CLOSE OF BUSINESS ON
FEBRUARY 28, 1998.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 117,024,896 SHARES
OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AT FEBRUARY 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(1) PORTIONS OF SOLUTIA INC.'S ANNUAL REPORT TO SECURITY HOLDERS FOR THE YEAR
DECEMBER 31, 1997 (PART I, PART II, AND PART IV OF FORM 10-K).
(2) PORTIONS OF SOLUTIA INC.'S NOTICE OF ANNUAL MEETING OF STOCKHOLDERS AND
PROXY STATEMENT DATED MARCH 11, 1998 (PART III OF FORM 10-K).
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This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
regarding the expected future financial position, results of operations, cash
flows, dividends, financing plans, business strategy, budgets, projected costs
and capital expenditures, competitive positions, growth opportunities for
existing products, benefits from new technology, plans and objectives of
management for future operations, and markets for stock of Solutia Inc. (the
"Company") are forward-looking statements. Although the Company believes its
expectations reflected in such forward-looking statements are based on
reasonable assumptions, no assurance can be given that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements herein include, among others, those set forth below or incorporated
by reference herein as well as general economic and business and market
conditions, customer acceptance of new products, efficacy of new technology and
facilities, changes in U.S. and ex-U.S. laws and regulations, costs or
difficulties relating to the establishment of the Company as an independent
entity, shortages of raw materials and fuels and increased competitive and/or
customer pressure.
PART I
ITEM 1. BUSINESS.
Solutia Inc. and its subsidiaries produce and market a range of high
performance chemical-based materials, including nylon and acrylic fibers and
fiber intermediates, Saflex(R) plastic interlayer, phosphorus derivatives, and
specialty chemicals. These materials are used by customers to make consumer,
household, automotive, and industrial products. Unless otherwise indicated by
the context, "Solutia" means Solutia Inc. and consolidated subsidiaries, and
the "Company" means Solutia Inc. only.
Solutia's strategic focus is built on four key technology strengths: polymer
chemistry, phosphorus chemistry, fiber technology, and process engineering
expertise. These technologies are used in various combinations to create
value-added products in three operating segments:
* CHEMICALS--comprised of the Intermediates, Phosphorus Derivatives and
Industrial Products business units;
* FIBERS--comprised of the Carpet Fibers, Nylon Industrial Fibers and
Acrilan(R) Acrylic Fibers business units; and
* POLYMERS & RESINS--comprised of the Saflex(R) Plastic Interlayer, Nylon
Plastics & Polymers, Resins and Polymer Modifiers business units.
To compete effectively in its markets, Solutia is implementing a strategy
which emphasizes the following key elements:
CORE PRODUCTS AND TECHNOLOGIES: Solutia is focusing on its core products and
technologies throughout its ten business units. Solutia will continue to invest
in manufacturing technology, product research and technical and marketing
support in order to continually improve its cost and quality positions as well
as its applications support and technical service.
AGGRESSIVE COST CONTROLS AND FOCUS ON PROFITABILITY: Over the past several
years, Solutia has restructured its product portfolio to exit underperforming
businesses. Solutia believes that additional expense reductions can be achieved
in manufacturing and administrative functions.
SELECTED GROWTH INITIATIVES: Solutia intends to develop the growth potential
of its core chemistries and technologies through targeted new product
introductions, innovations in related fields and selective expansions of its
presence in international markets.
PERFORMANCE INCENTIVES: Solutia is providing incentives for employees to
increase cash flow, earnings per share and stockholder value.
The Company was incorporated in Delaware in April 1997 as a wholly-owned
subsidiary of Monsanto Company ("Monsanto"). On or prior to September 1, 1997,
the businesses that form Solutia, which previously
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were wholly owned by Monsanto, were transferred to Solutia. On September 1, 1997
(the "Distribution Date"), Monsanto distributed all of the outstanding shares
of common stock of the Company as a dividend to Monsanto stockholders (the
"Spinoff"). The distribution resulted in the issuance of one share of Solutia
common stock for every five shares of Monsanto common stock held of record as of
August 20, 1997. As a result of the Spinoff, on September 1, 1997, Solutia
became an independent publicly-held company listed on the New York Stock
Exchange, and its operations ceased to be owned by Monsanto. Monsanto and
Solutia entered into a number of agreements (the "Distribution Agreement")
with respect to the separation of the companies and to provide mechanisms for an
orderly transition following the Spinoff.
DESCRIPTION OF PRINCIPAL PRODUCTS AND COMPETITIVE SITUATION
Set forth below are descriptions of the products in each of Solutia's three
segments: Chemicals, Fibers and Polymers & Resins.
The tabular and narrative information contained in Note 18 of "Notes to
Consolidated Financial Statements" appearing on pages 42 through 43 of the 1997
Annual Report is incorporated herein by reference.
CHEMICALS SEGMENT
INDUSTRIAL PRODUCTS
Solutia is a leading manufacturer of specialty industrial fluids and
lubricants. Its products are widely recognized in their market segments for high
performance characteristics which result from proprietary formulations.
Substantially all of the products in this business unit are trademarked, and
include the following brands: Skydrol(R) hydraulic fluids for aviation;
Therminol(R) heat transfer fluids; SkyKleen(TM) aviation solvent; Dequest(R)
water treatment chemicals; and Glacier Metalworking Fluids.(TM)
The Skydrol(R) product line includes fire-resistant hydraulic fluids which
are used in more than half of the world's commercial aircraft. A new product,
Skydrol(R) 5, was introduced in 1996. It offers a range of enhanced performance
characteristics, such as improved thermal stability and reduced weight. The
Skydrol(R) brand's major competitor is manufactured by Exxon Corporation
("Exxon").
Therminol(R) heat transfer fluids are leaders in the worldwide high
temperature liquid phase market. These products, used in various types of
capital equipment, are known for remaining thermally stable at high temperatures
and for their low temperature pumping characteristics. Competitors include The
Dow Chemical Company and Nippon Steel Chemical Co., Ltd.
SkyKleen(TM) aviation solvents are used for their cleaning performance in
the assembly of aircraft, original equipment manufacture and repair for both
commercial and military markets. SkyKleen(TM) helps reduce volatile organic
compound emissions in maintenance shops and parts cleaning operations where
volatile solvents like methyl ethyl ketone currently are used. Additional
characteristics of this clear liquid include biodegradability, low odor,
non-ozone depletion and improved worker safety.
Dequest(R) water treatment chemicals are used to solve problems in a number
of heavy and light industrial applications. These products offer functional
properties such as sequestration, scale inhibition and corrosion control.
Competing products are marketed by Albright & Wilson plc ("Albright & Wilson")
and Bayer Corporation ("Bayer").
Launched in 1996, Glacier Metalworking Fluids(TM) are the industry's first
protein-based fluids designed for machining operations such as grinding,
drilling and threading. The fluids are biodegradable and practically
non-toxic.
Solutia's specialty industrial fluids are sold throughout the world, with no
single customer accounting for a significant level of sales.
Industrial Products expects to develop new opportunities in its niche
markets by continuing to develop and introduce new products such as Glacier
Metalworking Fluids(TM) and by pursuing sales in additional geographic areas
such as Asia and Latin America. A joint venture with Jiangsu Chemical Pesticide
Group in Suzhou, China, manufactures Therminol(R) heat transfer fluids.
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Industrial Products relies on a number of raw materials such as benzene and
phenol, most of which are purchased from a number of suppliers.
INTERMEDIATES
Intermediates manufactures more than three dozen "building block"
chemicals which are used by Solutia and other companies to make a wide variety
of finished products. Intermediates' product lines include nylon intermediates,
sold to a number of fibers and plastics manufacturers worldwide; chlorobenzenes,
used in applications such as rubber chemicals, pigments, antioxidants,
herbicides, solvents and resins; and other intermediates which are used to
produce fertilizers, detergents and animal feed supplements.
Intermediates relies on aggressive cost control, exceptional product
quality, world-class manufacturing scale and proprietary manufacturing
technology to drive its competitive success. Its strategy is to support the
competitiveness of other Solutia products by achieving the low-cost position on
their critical "building block" chemicals and to pursue profitable external
sales of these products. Intermediates has achieved a leading position in nylon
intermediates through a combination of proprietary technology and scale.
Intermediates obtains its key raw materials, including natural gas,
cyclohexane, propylene, benzene and chlorine, from a number of suppliers.
To meet internal demand and address external sales opportunities,
Intermediates is planning an expansion of its acrylonitrile manufacturing
capacity, which is expected to reduce its manufacturing costs. See "Item 2.
PROPERTIES."
The majority of the production of Intermediates is used internally, with
most of the external sales made to a limited number of customers. In some
product lines, external sales are dependent on a major customer. However, in
each of these cases, sales to internal customers account for the majority of the
business unit's production capacity.
Competitors vary by product line and by world region and include Asahi
Chemical Industry Co., Ltd., E.I. du Pont de Nemours and Company ("DuPont"),
BASF AG ("BASF") and Rhodia, the chemicals subsidiary of Rhone-Poulenc S.A.
("Rhodia").
PHOSPHORUS DERIVATIVES
Solutia has developed an extensive franchise in phosphorus chemistry and is
recognized as a world leader in developing and marketing applications for
phosphorus chemistry. Solutia is a low-cost producer of phosphorus-based
chemicals, and most of its product technologies are proprietary. It also has a
joint venture in Brazil using purified wet acid technology to produce many of
these products. Solutia manufactures products for a wide range of industries:
FOOD AND BEVERAGE. Its phosphates are used in many food products to improve
texture, appearance and flavor. Branded products include Levn-Lite(R),
Pan-O-Lite(R) and Leverage(R) brand leavening agents, used in baking;
Nutrifos(R) sodium tripolyphosphate, used in meat and poultry processing; and
Katch(TM) phosphate, used to extend the shelf life of fish products.
PERSONAL CARE PRODUCTS. Major toothpaste manufacturers around the world rely
on Solutia's oral care phosphates to improve the performance of their products.
Solutia has been a leader in the development of dentifrice agents which are used
to control tartar and to polish and whiten teeth.
SPECIALTY CHEMICALS. Solutia manufactures a number of phosphorus-based
intermediates which serve as key ingredients in oil additives, pesticides and
mining chemicals. Solutia also offers high-purity phosphoric acid, used as a
building block in the manufacture of high-purity phosphate salts.
INDUSTRIAL CLEANERS AND FIRE RETARDANTS. Solutia provides specialized
cleaning ingredients for commercial laundries, restaurant and hospital
dishwashing systems and vehicle wash facilities. Solutia also makes and sells
Phos-Chek(R) fire fighting agent, used in aerial spraying to control forest
fires and wildfires.
ELEMENTAL PHOSPHORUS. Solutia also offers for sale elemental phosphorus
sourced from the Company's P4 joint venture with Monsanto.
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The primary competitors for Phosphorus Derivatives are FMC Corporation,
Albright & Wilson and Rhodia. The business unit's primary raw material is
elemental phosphorus, which is mined and processed in Soda Springs, Idaho, at
facilities which are jointly owned by the Company and Monsanto through the P4
joint venture. See "Principal Equity Affiliates."
FIBERS SEGMENT
ACRILAN(R) ACRYLIC FIBERS
Solutia is the largest producer of acrylic fiber in North America. It
manufactures and markets a full line of commodity and specialty grades of this
fiber, which is used to make finished products such as apparel, craft yarns,
upholstery fabrics, and brake fibers.
Solutia's Acrilan(R) trademark is widely recognized in the industry, as are
the following brand names which are used to identify products made with
Acrilan(R) acrylic fibers: Wear-Dated(R) upholstery; Duraspun(R) fibers; The
Smart Yarns(R) fibers (for socks); and Wintuk(R), Sayelle(R) and Bounce-Back(R)
fibers (for craft yarn).
The principal competitor for acrylic fiber in North America is Sterling
Chemicals, Inc. Competitors worldwide include MonteFibre S.p.A. (Italy), AKSA
Akrilik Kimya Sanayii A.S. (Turkey), Courtalds plc (United Kingdom) and
Mitsubishi Chemicals Corporation (Japan). Acrylic fiber also competes against
other fibers such as cotton and polyester.
The primary raw material for acrylic fiber is acrylonitrile, which is
produced internally by Intermediates and supplemented with external purchases.
There are a variety of differentiated Acrilan(R) brand products, including
producer-colored fiber, pigmented UV resistant fibers, bi-component
Bounce-Back(R) fibers, Duraspun(R) abrasion-resistant fibers and technical
fibers used in friction applications, as well as precursor chemicals for carbon
fibers. These products--and the opportunity to develop sales in other parts of
the Western Hemisphere--represent the business unit's best opportunity for
growth. In addition, Solutia generates significant income from the licensing of
its proprietary wet spinning acrylic technology, primarily in Asian markets.
CARPET FIBERS
Solutia is the world's largest producer of nylon staple fiber and a major
supplier of nylon bulk continuous filament ("BCF") to the carpet industry in
North America. Its products are used by carpet mills in the residential market
(new construction and replacement), the contract market (offices, hotels,
restaurants, retail and institutions) and the rug market. Its product portfolio
includes nylon 6,6 staple, BCF and acrylic staple fibers--offering carpet mills
a wide range of performance and styling characteristics.
Solutia's products are marketed under two of the industry's most respected
brand names: Wear-Dated(R) carpets for the residential market and Ultron(R) VIP
nylon for the contract or commercial market. The Wear-Dated(R) brand is widely
recognized by consumers in North America for its guarantee of the finished
carpet's outstanding quality and exceptional performance.
Competitive success is determined by different factors in different segments
of the market. Overall, Carpet Fibers benefits from vertical integration with
Intermediates. In the residential segment, branded products compete based on
technical advances and marketing programs, such as Solutia's warranty offered on
Wear-Dated(R) carpets, retailer sales incentives and similar activities.
In contract markets, the basis for competition is product performance and
downstream marketing programs. The Ultron(R) VIP nylon brand offers carpet
makers an innovative mix of fiber shapes and sizes that are specifically
engineered for features such as soil-hiding ability and extra bulk and cover.
Carpet Fibers works closely with the building design community to develop new
products which address the contract market's needs. It also sells Ultron(R) SD
Solution-Dyed nylon 6,6, which offers superior colorfastness and protection
against harsh chemicals, bacterial growth and stains.
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Solutia is introducing Dyenamix(TM) technology, a substantially improved
fiber system which permits rich, deep colors and enhances the print clarity of
carpets. This proprietary technology is environmentally friendly, while also
allowing carpet mills to achieve higher efficiencies and lower dye costs.
The principal competitors for nylon carpet fiber in the United States are
DuPont, AlliedSignal Inc. ("AlliedSignal") and BASF. Solutia and AlliedSignal
offer both nylon staple and BCF products, while DuPont and BASF are primarily
BCF suppliers. Solutia owns and operates the world's largest integrated nylon
manufacturing plant in Pensacola, Florida.
A majority of Carpet Fibers' sales are generated by a few major customers in
the carpet mill industry.
Carpet Fibers receives almost all of its major raw materials from
Intermediates.
NYLON INDUSTRIAL FIBERS
Solutia makes and supplies a complete line of industrial-strength nylon 6,6
fibers to a variety of manufacturing customers. Nylon Industrial Fibers' product
line features continuous filament nylon 6,6 yarns in thickness ranging from 60
to 2000 deniers. Heavier yarns are used for applications such as bias tires for
earth movers, NASA space shuttles, aircraft and trucks; mining conveyor belts;
ropes; and cargo slings. Lighter weight yarns are used to make backpacks,
ribbons, sewing threads and dental floss. Cost per unit of performance, service
(including the ability to tailor the properties of yarns for use in specific
applications) and breadth of product line are the major drivers of success in
the industrial fibers market. Solutia has built a strong presence in the bias
tire and other heavy-denier segments and in industrial sewing threads. Sales to
five major tire companies account for about 50% of total Nylon Industrial Fibers
volume.
Solutia recently increased spinning capacity with enhanced spinning
technology at its Greenwood, South Carolina plant. This project used proprietary
technology (licensed from Toray Industries Inc. ("Toray")) to improve product
quality, enhance yarn performance and tenacity and enable Solutia to achieve a
low-cost position in key segments of the market, including automotive airbags
and high performance tires.
Nylon Industrial Fibers receives almost all of its major raw materials from
Intermediates. Competitors in the United States include DuPont (the market
leader) and AlliedSignal.
POLYMERS & RESINS SEGMENT
NYLON PLASTICS & POLYMERS
Solutia manufactures and markets a line of Vydyne(R) nylon 6,6 molding
resins and extrusion polymers and nylon 6,6 polymers for fiber applications.
Vydyne(R) nylon gives plastics molders the ability to provide their products
with enhanced performance characteristics, such as heat resistance, chemical
resistance and toughness. Vydyne(R) nylon molding resins are used in
under-the-hood automotive components, electrical connectors for telephone
systems and computers, medical devices and similar applications.
Product performance, technical service, vertical integration and breadth of
product line are the major drivers of success in this market. Nylon Plastics &
Polymers relies on nylon 6,6 salt as its primary raw material. This material is
produced internally by Intermediates. The business unit's primary competitors
are DuPont and the Hoechst Group.
POLYMER MODIFIERS
Solutia manufactures and markets a line of polymer modifiers and specialty
plasticizers which are used to improve the performance of flooring products,
sealants, caulks, adhesives and other goods. Unit brands include Santicizer(R)
polymer modifiers and plasticizers, and Santotac MRS(R), a flooring additive.
Polymer Modifiers is focused on specialty applications, in which technical
expertise and processing knowledge can be used to help customers obtain valuable
performance attributes in their products (such as flexibility, mar/scratch
resistance, stain resistance, enhanced gloss and flame retardance). Competitors
vary by product line and include Bayer and Akzo Nobel N.V. ("Akzo Nobel").
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Polymer Modifiers obtains its key raw materials from U.S. and European
markets. New products (such as Santotac MRS(R) additives) and geographic
expansion (particularly into central Europe and Asia) are expected to be the
primary drivers of growth.
RESINS
This business unit manufactures and markets a line of specialty resins which
are used in the manufacture of products such as thermoset paints and coatings,
pressure sensitive adhesives, paper coatings and plastic products, among others.
Brands include Resimene(R) amino crosslinkers, Gelva(R) pressure sensitive
adhesives, Santosol(R) solvents, Scripset(R) resins for paper sizing, Butvar(R)
specialty binders, Modaflow(R) flow and leveling agents, Clear Pass(R) spray
control systems and other fabricated products.
Resins provides technical expertise to help customers obtain value-added
performance characteristics. Major competitors vary by product line and include
Cytec Industries, Inc. (coatings and surface size); National Starch and Chemical
Co. and Ashland Inc. (solution acrylic adhesives); Rohm and Haas Company and Air
Products and Chemicals, Inc. (emulsion water-based adhesives); and DuPont
(solvents which have improved environmental characteristics).
Resins relies on a number of commodity chemicals as raw materials, all of
which are readily available. New products (such as di-methyl esters, a solvent
with improved environmental characteristics) and geographic expansion
(particularly into Europe, Latin America and Asia) are expected to be the
primary drivers of growth.
SAFLEX(R) PLASTIC INTERLAYER
Solutia is the world's largest producer of polyvinyl butyral ("PVB"), a
plastic interlayer used in the manufacture of laminated glass for automotive and
architectural applications. The business unit's product is marketed under the
Saflex(R), Saflex SV(R) (superior value) and KeepSafe(R) (for residential
security windows) trademarks. In 1997, Saflex(R) Plastic Interlayer began
commercializing a patented, reformulated product which is designed to provide
superior processing and application performance. Continued business development
will be driven by the introduction of the reformulated PVB product, by increased
penetration of geographic markets (especially Asia) and by the creation of new
primary demand for PVB in laminated glass worldwide. A Saflex(R) interlayer
finishing plant began operation in Singapore in early 1998.
Six customers account for 65% to 70% of total sales of Saflex(R) products
worldwide. Saflex(R) Plastic Interlayer relies on vinyl acetate monomer,
polyvinyl alcohol and butanol as raw materials, all of which are readily
available in the U.S. and European markets. Sales volumes are influenced by
shifts in automotive production and commercial building construction, which are
cyclical businesses. The principal competitor in the manufacture of PVB is
DuPont.
PRINCIPAL EQUITY AFFILIATES
Solutia participates in a number of joint ventures in which it shares
management control with other companies. Solutia's equity earnings from
affiliates were $31 million, $21 million and $15 million in 1997, 1996 and 1995,
respectively. Principal joint ventures include Flexsys, L.P. ("Flexsys"),
Advanced Elastomer Systems, L.P. ("A.E.S.") and the P4 joint venture.
The Flexsys joint venture, headquartered in Belgium, is the world's leading
supplier of process chemicals to the rubber industry. Its product line includes
a number of branded accelerators (Santocure(R), Thiofide(R), Thiotax(R)),
pre-vulcanization inhibitors (Santogard(R)), antidegradants and antioxidants
(Flectol(R), Santowhite(R)), and insoluble sulphur (Crystex(R)). Flexsys is a
50/50 joint venture between the Company and Akzo Nobel.
A.E.S., headquartered in the United States, produces and sells thermoplastic
elastomers--materials that combine the processability of thermoplastic and the
functional performance of thermoset rubber products. The joint venture's product
lines include Santoprene(R) thermoplastic rubber and Vistaflex(R) thermoplastic
elastomer. A.E.S. is a 50/50 joint venture between Solutia and Exxon.
The P4 joint venture was formed in conjunction with the Spinoff. Monsanto
formed this venture for the mining of phosphate rock and the production of
elemental phosphorus and contributed a 40% interest in the
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venture to Solutia, retaining the remaining 60% interest, thereby forming
the P4 joint venture. The elemental phosphorus production facilities are located
at Soda Springs, Idaho, and are operated by Solutia under an operating agreement
with the P4 joint venture. The elemental phosphorus produced by the P4 joint
venture is sold to both Monsanto and Solutia generally at cost with certain
adjustments to reflect ownership. Monsanto has priority for a certain percentage
of the production volume. Monsanto uses the elemental phosphorus as a raw
material in the manufacture of herbicides (including Monsanto's Roundup(R)
brand). Solutia uses the elemental phosphorus as a raw material in the
manufacture of phosphorus derivatives, which Solutia then sells, and it sells
the elemental phosphorus to other users. In the event of a change of control of
Solutia or the sale of the phosphorus derivative business (including Solutia's
interest in the P4 joint venture), Monsanto has an option to acquire Solutia's
interest in the P4 joint venture at the then book value. Monsanto is paying
Solutia an annual fee in consideration of this option.
SALE OF PRODUCTS
Solutia's products are sold directly to end users in various industries, and
to wholesalers, principally by Solutia's own sales force. Solutia's marketing
and distribution practices do not result in unusual working capital requirements
on a consolidated basis. Inventories of finished goods, goods in process and raw
materials are maintained to meet customer requirements and Solutia's scheduled
production. In general, Solutia does not manufacture its products against a
backlog of firm orders; production is geared to the level of incoming orders and
to projections of future demand. Solutia generally is not dependent upon one or
a group of customers, and it has no material contracts with the government of
the United States, or any U.S., state or local, or foreign government. In
general, Solutia's sales are not subject to seasonality.
RAW MATERIALS AND ENERGY RESOURCES
Solutia is a significant purchaser of basic, commodity raw materials,
including propylene, cyclohexane, benzene and natural gas. Major requirements
for key raw materials and fuels are typically purchased pursuant to long-term
contracts. Solutia is not dependent on any one supplier for a material amount of
its raw materials or fuel requirements, but certain important raw materials are
obtained from a few major suppliers. In general, where Solutia has limited
sources of raw materials, it has developed contingency plans to minimize the
effect of any interruption or reduction in supply. Information regarding
specific raw materials is provided under "Description of Principal Products and
Competitive Situation."
While temporary shortages of raw materials and fuels may occasionally occur,
these items are generally sufficiently available to cover current and projected
requirements. However, their continuing availability and price are subject to
unscheduled plant interruptions occurring during periods of high demand, or due
to domestic and world market and political conditions, as well as to the direct
or indirect effect of U.S. and other countries' government regulations. The
impact of any future raw material and energy shortages on Solutia's business as
a whole or in specific world areas cannot be accurately predicted. Operations
and products may, at times, be adversely affected by legislation, shortages or
international or domestic events.
PATENTS AND TRADEMARKS
Solutia owns a large number of patents which relate to a wide variety of
products and processes, has pending a substantial number of patent applications,
and is licensed under a small number of patents owned by others. Solutia owns a
considerable number of established trademarks in many countries under which it
markets its products. Such patents and trademarks in the aggregate are of
material importance in the operations of Solutia and to each of its Chemicals,
Fibers, and Polymers & Resins segments.
COMPETITION
Solutia encounters substantial competition with respect to each of its
product lines. This competition, from other manufacturers of the same products
and from manufacturers of different products designed for the same uses, is
expected to continue in both U.S. and ex-U.S. markets. Depending on the product
involved, various types of competition are encountered, including price,
delivery, service, performance, product innovation, product recognition and
quality. Overall, Solutia regards its principal product groups to be competitive
with
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many other products of other producers and believes that it is an important
producer of many such product groups. For information regarding competition in
specific markets, see "Description of Principal Products and Competitive
Situation."
RESEARCH AND DEVELOPMENT
Research and development constitute an important part of Solutia's
activities. In recent years, Solutia's research and development expenses
amounted to approximately 2.4% of sales on average, or $60 million, $81 million
and $77 million in 1997, 1996 and 1995, respectively. Solutia focuses its
research and development expenditures on process improvements and select product
development.
Solutia actively pursues technologies from around the world that are
expected to bring value to its business. Recent examples include new technology
for converting benzene to phenol, which was licensed from Boreskov Institute of
Catalysis in Russia, and which Solutia is actively seeking to license to third
parties; and nylon industrial spinning technology, licensed from Toray in Japan.
Solutia is actively licensing technologies to other firms, such as acrylic fiber
spinning, acrylonitrile manufacturing and others.
ENVIRONMENTAL MATTERS
The narrative information appearing under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Environmental
Matters" on pages 23 through 25 of the 1997 Annual Report is incorporated
herein by reference.
EMPLOYEE RELATIONS
As of December 31, 1997, Solutia had approximately 8,800 employees
worldwide. Satisfactory relations have prevailed between Solutia and its
employees. Solutia uses self-directed work teams, incentive programs and other
initiatives to keep employees actively involved in the success of the business.
Substantially all of Solutia's employees have options to purchase Company Common
Stock. Approximately 20% of Solutia's workforce is represented by various labor
unions.
INTERNATIONAL OPERATIONS
Solutia and affiliated companies are engaged in manufacturing, sales and
research and development in areas outside the United States, including Europe,
Canada, Latin America and Asia. Approximately one-third of Solutia's overall
1997 sales were made into markets outside the United States. Operations outside
the United States are potentially subject to a number of risks and limitations
which are not present in domestic operations, including fluctuations in currency
values, trade restrictions, investment regulations, governmental instability and
other potentially detrimental governmental practices or policies affecting
companies doing business abroad. Solutia's Chemicals and Polymers & Resins
segments are particularly dependent upon their international operations.
Approximately one-third and one-half of their 1997 sales, respectively, were
made into markets outside of the United States.
ITEM 2. PROPERTIES.
The general offices of the Company are located in St. Louis County, Missouri
in premises leased from Monsanto. Solutia also has research laboratories,
research centers and manufacturing locations worldwide. In addition to the
general offices, Solutia has the following principal facilities all of which are
owned:
<TABLE>
<CAPTION>
Plant Site Business Units Served
- ---------- ---------------------
<S> <C>
Anniston, Alabama.................. Industrial Products
Augusta, Georgia................... Phosphorus Derivatives
Carondelet (St. Louis, Missouri)... Phosphorus Derivatives
Chocolate Bayou (Alvin, Texas)..... Industrial Products, Intermediates
Decatur, Alabama................... Acrilan(R) Acrylic Fiber, Intermediates, Research Center
8
<PAGE> 10
<CAPTION>
Plant Site Business Units Served
- ---------- ---------------------
<S> <C>
Delaware River (Bridgeport, New
Jersey).......................... Industrial Products, Intermediates, Polymer Modifiers
Foley, Alabama..................... Carpet Fibers, Nylon Plastics & Polymers
Ghent, Belgium..................... Resins, Saflex(R) Plastic Interlayer
Greenwood, South Carolina.......... Carpet Fibers, Nylon Industrial Fibers, Intermediates, Nylon
Plastics & Polymers
Indian Orchard (Springfield,
Massachusetts)................... Research Center, Resins, Saflex(R) Plastic Interlayer
Krummrich (Sauget, Illinois)....... Intermediates, Phosphorus Derivatives
LaSalle, Canada.................... Polymer Modifiers, Resins
Newport, Wales (U.K.).............. Industrial Products, Polymer Modifiers, Resins
Pensacola, Florida................. Carpet Fibers, Nylon Industrial Fibers, Intermediates, Nylon
Plastics & Polymers, Research Center
Queeny (St. Louis, Missouri)....... Industrial Products, Polymer Modifiers, Resins
Trenton, Michigan.................. Phosphorus Derivatives, Resins, Saflex(R) Plastic Interlayer
Westport (St. Louis, Missouri)..... Resins
</TABLE>
Solutia also owns certain buildings and production equipment, and leases the
underlying real estate, used to produce products for the indicated business
units at the following Monsanto sites:
<TABLE>
<CAPTION>
Plant Site Business Units Served
- ---------- ---------------------
<S> <C>
Antwerp, Belgium............................................... Industrial Products, Polymer Modifiers, Saflex(R) Plastic
Interlayer
Luling, Louisiana.............................................. Intermediates
Sao Jose dos Campos, Brazil.................................... Industrial Products, Phosphorus Derivatives, Saflex(R) Plastic
Interlayer
</TABLE>
Monsanto and Solutia have entered into certain operating agreements,
including master operating agreements (the "Operating Agreements") with
respect to each of the three facilities listed above and Chocolate Bayou in
Alvin, Texas. Under these Operating Agreements, Solutia is the guest (the
"Guest") and Monsanto is the operator (the "Operator") at all of the
facilities except the Chocolate Bayou facility, at which Monsanto is the Guest
and Solutia is the Operator. Pursuant to each of the Operating Agreements, the
Operator, as an independent contractor, provides, or arranges for the provision
of, such production, utility and certain ancillary services as are reasonably
necessary or required for the Guest's production operations at the facility, and
the Operator leases to the Guest the real property at the facility that is used
in connection with the Guest's production operations. The Guest is required to
pay all direct and indirect costs incurred by the Operator in the performance or
supply of such services, plus an agreed upon return on the net capital employed
in connection with the respective Operating Agreement. The Guest owns the
production assets related to its operations at the facility.
Unless terminated earlier by either party thereto in accordance with the
terms of the Operating Agreements, the initial term of each of the Operating
Agreements is 20 years. After the initial term, the Operating Agreements
continue indefinitely unless and until terminated by either party upon at least
24 months' prior written notice. Each of the Operating Agreements also provides
that, under certain circumstances, either the Operator or the Guest may
terminate the Operating Agreement prior to the expiration of its initial term.
The Operating Agreements contain provisions requiring the Guest to indemnify
the Operator for all losses (other than environmental liabilities) arising out
of the operation of the facility or the provision of services, except to the
extent that such losses are caused by the Operator's willful misconduct or
fraud. The Operating Agreements also apportion certain environmental
liabilities.
9
<PAGE> 11
Solutia operates several facilities for third parties in addition to
Monsanto, principally within the Chocolate Bayou, Krummrich and Pensacola sites,
under long-term lease and operating agreements.
Solutia's principal plants are suitable and adequate for their use.
Utilization of these facilities may vary with seasonal, economic and other
business conditions, but none of the principal plants is substantially idle. The
facilities generally have sufficient capacity for existing needs and expected
near-term growth.
Solutia plans to undertake four large construction projects during 1998 and
1999 for expansion in its Intermediates unit. These construction projects
include a world-scale acrylonitrile production facility at Chocolate Bayou which
employs Solutia's proprietary catalyst system and is expected to be capable of
producing in excess of 500 million pounds annually. Solutia has agreements with
customers who will participate in this project including Bayer, Novus
International Inc., and a leading Japanese chemical company. The other projects
include two projects at the Pensacola, Florida site to produce intermediates in
the nylon manufacturing process, one a phenol production facility and the other
a phenol processing facility; and an adiponitrile production facility at the
Decatur, Alabama site. These projects will require the Company to manage more
engineering and construction activity than it has had to supervise in recent
years.
Solutia is an active participant in the safety and health Voluntary
Protection Program ("VPP") administered by OSHA for sites in the U.S., and
implemented by Solutia for sites outside the U.S. Currently, 10 Solutia sites in
the U.S. qualify for the VPP "Star" designation, a rating designating full
compliance, and two European sites have achieved similar standards under
comparable local programs.
ITEM 3. LEGAL PROCEEDINGS.
At the time of the Spinoff, the Company assumed from Monsanto, pursuant to
the Distribution Agreement, liabilities related to specified legal proceedings.
As a result, although Monsanto remains the named defendant, the Company will
manage the litigation and indemnify Monsanto for costs, expenses and judgments
arising from such litigation. Most of these proceedings have arisen in the
ordinary course of business and involve claims for money damages. While the
results of litigation cannot be predicted with certainty, Solutia does not
believe these matters or their ultimate disposition will have a material adverse
effect on Solutia's combined financial position, profitability or liquidity in
any one year, as applicable. The following describes certain proceedings to
which Monsanto is a party and for which the Company assumed any liabilities as
of the Distribution Date pursuant to the Distribution Agreement.
On April 12, 1985, Monsanto was named as a defendant in Alanis et al. v.
Farm & Home Savings, et al., filed in the District Court in Harris County,
Texas, the first of a number of lawsuits in which plaintiffs claim injuries
resulting from alleged exposure to substances present at or emanating from the
Brio Superfund site near Houston, Texas. Monsanto is one of a number of
companies that has sold materials to the chemical reprocessor at that site.
Currently pending are the following matters: (1) Monsanto is one of a number of
defendants in five cases brought in Harris County District Court or the United
States District Court for the Southern District of Texas on behalf of 131
plaintiffs who owned homes or lived in subdivisions near the Brio site, attended
school near the site or used nearby recreational baseball fields. Plaintiffs
claim to have suffered various personal injuries and fear future disease; they
assert the need for medical monitoring, and, in the case of the homeowners,
claim property damage. In addition to their claims of personal injury, four
plaintiffs in one of these cases allege business losses. Plaintiffs seek
compensatory and punitive damages in an unspecified amount. Plaintiffs in one
additional case brought on behalf of 20 individuals who owned property along
Clear Creek downstream from the Brio site have agreed to settle their claims
against Monsanto for $150,000. (2) Monsanto is one of a number of defendants in
two actions brought in Harris County District Court and one action brought in
Galveston County District Court on behalf of 429 plaintiffs, who are former
employees of the owners/operators of the Brio site, and members of the
employees' families or persons who worked near the Brio site. Plaintiffs in one
of these actions also owned homes or lived in subdivisions near the site,
attended schools near the site or used nearby recreational ball fields.
Plaintiffs claim physical and emotional injury and seek compensatory and
punitive damages in an unspecified amount. The Company believes that there are
meritorious defenses to all of these lawsuits including lack of proximate cause,
lack of negligent or other improper conduct on the part of Monsanto, and
negligence of plaintiffs (or their parents) and/or of builders and developers of
the Southbend subdivision. These actions are being vigorously defended.
On November 15, 1993, Monsanto was named as a defendant in Dyer et al. v.
Monsanto Company, et al., filed in the Circuit Court in St. Clair County,
Alabama, the first of a number of lawsuits in which plaintiffs claim
10
<PAGE> 12
to have sustained personal injuries or property damage as a result of the
discharge of hazardous substances, including polychlorinated biphenyls
("PCBs"), from its Anniston, Alabama, plant site. The following matters are
currently pending: (1) Monsanto is a defendant in a case pending in Circuit
Court in St. Clair County, Alabama which has been certified as a class action on
behalf of all property owners in a specified area along waterways near the
plant. Monsanto is a defendant in an additional action filed in Circuit Court in
Shelby County, Alabama on behalf of a purported class of property owners farther
downstream along this waterway. Plaintiffs in both actions claim loss in the
value of their property. Plaintiffs in the Shelby County action additionally
claim increased risk of illness, emotional distress and the need for medical
monitoring. Plaintiffs seek compensatory and punitive damages in an unspecified
amount. (2) Monsanto is a defendant in 12 additional cases brought in Circuit
Court in Calhoun County, Circuit Court in St. Clair County, Circuit Court in
Taladega County or in U.S. District Court in the Northern District of Alabama on
behalf of 2,580 individual plaintiffs who own or rent homes or own or operate
businesses near the plant or along waterways near the plant or who attend
churches near the plant. An additional case has been filed in Circuit Court in
Calhoun County by one of the churches near the plant. The individual plaintiffs
claim to have suffered various personal injuries and fear future disease; they
assert the need for medical monitoring and claim to have suffered loss in the
value of their property or commercial injury. They seek compensatory and
punitive damages of $3 million or in unspecified amounts for each individual,
and $20 million for the church. (3) Monsanto was a defendant in an action
brought in U.S. District Court in the Northern District of Alabama pursuant to
the Resource Conservation and Recovery Act Section 7002(a) (1) (B) on behalf of
four individuals who are plaintiffs in one of the suits pending in Circuit Court
in Calhoun County. Plaintiffs sought an order enjoining Monsanto from continuing
to handle improperly hazardous waste from the Anniston plant, directing Monsanto
immediately to remove all PCBs released from the plant and granting plaintiffs
their costs of suit, including attorney and expert witness fees. On February 13,
1998, the Court granted plaintiffs' motion to dismiss the case without prejudice
to its refiling at a later date. The Company believes that there are meritorious
defenses to all these matters, including lack of any physical injury or property
damage to plaintiffs, lack of any imminent or substantial endangerment to health
or the environment and lack of negligence or improper conduct on Monsanto's
part. These actions are being vigorously defended.
During the fourth quarter of 1997, the Florida Department of Environmental
Protection ("FDEP") and the Company began discussions related to allegations
of violations of state air pollution standards and air permits. The alleged
violations related to operations at the Company's facility located in Pensacola,
Florida. Without admitting the allegations, the Company negotiated an
administrative consent order with the FDEP. The Company has agreed to pay an
administrative penalty of $207,375 to the FDEP and to perform certain corrective
actions at the facility.
RISK MANAGEMENT
Solutia has evaluated risk retention and insurance levels for product
liability, property damage and other potential areas of risk. Solutia will
continue to devote significant effort to maintaining and improving safety and
internal control programs, which reduce its exposure to certain risks.
Management decides the amount of insurance coverage to purchase from
unaffiliated companies and the appropriate amount of risk to retain based on the
cost and availability of insurance and the likelihood of a loss. Management
believes that the levels of risk retention which it has implemented are
consistent with those of other companies in the chemical industry. There can be
no assurance that Solutia will not incur losses beyond the limits, or outside
the coverage, of its insurance. Solutia's combined financial position,
profitability and liquidity are not expected to be affected materially by the
levels of risk retention that it accepts.
Under the Distribution Agreement, Solutia is entitled to the benefit of
liability insurance coverage under certain Monsanto policies, to the extent such
coverage existed and coverage limits are not exhausted, for claims for which it
is assuming responsibility. Such insurance coverage generally will be shared
with Monsanto for other liabilities existing prior to the Distribution Date
which Monsanto has retained, on an as available basis, without allocation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the security holders during the fourth quarter
of 1997.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The narrative and tabular information regarding the market for the Company's
common equity and related stockholder matters appearing under "Financial
Summary" on page 45 and "Shareholder Information--Stock Listing" on the
inside back cover of the 1997 Annual Report is incorporated herein by reference.
As reported in the Company's Form 10-Q for the period ending September 30,
1997, the Company filed a Registration Statement on Form S-1, File No. 333-36355
(the "Registration Statement"), to register certain debt securities (the
"Debt Securities"). The Securities and Exchange Commission declared the
Registration Statement, as amended, effective on October 15, 1997. The Company
estimates that its total expenses incurred in connection with the issuance and
distribution of the Debt Securities were $5,368,338, of which $4,462,000 was for
underwriting commissions and $906,338 was for other offering expenses, including
legal, printing and filing fees. None of the expenses involved payments to
directors or officers of the Company, persons owning more than 10 percent of any
class of equity securities of the Company, or affiliates of the Company
(collectively, "Affiliates"). Of the $906,338 in other expenses incurred,
$511,838 were actual expenses and $394,500 are estimated expenses. All of the
Company's net proceeds from the issuance of the Debt Securities, after deducting
the actual and estimated expenses set forth above, were used to refinance
existing debt. None of the proceeds were paid to Affiliates.
ITEM 6. SELECTED FINANCIAL DATA.
The tabular information under "Financial Summary" appearing on page 45 of
the 1997 Annual Report, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information appearing under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 20 through 26 of the
1997 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information appearing under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Derivative Financial
Instruments" on page 26 of the 1997 Annual Report is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Solutia appearing on pages 27
through 43; the Report of Independent Auditors' Opinion appearing on page 19;
and the tabular and narrative information appearing under "Quarterly Data" on
page 44 of the 1997 Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
12
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors and executive officers appearing under
"Election of Directors" on pages 3 through 6 of the Solutia Inc. Notice of
Annual Meeting and Proxy Statement (the "1998 Proxy Statement") dated March
11, 1998, is incorporated herein by reference. The following information
regarding Executive Officers of the Company on March 1, 1998, is included
pursuant to Instruction 3 of Item 401(b) of Regulation S-K:
<TABLE>
<CAPTION>
Year
First
Became an
Present Position with Executive
Name-Age Registrant Officer Other Business Experience since January 1, 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert G. Potter, 58 Chairman, Chief Executive Officer 1997 Chief executive of chemical businesses of Monsanto
and Director Company, 1986-1997. Executive Vice President of
Monsanto, 1990-1997. Advisory Director of Monsanto,
1986-1997.
Karl R. Barnickol, 56 Senior Vice President, General Counsel 1997 Associate General Counsel and Assistant Secretary of
and Secretary Monsanto, 1985-1997.
Rodney L. Bishop, 57 Vice President and Treasurer 1997 General Auditor of Monsanto, 1993-1997. Assistant
Controller of Monsanto, 1982-1993.
Dennis L. Cavner, 43 Vice President, Operations Excellence 1997 Director, Manufacturing, Saflex(R) Plastic
Interlayer, of Monsanto, 1996-1997. Director,
Manufacturing, Phosphorus and Derivatives, of
Monsanto, 1995-1996. Plant Manager of Monsanto's
Muscatine, Iowa facility, 1992-1995.
Robert A. Clausen, 53 Senior Vice President and Chief 1997 President, Monsanto Business Services, 1994-1997.
Financial Officer; Advisory Director Vice President, Asset Management of Monsanto,
1992-1994.
Sheila B. Feldman, 43 Vice President, Human Resources 1997 Director, Human Resources, Monsanto Business Services
and Stewardship, 1995-1997. Director, Human
Resources, The Chemical Group of Monsanto, 1993-1995.
Manager, Human Resources Planning, The Chemical
Group of Monsanto, 1991-1993.
G. Bruce Greer, Jr., 37 Vice President, Growth and Commercial 1997 Senior Director, Strategic Change, of Monsanto,
Development 1996-1997. Associate Manager and Principal of Gemini
Consulting, a management consulting firm, 1992-1996.
Roger S. Hoard, 53 Vice President and Controller 1997 Senior Director, Finance, Monsanto Business Services,
1995-1997. Controller, Fibers Division, The Chemical
Group of Monsanto, 1990-1995.
13
<PAGE> 15
<CAPTION>
Year
First
Became an
Present Position with Executive
Name-Age Registrant Officer Other Business Experience since January 1, 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John C. Hunter III, 51 President, Chief Operating Officer 1997 President, Fibers Business Unit of Monsanto,
and Director 1995-1997. Vice President and General Manager, Fibers
Division and Asia-Pacific, The Chemical Group of
Monsanto, 1993-1995. Vice President and General
Manager, Asia-Pacific, Monsanto Chemical Company,
1989-1993.
Michael E. Miller, 56 Senior Vice President and Chief 1997 President, Specialty Products Business Unit of
Administrative Officer; Advisory Monsanto, 1995-1997. Group Vice President, Industrial
Director Products of Monsanto, 1993-1995. Senior Vice
President, Operations, The Chemical Group of
Monsanto, 1993-1995. Corporate Vice President,
Administration of Monsanto, 1989-1993.
O. Jerry Mullis, 55 Vice President, Growth and Commercial 1997 Director of Technology and MTS for Specialty Products
Development and Chief Technical Officer Division, The Chemical Group of Monsanto, 1993-1997.
Director of Technology, Fibers Division, The Chemical
Group of Monsanto, 1991-1993.
</TABLE>
The above listed individuals are elected to the offices set opposite their
names to hold office until their successors are duly elected and have qualified,
or until their earlier death, resignation or removal.
ITEM 11. EXECUTIVE COMPENSATION.
Information appearing under "Compensation of Directors" on pages 7 and 8
and under "Compensation of Executive Officers" on pages 14 through 18 of the
1998 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information appearing under "Ownership of Company Common Stock" on pages 8
and 9 of the 1998 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
14
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. The financial statements set forth at pages 27 through 43 and the
Report of Independent Auditors on page 19 of the 1997 Annual Report
(See Exhibit 13 under Paragraph (a)3 of this Item 14)
2. Financial Statement Schedules
The following supplemental schedule for the years ended December 31,
1997, 1996 and 1995:
V--Valuation and Qualifying Accounts
All other supplemental schedules are omitted because of the absence
of the conditions under which they are required.
3. Exhibits--See the Exhibit Index beginning at page 20 of this Report.
For a listing of all management contracts and compensatory plans or
arrangements required to be filed as Exhibits to this Form 10-K, see
the Exhibits listed under Exhibit Nos. 10(a), 10(b), 10(d), 10(e),
10(f), 10(h) and 10(i) on pages 20 and 21 of the Exhibit Index. The
following Exhibits listed in the Exhibit Index are filed with this
Report:
10(a) Financial Planning and Tax Preparation Services Program
for the Executive Leadership Team
13 The Company's 1997 Annual Report to stockholders
18 Preferability Letter from Deloitte & Touche LLP, dated
February 25, 1998
21 Subsidiaries of the registrant (see page 22)
23(a) Consent of Independent Auditors (see page 23)
23(b) Consent of Company Counsel (see page 23)
24(a) Powers of Attorney submitted by Robert G. Potter, John C.
Hunter III, Robert A. Clausen, Roger S. Hoard, Robert T.
Blakely, Joan T. Bok, Paul H. Hatfield, Robert H. Jenkins,
Howard M. Love, Frank A. Metz, Jr., William D. Ruckelshaus
and John B. Slaughter
24(b) Certified copy of Board resolution authorizing Form 10-K
filing utilizing powers of attorney
27 Financial Data Schedule (part of electronic submission
only)
(b) Reports on Form 8-K during the quarter ended December 31, 1997:
The Company did not file any Reports on Form 8-K during the quarter
ended December 31, 1997.
15
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
Solutia Inc.:
We have audited the statement of consolidated financial position of Solutia
Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related
statements of consolidated income, stockholders' equity (deficit) and cash flow
for each of the three years in the period ended December 31, 1997 and have
issued our opinion thereon dated February 25, 1998 (which includes an
explanatory paragraph as to a change in method of accounting); such financial
statements and opinion are included in your 1997 Annual Report to stockholders
and are incorporated herein by reference. Our audits also comprehended the
schedule of Solutia Inc. and Subsidiaries, listed in Item 14(a)2. This schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Saint Louis, Missouri
February 25, 1998
16
<PAGE> 18
SCHEDULE V
<TABLE>
SOLUTIA INC.
------------
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In millions)
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Year Expenses Deductions Year
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Reserves deducted from related assets in the Statement of
Consolidated Financial Position:
Valuation accounts, principally for doubtful receivables
and returns and allowances $ 9 $ 1 $3 $7
Year Ended December 31, 1996:
Reserves deducted from related assets in the Statement of
Consolidated Financial Position:
Valuation accounts, principally for doubtful receivables
and returns and allowances $ 7 $ 2 -- $9
Year Ended December 31, 1995:
Reserves deducted from related assets in the Statement of
Consolidated Financial Position:
Valuation accounts, principally for doubtful receivables
and returns and allowances $16 $(2) $7 $7
</TABLE>
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /S/ ROGER S. HOARD
--------------------------------
Roger S. Hoard
Vice President and Controller
(Principal Accounting Officer)
Date: March 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
<F*> Chairman, Chief Executive Officer and March 13, 1998
- -------------------------------------------------- Director (Principal Executive Officer)
Robert G. Potter
<F*> President and Director March 13, 1998
- --------------------------------------------------
John C. Hunter III
<F*> Senior Vice President and Chief Financial March 13, 1998
- -------------------------------------------------- Officer (Principal Financial Officer)
Robert A. Clausen
/S/ ROGER S. HOARD Vice President and Controller (Principal March 13, 1998
- -------------------------------------------------- Accounting Officer)
Roger S. Hoard
<F*> Director March 13, 1998
- --------------------------------------------------
Robert T. Blakely
<F*> Director March 13, 1998
- --------------------------------------------------
Joan T. Bok
<F*> Director March 13, 1998
- --------------------------------------------------
Paul H. Hatfield
<F*> Director March 13, 1998
- --------------------------------------------------
Robert H. Jenkins
<F*> Director March 13, 1998
- --------------------------------------------------
Howard M. Love
18
<PAGE> 20
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
<F*> Director March 13, 1998
- --------------------------------------------------
Frank A. Metz, Jr.
<F*> Director March 13, 1998
- --------------------------------------------------
William D. Ruckelshaus
<F*> Director March 13, 1998
- --------------------------------------------------
John B. Slaughter
<FN>
<F*> Karl R. Barnickol, by signing his name hereto, does sign this document on
behalf of the above noted individuals, pursuant to powers of attorney duly
executed by such individuals which have been filed as an Exhibit to this
Form 10-K.
</TABLE>
/s/ KARL R. BARNICKOL
----------------------------------
Karl R. Barnickol
Attorney-in-Fact
19
<PAGE> 21
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
2 Distribution Agreement (incorporated herein by reference to Exhibit 2
of the Company's Registration Statement on Form S-1 (333-36355) filed
September 25, 1997)
3(a) Restated Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 3(a) of the Company's Registration
Statement on Form S-1 (333-36355) filed September 25, 1997)
3(b) By-Laws of the Company (incorporated herein by reference to Exhibit
3(b) of the Company's Registration Statement on Form S-1 (333-36355)
filed September 25, 1997)
4(a) Rights Agreement (incorporated herein by reference to Exhibit 4 of the
Company's Registration Statement on Form 10 filed on August 7, 1997)
4(b) Indenture dated as of October 1, 1997, between Solutia Inc. and The
Chase Manhattan Bank, as Trustee (incorporated herein by reference to
Exhibit 4.1 of the Company's Form 10-Q for the quarter ended September
30, 1997 filed on November 12, 1997)
4(c) 6.5% Notes due 2002 in the principal amount of $150,000,000
(incorporated herein by reference to Exhibit 4.2 of the Company's Form
10-Q for the quarter ended September 30, 1997 filed on November 12,
1997)
4(d) 7.375% Debentures due 2027 in the principal amount of $200,000,000
(incorporated herein by reference to Exhibit 4.3 of the Company's Form
10-Q for the quarter ended September 30, 1997 filed on November 12,
1997)
4(e) 7.375% Debentures due 2027 in the principal amount of $100,000,000
(incorporated herein by reference to Exhibit 4.4 of the Company's Form
10-Q for the quarter ended September 30, 1997 filed on November 12,
1997)
4(f) 6.72% Debentures due 2037 in the principal amount of $150,000,000
(incorporated herein by reference to Exhibit 4.5 of the Company's Form
10-Q for the quarter ended September 30, 1997 filed on November 12,
1997)
9 Omitted--Inapplicable
10(a) Financial Planning and Tax Preparation Services Program for the
Executive Leadership Team
10(b) Employee Benefits Allocation Agreement (incorporated herein by
reference to Exhibit 10(a) of the Company's Registration Statement on
Form S-1 (333-36355) filed September 25, 1997)
10(c) Tax Sharing and Indemnification Agreement (incorporated herein by
reference to Exhibit 10(b) of the Company's Registration Statement on
Form S-1 (333-36355) filed September 25, 1997)
10(d) Solutia Inc. Management Incentive Replacement Plan (incorporated herein
by reference to Exhibit 10(c) of the Company's Registration Statement
on Form S-1 (333-36355) filed September 25, 1997)
20
<PAGE> 22
<CAPTION>
EXHIBIT INDEX (CONT'D)
Exhibit No. Description
- ----------- -----------
<C> <S>
10(e) Solutia Inc. 1997 Stock-Based Incentive Plan (incorporated herein by
reference to Exhibit 10(d) of the Company's Registration Statement on
Form S-1 (333-36355) filed September 25, 1997)
10(f) Solutia Inc. Non-Employee Director Compensation Plan (incorporated
herein by reference to Exhibit 10(e) of the Company's Registration
Statement on Form S-1 (333-36355) filed September 25, 1997)
10(g) $800,000,000 Credit Agreement, dated as of August 14, 1997, among
Solutia Inc., the initial lenders named therein, Bank of America
National Trust and Savings Association and Citibank, N.A. (incorporated
herein by reference to Exhibit 10(f) of the Company's Registration
Statement on Form S-1 (333-36355) filed September 25, 1997)
10(h) Form of Employment Agreement with Named Executive Officers (incorpo-
rated herein by reference to Exhibit 10(h) of the Company's
Registration Statement on Form S-1 (333-36355) filed September 25,
1997)
10(i) Form of Employment Agreement with other executive officers
(incorporated herein by reference to Exhibit 10(i) of the Company's
Registration Statement on Form S-1 (333-36355) filed September 25,
1997)
11 Omitted--Inapplicable; see "Earnings per Share" on pages 40 through
41 of the 1997 Annual Report
12 Omitted--Inapplicable
13 The Company's 1997 Annual Report to stockholders. (The electronic
submission includes only the financial report section of the Annual
Report, consisting of pages 18 through 49 of that Report.) Only those
portions expressly incorporated by reference into this Form 10-K are
deemed "filed"; other portions are furnished only for the information
of the Commission.
16 Omitted--Inapplicable
18 Preferability Letter from Deloitte & Touche LLP, dated February 25,
1998
21 Subsidiaries of the Registrant (see page 22)
22 Omitted--Inapplicable
23(a) Consent of Independent Auditors (see page 23)
23(b) Consent of Company Counsel (see page 23)
24(a) Powers of Attorney submitted by Robert G. Potter, John C. Hunter III,
Robert A. Clausen, Roger S. Hoard, Robert T. Blakely, Joan T. Bok, Paul
H. Hatfield, Robert H. Jenkins, Howard M. Love, Frank A. Metz, Jr.,
William D. Ruckelshaus and John B. Slaughter
24(b) Certified copy of Board resolution authorizing Form 10-K filing
utilizing powers of attorney
27 Financial Data Schedule (part of electronic submission only)
<FN>
- --------
Only Exhibits Nos. 21, 23(a) and 23(b) have been included in the printed copy of
this Report.
</TABLE>
21
<PAGE> 23
APPENDIX
1. On printed page 1, the bullets in the printed document are represented
by asterisks in the EDGAR document.
2. In Exhibit 13 to the printed form 10-K, on page 49, three pie-charts
appear and depict information as follows: "1997 Capital Expenditures
by Operating Segment" depicting a percentage breakdown of Solutia's
1997 capital expenditures by operating segment; "1997 Capital Expenditures
by World Area" depicting a percentage breakdown of Solutia's 1997 capital
expenditures by world area; and "1997 Shareowner Composition" depicting a
percentage breakdown of Solutia's 1997 shareowner composition.
3. Throughout the printed Form 10-K, trademarks are designated by the
superscript letters "R" in a circle or "TM." The EDGAR copy indicates
trademarks with an "R" or "TM" in parentheses.
<PAGE> 1
[LOGO]
Exhibit 10(a)
FINANCIAL PLANNING AND TAX PREPARATION SERVICES PROGRAM
FOR THE
EXECUTIVE LEADERSHIP TEAM
PURPOSE: To provide Financial Planning Services to members of the Solutia
Executive Leadership Team (ELT).
ELIGIBILITY: Full-time employees who are designated members of the ELT.
Participation in any part of this program is completely
voluntary.
PROGRAM SUMMARY: To provide reimbursement to members of the ELT for
Financial Planning and related services.
1. Such services shall include: Tax preparation and planning, estate
planning (including wills and trusts), retirement planning and other
services of a similar type approved in advance by the Vice President
of Human Resources.
2. Reimbursement of tax preparation services shall be made upon receipt of
a paid bill for services from one of the APPROVED vendors (list attached),
--------
by submitting that receipt to the Controller, or designee, who will issue
the reimbursement check.
3. Reimbursement of financial planning services shall be made upon receipt
of a paid bill for services by submitting that receipt to the Controller,
or designee, who will issue the reimbursement check. A list of financial
planners is available from Human Resources but there is no requirement
--
to use any on the list.
4. For tax purposes, reimbursement for the cost of financial services are
regarded as additional income and, therefore, are subject to withholding.
Depending on the nature and cost of the financial services, fees charged
may be allowable as itemized deductions on federal income tax returns.
5. The maximum reimbursement allowable per year for tax preparation and
financial planning services will be:
For the Chairman/CEO, COO, CAO, CFO, GC: $7,000
For other ELT members: $5,000
6. Monies not used in one year cannot be carried over to the following
year.
7. Policy shall be effective for expenses incurred as of January 1, 1998.
<PAGE> 2
VENDORS:
TAX PREPARATION (one of these must be used to be eligible for
reimbursement): If you work outside the St. Louis area, contact one
of the individuals listed below and they will refer you to an office
in your location.
Joan Malloy
Arthur Anderson
1010 Market Street
St. Louis, MO 63101-2089
314-425-9228 (work)
314-621-1956 (fax)
Don Poling
Deloitte & Touche
One City Place
St. Louis, MO 63101-1819
314-342-4990 (work)
314-342-1100 (fax)
Judy Ethell
Price Waterhouse
800 Market Street
St. Louis, MO 63101
314-206-8661 (work)
314-206-8510 (fax)
Walter Knepper
Private Client Services
BDO Seidman, LLP
720 Olive Street, Suite 2300
St. Louis, MO 63101
314-231-7575 (work)
<PAGE> 1
SOLUTIA INC.
- --------------------------------------------------------------------------------
MANAGEMENT REPORT
Management is responsible for the preparation of Solutia Inc.'s consolidated
financial statements and all of the related information appearing in this
annual report in accordance with generally accepted accounting principles.
Where necessary, this information reflects estimates that are based upon
currently available information and management's judgments.
Management is also responsible for maintaining a system of internal
accounting controls with the objectives of providing reasonable assurance
that Solutia's assets are safeguarded against material loss from unauthorized
use or disposition and that authorized transactions are properly recorded to
permit the preparation of accurate financial information. Cost/benefit
judgments are an important consideration in this regard. The effectiveness of
internal controls is maintained by personnel selection and training, division
of responsibilities, establishment and communication of policies and ongoing
internal review programs and audits.
Management believes that Solutia's system of internal accounting controls as
of December 31, 1997, was effective and adequate to accomplish the objectives
described above.
/s/ Robert G. Potter
Robert G. Potter
Chairman and Chief Executive Officer
/s/ Robert A. Clausen
Robert A. Clausen
Senior Vice President and
Chief Financial Officer
February 25, 1998
AUDIT AND FINANCE COMMITTEE REPORT
The Audit and Finance Committee, composed of three nonemployee members of the
board of directors, met three times during 1997. The Committee reviews and
monitors Solutia's internal accounting controls, financial reports,
accounting practices and the scope and effectiveness of the audits performed
by the independent auditors and internal auditors. The Committee also
recommends to the full board of directors the appointment of Solutia's
principal independent auditors, and it approves in advance all significant
audit and nonaudit services provided by such auditors. Deloitte & Touche LLP
was appointed independent auditor to examine, and to express an opinion as to
the fair presentation of, the consolidated financial statements. This report
follows.
The Committee discusses audit and financial reporting matters with
representatives of the company's financial management, its internal auditors,
and Deloitte & Touche LLP. The internal auditors and Deloitte & Touche LLP
meet with the Committee, with and without management representatives present,
to discuss the results of their examinations, the adequacy of Solutia's
internal accounting controls, and the quality of its financial reporting. The
Committee encourages the internal auditors and Deloitte & Touche LLP to
communicate directly with the Committee.
The Audit and Finance Committee also reviews and monitors the company's
financial policies, planning and structure so that they will conform to the
company's requirements for growth and sound operation.
The Audit and Finance Committee has reviewed the financial section of this
annual report. Pursuant to the recommendation of the Committee, the board of
directors has approved the financial section.
/s/ Frank A. Metz Jr.
Frank A. Metz Jr.
Chairman, Audit and Finance Committee
February 25, 1998
18
<PAGE> 2
SOLUTIA INC.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS OF SOLUTIA INC.:
We have audited the accompanying statements of consolidated financial
position of Solutia Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related statements of consolidated income, stockholders' equity
(deficit) and cash flow for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Solutia Inc. and subsidiaries as
of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
As discussed in Note 16 to the financial statements, the company changed its
method of accounting for environmental obligations under the Resource
Conservation and Recovery Act in 1997.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
St. Louis, Missouri
February 25, 1998
19
<PAGE> 3
SOLUTIA INC.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Solutia Inc. is an international producer and marketer of a range of high
performance chemical-based materials that are used by its customers to make
consumer, household, automotive and industrial products. These products
include nylon and acrylic fibers, intermediates, Saflex(R) plastic interlayer,
phosphorus derivatives, and specialty chemicals.
The company's strategic focus is built on four key technology strengths:
polymer chemistry, phosphorus chemistry, fiber technology, and process
engineering expertise. These technologies are used in various combinations to
create value-added products in three operating segments:
*CHEMICALS - comprised of the intermediates, phosphorus derivatives and
industrial products business units;
*FIBERS - comprised of carpet fibers, nylon industrial fibers and Acrilan(R)
acrylic fibers business units, and;
*POLYMERS & RESINS - comprised of Saflex(R) plastic interlayer, nylon plastics &
polymers, resins and polymer modifier business units.
In 1997, the Chemicals, Fibers and Polymers & Resins segments accounted for
approximately 32 percent, 33 percent and 35 percent, respectively, of the
company's consolidated net sales. Solutia reported all of these businesses as
one segment prior to its adoption of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information," effective December 31, 1997. The discussion of the
company's results that follows has been prepared on the basis of one segment.
As permitted by this new standard, information for years prior to 1997 was
not restated to conform to the new disclosure requirements because it was
impracticable to do so.
Prior to September 1, 1997, the businesses that form the company were wholly
owned by Monsanto Company ("Monsanto"). On September 1, 1997, Monsanto
distributed all of the outstanding shares of common stock of the company as a
dividend to Monsanto stockholders (the "Spinoff"). The distribution resulted
in the issuance of one share of the company's common stock for every five
shares of Monsanto common stock held of record as of August 20, 1997. As a
result of the Spinoff on September 1, 1997, the company became an independent
publicly-held company listed on the New York Stock Exchange, and its
operations ceased to be owned by Monsanto.
Financial data included in the company's consolidated financial statements
for periods prior to the Spinoff were prepared on a combined basis. They
reflect an estimate of what the historical assets, liabilities and operations
would have been if Solutia had been organized as a separate legal entity,
owning certain net assets of Monsanto. Management believes that the
assumptions underlying these financial statements are reasonable. These
historical consolidated financial statements, however, may not necessarily
reflect the results of operations, cash flows or financial position of the
company in the future, or what the results of operations, cash flows or
financial position would have been had the company been a separate
stand-alone public entity.
For periods subsequent to the Spinoff, Solutia's consolidated financial
statements have been prepared on a basis that reflects the historical value
of the assets, liabilities, and operations of the businesses that were
contributed to Solutia by Monsanto. See Note 1 of the "Notes to Consolidated
Financial Statements" for a detailed discussion of the basis of presentation
used in the preparation of Solutia's consolidated financial statements.
Solutia produced strong financial results in 1997 as it began its operations
as an independent company. The improved operations were primarily attributed
to significant cost reductions. The combination of improved operating results
and improved working capital management resulted in very strong cash flow
subsequent to the Spinoff. These factors allowed the company to reduce
significantly the debt burden of $1.029 billion that it assumed in the
Spinoff to $790 million at year end and to make significant progress
20
<PAGE> 4
SOLUTIA INC.
- --------------------------------------------------------------------------------
on its share repurchase program. The following section provides a detailed
discussion of the company's results of operations in 1997.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
In 1997, the company's net sales of $2.97 billion were down slightly when
compared with net sales of $2.98 billion in 1996. The decrease was
principally attributed to the effects of unfavorable currency exchange rates,
and was partially offset by approximately $12 million of higher sales
volumes. The effect of higher average selling prices was minimal. Sales
volumes increased for the nylon plastics & polymers and the Saflex(R) plastic
interlayer business units. These increases were principally the result of
higher demand. These sales increases were offset by the combination of
unfavorable currency exchange rates and lower sales volumes of intermediates
and carpet staple. The use of alternative floor coverings and competition
from lower priced polyester staple had a negative effect on sales into the
residential carpet market. Combined net sales of the other business units
decreased slightly compared with net sales in 1996. While currency exchange
rates had a negative effect on Solutia's net sales in 1997, the effect on
company's 1997 operating income was minimal because ex-U.S. sales are sourced
primarily from ex-U.S. operations.
Solutia's operating income in 1997 increased significantly from operating
income in 1996. However, operating income was affected by unusual items in
both years. In 1997, operating income included a first quarter charge of $10
million ($6 million aftertax, or $0.05 per share) associated with the
adoption of the American Institute of Certified Public Accountants' Statement
of Position ("SOP") 96-1, "Environmental Remediation Liabilities," which is
further discussed in Note 16 of the "Notes to Consolidated Financial
Statements." Operating income in the second quarter of 1997 included a charge
of $10 million ($6 million aftertax, or $0.05 per share) for
environmental-related litigation associated with the Brio Superfund site near
Houston, Texas. In addition, operating income in the second quarter of 1997
included $8 million ($5 million aftertax, or $0.04 per share) of reversals of
excess restructuring reserves from prior years. The excess was primarily the
result of lower exit costs associated with the sale and closure of
nonstrategic facilities included in 1995 restructuring actions. Operating
income in the fourth quarter of 1997 included charges of $72 million ($46
million aftertax, or $0.37 per share) associated with environmental
remediation liability changes. These charges are discussed further in Note 16
of the "Notes to Consolidated Financial Statements."
Operating income in 1996 included a net charge of $248 million ($156 million
aftertax, or $1.30 per share) for restructuring and other actions, primarily
for the costs of work force reductions, asset write-offs, and facility
rationalizations.
The increase in operating income in 1997 can be attributed primarily to the
effect of cost reductions. The cost reductions were realized principally
through the restructuring actions that were taken during 1997. Significant
progress was made on this restructuring plan. During 1997, employment was
reduced by approximately 600 people. The effect of these cost savings was the
primary driver behind the reductions in the company's marketing and
administrative expenses in 1997. In addition, Solutia's operations in 1997
received lower cost allocations from Monsanto. As further described in Note 1
of the "Notes to Consolidated Financial Statements," on April 1, 1997,
Monsanto discontinued its allocations of corporate expenses for general and
administrative services that it had previously been providing. Solutia's 1997
administrative expenses consisted of three months of Monsanto allocations and
nine months of stand-alone staff expenses. If Solutia had operated as a
stand-alone entity in 1996 and 1997, management estimates that general and
administrative services would have been lower by approximately $39 million in
1996 and higher by $13 million in 1997 in order to reflect the cost of
replacing the services represented by these allocations.
The increase in "Earnings from equity affiliates" was driven by the Flexsys
L.P. ("Flexsys") and Advanced Elastomer Systems L.P. ("AES") joint ventures.
Solutia's share of the combined 1997 earnings for these ventures increased
approximately 40 percent over the combined earnings from these ventures in
21
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
1996. Solutia has a 50 percent ownership interest in each of these joint
ventures.
The company is affected by economic conditions, particularly as they relate
to the housing industry in the United States and the automotive industry both
in the United States and internationally, which are cyclical businesses. In
addition, global competition and customer demands for efficiency will
continue to make sustained price increases difficult. The prices of purchased
raw materials used by the company fluctuate in the short term and are
affected by factors such as plant outages, oil prices, and supply and demand.
However, in the long term, the company believes that the addition of new
worldwide capacity should exert downward pressure on purchased raw material
costs.
1996 COMPARED WITH 1995
The company's net sales increased $13 million in 1996. However, as further
discussed in Note 4 of the "Notes to Consolidated Financial Statements,"
prior year operations reflect four months of sales and operating income from
the rubber chemicals business that was contributed in May 1995 to the
formation of the Flexsys joint venture. Sales and operating results for the
rubber chemicals business are no longer included in the company's
consolidated totals. If the sales from this business were excluded in 1995,
the company's sales would have increased $153 million, or 5 percent, in 1996.
Approximately $204 million of the increase can be attributed to higher sales
volumes and an improved sales mix. This increase was partially offset by the
effect of lower average selling prices, which totaled approximately $51
million.
Most of the sales growth was driven by increased sales for fibers products,
primarily because of higher sales volumes of nylon and acrylic fibers. Nylon
fiber sales were considerably higher than sales in 1995 because of higher
demand in the carpet industry. Increased demand in U.S. markets and higher
export sales, particularly into China, drove the sales volume growth for
acrylic fibers. A decline in average selling prices partially offset the
increase in nylon and acrylic fiber sales. Nylon polymer sales also
contributed to the sales increase on the strength of higher sales volumes.
Sales of intermediates and phosphorus and derivative products were
essentially even with the prior year. Sales of industrial products in 1996
were up moderately from those in 1995, principally because of higher sales
volumes, led by higher sales volumes for Therminol(R) heat transfer fluids.
Higher sales volumes, partially offset by lower average selling prices,
resulted in a modest increase in the net sales of Saflex(R) plastic interlayer
in 1996. Polymer modifier sales declined slightly in 1996, primarily because
of lower sales volumes.
In 1996, operating income for the company decreased $225 million from
operating income in 1995. However, profitability in both years was affected
by unusual items. Operating income in 1996 included a net charge of $248
million ($156 million, or $1.30 per share) for restructuring and other
actions, primarily for the costs of work force reductions, asset write-offs,
and facility rationalizations. Operating income in 1995 was reduced by $46
million ($39 million aftertax, or $0.34 per share), principally as the result
of restructuring charges for employment reductions and the costs to close
several facilities.
The positive effect of higher sales volumes and lower raw material costs on
operating income was offset by lower average selling prices, by significantly
higher administrative expenses, and by higher manufacturing costs. The
manufacturing cost increase was principally associated with maintenance
downtime and capacity expansion projects. Worldwide competitive pressures
limited the company's pricing flexibility on most of its products. Future
reductions or increases in average selling prices will continue to be
contingent upon these demands and pressures. The 1996 increase in
administrative expenses was principally due to higher costs associated with
various employee incentive programs, as well as an increase in allocations
related to Monsanto's business and organizational development initiatives.
The increase in "Earnings from equity affiliates" was principally attributed
to higher earnings for the Flexsys and AES joint ventures.
Net of restructuring charges that are detailed in Note 4 of the "Notes to
Consolidated Financial Statements," the increase in "Other income (expense) -
net" resulted primarily from the combination of
22
<PAGE> 6
SOLUTIA INC.
- --------------------------------------------------------------------------------
lower expense allocations from Monsanto and higher gains on the sale of certain
assets.
The 1996 effective income tax rate of 3 percent compared with the federal
statutory rate of 35 percent can be attributed primarily to the joint venture
aftertax earnings included in "Earnings from equity affiliates" and benefits
from the foreign sales corporation. It is expected that the effective income
tax in future periods will be significantly higher and will approximate the
U.S. federal statutory rate.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the company has generated sufficient cash from its operations
to fund its capital needs, including working capital. Capital expenditures
were $165 million in 1997. These expenditures were used to fund various
maintenance and capacity expansion projects. The company expects that its
capital requirements will be in the range of $250 million to $350 million
annually over the next few years, principally as a result of capacity
expansion and cost reduction projects. A portion of these capital
expenditures will be funded from up-front payments received from third
parties participating in these projects. Environmental remediation
expenditures were $39 million in 1997, and the company anticipates that these
expenditures will approximate this amount annually over the next several
years.
Solutia's working capital as of December 31, 1997, decreased to $106 million
from $121 million at December 31, 1996, primarily because of the increase in
short-term debt, principally commercial paper, the proceeds of which Solutia
used to repay debt assumed with the Spinoff. The decrease in working capital
was partially offset by increases in cash, receivables and inventories.
As of December 31, 1997, Solutia had negative equity of $131 million. This
deficit position resulted primarily from the assumption of $1.029 billion of
debt and $1.018 billion of postretirement liabilities from Monsanto in
conjunction with the Spinoff.
Effective with the Spinoff, Solutia assumed approximately $1.029 billion of
debt from Monsanto, primarily assumable commercial paper. The assumable
commercial paper was guaranteed by Monsanto until repaid or refinanced by
Solutia at maturity, which was up to 30 days following the Spinoff. In
October of 1997, the company consummated the sale of debt securities in the
amount of $600 million having maturities of 5 to 40 years. The proceeds of
the offering were used to refinance a portion of the company's commercial
paper as it matured. In the four months following the Spinoff, the company
has reduced its debt outstanding by approximately $240 million. Solutia's
debt securities were rated "BBB/Baa2" by the major rating agencies.
As of December 31, 1997, Solutia had a five-year revolving credit facility of
$800 million with a syndicate of banks to support its commercial paper. The
credit facility is also available for working capital and other general
corporate purposes. No borrowings were outstanding under this credit facility
as of December 31, 1997. This credit facility gives Solutia the financing
flexibility to take advantage of investment opportunities that may arise and
to satisfy future funding requirements.
In September 1997, the company's board of directors authorized the purchase
of up to 5 million shares of the company's common stock. During 1997, the
company acquired approximately 1.4 million shares at a cost of approximately
$32 million. The company expects to substantially complete these purchases
over the next year. This repurchase program is in addition to the normal
repurchase of shares for compensation and benefits programs.
The company believes that its cash flow from operations, supplemented by
periodic additional borrowings, provides it with sufficient resources to
finance its operations and planned capital needs for the next 12 months.
ENVIRONMENTAL MATTERS
Solutia continues to make a strong commitment to comply with various laws and
government regulations concerning environmental matters and employee safety
and health in the United States and other countries. U.S. federal
environmental legislation that has a particular impact on the company
includes the Toxic Substances Control Act; the Resource Conservation and
Recovery Act ("RCRA"); the Clean Air Act; the Clean Water Act; the Safe
Drinking Water
23
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Act; and the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA," commonly known as "Superfund"), as amended by the Superfund
Amendments and Reauthorization Act. The company is also subject to the
Occupational Safety and Health Act and regulations of the Occupational Safety
and Health Administration ("OSHA") concerning employee safety and health
matters. The U.S. Environmental Protection Agency ("EPA"), OSHA, and other
federal agencies have the authority to promulgate regulations that have an
impact on the company's operations. In addition to these federal activities,
various states have been delegated certain authority under the aforementioned
federal statutes. Many state and local governments have adopted environmental
and employee safety and health laws and regulations, some of which are similar
to federal requirements. State and federal authorities may seek fines and
penalties for violation of these laws and regulations.
Solutia is dedicated to long-term environmental protection and compliance
programs that reduce and monitor emissions of hazardous materials into the
environment as well as to the remediation of identified existing
environmental concerns. The company is among the leaders in the chemical
industry's Responsible Care performance enhancement program.
Expenditures in 1997 were approximately $10 million for environmental capital
projects and approximately $75 million for the management of environmental
programs, including the operation and maintenance of facilities for
environmental control. The company estimates that a total of approximately
$25 million will be spent during 1998 and 1999 on additional capital projects
for environmental protection and that expenses for the management of
environmental programs in 1998 and 1999 will continue at levels comparable to
1997.
With respect to environmental remediation obligations, the company's policy
is to accrue costs for remediation of contaminated sites in the accounting
period in which the obligation is probable and the cost is reasonably
estimable. Significant adjustments to these obligations included the 1997
fourth quarter charges of approximately $34 million ($22 million aftertax, or
$0.18 per share) to increase the company's environmental reserves. This
action was required in order to reflect revised estimates for changed
circumstances relating to the ultimate outcome of previously known
environmental matters. These revised estimates were based upon further
discussions with environmental authorities and the availability of new
information from recently completed environmental studies. These events and
activities help to define better and to quantify the company's ultimate
liability for these matters.
In addition, effective January 1, 1997, Solutia adopted SOP 96-1 which
establishes authoritative guidance regarding the recognition, measurement and
disclosure of environmental remediation liabilities. A charge of
approximately $10 million ($6 million aftertax, or $0.05 per share) was
recorded in the first quarter of 1997 associated with the adoption of SOP
96-1. The timing of this charge was predicated upon an application of SOP
96-1 in which liabilities arising under RCRA should be recorded when a RCRA
corrective measures study ("CMS") is completed. Subsequently, the company
reassessed its application of SOP 96-1 and concluded that these liabilities
would be recorded over a continuum of events leading up to and including a
CMS. As a result, the company recorded in the fourth quarter of 1997,
additional charges of approximately $38 million ($24 million aftertax, or
$0.19 per share) associated with these RCRA environmental liabilities.
Monsanto has intermittently received notices from the EPA alleging that it is
a potentially responsible party ("PRP") with respect to Superfund at specific
sites. In 1997, no such notices were received. With respect to many of the
past notices, Monsanto has resolved disputes, entered partial and complete
consent decrees, and executed administrative orders with the EPA settling a
portion or all of Monsanto's liability at various sites. Remediation pursuant
to such settlements is ongoing. At the time of the Spinoff, the company
assumed from Monsanto, pursuant to a distribution agreement, liabilities
related to specified Superfund proceedings. As a result, while Monsanto
remains the named PRP or defendant for actions that occurred prior to
September 1, 1997, the company
24
<PAGE> 8
SOLUTIA INC.
- --------------------------------------------------------------------------------
will manage proceedings and litigation indemnifying Monsanto for costs, expense
and judgments arising from these assumed liabilities.
The company's estimates of its liabilities for Superfund sites are based on
evaluations of currently available facts with respect to each individual site
and take into consideration factors such as existing technology, laws and
agency policy, and prior experience in remediation of contaminated sites. As
assessments and remediation activities progress at individual sites, these
liabilities are reviewed periodically and adjusted to reflect additional
technical, engineering and legal information that becomes available. The
company has an accrued liability of $48 million as of December 31, 1997 for
Superfund sites. Major Superfund sites in this category include the
noncompany-owned sites at Brio and MOTCO in Texas, Fike/Artel in West
Virginia and Woburn in Massachusetts, which account for $33 million of the
accrued amount. The company spent approximately $12 million in 1997 for
remediation of Superfund sites. Similar amounts can be expected in future
years.
The company had an accrued liability of $88 million as of December 31, 1997,
for shut-down plants and third-party sites for which the company assumed
responsibility pursuant to a distribution agreement entered into with
Monsanto. The company's estimate of its liability related to these sites is
based on evaluations of currently available facts with respect to each
individual site and takes into consideration factors such as existing
technology, laws and agency policy and prior experience in remediation of
contaminated sites. The company spent $11 million in 1997 for remediation of
these sites. Similar amounts can be expected in the future.
The company had an accrued liability of $81 million as of December 31, 1997
for solid and hazardous waste remediation, and post-closure costs at the
company's operating locations. The company recognizes certain post-closure
costs over the estimated remaining useful life of the related facilities. The
company spent $16 million in 1997 for remediation of these facilities.
Uncertainties related to all of the company's environmental liabilities are
evolving government regulations, the method and extent of remediation and
future changes in technology. Because of these uncertainties, the company
estimates that potential future expenses associated with these liabilities
could be an additional $20 million to $30 million. Although the ultimate
costs and results of remediation of contaminated sites cannot be predicted
with certainty, they are not expected to result in a material adverse effect
on Solutia's consolidated financial position, liquidity, or profitability in
any one year.
THE YEAR 2000 ISSUE
The year 2000 ("Y2K") issue refers to the inability of a date-sensitive
computer program to recognize a two-digit date field designated as "00" as
the year 2000. Mistaking "00" for 1900 could result in a system failure or
miscalculations causing disruptions to operations, including manufacturing, a
temporary inability to process transactions, send invoices, or engage in
other normal business activities. This is a significant issue for most, if
not all companies, with far reaching implications, some of which cannot be
anticipated or predicted with any degree of certainty.
Solutia has completed an assessment of the magnitude of its Y2K issue and has
determined that it will be required to modify or replace significant portions
of its software so that its computer systems will be able to function
properly beyond December 31, 1999. The majority of the company's Y2K issue
will be addressed though its worldwide implementation of new software
licensed from SAP AG which is Y2K compliant. Issues that are not covered by
the SAP implementation will have to be addressed individually and may require
software replacement, reprogramming or other remedial action. The company is
communicating with its suppliers and customers to determine the extent of the
company's vulnerability to the failure of third parties to remediate their
own Y2K issue.
In conjunction with this assessment, the company is finalizing its action
plans to address the Y2K issue, including contingencies to address unforeseen
problems. The company plans to use both internal and external resources to
complete Y2K reprogramming, software replacement and testing. Preliminary
plans anticipate completion of the SAP implementation and Y2K remedial work
by mid-1999. To date, the company has
25
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
incurred approximately $3 million related to the Y2K remedial work. The total
remaining cost of the Y2K remedial work is estimated to be $5 million and will
be expensed as incurred over the next two years. The costs of Y2K remedial work
exclude the cost of SAP implementation.
The costs of the project and the date on which the company plans to complete
the Y2K remediation work are based on management's best estimates, which were
derived from numerous assumptions about future events, including the
availability of certain resources, third-party modification plans, and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
Specific factors that might cause material differences include, but are not
limited to, the availability and cost of personnel trained in this area and
the ability to identify and correct all relevant computer codes.
DERIVATIVE FINANCIAL INSTRUMENTS
The company is exposed to market risk, including changes in interest rates,
currency exchange rates, and certain commodity prices. To manage the
volatility relating to these exposures, the company enters into various
derivative transactions pursuant to the company's policies. The company does
not purchase or hold any derivative financial instruments for trading
purposes.
The tests discussed below for exposure to interest rate and currency rate
exposures are based on a variance/covariance value at risk model using a
one-year horizon and a 95 percent confidence level. The model assumes that
financial returns are normally distributed. The value at risk model takes
into account correlations and diversification across market factors,
including currencies and interest rates. Estimates of volatility and
correlations or market factors are drawn from the JP Morgan RiskMetrics(TM)
dataset as of December 31, 1997. In cases where data is unavailable, a
reasonable approximation is included. The effect of these estimates did not
significantly change the total value at risk.
FOREIGN CURRENCY EXCHANGE RATE RISK
Currency forward contracts are used to manage currency exposures for
financial instruments denominated in currencies other than the entity's
functional currency. Gains and losses on contracts that are designated and
effective as hedges are included in net income and offset the exchange gain
or loss of the transaction being hedged. Corporate policy prescribes the
range of allowable hedging activity and the instruments permitted for use.
Because the counterparties to these contracts are major international
financing institutions, credit risk arising from these contracts is not
significant and Solutia does not anticipate any counterparty losses. This
hedging activity is intended to protect the company from adverse fluctuations
in foreign currency exchange rates.
As of December 31, 1997, Solutia had currency forward contracts to purchase
$22 million and to sell $22 million of other currencies with average
maturities of 2 months, principally the Belgian franc and the British pound
sterling. Net unrealized hedging losses as of December 31, 1997 were not
material.
Based on the company's overall currency rate exposure at December 31, 1997,
including derivative and other foreign currency sensitive instruments, a
near-term change in currency rates within a 95 percent confidence level based
on historical currency rate movements, would not materially affect the
consolidated financial position, results of operations, or cash flows of the
company.
INTEREST RATE RISK
Interest rate risk is primarily related to the changes in fair value on
fixed-rate, long-term debt and short-term, floating rate debt. Based on the
company's overall interest rate exposure at December 31, 1997, a near-term
change in interest rates, within a 95 percent confidence level based on
historical interest rate movements, would not materially affect the
consolidated financial position, results of operations, or cash flows of the
company.
COMMODITY PRICE RISK
Certain raw materials are subject to price volatility caused by weather,
petroleum prices, and other unpredictable factors. The company employs
commodity price swaps to hedge this exposure. The commodity price risk is not
material to the company's consolidated financial position, results of
operations, or cash flow.
26
<PAGE> 10
SOLUTIA INC.
- --------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share)
The following unaudited pro forma condensed consolidated statements of income
for the years ended December 31, 1997 and 1996 give effect to the Spinoff and
Solutia's 1997 debt offering as if the Spinoff and the offering had occurred
as of the beginning of the periods presented. The pro forma information is
presented for illustrative purposes only and may not be indicative of the
results that would have been obtained had the transactions actually occurred
on the date assumed, nor is it necessarily indicative of future consolidated
results of operations. The unaudited pro forma condensed consolidated
financial statements should be read in conjunction with the historical
financial statements and the related notes thereto included elsewhere in
this annual report.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997 For the Year Ended December 31, 1996
------------------------------------ ------------------------------------
Pro Forma Pro Forma
Historical ------------------------ Historical -----------------------
Solutia Adjustments Solutia Solutia Adjustments Solutia
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $2,969 $ (9)<FA> $2,960 $2,977 $ (15)<FA> $2,962
Cost of Goods Sold 2,316 (1)<FB> 2,313 2,325 3 <FB> 2,313
1 <FC> 3 <FC>
(3)<FD> (18)<FD>
---------------------------------------------------------------------------
GROSS PROFIT 653 (6) 647 652 (3) 649
Marketing, Administrative, and
Technological Expenses 363 14 <FB> 393 427 14 <FB> 420
(9)<FD> (67)<FD>
25 <FE> 46 <FE>
Restructuring Expenses - net 192 192
---------------------------------------------------------------------------
OPERATING INCOME 290 (36) 254 33 4 37
Interest Expense (41) (19)<FF> (60) (36) (28)<FF> (64)
Other Income (Expense) - net 41 41 36 36
---------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 290 (55) 235 33 (24) 9
Income Taxes 98 (20)<FG> 78 1 (9)<FG> (8)
---------------------------------------------------------------------------
NET INCOME $ 192 $ (35) $ 157 $ 32 $ (15) $ 17
===========================================================================
EARNINGS PER SHARE $ 1.63 $(0.30) $ 1.33 $ 0.28 $(0.13) $ 0.15
===========================================================================
EARNINGS PER SHARE, ASSUMING DILUTION $ 1.55 $(0.28) $ 1.27 $ 0.27 $(0.13) $ 0.14
===========================================================================
Weighted Average Shares - Basic 117.7 116.2
===========================================================================
Weighted Average Shares - Diluted 123.7 119.8
===========================================================================
<FN>
NOTES
<FA> To record the estimated effect of new selling prices and arrangements on
former intercompany sales from Solutia to Monsanto.
<FB> To record the assumed increase in retiree medical and pension costs as a
result of the Spinoff.
<FC> To record the estimated effect of transactions with the P4 joint venture
formed by Monsanto in conjunction with the Spinoff.
<FD> To reverse the historical Monsanto corporate expense allocation to the
company because the company is no longer subject to the allocation of
corporate expenses from Monsanto following the Spinoff.
<FE> Because the company is no longer subject to this corporate expense
allocation, a pro forma adjustment was made to record estimated general
corporate costs that the company believes it would have incurred had the
company been a separate public company for the periods presented.
<FF> To record additional interest expense as a result of the company's
assumption of debt from Monsanto and the borrowings of Solutia's 1997
public debt offering.
<FG> To record the estimated provision for income tax as a result of the pro
forma adjustments referred to in Notes (A) through (F) above at an
estimated combined U.S. federal income and state income tax rate of
36 percent.
</TABLE>
27
<PAGE> 11
SOLUTIA INC.
- --------------------------------------------------------------------------------
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
(Dollars in millions, except per share)
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
NET SALES $2,969 $2,977 $2,964
Cost of goods sold 2,316 2,325 2,243
------------------------------------------
GROSS PROFIT 653 652 721
Marketing expenses 143 172 179
Administrative expenses 133 167 136
Technological expenses 87 88 95
Restructuring expenses-net -- 192 53
------------------------------------------
OPERATING INCOME 290 33 258
Equity earnings from affiliates 31 21 15
Interest expense (41) (36) (36)
Other income (expense)-net 10 15 (6)
------------------------------------------
INCOME BEFORE INCOME TAXES 290 33 231
Income taxes 98 1 84
------------------------------------------
NET INCOME $ 192 $ 32 $ 147
==========================================
EARNINGS PER SHARE $ 1.63 $ 0.28 $ 1.30
==========================================
EARNINGS PER SHARE, ASSUMING DILUTION $ 1.55 $ 0.27 $ 1.27
==========================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
KEY FINANCIAL STATISTICS (UNAUDITED)
<CAPTION>
AS A PERCENT OF NET SALES: 1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Gross profit 22% 22% 24%
Marketing, administrative and technological expenses 12 14 14
Operating income 10 1 9
Net income 6 1 5
EFFECTIVE INCOME TAX RATE 34 3 36
</TABLE>
28
<PAGE> 12
SOLUTIA INC.
- --------------------------------------------------------------------------------
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except per share)
<CAPTION>
As of December 31,
-----------------------
1997 1996
------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24 $ --
Trade receivables, net of allowances of $6 in 1997 and $7 in 1996 425 412
Miscellaneous receivables and prepaid expenses 136 80
Deferred income tax benefit 91 108
Inventories 325 291
------------------------
TOTAL CURRENT ASSETS 1,001 891
PROPERTY, PLANT AND EQUIPMENT:
Land 17 18
Buildings 357 367
Machinery and equipment 2,707 2,622
Construction in progress 107 121
------------------------
Total property, plant and equipment 3,188 3,128
Less accumulated depreciation 2,265 2,217
------------------------
NET PROPERTY, PLANT AND EQUIPMENT 923 911
INVESTMENTS IN AFFILIATES 423 366
LONG-TERM DEFERRED INCOME TAX BENEFIT 300 194
OTHER ASSETS 121 121
------------------------
TOTAL ASSETS $2,768 $2,483
========================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 221 $ 223
Wages and benefits 106 156
Restructuring reserves 40 79
Miscellaneous accruals 335 312
Short-term debt 193 --
------------------------
TOTAL CURRENT LIABILITIES 895 770
LONG-TERM DEBT 597 --
POSTRETIREMENT LIABILITIES 958 634
OTHER LIABILITIES 449 423
STOCKHOLDERS' EQUITY (DEFICIT):
Monsanto Company Equity -- 656
Common stock (authorized, 600,000,000 shares par value $0.01)
Issued: 118,400,635 shares in 1997 1 --
Additional contributed capital (119) --
Treasury stock, at cost (992,828 shares in 1997) (22) --
Minimum pension liability adjustment (7) --
Unearned ESOP shares (31) --
Accumulated currency adjustment 19 --
Reinvested earnings 28 --
------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (131) 656
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $2,768 $2,483
========================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
29
<PAGE> 13
SOLUTIA INC.
- --------------------------------------------------------------------------------
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOW
(Dollars in millions)
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 192 $ 32 $ 147
Adjustments to reconcile to Cash Provided by Operations:
Items that did not use (provide) cash:
Deferred income taxes 32 (45) 25
Depreciation and amortization 142 166 162
Restructuring expenses - net -- 192 53
Other (39) 43 1
Working capital changes that provided (used) cash:
Accounts receivable (9) (43) 64
Inventories (32) 20 (78)
Accounts payable and accrued liabilities (115) (33) (61)
Other (45) 24 (13)
Other items 33 (20) 20
------------------------------------------
TOTAL CASH PROVIDED BY OPERATIONS 159 336 320
------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (165) (192) (179)
Acquisition and investment payments (2) (17) (51)
Investment and property disposal proceeds 9 4 51
------------------------------------------
CASH USED IN INVESTING ACTIVITIES (158) (205) (179)
------------------------------------------
FINANCING ACTIVITIES:
Net transactions with Monsanto Company prior to Spinoff 292 (131) (141)
Long-term debt proceeds 600 -- --
Repayment of debt obligations (840) -- --
Treasury stock purchases (35) -- --
Dividend payments (1) -- --
Common stock issued under employee stock plans 13 -- --
Other financing activities (6) -- --
------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 23 (131) (141)
------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24 -- --
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR -- -- --
------------------------------------------
END OF YEAR $ 24 $ -- $ --
==========================================
See accompanying Notes to Consolidated Financial Statements.
The effect of exchange rate changes on cash and cash equivalents was not
material. Cash payments for interest (net of amounts capitalized) were $3
million in 1997.
Cash payments for income taxes were $30 million in 1997.
</TABLE>
30
<PAGE> 14
SOLUTIA INC.
- --------------------------------------------------------------------------------
<TABLE>
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions)
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
MONSANTO COMPANY EQUITY:
BALANCE, JAN. 1 $ 656 $ 755 $ 741
Net income 32 147
Translation adjustments -- 8
Net transactions with Monsanto Company prior to Spinoff (131) (141)
1997 activity to date of Spinoff:
Net income 163
Translation adjustments 13
Net transactions with Monsanto Company 292
Elimination of Monsanto Company Equity at Spinoff (1,124)
-----------------------------------
BALANCE, DEC. 31 $ -- $ 656 $ 755
-----------------------------------
COMMON STOCK:
BALANCE, JAN. 1 $ -- $ -- $ --
Issuance of 118,371,280 shares at Spinoff 1
Issuance of 29,355 shares for stock option exercises --
-----------------------------------
BALANCE, DEC. 31 $ 1 $ -- $ --
-----------------------------------
ADDITIONAL CONTRIBUTED CAPITAL:
BALANCE, JAN. 1 $ -- $ -- $ --
Net liability transfer to Solutia at Spinoff (101)
Post-Spinoff adjustments (12)
Employee stock plans and ESOP (6)
-----------------------------------
BALANCE, DEC. 31 $ (119) $ -- $ --
-----------------------------------
TREASURY STOCK:
BALANCE, JAN. 1 $ -- $ -- $ --
Shares purchased (1,569,800 shares in 1997) (35)
Net shares issued under employee stock option plans (576,972 shares in 1997) 13
-----------------------------------
BALANCE, DEC. 31 $ (22) $ -- $ --
-----------------------------------
MINIMUM PENSION LIABILITY ADJUSTMENT:
BALANCE, JAN. 1 $ -- $ -- $ --
Post-Spinoff adjustment (7)
-----------------------------------
BALANCE, DEC. 31 $ (7) $ -- $ --
-----------------------------------
UNEARNED ESOP SHARES:
BALANCE, JAN. 1 $ -- $ -- $ --
Transfer of ESOP reserve balance to Solutia at Spinoff (31)
Amortization of ESOP balance --
-----------------------------------
BALANCE, DEC. 31 $ (31) $ -- $ --
-----------------------------------
ACCUMULATED CURRENCY ADJUSTMENT:
BALANCE, JAN. 1 $ -- $ -- $ --
Balance transferred to Solutia at Spinoff 11
Translation adjustments 8
-----------------------------------
BALANCE, DEC. 31 $ 19 $ -- $ --
-----------------------------------
REINVESTED EARNINGS:
BALANCE, JAN. 1 $ -- $ -- $ --
Net income from date of Spinoff through December 31, 1997 29
Dividends (1)
-----------------------------------
BALANCE, DEC. 31 $ 28 $ -- $ --
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) $ (131) $ 656 $ 755
===================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
31
<PAGE> 15
SOLUTIA INC.
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
1. BASIS OF PRESENTATION
Solutia Inc. is an international producer and marketer of a range of high
performance chemical-based materials that are used by its customers to make
consumer, household, automotive and industrial products. Prior to September
1, 1997, the businesses that form the company were wholly owned by Monsanto
Company ("Monsanto"). On September 1, 1997, Monsanto distributed all of the
outstanding shares of common stock of the company as a dividend to Monsanto
stockholders (the "Spinoff"). The distribution resulted in the issuance of
one share of the company's common stock for every five shares of Monsanto
common stock held of record as of August 20, 1997. As a result of the Spinoff
on September 1, 1997, the company became an independent publicly-held company
listed on the New York Stock Exchange and its operations ceased to be owned
by Monsanto. Monsanto and Solutia have entered into a number of agreements
with respect to the separation of the companies and to provide mechanisms for
an orderly transition following the Spinoff.
PRE-SPINOFF FINANCIAL INFORMATION
Financial data included in the accompanying consolidated financial
statements, for periods prior to the Spinoff, were prepared on a combined
basis. They reflect an estimate of what the historical assets, liabilities
and operations would have been if Solutia had been organized as a separate
legal entity, owning certain net assets of Monsanto. Generally, only those
assets and liabilities of the ongoing chemicals businesses that were expected
to be transferred to Solutia prior to the Spinoff were included in the
Statement of Consolidated Financial Position.
The Spinoff was accomplished through a distribution agreement which
defined the assets that were contributed to Solutia and the liabilities that
were assumed by Solutia. Certain of those assets and liabilities were not
included in the accompanying Statement of Consolidated Financial Position as
of December 31, 1996. Those omitted assets and liabilities were principally
comprised of a joint venture interest in Monsanto's elemental phosphorus
business and a defined amount of cash and debt.
Monsanto and Solutia also entered into an employee benefits and
compensation allocation agreement that set forth the manner in which assets
and liabilities under employee benefit plans and other employment-related
liabilities were divided between them. Certain assets and liabilities related
to the plans have not been included in the accompanying Statement of
Consolidated Financial Position as of December 31, 1996. Items excluded were
comprised principally of assets and liabilities for U.S. and ex-U.S. defined
benefit pension plans as well as workers' compensation and additional
obligations for health care and other postretirement benefits that Solutia
retained for substantially all retired U.S. employees.
The following unaudited pro forma amounts were estimated to give effect
to the previously described assets and liabilities that were excluded from
Solutia's December 31, 1996 Statement of Consolidated Financial Position, as
well as certain other items. For the unaudited pro forma condensed Statement
of Consolidated Financial Position, the amounts were estimated as if the
Spinoff had occurred on December 31, 1996. The comparable audited amounts as
of December 31, 1997 are included for informational purposes. For the
unaudited pro forma condensed Statements of Consolidated Income, the amounts
were estimated as if the Spinoff had occurred as of the beginning of the
years presented.
Condensed Statements of Consolidated Financial Position as of
December 31:
<TABLE>
<CAPTION>
Unaudited
Pro Forma
1997 1996
--------------------------------
<S> <C> <C>
Total Assets $2,768 $2,660
Long-Term Debt 597 1,029
Postretirement Liabilities 958 876
Stockholders' Deficit (131) (439)
Total Liabilities and Stockholders' Deficit $2,768 $2,660
</TABLE>
Unaudited Pro Forma Condensed Statements of Consolidated Income for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Income Before Income Taxes $ 235 $ 9
Net Income 157 17
Earnings per Share $1.33 $0.15
Earnings per Share, assuming dilution $1.27 $0.14
</TABLE>
The pro forma information is presented for illustrative purposes only and
may not be indicative of the results that would have been obtained had the
transactions actually occurred on the dates assumed, nor is it necessarily
indicative of the future consolidated results of operations.
The final determination of the assets contributed to Solutia and the
liabilities assumed by Solutia was made pursuant to the agreements entered
into between Monsanto and Solutia in connection with the Spinoff. As of the
date of the Spinoff, a net liability transfer to Solutia was affected
directly through the "Monsanto Company Equity" account in the Statement of
Consolidated Financial Position.
Monsanto provided certain general and administrative services to Solutia,
including finance, legal, treasury, information systems, and human resources.
The cost allocated to Solutia for these services was based upon the
percentage relationship between the net assets utilized in Solutia's
operations and Monsanto's total net assets, as well as other methods which
management believes to be reasonable. These allocations were $12 million, $85
million and $72 million in 1997, 1996 and 1995, respectively. In preparation
for the Spinoff,
32
<PAGE> 16
SOLUTIA INC.
- ------------------------------------------------------------------------------
Monsanto began a transition plan for the separation. As part of this plan,
Monsanto discontinued its allocation of corporate expenses for these general
and administrative services on April 1, 1997, as these expenses were
specifically identified and segregated as part of Solutia's ongoing cost
infrastructure. As a result of the Spinoff, Solutia is now required to
perform these general and administrative functions using its own resources or
purchased services and is responsible for the costs and expenses associated
with the management of a public company. If Solutia had operated as a
stand-alone entity in 1996 and 1997, management estimates that general and
administrative services would have been lower by approximately $39 million in
1996 and higher by $13 million in 1997 in order to reflect the cost of
replacing the services represented by these allocations.
As described in Notes 10, 11 and 12, Solutia employees and retirees
participated in various Monsanto pension, health care, savings and other
benefit plans. The costs and certain obligations related to these plans were
included in Solutia's consolidated financial statements generally based on
the percentage of Solutia payroll costs to total Monsanto payroll costs.
Certain assets and liabilities related to Solutia's operation had been
managed and controlled by Monsanto on a centralized basis. Such assets and
liabilities have been allocated to Solutia in the manner described in the
preceding paragraphs for allocated general and administrative expenses and
benefit plans. A portion of the following pre-Spinoff assets and liabilities
have been determined in this manner: other assets, accounts payable,
postretirement liabilities, miscellaneous accruals and other liabilities.
Monsanto used a centralized approach to cash management and the financing
of its operations. As a result, cash and cash equivalents and debt were not
allocated to Solutia in the pre-Spinoff historical financial statements.
Solutia generally has not had borrowings except amounts due to Monsanto.
Interest expense was allocated to Solutia in the consolidated financial
statements to reflect Solutia's pro rata share of the financing structure of
Monsanto. This allocation in the consolidated financial statements is based
on the percentage relationship between the net assets utilized in Solutia's
operations and Monsanto's net assets.
The allocation methodology followed in preparing the consolidated
financial statements may not necessarily reflect the results of operations,
cash flows, or financial position of Solutia in the future, or what the
results of operations, cash flows, or financial position would have been had
Solutia been a separate stand-alone entity.
POST-SPINOFF FINANCIAL INFORMATION
Financial data included in the accompanying consolidated financial
statements, for periods subsequent to the Spinoff, have been prepared on a
basis that reflects the historical value of the assets, liabilities, and
operations of the businesses that were contributed to Solutia by Monsanto in
accordance with the distribution and employee benefits and compensation
allocation agreements described in the preceding paragraphs.
Effective with the Spinoff on September 1, 1997, the assets contributed
to Solutia and the liabilities assumed by Solutia included a joint venture
interest in Monsanto's elemental phosphorus business, cash of $75 million,
debt of $1.029 billion, accrued net pension liability for the U.S. and ex-U.S.
defined benefit pension plans, and additional obligations for healthcare and
other postretirement benefits. At the date of the Spinoff, the amount of
postretirement liabilities assumed by Solutia totaled approximately $1.018
billion.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
Subsequent to the Spinoff, the consolidated financial statements include the
accounts of Solutia and its majority owned subsidiaries. Other companies in
which Solutia has a significant interest (20 to 50 percent) are included in
"Investments in Affiliates" in the Statement of Consolidated Financial
Position. Solutia's share of these companies' net earnings or losses is
reflected in "Equity earnings from affiliates" in the Statement of
Consolidated Income. Prior to the Spinoff, the consolidated financial
statements included the accounts of Solutia as described in Note 1.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and temporary investments with
maturities of three months or less when purchased.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
that affect revenues and expenses during the period reported. Estimates are
adjusted when necessary to reflect actual experience. Significant estimates
are used to account for the allocation between Monsanto and Solutia of
financial statement amounts, restructuring reserves, environmental reserves,
self-insurance reserves, employee benefit plans, asset impairments, and
contingencies.
CURRENCY TRANSLATION
The financial statements for most of Solutia's ex-U.S. operations are
translated into U.S. dollars at current exchange rates. Unrealized currency
adjustments in the Statement of Consolidated Financial Position are
accumulated in equity. The financial statements of ex-U.S. entities that
operate in hyperinflationary economies are translated at either current or
historical exchange rates, as appropriate. These currency adjustments are
included in net income.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. The cost of plant and
equipment is depreciated over weighted average periods of 18
33
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
years for buildings and 10 years for machinery and equipment, by the
straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate a
possible loss. Such impairment tests are based on a comparison of
undiscounted cash flows to the recorded value of the asset. If an impairment
is indicated, the asset value is written down to its fair value based upon
discounted cash value, using an appropriate discount rate.
INVENTORY VALUATION
Inventories are stated at cost or market, whichever is less. Actual cost is
used to value raw materials and supplies. Standard cost, which approximates
actual cost, is used to value finished goods and goods in process. Standard
cost includes direct labor and raw materials, and manufacturing overhead
based on practical capacity. The cost of certain inventories (77 percent as
of December 31, 1997) is determined by the last-in, first-out ("LIFO")
method, which generally reflects the effects of inflation or deflation on
cost of goods sold sooner than other inventory cost methods. The cost of
other inventories generally is determined by the first-in, first-out ("FIFO")
method.
INCOME TAXES
Subsequent to the Spinoff, Solutia became responsible for its income taxes
and will file its own income tax returns. Prior to the Spinoff, the company
did not file separate tax returns because its results were included in the
income tax returns filed by Monsanto and its subsidiaries in various U. S.
and ex-U. S. jurisdictions. The tax provisions reflected in the Statement of
Consolidated Income, for periods prior to the Spinoff, have been computed as
if Solutia was a separate company.
The company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities using enacted rates.
EARNINGS PER SHARE
Effective December 31, 1997, Solutia adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under this new
standard, the presentation of primary and fully diluted earnings per share
required by current standards is replaced by basic and diluted earnings per
share. Basic earnings per share measures operating performance assuming no
dilution from securities or contracts to issue common stock. Diluted earnings
per share measures operating performance giving effect to the dilution that
would occur when securities or contracts to issue common stock are exercised
or converted. This change and the amounts associated with it are more fully
described in Note 14.
For periods ended prior to the Spinoff, the number of weighted average
shares outstanding and common share equivalents used in the earnings per share
calculation was based upon the weighted average number of Monsanto shares
outstanding and Monsanto common share equivalents for the applicable period,
adjusted for the distribution ratio in the Spinoff of one share of the
company's common stock for every five shares of Monsanto common stock.
ENVIRONMENTAL REMEDIATION
Costs for remediation of waste disposal sites are accrued in the accounting
period in which the obligation is probable and when the cost is reasonably
estimable. Postclosure costs for hazardous and other waste facilities at
operating locations are accrued over the estimated life of the facility as
part of its anticipated closure cost. Environmental liabilities are not
discounted, and they have not been reduced for any claims for recoveries from
insurance or third parties. In those cases where insurance carriers of
third-party indemnitors have agreed to pay any amounts and management
believes that collectibility of such amounts is probable, the amounts are
reflected as receivables in the consolidated financial statements.
Effective January 1, 1997, Solutia adopted the American Institute of
Certified Public Accountants' Statement of Position ("SOP") 96-1,
"Environmental Remediation Liabilities." SOP 96-1 establishes authoritative
guidance regarding the recognition, measurement and disclosure of
environmental remediation liabilities. The primary change in Solutia's
accounting principles associated with the adoption of this SOP was an
acceleration of the recognition of certain environmental remediation
liabilities at operating facilities. This change and the amounts associated
with it are more fully described in Note 16.
DERIVATIVE FINANCIAL INSTRUMENTS
Currency forward contracts are used to manage currency exposures for
financial instruments denominated in currencies other than the entity's
functional currency. Gains and losses on contracts that are designated and
effective as hedges are included in net income and offset the exchange gain
or loss of the transaction being hedged.
Major currencies effecting the company's business are the U.S. dollar,
the British pound sterling, the Belgian franc, and the German deutsche mark.
Currency restrictions are not expected to have a significant effect on
Solutia's cash flow, liquidity, or capital resources.
3. INTERCOMPANY TRANSACTIONS
Transactions with Monsanto prior to the Spinoff, included in the Statement of
Consolidated Income, are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Intercompany sales $42 $63 $75
General and administrative services 12 85 72
Interest expense 26 36 36
</TABLE>
34
<PAGE> 18
SOLUTIA INC.
- ------------------------------------------------------------------------------
Intercompany sales were made at Monsanto's established transfer prices.
In addition, the costs for certain general and administrative services were
allocated to Solutia. As further discussed in Note 1, Monsanto discontinued
its allocation of the cost of general and administrative expenses to Solutia,
effective April 1, 1997, as part of its transition plan of separation. Such
expenses were specifically identified and segregated as part of Solutia's
ongoing cost infrastructure. Interest expense charged to Solutia represents
an allocation from Monsanto of its total interest expense.
4. RESTRUCTURING AND OTHER ACTIONS
Items that affected Solutia's results of operations in 1997 included a first
quarter charge of $10 million ($6 million aftertax) associated with the
adoption of the SOP 96-1 which is further discussed in Note 16. The second
quarter of 1997 included a charge of $10 million ($6 million aftertax) for
environmental-related litigation. This charge resulted from a settlement that
Monsanto reached with 811 plaintiffs in six lawsuits related to the Brio
Superfund site near Houston, Texas. The suits were among eleven suits brought
in Harris County District Court or the United States District Court for the
Southern District of Texas on behalf of 960 plaintiffs who claimed injuries
resulting from alleged exposure to substances present at or emanating from
the Brio site. In addition, the second quarter included $8 million ($5
million aftertax) of reversals of excess restructuring reserves from prior
years. The excess was primarily the result of lower exit costs associated
with the sale and closure of nonstrategic facilities included in 1995
restructuring actions. The fourth quarter of 1997 included charges of $72
million ($46 million aftertax) associated with changes in estimates for
environmental remediation liabilities. These charges are discussed further in
Note 16.
In December 1996, Solutia recorded pretax restructuring charges totaling
$256 million ($164 million aftertax) to cover the costs associated with the
closure or sale of certain facilities, asset write-offs, and workforce
reductions. Included in these charges were pretax amounts for asset
impairments totaling $56 million. These write-offs were necessary primarily
because of excess production capacity, coupled with insufficient demand for
certain products. Asset values were written down to their discounted cash
values, using appropriate discount rates. Significant progress was made on
this plan in 1997, with employment being reduced by approximately 600 people.
In December 1995, Monsanto's board of directors approved a restructuring
plan. The pretax charge associated with these actions was $66 million ($57
million aftertax) and covered the costs of work force reductions, business
consolidations, facility closures, and the exit from nonstrategic businesses
and facilities. This plan was substantially completed by the end of 1996 and
reduced employment by approximately 100 people.
In December 1994, Monsanto and Akzo Nobel N.V. agreed to form a 50-50
joint venture by combining their respective rubber chemicals businesses. The
venture partners agreed to bear the one-time costs required to integrate
their respective rubber chemicals businesses into the joint venture. For
Solutia, these integration costs, which totaled $40 million pretax ($25
million aftertax), were primarily for the cost of reducing the work force by
approximately 120 people and for special termination benefits for
approximately 300 people transferring from Solutia to the joint venture. The
charge for these actions was recorded in the first quarter of 1995. On May 1,
1995, the joint venture, known as Flexsys, L.P. (" Flexsys"), began operation
and is accounted for as an equity affiliate. Accordingly, Solutia's share of
the earnings of Flexsys after that date has been reflected in "Equity
earnings from affiliates" in the Statement of Consolidated Income. Solutia's
results of operations for 1995 included net sales of $140 million from the
rubber chemicals business. Operating income for this business during these
periods was not significant.
Other items that affected Solutia's results of operations in 1995
included the receipt in the first and third quarters of settlement payments
from various insurers related to environmental and other insurance litigation.
The combined effect of these settlements totaled $88 million pretax ($55
million aftertax). In addition, Monsanto settled a lawsuit related to a
Comprehensive Environmental Response, Compensation and Liability site,
commonly known as a "Superfund" site, in La Marque, Texas. The suit was
brought by IT Corporation ("IT"), a subsidiary of International Technology
Corp., and claimed, among other things, breach of a contract calling for IT to
perform incineration and remediation work at the site. Monsanto settled the
suit by paying $41 million pretax ($25 million aftertax), and Solutia recorded
the payment in the third quarter of 1995.
The components of the pretax expense (income) related to the restructuring
programs and the other actions included in the accompanying Statement of
Consolidated Income were:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Changes in estimates for environmental
reserves and application of SOP 96-1 $82
Cost of employee reductions $157 $ 22
Shutdown and consolidation of
various facilities and departments (8) 33 44
Asset impairments 56
Insurance-related
settlement (income) (88)
Litigation settlement 10 41
Joint venture integration costs 40
Other costs 10
-----------------------------------------
TOTAL $84 $256 $ 59
=========================================
</TABLE>
35
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Restructuring expenses are recorded based on estimates prepared at the time
the restructuring actions are approved by the board of directors. The balance
in restructuring reserves as of December 31, 1997, was $104 million. It is
earmarked primarily for work force reduction costs and the costs associated
with the consolidation of various facilities and departments. Management
believes that the balance of these reserves as of December 31, 1997, is
adequate for completion of those activities. Restructuring actions during the
last three years have reduced these liabilities by approximately $350
million. Approximately 60 percent of these reductions were recorded for
write-offs and expenditures related to the shutdown and consolidation of
various facilities and departments. The remaining reductions were related
primarily to the cost of work force reduction programs. As of December 31,
1997, substantially all of the restructuring reserves established in 1995 had
been utilized.
The pretax expenses (income) related to the restructuring programs and the
other unusual items were recorded in the Statement of Consolidated Income in
the following categories:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Cost of goods sold $84 $ 56 $(7)
Restructuring expenses - net 192 53
----------------------------------------
Decrease in operating income 84 248 46
Other expense<F1> 8 13
-----------------------------------------
TOTAL DECREASE IN INCOME
BEFORE INCOME TAXES $84 $256 $59
=========================================
<FN>
<F1> In 1996 and 1995, other expense includes Solutia's share of restructuring
actions undertaken for the Flexsys joint venture.
</TABLE>
Net income was decreased by $53 million, $164 million, and $52 million in
1997, 1996, and 1995, respectively, because of these restructurings and other
actions.
5. INVESTMENTS IN AFFILIATES
At December 31, 1997, Solutia's investments in affiliates consisted
principally of its 50 percent interests in the Flexsys rubber chemicals joint
venture and the Advanced Elastomers Systems, L.P. ("AES") joint venture for
which Solutia uses the equity method of accounting. Summarized combined
financial information for the Flexsys and AES joint ventures follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Results of operations:
Net sales $865 $779 $628
Net income 78 64 3
Financial position:
Total assets $899 $853 $854
Total liabilities 254 237 290
</TABLE>
6. INVENTORY VALUATION
The components of inventories were:
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Finished goods $ 259 $ 258
Goods in process 60 47
Raw materials and supplies 148 126
------------------------
Inventories, at FIFO cost 467 431
Excess of FIFO over LIFO cost (142) (140)
------------------------
TOTAL $ 325 $ 291
=======================
</TABLE>
Inventories at FIFO approximate current cost. The effect of LIFO inventory
liquidations was not material in 1997, increased pretax income by $5 million
in 1996 and was not material in 1995.
7. INCOME TAXES
The components of income before income taxes were:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
United States $187 $11 $221
Outside United States 103 22 10
-------------------------------------------
TOTAL $290 $33 $231
===========================================
</TABLE>
The components of income tax expense charged to operations were:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $36 $ 13 $39
U.S. state 7 2 7
Outside United States 23 31 13
----------------------------------------
66 46 59
----------------------------------------
Deferred:
U.S. federal 19 (21) 23
U.S. state 2 (1) 3
Outside United States 11 (23) (1)
----------------------------------------
32 (45) 25
----------------------------------------
TOTAL $98 $ 1 $84
========================================
</TABLE>
Factors causing Solutia's effective tax rate to differ from the U.S.
federal statutory rate were:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
U.S. federal statutory rate 35% 35% 35%
U.S. state income taxes 2 1 3
Tax benefit of foreign
sales corporation (2) (23) (4)
Taxes related to foreign income,
net of credits - 3 4
Income from equity affiliates
recorded net of tax (3) (13) (1)
Other 2 - (1)
----------------------------------------
EFFECTIVE INCOME TAX RATE 34% 3% 36%
========================================
</TABLE>
36
<PAGE> 20
SOLUTIA INC.
- ------------------------------------------------------------------------------
Deferred income tax balances were related to:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Property $(177) $(176)
Postretirement benefits 394 248
Restructuring reserves 51 92
Environmental liabilities 80 57
Inventory (2) 4
Other 41 77
-------------------------
NET ASSET $ 387 $ 302
=========================
</TABLE>
Income taxes and remittance taxes have not been recorded on $33 million
in undistributed earnings of subsidiaries, either because any taxes on
dividends would be offset substantially by foreign tax credits or because
Solutia intends to reinvest those earnings indefinitely. It is not practicable
to estimate the tax effect of remitting these earnings to the U.S.
8. DEBT OBLIGATIONS
DEBT MATURING IN ONE YEAR
Debt maturing in one year consisted principally of commercial paper balances,
which totaled $190 million as of December 31, 1997. The weighted average
interest rate on this debt was 6.99 percent as of December 31, 1997. Interest
expense on commercial paper balances, charged to income subsequent to the
Spinoff was at a weighted average rate of 5.78 percent.
As of December 31, 1997, Solutia had a five-year revolving credit
facility of $800 million with a syndicate of banks to support its commercial
paper. The credit facility is also available for working capital and other
general corporate purposes. Interest on amounts borrowed under this credit
facility is expected to approximate money market rates.
The credit agreement contains various covenants that, among other things,
restrict the ability of Solutia to merge with another entity and that require
Solutia to meet certain leverage and interest coverage ratios. The company
does not anticipate that future borrowings will be limited by the terms of
this agreement.
No borrowings were outstanding under this credit facility as of
December 31, 1997.
LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
6.5% notes due 2002 $150 $ -
7.375% debentures due 2027 300 -
6.72% debentures due 2037 150 -
Unamortized debt discount (3) -
-------------------------
TOTAL $597 $ -
=========================
</TABLE>
The notes and debentures are unsecured obligations. Interest is payable
semiannually, on April 15 and October 15 of each year, commencing April 15,
1998. The 2037 debentures may be repaid on October 15, 2004 at the option of
the holder. The notes and debentures contain provisions that, among other
things, restrict Solutia's ability to create liens against assets and its
ability to enter into sale and leaseback transactions.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value of Solutia's long-term debt as of December 31, 1997,
was $605 million. This estimate compares with the recorded amount of $597
million.
The recorded amounts of cash, trade receivables, third-party guarantees,
accounts payable and short-term debt approximate their fair values. The
estimated fair value of the company's foreign currency forward contracts
approximates their notional amounts.
Fair values are estimated by the use of quoted market prices, estimates
obtained from brokers, and other appropriate valuation techniques based upon
information available as of December 31, 1997. The fair-value estimates do
not necessarily reflect the values Solutia could realize in the current
market.
10. POSTRETIREMENT BENEFITS - PENSIONS
Prior to the Spinoff, Solutia's employees participated in Monsanto's
noncontributory pension plans. In conjunction with the Spinoff, Solutia
assumed pension liabilities and received related assets from those plans for
its active employees and for certain former employees who left Monsanto in
earlier years. Solutia's plans are substantially identical to Monsanto's
plans. Pension benefits are based on the employee's years of service and/or
compensation level. The pension plans are funded in accordance with Solutia's
long-range projections of the plans' financial conditions. These projections
take into account benefits earned and expected to be earned, anticipated
returns on pension plan assets, and income tax and other regulations.
The company's net pension cost was $28 million in 1997. It consisted of
$9 million of net pension costs incurred subsequent to the Spinoff and $19
million of cost allocations from Monsanto. Solutia's net pension cost
allocations from Monsanto were $18 million and $1 million in 1996 and
1995, respectively. Separate calculations of the components of Solutia's net
pension cost and the funded status of the plans prior to the Spinoff are not
available. Subsequent to the
37
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Spinoff, the company's net pension cost was $9 million and its components
were as follows:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Service costs for benefits earned $ 11
Interest cost on benefit obligation 52
Assumed return on plan assets<F1> (53)
Amortization of unrecognized net gain (1)
------
TOTAL $ 9
======
<FN>
<F1> Actual return on plan assets was $44 million for the four months
ended December 31, 1997.
</TABLE>
The funded status of Solutia's pension plans at year-end was:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
PLAN ASSETS AT FAIR VALUE $1,834
--------
Actuarial present value of plan benefits:
Vested $1,538
Nonvested 107
--------
Accumulated benefit obligation 1,645
Effect of projected future salary increases 179
--------
PROJECTED BENEFIT OBLIGATION<F1> $1,824
--------
Excess of plan assets over
projected benefit obligation $ 10
Less:
Unrecognized initial net gain 33
Unrecognized prior service costs (178)
Additional liability 14
Unrecognized subsequent net gain 269
--------
ACCRUED NET PENSION LIABILITY<F2> $ 128
========
<FN>
<F1> Included $27 million in 1997 for unfunded plans.
<F2> Included $22 million in 1997 for unfunded plans.
</TABLE>
The accrued net pension liability was included in:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Postretirement liabilities $136
Less: Other assets 8
------
ACCRUED NET PENSION LIABILITY $128
======
</TABLE>
Included in the preceding table are plan assets and projected benefit
obligations for the principal U.S. plan of approximately $1.762 billion and
$1.732 billion, respectively, as of December 31, 1997. Plan assets consist
principally of common stocks and U.S. government and corporate obligations.
Contributions to these plans were neither required nor made in 1997 because
Solutia's principal pension plan is adequately funded, using assumed returns.
The significant actuarial assumptions used to estimate the projected
benefit obligation for the company's principal pension plan were as follows:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Discount rate 7.25%
Assumed long-term rate of return on plan assets 9.50%
Annual rates of salary increase (for plans
that base benefits on final compensation level) 4.00%
</TABLE>
11. POSTRETIREMENT BENEFITS - HEALTH CARE AND OTHER
In connection with the Spinoff, Solutia assumed retiree medical liabilities
for its active employees and for approximately two-thirds of the retired U.S.
employees of Monsanto. Solutia's employees participate in benefit programs
that provide certain health care and life insurance benefits for retired
employees. Substantially all regular, full-time U.S. employees and certain
employees in other countries may become eligible for these benefits if they
reach retirement age while employed by Solutia. These postretirement benefits
are unfunded and are generally based on the employee's years of service
and/or compensation level. The costs of postretirement benefits are accrued
by the date the employees become eligible for the benefits.
Solutia's postretirement benefit costs in 1997 were $54 million, which
consisted of $23 million of postretirement benefit costs incurred subsequent
to the Spinoff and $31 million of cost allocations from Monsanto. Solutia's
postretirement benefit cost allocations from Monsanto were $50 million in
1996 and $54 million in 1995. Because of the significant increase in
postretirement liabilities assumed in the Spinoff, future postretirement
benefit costs are likely to increase when compared to historical amounts.
Separate calculations of the components of Solutia's total cost for
postretirement benefits and the status of the plans prior to the Spinoff are
not available. Subsequent to the Spinoff, the company's postretirement
benefit cost was $23 million, and its components were as follows:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Service costs for benefits earned $ 4
Interest cost on benefit obligation 20
Amortization of unrecognized net gain (1)
------
TOTAL $23
======
</TABLE>
As of December 31, the status of Solutia's postretirement health care and
life insurance benefit plans, and employee disability benefit plans was:
<TABLE>
<CAPTION>
1997
------
<S> <C>
ACCUMULATED BENEFIT OBLIGATION:
Retirees $762
Eligible active employees 32
Other active employees 124
------
TOTAL $918
Unrecognized benefits from prior service 27
Unrecognized subsequent net loss (32)
------
ACCRUED LIABILITY $913
======
</TABLE>
The accrued liability was included in:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Miscellaneous accruals $ 91
Postretirement liabilities 822
------
ACCRUED LIABILITY $913
======
</TABLE>
38
<PAGE> 22
SOLUTIA INC.
- ------------------------------------------------------------------------------
Postretirement benefit costs were determined using the following rate
assumptions:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Discount rate 7.25%
Initial trend rate for health care costs 5.00%
Ultimate trend rate for health care costs 5.00%
</TABLE>
A 1 percent increase in the assumed trend rate for health care costs
would have increased the accumulated benefit obligation by $38 million as of
December 31, 1997.
12. EMPLOYEE SAVINGS PLANS
For some employee savings plans, employee contributions are matched in part
by Solutia. The value of these contributions for Solutia was $10 million in
1997 and $11 million in 1996 and 1995.
In connection with the Spinoff, Monsanto common stock held by the Monsanto
Employee Stock Ownership Plan ("ESOP") and related Monsanto ESOP borrowings
were allocated between Solutia and Monsanto. As a result of this allocation,
Solutia received 2.4 million shares of Monsanto common stock and assumed $29
million of ESOP debt to third parties. Simultaneously, Solutia created its
own ESOP, established a trust to hold the Monsanto shares and issued a $29
million loan to the trust. Proceeds of the loan were used by the trust to
repay the assumed third-party debt. Subsequent to the Spinoff, the ESOP trust
was required by government regulations to divest its holdings of Monsanto
common shares and use the proceeds to acquire Solutia common shares. As of
December 31, 1997, Solutia's ESOP trust held approximately 9.9 million shares
of Solutia common stock and approximately $21 million of cash.
A portion of the ESOP shares is allocated each year to employee savings
accounts as matching contributions. In 1997, 232,674 shares were allocated to
participants' accounts under the plan, leaving 3,700,792 unallocated shares
as of December 31, 1997. Unallocated shares held by the ESOP are considered
outstanding for earnings per share calculations. Compensation expense is
equal to the cost of the shares allocated to participants, less dividends
paid on the shares held by the ESOP. Information regarding the ESOP follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Total ESOP expense $ 5 $ 3 $ 5
Interest portion of total ESOP expense 3 2 3
Cash contributions - - -
Dividends paid on ESOP shares held - - -
</TABLE>
For periods prior to the Spinoff, the total Monsanto ESOP expense and the
related interest were allocated to Solutia from Monsanto. Cash contributions
and dividends paid on ESOP shares for periods prior to the Spinoff were not
applicable to the Solutia ESOP.
13. STOCK OPTION PLANS
The Solutia Inc. 1997 Stock-Based Incentive Plan (the "1997 Plan") provides
to officers and employees of the company and its subsidiaries incentives
directly linked to the price of Solutia's stock. The 1997 Plan is the
company's current stock-based incentive plan for management.
The 1997 Plan authorizes up to 7,800,000 shares of company common stock
for grants of non-qualified and incentive stock options, stock appreciation
rights, restricted stock awards, and bonus stock awards. Shares used may be
either newly issued shares or treasury shares or both. Under the 1997 Plan,
the exercise price of a stock option must be no less than the fair market
value of the company common stock on the grant date. Additionally, the 1997
Plan provides that the term of any stock option granted under the plan may
not exceed ten years. As of December 31, 1997, approximately 3,232,275 shares
of company common stock remained available for grants under the 1997 Plan.
During 1997, non-qualified stock options granted under the 1997 Plan were
1,046,000 to all current executive officers and other senior executives as a
group and 3,519,500 shares to all other employees at an exercise price of
$19.25 per share. The options granted in September 1997 to the company's
executive officers and other senior executives are accelerated performance
options. The options granted to the other management employees are
time-based. They become exercisable in thirds, one-third on each of the first
three anniversaries of the option grant date.
Certain options granted under Monsanto's stock option plans ("Monsanto
Options") to company employees in 1997 prior to the Spinoff were converted
into Solutia options with adjustments to preserve their value. In addition,
unexercised Monsanto Options granted to Solutia and Monsanto employees prior
to 1997 were converted into two awards, one based on Monsanto common stock
and one based on Solutia common stock, with the same overall value at the
time of the Spinoff as the old award.
Effective January 1, 1996, Solutia adopted Statement of Financial
Accounting Standard ("SFAS") No.123, "Accounting for Stock-Based
Compensation." As permitted by the standard, Solutia has elected to continue
following the guidance of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," for measurement and recognition of
stock-based transactions with employees. Accordingly, no compensation cost
has been recognized for Solutia's option plans. Had the determination of
compensation cost for these plans been based on the fair value at the grant
dates for awards under these plans, consistent with the method of SFAS
39
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
No. 123, Solutia's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
NET INCOME:
As reported $ 192 $ 32 $ 147
Pro forma 159 18 144
EARNINGS PER SHARE, ASSUMING DILUTION:
As reported $1.55 $0.27 $1.27
Pro forma 1.29 0.15 1.24
</TABLE>
The resulting compensation expense may not be representative of
compensation expense to be incurred on a pro forma basis in future years.
The fair value of each option grant is estimated on the date of grant by
using the Black-Scholes option-pricing model.
The following weighted-average assumptions were used to calculate the
expense attributable to the company for Monsanto Options granted to company
employees in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0.3% 1.5% 3.0%
Expected volatility 27.0% 25.0% 20.0%
Risk-free interest rates 6.3% 6.0% 7.1%
Expected option lives (years) 4.0 4.0 4.5
</TABLE>
The following weighted-average assumptions were used for grants of
Solutia options in 1997:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Expected dividend yield 0.2%
Expected volatility 25.0%
Risk-free interest rates 5.9%
Expected option lives (years) 4.0
</TABLE>
The weighted-average fair values of options granted during 1997 and 1996
were $4.83 and $6.43, respectively.
A summary of the status of the company's stock option plans for the period
subsequent to the Spinoff through December 31, 1997 follows:
<TABLE>
<CAPTION>
Outstanding
-------------------------------------
Exercisable Weighted-Average
Shares Shares Exercise Price
------------------------------------------------------
<S> <C> <C> <C>
September 1, 1997 10,269,960 24,122,741 $13.48
------------------------------------------------------
Granted 4,565,500 19.25
Exercised (752,102) 9.29
Expired (118,411) 16.36
------------------------------------------------------
DECEMBER 31, 1997 9,517,858 27,817,728 $14.53
======================================================
</TABLE>
The following tables summarize information about stock options outstanding
as of December 31, 1997:
OPTIONS OUTSTANDING:
<TABLE>
<CAPTION>
Weighted-Average
Range of Remaining Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 3 to 7 5,627,732 3.6 years $ 5.73
8 to 11 55,479 6.9 10.07
12 to 15 1,722,939 7.5 12.63
16 to 18 15,660,834 7.9 16.47
19 to 23 4,750,744 9.0 19.30
----------------------------------------------------------
$ 3 to 23 27,817,728 7.2 $14.53
==========================================================
</TABLE>
OPTIONS EXERCISABLE:
<TABLE>
<CAPTION>
Range of Weighted-Average
Exercise Prices Shares Exercise Price
- -------------------------------------------------------------
<S> <C> <C>
$ 3 to 7 5,623,032 $5.73
8 to 11 44,729 10.18
12 to 15 1,098,815 12.16
16 to 18 2,705,082 16.82
19 to 23 46,200 19.11
----------------------------------
$ 3 to 23 9,517,858 $9.71
==================================
</TABLE>
14. EARNING PER SHARE
Effective December 31, 1997, Solutia adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under this new
standard, the presentation of primary and fully diluted earnings per share
required by current standards is replaced by basic and diluted earnings per
share. Basic earnings per share measures operating performance assuming no
dilution from securities or contracts to issue common stock. Diluted earnings
per share measures operating performance giving effect to the dilution that
would occur when securities or contracts to issue common stock are exercised
or converted.
For periods ended prior to the Spinoff, the number of weighted average
shares outstanding and common share equivalents used in the earnings per share
calculation was based upon the weighted average number of Monsanto shares
outstanding and Monsanto common share equivalents for the applicable period,
adjusted for the distribution ratio in the Spinoff of one share of the
company's common stock for every five shares of Monsanto common stock.
40
<PAGE> 24
SOLUTIA INC.
- ------------------------------------------------------------------------------
The computation of basic earnings per share is reconciled with diluted
earnings per share as follows:
<TABLE>
<CAPTION>
Per-share
1997 Income Shares Amount
- ------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $192 117.7 $1.63
========
EFFECT OF DILUTIVE SECURITIES:
Common share equivalents -
common stock issuable upon exercise
of outstanding stock options 6.0
-----------------------
DILUTED EARNINGS PER SHARE $192 123.7 $1.55
============================================
<CAPTION>
Per-share
1996 Income Shares Amount
- ------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 32 116.2 $0.28
========
EFFECT OF DILUTIVE SECURITIES:
Common share equivalents -
common stock issuable upon exercise
of outstanding stock options 3.6
-----------------------
DILUTED EARNINGS PER SHARE $ 32 119.8 $0.27
============================================
<CAPTION>
Per-share
1995 Income Shares Amount
- ------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $147 113.5 $1.30
========
EFFECT OF DILUTIVE SECURITIES:
Common share equivalents -
common stock issuable upon exercise
of outstanding stock options 2.6
-----------------------
DILUTED EARNINGS PER SHARE $147 116.1 $1.27
============================================
</TABLE>
15. CAPITAL STOCK
The company's board of directors declared a dividend of one preferred stock
purchase right on each share of the company's common stock issued in the
distribution of shares by Monsanto to its stockholders on the effective date
of the Spinoff. If a person or group acquires beneficial ownership of 20
percent or more, or announces a tender offer that would result in beneficial
ownership of 20 percent or more, of the company's outstanding common stock,
the rights become exercisable and for every right held, the owner will be
entitled to purchase one one-hundredth of a share of a series of preferred
stock for $125. If Solutia is acquired in a business combination transaction
while the rights are outstanding, for every right held, the holder will be
entitled to purchase, for $125, common shares of the acquiring company having
a market value of $250. In addition, if a person or group acquires beneficial
ownership of 20 percent or more of the company's outstanding common stock,
for every right held, the holder (other than such person or members of such
group) will be entitled to purchase, for $125, a number of shares of the
company's common stock having a market value of $250. Furthermore, at any
time after a person or group acquires beneficial ownership of 20 percent or
more (but less than 50 percent) of the company's outstanding common stock,
the board of directors may, at its option, exchange part or all of the rights
(other than rights held by the acquiring person or group) for shares of the
company's common stock on a one share-for-every-one-right basis. At any time
prior to the acquisition of such a 20 percent position, the company can
redeem each right for $0.01. The board of directors is also authorized to
reduce the aforementioned 20 percent thresholds to not less than 10 percent.
The rights expire in the year 2007.
The company has 10 million shares of preferred stock, par value $0.01 per
share, authorized. As of December 31, 1997, there were no preferred shares
issued or outstanding.
16. COMMITMENTS AND CONTINGENCIES
Commitments, principally in connection with uncompleted additions to
property, were approximately $21 million as of December 31, 1997. Solutia was
contingently liable as a guarantor for bank loans totaling approximately $12
million as of December 31, 1997. Monsanto was contingently liable as a
guarantor for bank loans and discounted customers' receivables relating to
Solutia totaling approximately $16 million as of December 31, 1996. Solutia's
future minimum payments under noncancelable operating leases and
unconditional purchase obligations are $23 million for 1998, $17 million for
1999, $12 million for 2000, $8 million for 2001, $41 million for 2002, and
$15 million thereafter.
Solutia has entered into agreements with customers to supply a guaranteed
quantity of certain products annually at prices specified in the agreements.
In return, the customers have advanced funds to Solutia to cover the costs of
expanding capacity to provide the guaranteed supply. Solutia has recorded the
advances as deferred credits and amortizes the amounts to income as the
customers purchase the products. At December 31, 1997, the unamortized
deferred credits were approximately $59 million.
The more significant concentrations in Solutia's trade receivables at
year-end were:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
U.S. chemical industry $130 $129
U.S. carpet industry 73 79
European chemical industry 41 36
</TABLE>
Management does not anticipate losses on its trade receivables in excess
of established allowances.
41
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
Solutia's Statement of Consolidated Financial Position included accrued
liabilities of $217 million and $150 million as of December 31, 1997 and
1996, respectively, for the remediation of identified waste disposal sites.
Expenditures related to remediation activities were $39 million in 1997, $59
million in 1996, and $68 million in 1995. Solutia recorded charges of
approximately $34 million ($22 million aftertax) in the fourth quarter of
1997 to increase its environmental reserves. This action was required in
order to reflect revised estimates for changed circumstances relating to the
ultimate outcome of previously known environmental matters. These revised
estimates were based upon further discussions with environmental authorities
and the availability of new information from recently completed environmental
studies. These events and activities help to define better and to quantify
the company's ultimate liability for these matters.
Effective January 1, 1997, Solutia adopted the American Institute of
Certified Public Accountants' Statement of Position ("SOP") 96-1,
"Environmental Remediation Liabilities." SOP 96-1 establishes authoritative
guidance regarding the recognition, measurement and disclosure of
environmental remediation liabilities. A charge of approximately $10 million
($6 million aftertax) was recorded in the first quarter of 1997 associated
with the adoption of SOP 96-1. The timing of this charge was predicated upon
an application of SOP 96-1 in which liabilities arising under the Resource
Conservation and Recovery Act ("RCRA") should be recorded when a RCRA
corrective measures study ("CMS") is completed. Subsequently, the company
reassessed its application of SOP 96-1 and concluded that these liabilities
would be recorded over a continuum of events leading up to and including a
CMS. As a result, the company recorded in the fourth quarter of 1997
additional charges of approximately $38 million ($24 million aftertax)
associated with these RCRA environmental liabilities.
Uncertainties related to all of the company's environmental liabilities
are evolving government regulations, the method and extent of remediation and
future changes in technology. Because of these uncertainties, the company
estimates that potential future expenses associated with these liabilities
could be an additional $20 million to $30 million. Although the ultimate
costs and results of remediation of contaminated sites cannot be predicted
with certainty, they are not expected to result in a material adverse effect
on Solutia's consolidated financial position, liquidity, or profitability in
any one year.
Monsanto is a party to a number of lawsuits and claims relating to
Solutia, for which Solutia has assumed responsibility in the Spinoff and which
Solutia intends to defend vigorously. Such matters arise out of the normal
course of business and relate to product liability, government regulation,
including environmental issues, and other issues. Certain of the lawsuits and
claims seek damages in very large amounts. Although the results of litigation
cannot be predicted with certainty, management's belief, based upon the advice
of Solutia's counsel, is that the final outcome of such litigation will not
have a material adverse effect on Solutia's consolidated financial position,
profitability or liquidity in any one year, as applicable.
17. SUPPLEMENTAL DATA
Supplemental income statement data were:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Raw material and energy costs $1,102 $1,059 $929
Employee compensation and benefits 746 715 794
Current income and other taxes 149 134 152
Rent expense 28 29 31
Technological expenses:
Research and development 60 81 77
Engineering, commercial
development and patent 27 7 18
--------------------------------------------
Total technological expenses 87 88 95
Interest expense:
Total interest cost 49 41 42
Less capitalized interest 8 5 6
--------------------------------------------
Net interest expense 41 36 36
Currency losses including equity in
affiliates' currency gains and losses 6 2 3
</TABLE>
18. SEGMENT AND GEOGRAPHIC DATA
Effective December 31, 1997, Solutia adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The required disclosures
follow. As permitted by the standard, information for years prior to 1997 was
not restated to conform to the new disclosure requirements because it was
impracticable to do so. Solutia reported one segment prior to the adoption of
SFAS No. 131.
Solutia has three reportable segments: Chemicals, Fibers, and Polymers &
Resins. The Chemicals segment produces intermediate chemicals used in other
finished products, phosphorus-based products used in food and beverages and
personal care products, and specialty fluids and lubricants. The Fibers
segment produces Acrilan(R) acrylic fibers used in apparel, cloth and brake
fibers; nylon carpet fibers for residential and contract markets; and
industrial-strength nylon fibers used in tire and other industrial
applications. The Polymers & Resins segment produces Saflex(R) plastic
interlayer used in automotive and architectural applications, specialty
resins used in paints and adhesives, polymer modifiers and plasticizers used
in flooring products, sealants, caulks, and adhesives, and Vydyne(R) for
engineering thermoplastics and nylon 6,6 polymers for fiber applications.
42
<PAGE> 26
SOLUTIA INC.
- ------------------------------------------------------------------------------
Solutia's reportable segments are groupings of the company's ten business
units, which are managed to focus on key technological strengths of polymer
chemistry, phosphorus chemistry, fiber technology, and process engineering
expertise. Business units sharing similar economic characteristics and
similarities in the areas of products, production processes, types of
customers, and methods of distribution were aggregated.
Accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 2. However, segment profit
only reflects the operating expenses that are directly attributable to the
segment. Unallocated service costs are managed centrally and primarily
include costs of technology, engineering and manufacturing services that are
provided to the segments. These amounts also include corporate administration
costs. The company accounts for intersegment sales at agreed upon transfer
prices. Intersegment sales are eliminated in consolidation. Segment assets
consist primarily of customer receivables, finished goods inventories, and
fixed assets directly associated with the production processes of the segment
("direct fixed assets"). Segment depreciation and amortization is based upon
direct fixed assets. Unallocated assets consist primarily of deferred taxes,
certain investments in equity affiliates, and indirect fixed assets.
Solutia's 1997 segment information follows:
<TABLE>
<CAPTION>
Net Intersegment Depreciation
SEGMENT: Sales Sales and Amortization
---------------------------------------------------
<S> <C> <C> <C>
Chemicals $ 965 $ 18 $ 37
Fibers 979 - 26
Polymers & Resins 1,041 5 41
---------------------------------------------------
SEGMENT TOTALS 2,985 23 104
RECONCILIATION TO CONSOLIDATED TOTALS:
Elimination of intersegment sales (23) (23)
Other revenues 7
Unallocated depreciation and amortization 38
---------------------------------------------------
CONSOLIDATED TOTALS $2,969 $ - $142
===================================================
<CAPTION>
Capital
SEGMENT: Profit Assets Expenditures
---------------------------------------------------
<S> <C> <C> <C>
Chemicals $ 231 $ 601 $ 50
Fibers 161 400 33
Polymers & Resins 272 571 55
---------------------------------------------------
SEGMENT TOTALS 664 1,572 138
RECONCILIATION TO CONSOLIDATED TOTALS:
Less unallocated service costs included in:
Cost of goods sold (148)
Marketing, administrative and technological expenses (226)
Equity earnings from affiliates 31
Interest expense (41)
Other income (expense) - net 10
---------
INCOME BEFORE INCOME TAXES $ 290
=========
Unallocated assets and capital expenditures 1,196 27
---------------------------------
CONSOLIDATED TOTALS $2,768 $165
=================================
</TABLE>
Solutia's geographic information for 1997 follows:
<TABLE>
<CAPTION>
Net Long-Lived
SEGMENT: Sales Assets
---------------------------------
<S> <C> <C>
U.S. $2,030 $803
Other countries 939 120
---------------------------------
CONSOLIDATED TOTALS $2,969 $923
=================================
</TABLE>
43
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
19. QUARTERLY DATA - UNAUDITED
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 1997 $ 719 $ 770 $ 749 $ 731 $2,969
1996 705 749 753 770 2,977
Gross Profit 1997 176 189 173 115 653
1996 160 175 200 117 652
Operating Income (Loss) 1997 95 97 88 10 290
1996 56 62 96 (181) 33
Net Income (Loss) 1997 65 62 56 9 192
1996 36 47 61 (112) 32
Earnings (Loss) per Share 1997 0.56 0.52 0.47 0.08 1.63
1996 0.31 0.41 0.52 (0.96) 0.28
Earnings (Loss) per Share, assuming dilution 1997 0.54 0.51 0.44 0.06 1.55
1996 0.30 0.39 0.51 (0.93) 0.27
</TABLE>
In the first quarter of 1997, net income included an aftertax charge of
$6 million associated with the adoption of SOP 96-1 for environmental reserves
at operating locations. Net income in the second quarter of 1997 included an
aftertax charge of $6 million for environmental-related litigation at the
Brio Superfund site and $5 million of aftertax reversals of excess
restructuring reserves from prior years. In the fourth quarter of 1997, net
income included aftertax charges totaling $46 million related to changes in
estimates for environmental remediation liabilities.
Net income for the fourth quarter of 1996 included an aftertax charge of
$164 million for restructuring and other actions.
44
<PAGE> 28
SOLUTIA INC.
- ------------------------------------------------------------------------------
FINANCIAL SUMMARY
(Dollars in millions, except per share)
<TABLE>
<CAPTION>
Unaudited Pro Forma <F1> Historical
-------------------------- -------------------------------------------
OPERATING RESULTS: 1997 1996 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES<F2> $2,960 $2,962 $2,969 $2,977 $2,964 $3,097 $3,028
GROSS PROFIT 647 649 653 652 721 729 699
As percent of net sales 22% 22% 22% 22% 24% 24% 23%
MARKETING, ADMINISTRATIVE AND
TECHNOLOGICAL EXPENSES 393 420 363 427 410 439 438
As percent of net sales 13% 14% 12% 14% 14% 14% 14%
OPERATING INCOME<F3> 254 37 290 33 258 256 300
As percent of net sales 9% 1% 10% 1% 9% 8% 10%
INCOME BEFORE INCOME TAXES 235 9 290 33 231 228 290
NET INCOME<F4> 157 17 192 32 147 149 192
As percent of net sales 5% <1% 6% 1% 5% 5% 6%
SHARE DATA:
- ----------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE<F5> $ 1.33 $ 0.15 $ 1.63 $ 0.28 $ 1.30 $ 1.30 $ 1.61
EARNINGS PER SHARE, ASSUMING DILUTION<F5> 1.27 0.14 1.55 0.27 1.27 1.27 1.59
DIVIDENDS PER SHARE 0.01
COMMON STOCK PRICE:
HIGH - - 27 3/4 - - - -
LOW - - 18 11/16 - - - -
CLOSE - - 26 11/16 - - - -
PRICE/EARNINGS RATIO ON YEAR-END STOCK PRICE - - 17 - - - -
NUMBER OF REGISTERED STOCKHOLDERS - - 57,894 - - - -
YEAR-END SHARES OUTSTANDING (IN THOUSANDS) - - 117,408 - - - -
SHARES REPURCHASED (IN THOUSANDS) - - 1,570 - - - -
AVERAGE DAILY TRADING VOLUME (IN THOUSANDS) - - 1,053 - - - -
OTHER DATA:
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE<F6> $ 60 $ 64 $ 41 $ 36 $ 36 $ 29 $ 19
INCOME TAXES 78 (8) 98 1 84 79 98
DEPRECIATION AND AMORTIZATION 142 166 142 166 162 219 224
TOTAL ASSETS - 2,660 2,768 2,483 2,462 2,435 2,491
CAPITAL EXPENDITURES - - 165 192 179 187 179
INTERCOMPANY CHARGES<F7> - - 12 85 72 69 61
LONG-TERM DEBT<F6> - - 597 0 0 0 0
EMPLOYEES (YEAR-END) - - 8,800 - - - -
<FN>
<F1> The unaudited pro forma financial information is presented for
illustrative purposes only. It may not be indicative of the results that
would have been obtained had the Spinoff and the company's 1997 debt
offering actually occurred on the dates assumed, nor is it indicative of
the future consolidated results of operations.
<F2> Net sales for the company included $140 million in 1995, $400 million in
1994 and $407 million in 1993 for its rubber chemicals business. In
May 1995, this business was contributed by Monsanto to the Flexsys L.P.
joint venture.
<F3> Operating income includes (charges) credits for restructuring and other
actions of $(84) million in 1997, $(248) million in 1996, $(46) million
in 1995, $(34) million in 1994 and $43 million in 1993. In addition,
operating income in 1993 includes $25 million for the company's rubber
chemicals business. Operating income for this business was not
significant in 1994 and 1995.
<F4> Net income includes (charges) credits for restructuring and other actions
of $(53) million, or $(0.43) per share in 1997, $(164) million, or
$(1.37) per share in 1996, $(52) million, or $(0.45) per share in 1995,
$(21) million, or $(0.18) per share in 1994, and $26 million, or $0.22 in
1993.
<F5> For periods ended prior to the Spinoff, the number of Monsanto weighted
average shares outstanding and common share equivalents were adjusted for
the distribution ratio in the Spinoff of one share of Solutia's common
stock for every five shares of Monsanto common stock.
<F6> Monsanto used a centralized approach to cash management and the financing
of its operations. As a result, cash and cash equivalents and debt were
not allocated to the company in the historical financial statements.
Interest expense was allocated to the company in the company's
consolidated financial statements to reflect the company's pro rata share
of the financing structure of Monsanto.
<F7> Prior to the Spinoff, Monsanto provided certain general and
administrative services to the company, including finance, legal,
treasury, information systems and human resources. The cost of these
services was allocated to the company based upon the percentage
relationship between the net assets utilized in the company's operations
and Monsanto's total net assets, as well as other methods which
management believes to be reasonable.
</TABLE>
45
<PAGE> 1
EXHIBIT 18
PREFERABILITY LETTER
February 25, 1998
Solutia Inc.
10300 Olive Boulevard
P.O. Box 66760
St. Louis, Missouri 63166-6760
To the Board of Directors:
We have audited the financial statements of Solutia Inc. as of December 31,
1997 and 1996, and for each of the three years in the period ended December
31, 1997, included in your Annual Report on Form 10-K to the Securities and
Exchange Commission, and have issued our report thereon dated February 25,
1998. Note 16 to such financial statements contains a description of your
modification of the application of Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities" during the year ended December 31,
1997. In our judgment, such change is to an alternative accounting principle
that is preferable under the circumstances.
Yours truly,
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
St. Louis, Missouri
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of Solutia's subsidiaries as of December 31, 1997,
except for unnamed subsidiaries which, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary.
<TABLE>
<CAPTION>
Percentage
of
Voting
Power
Owned by
Solutia
-----------
<S> <C>
Monchem International, Inc............................................ 100
Solutia Europe N.V. / S.A............................................. 100
</TABLE>
22
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Solutia's Registration
Statements on Form S-8 (Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689) of our opinions dated February 25, 1998
(which includes an explanatory paragraph as to a change in method of
accounting), appearing in and incorporated by reference in this annual report on
Form 10-K of Solutia Inc. for the year ended December 31, 1997.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Saint Louis, Missouri
March 13, 1998
--------------------------
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF COMPANY COUNSEL
I hereby consent to the reference to Solutia Counsel in the "Commitments
and Contingencies" note to the financial statements in the Company's 1997
Annual Report to stockholders and incorporated in the Company's Registration
Statements on Form S-8 (Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689). In giving this consent I do not thereby
admit that I am within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
/S/ KARL R. BARNICKOL
KARL R. BARNICKOL
General Counsel
Solutia Inc.
Saint Louis, Missouri
March 13, 1998
23
<PAGE> 1
EXHIBIT 24(a)
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Robert T. Blakely, of Greenwich, State of Connecticut, Director
of Solutia Inc. (the "Company"), a Delaware corporation with its general
offices in the County of St. Louis, Missouri, do by these presents make,
constitute and appoint KARL R. BARNICKOL and KAREN L. KNOPF, both of St.
Louis County, Missouri, or either of them acting alone, to be my true and
lawful attorneys for me and in my name, place and stead, to execute and sign:
(i) the Annual Report on Form 10-K and any Amendments thereto to be filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8
and any Amendments thereto to be filed with the Commission under the
Securities Act of 1933, as amended (the "Act"), covering the registration of
additional securities of the Company to be issued under the Solutia Inc.
ERISA Parity Savings and Investment Plan; (iii) any Amendments to
Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been
filed with the Commission under the Act, covering the registration of
securities of the Company, or any new Registration Statements on Form S-8
covering the registration of additional shares of Common Stock of the Company
to be issued under the benefit and incentive plans registered on these
aforementioned Registration Statements which have been previously filed with
the Commission; and (iv) any Registration Statements on Form S-8 and any
amendments thereto to be filed with the Commission under the Act, covering
the registration of the Company's securities to be issued under new deferral
plans; giving and granting unto said attorneys full power and authority to do
and perform such actions as fully as I might have done or could do if
personally present and executing any of said documents.
Witness my hand this 16th day of January, 1998.
/s/ Robert T. Blakely
-----------------------------------
Robert T. Blakely
STATE OF CONNECTICUT )
) SS
COUNTY OF FAIRFIELD )
On this 16th day of January, 1998, before me personally appeared Robert
T. Blakely, to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Patricia A. Olin
-----------------------------------
Notary Public
My Commission Expires: Patricia A. Olin
Notary Public, State of Connecticut
No. 115196
Commission Expires April 30, 2002
<PAGE> 2
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Joan T. Bok, of Boston, Commonwealth of Massachusetts, Director
of Solutia Inc. (the "Company"), a Delaware corporation with its general
offices in the County of St. Louis, Missouri, do by these presents make,
constitute and appoint KARL R. BARNICKOL and KAREN L. KNOPF, both of St.
Louis County, Missouri, or either of them acting alone, to be my true and
lawful attorneys for me and in my name, place and stead, to execute and sign:
(i) the Annual Report on Form 10-K and any Amendments thereto to be filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8
and any Amendments thereto to be filed with the Commission under the
Securities Act of 1933, as amended (the "Act"), covering the registration of
additional securities of the Company to be issued under the Solutia Inc.
ERISA Parity Savings and Investment Plan; (iii) any Amendments to
Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been
filed with the Commission under the Act, covering the registration of
securities of the Company, or any new Registration Statements on Form S-8
covering the registration of additional shares of Common Stock of the Company
to be issued under the benefit and incentive plans registered on these
aforementioned Registration Statements which have been previously filed with
the Commission; and (iv) any Registration Statements on Form S-8 and any
amendments thereto to be filed with the Commission under the Act, covering
the registration of the Company's securities to be issued under new deferral
plans; giving and granting unto said attorneys full power and authority to do
and perform such actions as fully as I might have done or could do if
personally present and executing any of said documents.
Witness my hand this 8th day of January, 1998.
/s/ Joan T. Bok
-----------------------------------
Joan T. Bok
COMMONWEALTH OF MASSACHUSETTS )
) SS
COUNTY OF SUFFOLK )
On this 8th day of January, 1998, before me personally appeared Joan T.
Bok, to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that she executed the same as her free act and
deed.
/s/ Michelle McGee Curran
-----------------------------------
Notary Public
My Commission Expires: February 27, 1998
<PAGE> 3
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Paul H. Hatfield of St. Louis County, State of Missouri,
Director of Solutia Inc. (the "Company"), a Delaware corporation with its
general offices in the County of St. Louis, Missouri, do by these presents
make, constitute and appoint KARL R. BARNICKOL and KAREN L. KNOPF, both of
St. Louis County, Missouri, or either of them acting alone, to be my true and
lawful attorneys for me and in my name, place and stead, to execute and sign:
(i) the Annual Report on Form 10-K and any Amendments thereto to be filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8
and any Amendments thereto to be filed with the Commission under the
Securities Act of 1933, as amended (the "Act"), covering the registration of
additional securities of the Company to be issued under the Solutia Inc.
ERISA Parity Savings and Investment Plan; (iii) any Amendments to
Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been
filed with the Commission under the Act, covering the registration of
securities of the Company, or any new Registration Statements on Form S-8
covering the registration of additional shares of Common Stock of the Company
to be issued under the benefit and incentive plans registered on these
aforementioned Registration Statements which have been previously filed with
the Commission; and (iv) any Registration Statements on Form S-8 and any
amendments thereto to be filed with the Commission under the Act, covering
the registration of the Company's securities to be issued under new deferral
plans; giving and granting unto said attorneys full power and authority to do
and perform such actions as fully as I might have done or could do if
personally present and executing any of said documents.
Witness my hand this 7th day of January, 1998.
/s/ Paul H. Hatfield
-----------------------------------
Paul H. Hatfield
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 7th day of January, 1998, before me personally appeared Paul H.
Hatfield, to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Lisa K. Crawford
-----------------------------------
Notary Public
My Commission Expires: Lisa K. Crawford
Notary Public -- State of Missouri
Jefferson County
My Commission Expires May 21, 1999
<PAGE> 4
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, John C. Hunter III of St. Louis County, State of Missouri,
President, Chief Operating Officer and Director of Solutia Inc. (the
"Company"), a Delaware corporation with its general offices in the County of
St. Louis, Missouri, do by these presents make, constitute and appoint KARL R
BARNICKOL and KAREN L KNOPF, both of St. Louis County, Missouri, or either of
them acting alone, to be my true and lawful attorneys for me and in my name,
place and stead, to execute and sign: (i) the Annual Report on Form 10-K and
any Amendments thereto to be filed with the Securities and Exchange
Commission (the "Commission") under the Securities Exchange Act of 1934; (ii)
the Registration Statement on Form S-8 and any Amendments thereto to be filed
with the Commission under the Securities Act of 1933, as amended (the
"Act"), covering the registration of additional securities of the Company to
be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan;
(iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587,
333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8,
which have previously been filed with the Commission under the Act, covering
the registration of securities of the Company, or any new Registration
Statements on Form S-8 covering the registration of additional shares of
Common Stock of the Company to be issued under the benefit and incentive
plans registered on these aforementioned Registration Statements which have
been previously filed with the Commission; and (iv) any Registration
Statements on Form S-8 and any amendments thereto to be filed with the
Commission under the Act, covering the registration of the Company's
securities to be issued under new deferral plans; giving and granting unto
said attorneys full power and authority to do and perform such actions as
fully as I might have done or could do if personally present and executing
any of said documents.
Witness my hand this 14th day of January, 1998.
/s/ John C. Hunter
-----------------------------------
John C. Hunter III
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 14th day of January, 1998, before me personally appeared John
C. Hunter III, to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Mary K. McBride
-----------------------------------
Notary Public
My Commission Expires: February 12, 1998
Mary K. McBride
Notary Public, State of Missouri
My Commission Expires Feb. 12, 1998
St. Louis County
<PAGE> 5
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Robert H. Jenkins of Rockford, State of Illinois, Director of
Solutia Inc. (the "Company"), a Delaware corporation with its general offices
in the County of St. Louis, Missouri, do by these presents make, constitute
and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County,
Missouri, or either of them acting alone, to be my true and lawful attorneys
for me and in my name, place and stead, to execute and sign: (i) the Annual
Report on Form 10-K and any Amendments thereto to be filed with the
Securities and Exchange Commission (the "Commission") under the Securities
Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any
Amendments thereto to be filed with the Commission under the Securities Act
of 1933, as amended (the "Act"), covering the registration of additional
securities of the Company to be issued under the Solutia Inc. ERISA Parity
Savings and Investment Plan; (iii) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and
333-35689, all on Form S-8, which have previously been filed with the
Commission under the Act, covering the registration of securities of the
Company, or any new Registration Statements on Form S-8 covering the
registration of additional shares of Common Stock of the Company to be issued
under the benefit and incentive plans registered on these aforementioned
Registration Statements which have been previously filed with the Commission;
and (iv) any Registration Statements on Form S-8 and any amendments thereto
to be filed with the Commission under the Act, covering the registration of
the Company's securities to be issued under new deferral plans; giving and
granting unto said attorneys full power and authority to do and perform such
actions as fully as I might have done or could do if personally present and
executing any of said documents.
Witness my hand this 7th day of January, 1998.
/s/ Robert H. Jenkins
-----------------------------------
Robert H. Jenkins
STATE OF ILLINOIS )
) SS
COUNTY OF WINNEBAGO )
On this 7th day of January, 1998, before me personally appeared Robert
H. Jenkins, to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Carolyn J. Thomas
-----------------------------------
Notary Public
My Commission Expires: Jan. 18, 1999
"Official Seal"
Carolyn J. Thomas
Notary Public, State of Illinois
My commission Expires 1/18/99
<PAGE> 6
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Howard M. Love of Pittsburgh, Commonwealth of Pennsylvania,
Director of Solutia Inc. (the "Company"), a Delaware corporation with its
general offices in the County of St. Louis, Missouri, do by these presents
make, constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St.
Louis County, Missouri, or either of them acting alone, to be my true and
lawful attorneys for me and in my name, place and stead, to execute and sign:
(i) the Annual Report on Form 10-K and any Amendments thereto to be filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8
and any Amendments thereto to be filed with the Commission under the
Securities Act of 1933, as amended (the "Act"), covering the registration of
additional securities of the Company to be issued under the Solutia Inc.
ERISA Parity Savings and Investment Plan; (iii) any Amendments to
Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been
filed with the Commission under the Act, covering the registration of
securities of the Company, or any new Registration Statements on Form S-8
covering the registration of additional shares of Common Stock of the Company
to be issued under the benefit and incentive plans registered on these
aforementioned Registration Statements which have been previously filed with
the Commission; and (iv) any Registration Statements on Form S-8 and any
amendments thereto to be filed with the Commission under the Act, covering
the registration of the Company's securities to be issued under new deferral
plans; giving and granting unto said attorneys full power and authority to do
and perform such actions as fully as I might have done or could do if
personally present and executing any of said documents.
Witness my hand this 13th day of January, 1998.
/s/ H. M. Love
-----------------------------------
Howard M. Love
COMMONWEALTH OF PENNSYLVANIA )
) SS
COUNTY OF ALLEGHENY )
On this 13th day of January, 1998, before me personally appeared Howard
M. Love, to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Joan M. Zakor
-----------------------------------
Notary Public
My Commission Expires: Notarial Seal
Joan M. Zakor, Notary Public
City of Pittsburgh, Allegeny Co.
My Commission Expires April 14, 1999
<PAGE> 7
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Frank A. Metz, Jr. of Sloatsburg, State of New York, Director
of Solutia Inc. (the "Company"), a Delaware corporation with its general
offices in the County of St. Louis, Missouri, do by these presents make,
constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis
County, Missouri, or either of them acting alone, to be my true and lawful
attorneys for me and in my name, place and stead, to execute and sign: (i)
the Annual Report on Form 10-K and any Amendments thereto to be filed with
the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8
and any Amendments thereto to be filed with the Commission under the
Securities Act of 1933, as amended (the "Act"), covering the registration of
additional securities of the Company to be issued under the Solutia Inc.
ERISA Parity Savings and Investment Plan; (iii) any Amendments to
Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been
filed with the Commission under the Act, covering the registration of
securities of the Company, or any new Registration Statements on Form S-8
covering the registration of additional shares of Common Stock of the Company
to be issued under the benefit and incentive plans registered on these
aforementioned Registration Statements which have been previously filed with
the Commission; and (iv) any Registration Statements on Form S-8 and any
amendments thereto to be filed with the Commission under the Act, covering
the registration of the Company's securities to be issued under new deferral
plans; giving and granting unto said attorneys full power and authority to do
and perform such actions as fully as I might have done or could do if
personally present and executing any of said documents.
Witness my hand this 28th day of January, 1998.
/s/ Frank A. Metz, Jr.
-----------------------------------
Frank A. Metz, Jr.
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 28th day of January, 1998, before me personally appeared Frank
A. Metz, Jr., to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Helen Joanne Bonney
-----------------------------------
Notary Public
My Commission Expires: Helen Joanne Bonney
Notary Public State of Missouri
St. Louis County
My Commission Exp. July 1, 2001
<PAGE> 8
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Robert G. Potter of St. Louis County, State of Missouri,
Chairman and Chief Executive Officer ("Principal Executive Officer") and
Director of Solutia Inc. (the "Company"), a Delaware corporation with its
general offices in the County of St. Louis, Missouri, do by these presents
make, constitute and appoint KARL R. BARNICKOL and KAREN L. KNOPF, both of
St. Louis County, Missouri, or either of them acting alone, to be my true and
lawful attorneys for me and in my name, place and stead, to execute and sign:
(i) the Annual Report on Form 10-K and any Amendments thereto to be filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8
and any Amendments thereto to be filed with the Commission under the
Securities Act of 1933, as amended (the "Act"), covering the registration of
additional securities of the Company to be issued under the Solutia Inc.
ERISA Parity Savings and Investment Plan; (iii) any Amendments to
Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been
filed with the Commission under the Act, covering the registration of
securities of the Company, or any new Registration Statements on Form S-8
covering the registration of additional shares of Common Stock of the Company
to be issued under the benefit and incentive plans registered on these
aforementioned Registration Statements which have been previously filed with
the Commission; and (iv) any Registration Statements on Form S-8 and any
amendments thereto to be filed with the Commission under the Act, covering
the registration of the Company's securities to be issued under new deferral
plans; giving and granting unto said attorneys full power and authority to do
and perform such actions as fully as I might have done or could do if
personally present and executing any of said documents.
Witness my hand this 14th day of January, 1998.
/s/ Robert G. Potter
-----------------------------------
Robert G. Potter
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 14th day of January, 1998, before me personally appeared Robert
G. Potter, to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Mary K. McBride
-----------------------------------
Notary Public
My Commission Expires: Feb. 12, 1998
Mary K. McBride
Notary Public, State of Missouri
My Commission Expires Feb. 12, 1998
St. Louis County
<PAGE> 9
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, William D. Ruckelshaus of Medina, State of Washington, Director
of Solutia Inc. (the "Company"), a Delaware corporation with its general
offices in the County of St. Louis, Missouri, do by these presents make,
constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis
County, Missouri, or either of them acting alone, to be my true and lawful
attorneys for me and in my name, place and stead, to execute and sign: (i)
the Annual Report on Form 10-K and any Amendments thereto to be filed with
the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8
and any Amendments thereto to be filed with the Commission under the
Securities Act of 1933, as amended (the "Act"), covering the registration of
additional securities of the Company to be issued under the Solutia Inc.
ERISA Parity Savings and Investment Plan; (iii) any Amendments to
Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been
filed with the Commission under the Act, covering the registration of
securities of the Company, or any new Registration Statements on Form S-8
covering the registration of additional shares of Common Stock of the Company
to be issued under the benefit and incentive plans registered on these
aforementioned Registration Statements which have been previously filed with
the Commission; and (iv) any Registration Statements on Form S-8 and any
amendments thereto to be filed with the Commission under the Act, covering
the registration of the Company's securities to be issued under new deferral
plans; giving and granting unto said attorneys full power and authority to do
and perform such actions as fully as I might have done or could do if
personally present and executing any of said documents.
Witness my hand this 8th day of January, 1998.
/s/ William Ruckelshaus
-----------------------------------
William D. Ruckelshaus
STATE OF WASHINGTON )
) SS
COUNTY OF KING )
On this 8th day of January, 1998, before me personally appeared William
D. Ruckelshaus, to me known to be the person described in and who executed
the foregoing instrument, and acknowledged that he executed the same as his
free act and deed.
/s/ Diane L. Hodgson
-----------------------------------
Notary Public
My Commission Expires: 11/12/2001
<PAGE> 10
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, John B. Slaughter of Pasadena, State of California, Director of
Solutia Inc. (the "Company"), a Delaware corporation with its general offices
in the County of St. Louis, Missouri, do by these presents make, constitute
and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County,
Missouri, or either of them acting alone, to be my true and lawful attorneys
for me and in my name, place and stead, to execute and sign: (i) the Annual
Report on Form 10-K and any Amendments thereto to be filed with the
Securities and Exchange Commission (the "Commission") under the Securities
Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any
Amendments thereto to be filed with the Commission under the Securities Act
of 1933, as amended (the "Act"), covering the registration of additional
securities of the Company to be issued under the Solutia Inc. ERISA Parity
Savings and Investment Plan; (iii) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and
333-35689, all on Form S-8, which have previously been filed with the
Commission under the Act, covering the registration of securities of the
Company, or any new Registration Statements on Form S-8 covering the
registration of additional shares of Common Stock of the Company to be issued
under the benefit and incentive plans registered on these aforementioned
Registration Statements which have been previously filed with the Commission;
and (iv) any Registration Statements on Form S-8 and any amendments thereto
to be filed with the Commission under the Act, covering the registration of
the Company's securities to be issued under new deferral plans; giving and
granting unto said attorneys full power and authority to do and perform such
actions as fully as I might have done or could do if personally present and
executing any of said documents.
Witness my hand this 12th day of January, 1998.
/s/ John B. Slaughter
-----------------------------------
John B. Slaughter
STATE OF CALIFORNIA )
) SS
COUNTY OF LOS ANGELES )
On this 12th day of January, 1998, before me personally appeared John
B. Slaughter, to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Kay Lynn Fujiwara
-----------------------------------
Notary Public
My Commission Expires: Kay Lynn Fujiwara
Commission #1149223
Notary Public -- California
Los Angeles County
My Comm. Expires Jul 31, 2001
<PAGE> 11
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Robert A. Clausen of St. Louis County, State of Missouri,
Senior Vice President and Chief Financial Officer ("Principal Financial
Officer") of Solutia Inc. (the "Company"), a Delaware corporation with its
general offices in the County of St. Louis, Missouri, do by these presents
make, constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St.
Louis County, Missouri, or either of them acting alone, to be my true and
lawful attorneys for me and in my name, place and stead, to execute and sign:
(i) the Annual Report on Form 10-K and any Amendments thereto to be filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8
and any Amendments thereto to be filed with the Commission under the
Securities Act of 1933, as amended (the "Act"), covering the registration of
additional securities of the Company to be issued under the Solutia Inc.
ERISA Parity Savings and Investment Plan; (iii) any Amendments to
Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been
filed with the Commission under the Act, covering the registration of
securities of the Company, or any new Registration Statements on Form S-8
covering the registration of additional shares of Common Stock of the Company
to be issued under the benefit and incentive plans registered on these
aforementioned Registration Statements which have been previously filed with
the Commission; and (iv) any Registration Statements on Form S-8 and any
amendments thereto to be filed with the Commission under the Act, covering
the registration of the Company's securities to be issued under new deferral
plans; giving and granting unto said attorneys full power and authority to do
and perform such actions as fully as I might have done or could do if
personally present and executing any of said documents.
Witness my hand this 12th day of January, 1998.
/s/ Robert A. Clausen
-----------------------------------
Robert A. Clausen
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 12th day of January, 1998, before me personally appeared Robert A.
Clausen, to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Helen Joanne Bonney
-----------------------------------
Notary Public
My Commission Expires: Helen Joanne Bonney
Notary Public State of Missouri
St. Louis County
My Commission Exp. July 1, 2001
<PAGE> 12
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Roger S. Hoard of St. Louis County, State of Missouri, Vice
President and Controller ("Principal Accounting Officer") of Solutia Inc.
(the "Company"), a Delaware corporation with its general offices in the
County of St. Louis, Missouri, do by these presents make, constitute and
appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County,
Missouri, or either of them acting alone, to be my true and lawful attorneys
for me and in my name, place and stead, to execute and sign: (i) the Annual
Report on Form 10-K and any Amendments thereto to be filed with the
Securities and Exchange Commission (the "Commission") under the Securities
Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any
Amendments thereto to be filed with the Commission under the Securities Act
of 1933, as amended (the "Act"), covering the registration of additional
securities of the Company to be issued under the Solutia Inc. ERISA Parity
Savings and Investment Plan; (iii) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and
333-35689, all on Form S-8, which have previously been filed with the
Commission under the Act, covering the registration of securities of the
Company, or any new Registration Statements on Form S-8 covering the
registration of additional shares of Common Stock of the Company to be issued
under the benefit and incentive plans registered on these aforementioned
Registration Statements which have been previously filed with the Commission;
and (iv) any Registration Statements on Form S-8 and any amendments thereto
to be filed with the Commission under the Act, covering the registration of
the Company's securities to be issued under new deferral plans; giving and
granting unto said attorneys full power and authority to do and perform such
actions as fully as I might have done or could do if personally present and
executing any of said documents.
Witness my hand this 7th day of January, 1998.
/s/ Roger S. Hoard
-----------------------------------
Roger S. Hoard
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 7th day of January, 1998, before me personally appeared Roger
S. Hoard, to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed the same as his free
act and deed.
/s/ Helen Joanne Bonney
-----------------------------------
Notary Public
My Commission Expires: Helen Joanne Bonney
Notary Public State of Missouri
St. Louis County
My Commission Exp. July 1, 2001
<PAGE> 1
EXHIBIT 24(b)
SOLUTIA INC.
CERTIFICATE
I, Karen L. Knopf, Assistant Secretary of Solutia Inc. (the "Company"),
hereby certify that the following is a full, true and correct copy of a
resolution adopted by the Board of Directors of the Company on February 25,
1998, at which meeting a quorum was present and acting throughout:
RESOLVED, that each officer and director who may be required to sign
and execute the 10-K or any document in connection therewith (whether
for and on behalf of the Company, or as an officer or director of the
Company, or otherwise), be and hereby is authorized to execute a power
of attorney appointing Karl R. Barnickol and Karen L. Knopf, or either
of them acting alone, his or her true and lawful attorney or attorneys
to sign in his or her name, place and stead in any such capacity such
Form 10-K and any and all amendments thereto and documents in
connection therewith, and to file the same with the Commission or any
other governmental body, each of said attorneys to have power to act
with or without the others, and to have full power and authority to do
and perform, in the name and on behalf of each of said officers and
directors, every act whatsoever which such attorneys, or any one of
them, may deem necessary, appropriate or desirable to be done in
connection therewith as fully and to all intents and purposes as such
officers or directors might or could do in person.
IN WITNESS WHEREOF, I have hereunto set my hand in my official capacity
and affixed the corporate seal of the Company this 2nd day of March, 1998.
/s/Karen L. Knopf
-------------------------------
Karen L. Knopf
Assistant Secretary
SEAL
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Consolidated Income of Solutia Inc. for the year ended
December 31, 1997, and the Statement of Consolidated Financial Position
as of December 31, 1997. Such information is qualified in its entirety
by reference to such consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 24
<SECURITIES> 0
<RECEIVABLES> 431
<ALLOWANCES> 6
<INVENTORY> 325
<CURRENT-ASSETS> 1,001
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0
0
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</TABLE>
