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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, 1998
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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
- ---------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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$.01 PAR VALUE COMMON STOCK NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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(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 AND NON-VOTING
COMMON EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT:
APPROXIMATELY $2.1 BILLION AS OF THE CLOSE OF BUSINESS ON MARCH 1,
1999.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE
REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE
DATE: 111,664,547 SHARES OF COMMON STOCK, $.01 PAR VALUE,
OUTSTANDING AS OF THE CLOSE OF BUSINESS ON MARCH 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
(1) PORTIONS OF SOLUTIA INC.'S ANNUAL REPORT TO SECURITY HOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1998 (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 15, 1999 (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, effect of changes in accounting due to
recently issued accounting standards, benefits from new technology,
the cost of remediating the Year 2000 issue and the effect of any
unremediated or undiscovered Year 2000 issues on the operations,
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, 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, shortages of raw materials and energy 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.
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 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 (collectively, the "Distribution Agreement") with respect
to the separation of the companies and to provide mechanisms for an
orderly transition following the Spinoff. Solutia has completed the
transition to services independent of Monsanto for many of these
contracts and anticipates that the remaining transitions will be
completed in accordance with the transition timeline.
Solutia's strategic focus is built on key strengths, including
polymer chemistry, fiber technology, process engineering expertise,
technical service and customer problem solving. These strengths 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.
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To compete effectively in its markets, Solutia has implemented a
strategy that 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: Solutia believes that further expense
reductions can be achieved in manufacturing through capital
investment for more cost-effective production facilities and in
administrative functions through redesign and reengineering of
selected business processes.
SELECTED GROWTH INITIATIVES AND FOCUS ON PROFITABILITY: 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. Solutia is also working to divest certain
businesses and acquire other businesses to upgrade the profitability
of its product portfolio. During 1998, the Company announced that it
was reviewing options for its Phosphorus Derivatives business unit
that included sale, alliance or joint venture. The Company is
primarily pursuing a sale of the business but is still considering
all alternatives. The business has annual sales of approximately
$300 million. The Company also announced that it is evaluating the
SCRIPSET(R) business of its Resins business unit for possible sale,
joint venture or other alliance.
PERFORMANCE INCENTIVES: Solutia is providing incentives for
employees to increase cash flow, earnings per share and stockholder
value.
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 1998 Annual Report is incorporated herein by
reference.
CHEMICALS SEGMENT
INDUSTRIAL PRODUCTS
Solutia is a leading manufacturer of specialty industrial
fluids. 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. They 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. SKYDROL(R) 5, which was introduced in 1996, 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 ("Dow") 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.
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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 AG ("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.
The Industrial Products business unit 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.
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
The Intermediates business unit 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, used internally and
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 reduce the costs of sourcing acrylonitrile and address
external sales opportunities, Intermediates has undertaken a
significant expansion of its acrylonitrile manufacturing capacity.
Three customers have provided advance payments in return for
long-term supply contracts of acrylonitrile or a byproduct. Also,
Intermediates plans two projects at Solutia's Pensacola, Florida
plant, one-step-phenol and phenol-to-ketone alcohol. These projects
are phased to supply new low-cost ketone alcohol for the Company's
nylon-based businesses in 2000. 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. ("Asahi"), E.I. du Pont de Nemours
and Company ("DuPont"), BASF AG ("BASF") and Rhodia, the chemicals
subsidiary of Rhone-Poulenc S.A. ("Rhodia").
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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. Although the Phosphorus Derivatives business unit has been
profitable, the Company is pursuing its sale, or alternatively, an
alliance or joint venture, in light of the global consolidation
anticipated for this industry.
The Phosphorus Derivatives business unit manufactures products
for a wide range of industries:
FOOD AND BEVERAGE. Solutia's 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 that 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.
The primary competitors for the Phosphorus Derivatives business
unit 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 BOUNCE-BACK(R) fibers (for craft yarn).
Solutia's 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),
Courtaulds plc (United Kingdom) (recently acquired by Akzo Nobel
N.V. ("Akzo Nobel")) 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.
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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 Acrylic Fibers business unit's best
opportunities for growth.
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 VIP(TM) 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 VIP(TM)
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. The Carpet Fibers
business unit 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.
In 1998, Solutia launched WEAR-DATED(R) PET-AGREE(TM) carpet,
which has a special backing that prevents spills or pet accidents
from penetrating the padding and damaging the subflooring.
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.
Because of recent consolidation in the carpet mill industry, two
customers generate approximately 70% of Carpet Fibers' sales.
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. The Nylon
Industrial Fibers business unit's product line features continuous
filament nylon 6,6 yarns in thickness ranging from 60 to 2000 deniers.
Heavier yarns are used for tire cord for heavy duty applications such
as bias tires for 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 approximately 35% of total Nylon Industrial Fibers sales.
In 1997, Solutia increased spinning capacity with enhanced
spinning technology at its Greenwood, South Carolina plant. This
project used proprietary technology (licensed from Toray Industries
Inc.
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("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 nylon 6,6 extrusion
polymers and nylon 6,6 polymers for fiber applications. In 1998,
Solutia formed a global alliance with Dow Plastics, a business unit
of Dow, to increase the applications, development and sales of
VYDYNE(R) nylon 6,6 molding resins in key plastics markets.
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. The Nylon Plastics & Polymers business unit relies on nylon
6,6 salt as its primary raw material. This material is produced
internally by Intermediates. The business unit's primary competitor
is DuPont. Other competitors include Rhodia and the Hoechst Group.
POLYMER MODIFIERS
Solutia manufactures and markets a line of polymer modifiers and
specialty plasticizers that 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.
The Polymer Modifiers business unit 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.
Polymer Modifiers obtains its key raw materials from the U.S.
and Europe. Continued growth of SANTOTAC MRS(R) additives and
SANTICIZER(R) phosphate esters as well as geographic expansion
(particularly into central Europe and Asia) are expected to be the
primary drivers of growth.
RESINS
The Resins 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 & 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
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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. This business
unit's products are marketed under the SAFLEX(R) (for automotive and
architectural applications), KEEPSAFE(R) and SAFLEX INSIDE(TM) (for
residential security windows) and KEEPSAFE MAXIMUM(TM) (for
hurricane protection) trademarks. In 1998, SAFLEX(R) Plastic
Interlayer completed commercializing SAFLEX IIIG(TM), 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 for residential home security,
hurricane resistance and side and rear laminates in automobiles. A
SAFLEX(R) interlayer finishing plant began operation in Singapore in
early 1998.
Five customers account for approximately 75% 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 $25 million, $31 million and $21
million in 1998, 1997 and 1996, 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, principally located at Soda Springs,
Idaho, mines phosphate rock and produces elemental phosphorous. This
joint venture was formed during the Spinoff, with Solutia obtaining
a 40% interest and Monsanto retaining the remaining 60%. Solutia
operates the joint venture under an operating agreement. 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 herbicide). 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 for this
option.
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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 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 energy 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 energy 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 energy 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.
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 its
Chemicals, Fibers and Polymers & Resins operating 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 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 2.3% of sales on
average, or $60 million, $60 million and $81 million in 1998, 1997
and 1996, respectively. Solutia focuses its research and development
expenditures on process improvements and select product development.
8
<PAGE>
<PAGE>
Products launched recently as a result of internal development
include a new low-temperature cure crosslinker for paints
(RESIMENE(R) CE-7103), a new adhesive used in self-adhesive postage
stamps (GME 3026), a new nylon staple product for loop carpets, a
new carpet product for pet owners (WEAR-DATED(R) PET-AGREE(TM)) and
a plastic interlayer reformulated for improved edge stability and
moisture sensitivity (SAFLEX IIIG(TM)).
Solutia also actively pursues technologies from around the world
that are expected to bring value to its business. Recent examples
include technology for one-step phenol production, 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 and 24 of the 1998
Annual Report is incorporated herein by reference.
EMPLOYEE RELATIONS
As of December 31, 1998, Solutia had approximately 8,700
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. The vast majority 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 its 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 30%
of Solutia's overall 1998 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 1998 sales, respectively, were made into markets outside the
United States.
9
<PAGE>
<PAGE>
ITEM 2. PROPERTIES.
The general offices of the Company are located in St. Louis
County, Missouri in premises leased from Monsanto. The Company is
scheduled to move into a new leased facility in St. Louis County in
the third quarter of 1999. Solutia's European headquarters are
located in Louvain La Neuve, Belgium, in premises leased from the
University of Louvain. 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
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
Singapore.............................. SAFLEX(R) Plastic Interlayer
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>
10
<PAGE>
<PAGE>
Monsanto and Solutia have entered into certain 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.
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.
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 has commenced construction of 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 Asahi. In addition,
Solutia plans to undertake three other construction projects during
1999 and 2000. These 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 expansion of the 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, 11 Company sites in the U.S. qualify for the OSHA VPP
"Star" designation, a rating designating full compliance, and one
site for the OSHA VPP "Merit" status. Three other Solutia sites, two
in Europe and one in Canada, have achieved the Solutia "Star"
designation, which is an internal equivalent to the OSHA
designation.
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
11
<PAGE>
<PAGE>
adverse effect on Solutia's consolidated financial position,
profitability or liquidity in any one year, as applicable. The
following describes certain proceedings to which the Company is a
party or 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 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 120 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. (2) Monsanto is one of a number of
defendants in two actions brought in Harris County District Court on
behalf of 396 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 or Solutia, 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 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 two cases pending in Circuit
Court in St. Clair County, Alabama which have been consolidated and
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 4,575 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.
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 plaintiff. (3) The Company received
a letter dated March 12, 1998, giving notice of intention to file a
Citizens' Suit pursuant to the Resource Conservation and Recovery
Act, 42 U.S.C. Sections 6972(a)(1)(B) and (b)(2)(A) and the Toxic
Substances Control Act, 15 U.S.C. Sections 2619(a)(1) and (b)(1)(A)
on behalf of four named individuals who are also plaintiffs in other
pending litigation relating to the Anniston plant. The notice claims
that solid or hazardous wastes have been released from the Anniston
plant and pose an imminent and substantial threat to health or the
environment. Plaintiffs seek statutory penalties of $25,000 per day
for a period of more than 5 years, for a total of $46 million, plus
attorneys' fees and expenses. 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
12
<PAGE>
<PAGE>
any imminent or substantial endangerment to health or the
environment and lack of negligence or improper conduct on the part
of the Company or Monsanto. These actions are being vigorously
defended.
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 consolidated 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 1998.
13
<PAGE>
<PAGE>
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 44 of the 1998 Annual
Report is incorporated herein by reference.
The declaration and payment of dividends is made at the
discretion of the Company's Board of Directors. In October 1998, the
Board approved a change in dividend policy. Beginning in 1999, in
accordance with this policy, cash dividends will be paid on an
annual basis in December, rather than quarterly. The Board
anticipates that the current 4 cent annual dividend will remain
unchanged for the foreseeable future.
The Company's stock is traded principally on the New York Stock
Exchange under the symbol "SOI."
ITEM 6. SELECTED FINANCIAL DATA.
The tabular information under "Financial Summary" appearing on
page 44 of the 1998 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 27 of the 1998 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 pages 26 and 27 of the 1998 Annual Report
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Solutia appearing on
pages 28 through 43; the Report of Independent Auditors' Opinion
appearing on page 19; and the tabular and narrative information
appearing under "Quarterly Data" on page 43 of the 1998 Annual
Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
14
<PAGE>
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors and executive officers appearing
under "Election of Directors" on pages 4 through 6 of the Solutia
Inc. Notice of Annual Meeting and Proxy Statement (the "1999 Proxy
Statement") dated March 15, 1999, is incorporated herein by
reference. The following information regarding Executive Officers of
the Company on March 1, 1999, is included pursuant to Instruction 3
of Item 401(b) of Regulation S-K:
<TABLE>
<CAPTION>
Year
First
Became
an
Executive
Name-Age Present Position with Registrant Officer Other Business Experience since January 1, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert G. Potter, 59 Chairman, Chief Executive 1997 Chief executive of chemical businesses of
Officer and Director Monsanto Company, 1986-1997. Executive Vice
President of Monsanto, 1990-1997. Advisory
Director of Monsanto, 1986-1997.
Karl R. Barnickol, 57 Senior Vice President, General 1997 Associate General Counsel and Assistant
Counsel and Secretary Secretary of Monsanto, 1985-1997.
Rodney L. Bishop, 58 Vice President and Treasurer 1997 General Auditor of Monsanto, 1993-1997.
A. Hameed Bhombal, 53 Vice President-Technology and 1999 Vice President and General Manager, Nylon
Chief Technical Officer Industrial Fibers, 1997-1999. Director,
Technology, Fibers Business Unit, of Monsanto,
1993-1997.
Dennis L. Cavner, 44 Vice President, Operations 1997 Director, Manufacturing, SAFLEX(R) Plastic
Excellence 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, 54 Senior Vice President and Chief 1997 President, Monsanto Business Services,
Financial Officer; Advisory 1994-1997. Vice President, Asset Management, of
Director Monsanto, 1992-1994.
Sheila B. Feldman, 44 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.
John J. Ferguson, 46 Senior Vice President, Shared 1998 Vice President and General Manager, SAFLEX(R)
Services and Supply Chain Plastic Interlayer, 1997-1998. President,
SAFLEX(R) Plastic Interlayer, of Monsanto,
1994-1997. Vice President and General Manager,
SAFLEX(R) Plastic Interlayer and Vice President
Europe/Africa Operations, The Chemical Group of
Monsanto, 1993-1994.
15
<PAGE>
<CAPTION>
Year
First
Became
an
Executive
Name-Age Present Position with Registrant Officer Other Business Experience since January 1, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
G. Bruce Greer, Jr., 38 Vice President, 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, 54 Vice President and Controller 1997 Senior Director, Finance, Monsanto Business
Services, 1995-1997. Controller, Fibers
Division, The Chemical Group of Monsanto, 1990-
1995.
John C. Hunter III, 52 President, Chief Operating 1997 President, Fibers Business Unit, of Monsanto,
Officer and Director 1995-1997. Vice President and General Manager,
Fibers Division and Asia-Pacific, The Chemical
Group of Monsanto, 1993-1995.
Michael E. Miller, 57 Vice Chairman; Advisory Director 1997 President, Specialty Products Business Unit of
Monsanto, 1995-1997. Group Vice President,
Industrial Products of Monsanto, 1993-1995.
Senior Vice President, Operations, The Chemical
Group of Monsanto, 1993-1995.
John F. Saucier, 45 Vice President, Strategic 1998 Vice President, Strategic Planning, Mergers and
Planning and Corporate Acquisitions, 1997-1998. Director, Marketing,
Development SAFLEX(R) Plastic Interlayer, of Monsanto,
1995-1996. Manager, Worldwide Marketing, SAFLEX
Division, The Chemical Group of Monsanto,
1993-1995.
</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 page
8 and under "Compensation of Executive Officers" on pages 15 through
18 of the 1999 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 9 and 10 of the 1999 Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
16
<PAGE>
<PAGE>
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 28 through 43
and the Report of Independent Auditors on page 19 of the
1998 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, 1998, 1997 and 1996:
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 22 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),
10(i), 10(j), 10(k) and 10(l) on pages 22 and 23 of the
Exhibit Index. The following Exhibits listed in the
Exhibit Index are filed with this Report:
3(b) By-Laws of the Company
13 The Company's 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant (see page 24)
23 Consent of Independent Auditors (see page 25)
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,
1998:
The Company did not file any Reports on Form 8-K during the
quarter ended December 31, 1998.
17
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Solutia Inc.:
We have audited the statements of consolidated financial
position of Solutia Inc. and Subsidiaries as of December 31, 1998
and 1997 and the related statements of consolidated income,
shareholders' equity (deficit) and cash flow for each of the three
years in the period ended December 31, 1998 and have issued our
opinion thereon dated February 24, 1999 (which includes an
explanatory paragraph as to a change in method of accounting in
1997); such financial statements and opinion are included in your
1998 Annual Report to shareholders 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 24, 1999
18
<PAGE>
<PAGE>
SCHEDULE V
<TABLE>
SOLUTIA INC.
------------
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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, 1998:
Reserves deducted from related assets in the
Statement of Consolidated Financial Position:
Valuation accounts, principally for doubtful
receivables and returns and allowances $7 $2 $1 $8
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
</TABLE>
19
<PAGE>
<PAGE>
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 16, 1999
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 16, 1999
- --------------------------------------------- Director (Principal Executive Officer)
Robert G. Potter
<F*> President and Director March 16, 1999
- ---------------------------------------------
John C. Hunter III
<F*> Senior Vice President and March 16, 1999
- --------------------------------------------- Chief Financial Officer
Robert A. Clausen (Principal Financial Officer)
/s/ ROGER S. HOARD Vice President and Controller March 16, 1999
- --------------------------------------------- (Principal Accounting Officer)
Roger S. Hoard
<F*> Director March 16, 1999
- ---------------------------------------------
Robert T. Blakely
<F*> Director March 16, 1999
- ---------------------------------------------
Joan T. Bok
<F*> Director March 16, 1999
- ---------------------------------------------
Paul H. Hatfield
20
<PAGE>
<F*> Director March 16, 1999
- ---------------------------------------------
Robert H. Jenkins
<F*> Director March 16, 1999
- ---------------------------------------------
Howard M. Love
<F*> Director March 16, 1999
- ---------------------------------------------
Frank A. Metz, Jr.
<F*> Director March 16, 1999
- ---------------------------------------------
William D. Ruckelshaus
<F*> Director March 16, 1999
- ---------------------------------------------
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
21
<PAGE>
<PAGE>
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K.
Exhibit No. Description
- ----------- -----------
2 Distribution Agreement (incorporated herein by reference to
Exhibit 2 of the Company's Registration Statement on Form
S-1 (333-36355) filed on 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 on September 25, 1997)
3(b) By-Laws of the Company
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 (incorporated herein by
reference to Exhibit 10(a) of the Company's Form 10-K for
the year ended December 31, 1997, filed on March 13, 1998)
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 on 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 on
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 on September 25, 1997)
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 on
September 25, 1997)
22
<PAGE>
<PAGE>
EXHIBIT INDEX (cont'd)
Exhibit No. Description
- ----------- -----------
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 on 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 on September 25, 1997)
10(h) Form of Employment Agreement with Named Executive Officers
(incorporated herein by reference to Exhibit 10(1) of the
Company's Form 10-Q for the quarter ended March 31, 1998,
filed on May 7, 1998)
10(i) Form of Employment Agreement with other executive officers
(incorporated herein by reference to Exhibit 10(2) of the
Company's Form 10-Q for the quarter ended March 31, 1998,
filed on May 7, 1998)
10(j) Solutia Inc. Annual Incentive Plan (incorporated herein by
reference to Appendix A of the Solutia Inc. Notice of Annual
Meeting and Proxy Statement dated March 11, 1998)
10(k) Solutia Inc. 1998-1999 Long-Term Incentive Plan
(incorporated herein by reference to Appendix B of the
Solutia Inc. Notice of Annual Meeting and Proxy Statement
dated March 11, 1998)
10(l) Solutia Inc. Deferred Compensation Plan (incorporated herein
by reference to Exhibit 10 of the Company's Form 10-Q for
the quarter ended September 30, 1998, filed on October 23,
1998)
11 Omitted--Inapplicable; see "Statement of Consolidated
Income" on page 28 of the 1998 Annual Report
12 Omitted--Inapplicable
13 The Company's 1998 Annual Report to stockholders. (The
electronic submission includes only the financial report
section of the Annual Report, consisting of pages 18 through
45 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 (incorporated by reference to Exhibit 18
of the Company's Form 10-K for the year ended December 31,
1997, filed on March 13, 1998).
21 Subsidiaries of the Registrant (see page 24)
22 Omitted--Inapplicable
23 Consent of Independent Auditors (see page 25)
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 and 23 have been included in the printed copy of this
Report.
23
<PAGE>
BY-LAWS
OF
SOLUTIA INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
AS AMENDED FEBRUARY 24, 1999
ARTICLE I.
OFFICES AND RECORDS
SECTION 1.1. Delaware Office. The name of the registered agent
of the Company is The Corporation Trust Company and the registered
office of the Company shall be located in the City of Wilmington, County
of New Castle, State of Delaware.
SECTION 1.2. Other Offices. The Company may have such other
offices, either within or without the State of Delaware, as the Board of
Directors may designate or as the business of the Company may from time
to time require.
SECTION 1.3. Books and Records. The books and records of the
Company may be kept outside the State of Delaware at such place or
places as may from time to time be designated by the Board of Directors.
ARTICLE II.
STOCKHOLDERS
SECTION 2.1. Annual Meeting. The annual meeting of the
stockholders of the Company shall be held on such date and at such place
and time as may be fixed by resolution of the Board of Directors.
SECTION 2.2. Special Meeting. Subject to the rights of the
holders of any series of stock having a preference over the Common Stock
of the Company as to dividends or upon liquidation ("Preferred Stock")
with respect to such series of Preferred Stock, special meetings of the
stockholders may be called only by the Chairman of the Board or the
President or by the Board of Directors pursuant to a resolution adopted
by a majority of the total number of directors which the Company would
have if there were no vacancies (the "Whole Board").
<PAGE>
<PAGE>
SECTION 2.3. Place of Meeting. The Board of Directors or the
Chairman of the Board, as the case may be, may designate the place of
meeting for any annual meeting or for any special meeting of the
stockholders called by the Board of Directors or the Chairman of the
Board. If no designation is so made, the place of meeting shall be the
principal office of the Company.
SECTION 2.4. Notice of Meeting. Written or printed notice,
stating the place, day and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be delivered by the
Company not less than ten (10) days nor more than sixty (60) days before
the date of the meeting, either personally or by mail, to each
stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United
States mail with postage thereon prepaid, addressed to the stockholder
at his address as it appears on the stock transfer books of the Company.
Such further notice shall be given as may be required by law. Only such
business shall be conducted at a special meeting of stockholders as
shall have been brought before the meeting pursuant to the Company's
notice of meeting. Meetings may be held without notice if all
stockholders entitled to vote are present, or if notice is waived by
those not present in accordance with Section 6.4 of these By-Laws. Any
previously scheduled meeting of the stockholders may be postponed, and
(unless the Restated Certificate of Incorporation, as it may be amended
(the "Certificate of Incorporation") otherwise provides) any special
meeting of the stockholders may be cancelled, by resolution of the Board
of Directors upon public notice given on or prior to the date previously
scheduled for such meeting of stockholders.
SECTION 2.5. Quorum and Adjournment. Except as otherwise
provided by law or by the Certificate of Incorporation, the holders of a
majority of the outstanding shares of the Company entitled to vote
generally in the election of directors (the "Voting Stock"), represented
in person or by proxy, shall constitute a quorum at a meeting of stock-
holders, except that when specified business is to be voted on by a
class or series of stock voting as a class, the holders of a majority of
the outstanding shares of such class or series shall constitute a quorum
of such class or series for the transaction of such business. The
Chairman of the meeting or a majority of the shares so represented may
adjourn the meeting from time to time, whether or not there is such a
quorum. No notice of the time and place of adjourned meetings need be
given except as required by law. The stockholders present at a duly
called meeting at which a quorum is present may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 2.6. Proxies. At all meetings of stockholders, a
stockholder may vote by proxy executed in writing (or in such manner
prescribed by the General Corporation Law of the State of Delaware) by
the stockholder, or by his duly authorized attorney in fact.
SECTION 2.7. Notice of Stockholder Business and Nominations.
(A) Annual Meetings of Stockholders. (1) Nominations of persons
for election to the Board of Directors of the Company and the proposal
of business to be considered by the stockholders may be made at an
annual meeting of stockholders only (a) pursuant to the
-2-
<PAGE>
<PAGE>
Company's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Company who was a stockholder
of record at the time of giving of notice provided for in this By-Law,
who is entitled to vote at the meeting and who complies with the notice
procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (A)(1) of this By-Law, the stockholder must have given timely
notice thereof in writing to the Secretary of the Company and such other
business must otherwise be a proper matter for stockholder action. To
be timely, a stockholder's notice shall be delivered to the Secretary at
the principal executive offices of the Company not later than the close
of business on the 90th day nor earlier than the close of business on
the 120th day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of
the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must
be so delivered not earlier than the close of business on the 120th day
prior to such annual meeting and not later than the close of business on
the later of the 90th day prior to such annual meeting or the 10th day
following the day on which public announcement of the date of such
meeting is first made by the Company. In no event shall the public
announcement of an adjournment or postponement of an annual meeting
commence a new time period for the giving of a stockholder's notice as
described above. Such stockholder's notice shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or
re-election as a director all information relating to such person that
is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder (including such
person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c)
as to the stockholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the Company's books, and
of such beneficial owner, (ii) the class and number of shares of the
Company which are owned beneficially and of record by such stockholder
and such beneficial owner, and (iii) a representation whether the
stockholder or the beneficial owner, if any, intends or is part of a
group which intends, to (x) deliver a proxy statement and form of proxy
to holders of at least the percentage of the Company's outstanding
Voting Stock required to approve or adopt the proposal or elect the
nominee and/or (y) otherwise solicit proxies from stockholders in
support of such proposal or nomination.
-3-
<PAGE>
<PAGE>
(3) Notwithstanding anything in the second sentence of paragraph
(A)(2) of this By-Law to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Company is
increased and there is no public announcement by the Company naming all
of the nominees for director or specifying the size of the increased
Board of Directors at least 100 days prior to the first anniversary of
the preceding year's annual meeting, a stockholder's notice required by
this By-Law shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive offices of the
Company not later than the close of business on the 10th day following
the day on which such public announcement is first made by the Company.
(B) Special Meetings of Stockholders. Only such business shall
be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Company's notice of meeting.
Nominations of persons for election to the Board of Directors may be
made at a special meeting of stockholders at which directors are to be
elected pursuant to the Company's notice of meeting (a) by or at the
direction of the Board of Directors or (b) provided that the Board of
Directors has determined that directors shall be elected at such
meeting, by any stockholder of the Company who is a stockholder of
record at the time of giving of notice provided for in this By-Law, who
shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in this By-Law. In the event the Company
calls a special meeting of stockholders for the purpose of electing one
or more directors to the Board of Directors, any such stockholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Company's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this By-Law shall
be delivered to the Secretary at the principal executive offices of the
Company not earlier than the close of business on the 120th day prior to
such special meeting and not later than the close of business on the
later of the 90th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date
of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment or postponement of a special meeting
commence a new time period for the giving of a stockholder's notice as
described above.
(C) General. (1) Only such persons who are nominated in
accordance with the procedures set forth in this By-Law shall be
eligible to be elected at an annual or special meeting of stockholders
of the Company to serve as directors and only such business shall be
conducted at a meeting of stockholders as shall have been brought before
the meeting in accordance with the procedures set forth in this By-Law.
Except as otherwise provided by law, the Certificate of Incorporation or
these By-Laws, the Chairman of the meeting shall have the power and duty
to determine whether a nomination or any business proposed to be brought
before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this By-Law and, if any
proposed nomination or business is not in compliance with this By-Law,
to declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or
-4-
<PAGE>
<PAGE>
comparable national news service or in a document publicly filed by the
Company with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this By-Law. Nothing in this By-Law shall be
deemed to affect any rights (i) of stockholders to request inclusion of
proposals in the Company's proxy statement pursuant to Rule 14a-8 under
the Exchange Act or (ii) of the holders of any series of Preferred Stock
to elect directors under specified circumstances.
SECTION 2.8. Procedure for Election of Directors; Required Vote.
Election of directors at all meetings of the stockholders at which
directors are to be elected shall be by ballot, and, subject to the
rights of the holders of any series of Preferred Stock to elect
directors under specified circumstances, a plurality of the votes cast
thereat shall elect directors. Except as otherwise provided by law, the
Certificate of Incorporation, or these By-Laws, in all matters other
than the election of directors, the affirmative vote of a majority of
the shares present in person or represented by proxy at the meeting
shall be the act of the stockholders.
SECTION 2.9. Inspectors of Elections; Opening and Closing the
Polls. The Board of Directors by resolution shall appoint one or more
inspectors, which inspector or inspectors may include individuals who
serve the Company in other capacities, including, without limitation, as
officers, employees, agents or representatives, to act at the meetings
of stockholders and make a written report thereof. One or more persons
may be designated as alternate inspectors to replace any inspector who
fails to act. If no inspector or alternate has been appointed to act or
is able to act at a meeting of stockholders, the Chairman of the meeting
shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging his or her duties, shall take and sign an
oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspec-
tors shall have the duties prescribed by law.
The Chairman of the meeting shall fix and announce at the meeting
the date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at the meeting.
SECTION 2.10. No Stockholder Action by Written Consent. Subject
to the rights of the holders of any series of Preferred Stock with
respect to such series of Preferred Stock, any action required or
permitted to be taken by the stockholders of the Company must be
effected at an annual or special meeting of stockholders of the Company
and may not be effected by any consent in writing by such stockholders.
-5-
<PAGE>
<PAGE>
ARTICLE III.
BOARD OF DIRECTORS
SECTION 3.1. General Powers. The business and affairs of the
Company shall be managed under the direction of its Board of Directors.
In addition to the powers and authorities by these By-Laws expressly
conferred upon it, the Board of Directors may exercise all powers of the
Company and do all such lawful acts and things as are not by law or by
the Certificate of Incorporation or by these By-Laws required to be
exercised or done by the stockholders.
SECTION 3.2. Number and Tenure. Subject to the rights of the
holders of any series of Preferred Stock to elect directors under
specified circumstances, the number of directors shall be fixed from
time to time exclusively pursuant to a resolution adopted by a majority
of the Whole Board. The directors, other than those who may be elected
by the holders of any series of Preferred Stock under specified
circumstances, shall be divided, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
is reasonably possible, with the term of office of the first class to
expire at the 1998 annual meeting of stockholders, the term of office of
the second class to expire at the 1999 annual meeting of stockholders
and the term of office of the third class to expire at the 2000 annual
meeting of stockholders, with each director to hold office until his or
her successor shall have been duly elected and qualified. At each
annual meeting of stockholders, commencing with the 1998 annual meeting,
(i) directors elected to succeed those directors whose terms then expire
shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each director
to hold office until his or her successor shall have been duly elected
and qualified, and (ii) if authorized by a resolution of the Board of
Directors, directors may be elected to fill any vacancy on the Board of
Directors, regardless of how such vacancy shall have been created.
SECTION 3.3. Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this By-Law on the
same date, and at the same place as, the Annual Meeting of Stockholders.
The Board of Directors may, by resolution, provide the time and place
for the holding of additional regular meetings without other notice than
such resolution.
SECTION 3.4. Special Meetings. Special meetings of the Board of
Directors shall be called at the request of the Chairman of the Board,
the President or a majority of the Board of Directors then in office.
The person or persons authorized to call special meetings of the Board
of Directors may fix the place and time of the meetings.
SECTION 3.5. Notice. Notice of any special meeting of directors
shall be given to each director at his business or residence in writing
by hand delivery, first class or overnight mail or other overnight or
express delivery service, telegram or facsimile transmission, by
electronic mail or orally by telephone. If mailed by first class mail,
such notice shall be deemed adequately delivered when deposited in the
United States mails so addressed, with postage
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<PAGE>
<PAGE>
thereon prepaid, at least five (5) days before such meeting. If by
telegram, overnight mail or courier service, such notice shall be deemed
adequately delivered when the telegram is delivered to the telegraph
company or the notice is delivered to the overnight mail or other over-
night or express delivery service company at least twenty-four (24)
hours before such meeting. If by facsimile transmission or electronic
mail, such notice shall be deemed adequately delivered when the notice
is transmitted at least twelve (12) hours before such meeting. If by
telephone or by hand delivery, the notice shall be given at least twelve
(12) hours prior to the time set for the meeting. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors need be specified in the notice of such
meeting, except for amendments to these By-Laws, as provided under
Section 9.1. A meeting may be held at any time without notice if all
the directors are present or if those not present waive notice of the
meeting in accordance with Section 6.4 of these By-Laws.
SECTION 3.6. Action by Consent of Board of Directors. Any action
required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if
all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
SECTION 3.7. Conference Telephone Meetings. Members of the Board
of Directors, or any committee thereof, may participate in a meeting of
the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such
meeting.
SECTION 3.8. Quorum. Subject to Section 3.9, one third of the
whole number of directors, but not less than two, shall constitute a
quorum for the transaction of business, but if at any meeting of the
Board of Directors there shall be less than a quorum present, a majority
of the directors present may adjourn the meeting from time to time
without further notice. The act of the majority of the directors pres-
ent at a meeting at which a quorum is present shall be the act of the
Board of Directors.
SECTION 3.9. Vacancies. Subject to applicable law and the rights
of the holders of any series of Preferred Stock with respect to such
series of Preferred Stock, and unless the Board of Directors otherwise
determines, vacancies resulting from death, resignation, retirement,
disqualification, removal from office or other cause, and newly created
directorships resulting from any increase in the authorized number of
directors, may be filled only by the affirmative vote of a majority of
the remaining directors, though less than a quorum of the Board of
Directors, and not by stockholders. Directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected
expires and until such director's successor shall have been duly elected
and qualified. No decrease in the number of authorized directors
constituting the Whole Board shall shorten the term of any incumbent
director.
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<PAGE>
SECTION 3.10. Executive and Other Committees. The Board of
Directors may, by resolution adopted by a majority of the Whole Board,
designate an Executive Committee to exercise, subject to any limitations
provided by law, all the powers of the Board in the management of the
business and affairs of the Company when the Board is not in session,
including without limitation the power to declare dividends, to
authorize the issuance of the Company's capital stock and to adopt a
certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of the State of Delaware, and may, by resolution
similarly adopted, designate one or more other committees. The
Executive Committee and each such other committee shall consist of two
or more directors of the Company. The Board may designate one or more
directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. Any such
committee, other than the Executive Committee (the powers of which are
expressly provided for herein), may to the extent permitted by law
exercise such powers and shall have such responsibilities as shall be
specified in the designating resolution. In the absence or
disqualification of any member of such committee or committees, the
member or members thereof present at any meeting and not disqualified
from voting, whether or not constituting a quorum, may unanimously
appoint another member of the Board to act at the meeting in the place
of any such absent or disqualified member. Each committee shall keep
written minutes of its proceedings and shall report such proceedings to
the Board when required; but failure to keep such minutes shall not
affect the validity of any acts of the committee or committees.
At any meeting of a committee, the presence of one third of its
members, but not less than two, shall constitute a quorum for the
transaction of business and the act of a majority of any committee may
determine its action. Each committee may provide for the holding of
regular meetings, make provision for the calling of special meetings
and, except as otherwise provided in these By-Laws or by resolution of
the Board of Directors, make rules for the conduct of its business.
Notice of special meetings of committees shall be given to each member
of the committee in the manner provided for in Section 3.5 of these
By-Laws. The Board shall have power at any time to fill vacancies in,
to change the membership of, or to dissolve any such committee. Nothing
herein shall be deemed to prevent the Board from appointing one or more
committees consisting in whole or in part of persons who are not
directors of the Company; provided, however, that no such committee
shall have or may exercise any authority of the Board.
SECTION 3.11. Removal. Subject to the rights of the holders of
any series of Preferred Stock with respect to such series of Preferred
Stock, any director, or the entire Board of Directors, may be removed
from office at any time, but only for cause and only by the affirmative
vote of the holders of at least 80 percent of the voting power of all of
the then-outstanding shares of Voting Stock, voting together as a single
class.
SECTION 3.12. Records. The Board of Directors shall cause to be
kept a record containing the minutes of the proceedings of the meetings
of the Board and of the stockholders, appropriate stock books and
registers and such books of records and accounts as may be necessary for
the proper conduct of the business of the Company.
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<PAGE>
<PAGE>
ARTICLE IV.
OFFICERS
SECTION 4.1. Elected Officers. The elected officers of the
Company shall be a Chairman of the Board of Directors, a President, one
or more Vice Chairmen, a Secretary, a Treasurer, a Controller, a number
of Vice Presidents, and such other officers (including, without limita-
tion, a Chief Financial Officer) as the Board of Directors from time to
time may deem proper. The Chairman of the Board shall be chosen from
among the directors. All officers elected by the Board of Directors
shall each have such powers and duties as generally pertain to their
respective offices, subject to the specific provisions of this Article
IV. Such officers shall also have such powers and duties as from time
to time may be conferred by the Board of Directors or by any committee
thereof. The Board may from time to time elect, or the Chairman of the
Board or President may appoint, such other officers (including one or
more Assistant Vice Presidents, Assistant Secretaries, Assistant
Treasurers, and Assistant Controllers) and such agents, as may be
necessary or desirable for the conduct of the business of the Company.
Such other officers and agents shall have such duties and shall hold
their offices for such terms as shall be provided in these By-Laws or as
may be prescribed by the Board or by the Chairman of the Board or
President, as the case may be.
SECTION 4.2. Election and Term of Office. The elected officers
of the Company shall be elected annually by the Board of Directors at
the regular meeting of the Board of Directors held on the date of the
annual meeting of the stockholders. If the election of officers shall
not be held at such meeting, such election shall be held as soon
thereafter as convenient. Alternatively, at the last regular meeting of
the Board of Directors prior to an annual meeting of stockholders, the
Board of Directors may elect the officers of the Company, contingent
upon the election of the persons nominated to be directors by the Board
of Directors. Each officer shall hold office until his successor shall
have been duly elected and shall have qualified or until his earlier
death, resignation or removal.
SECTION 4.3. Chairman of the Board. The Chairman of the Board
shall preside at all meetings of the stockholders and of the Board of
Directors and shall be the Chief Executive Officer of the Company. The
Chairman of the Board shall be responsible for the general management of
the affairs of the Company and shall perform all duties incidental to
his office which may be required by law and all such other duties as are
properly required of him by the Board of Directors. He shall make
reports to the Board of Directors and the stockholders, and shall see
that all orders and resolutions of the Board of Directors and of any
committee thereof are carried into effect. The Chairman of the Board
may also serve as President, if so elected by the Board.
SECTION 4.4. President. The President shall act in a general
executive capacity and shall assist the Chairman of the Board in the
administration and operation of the Company's business and general
supervision of its policies and affairs. The President shall, in the
absence of or because of the inability to act of the Chairman of the
Board, perform all duties of the Chairman of the Board and preside at
all meetings of stockholders and of the Board of Directors.
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SECTION 4.5. Vice Chairmen. The Vice Chairmen shall act in a
general executive capacity with enterprise-wide responsibility as
assigned by the Chairman of the Board or the President and shall have
such powers and shall perform such duties as shall be assigned to him by
the Board of Directors, the Chairman of the Board or the President.
SECTION 4.6. Vice-Presidents. Each Vice President shall have such
powers and shall perform such duties as shall be assigned to him by the
Board of Directors, the Chairman of the Board or the President.
SECTION 4.7. Chief Financial Officer. The Chief Financial Officer
(if any) shall be a Vice President and act in an executive financial
capacity. He shall assist the Chairman of the Board and the President
in the general supervision of the Company's financial policies and
affairs.
SECTION 4.8. Treasurer. The Treasurer shall exercise general
supervision over the receipt, custody and disbursement of corporate
funds. The Treasurer shall cause the funds of the Company to be
deposited in such banks as may be authorized by the Board of Directors,
or in such banks as may be designated as depositaries in the manner
provided by resolution of the Board of Directors. He shall have such
further powers and duties and shall be subject to such directions as may
be granted or imposed upon him from time to time by these By-Laws, the
Board of Directors, the Chairman of the Board, the President or the
Chief Financial Officer.
SECTION 4.9. Secretary. The Secretary shall attend all meetings
of the Board of Directors and of the stockholders and record all votes
and the minutes of all proceedings in a book to be kept for that
purpose. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors and,
when appropriate, shall cause the corporate seal to be affixed to any
instruments executed on behalf of the Company. The Secretary shall also
perform all duties incident to the office of Secretary and such other
duties as may be assigned to him by these By-Laws, the Board of
Directors, the Chairman of the Board or the President.
SECTION 4.10. Controller. The Controller shall serve as the
principal accounting officer of the Company and shall keep full and
accurate account of receipts and disbursements in books of the Company
and render to the Board of Directors, the Chairman of the Board, the
President or the Chief Financial Officer, whenever requested, an account
of all his transactions as Controller and of the financial condition of
the Company. The Controller shall also perform all duties incident to
the office of Controller and such other duties as may be assigned to him
by these By-Laws, the Board of Directors, the Chairman of the Board, the
President or the Chief Financial Officer.
SECTION 4.11. Assistant Secretaries, Assistant Treasurers and
Assistant Controllers. The Assistant Secretaries shall, during the
absence of the Secretary, perform the duties and functions and exercise
the powers of the Secretary. Each Assistant Secretary shall perform
such other duties as may be assigned to such Assistant Secretary by the
Board of
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Directors, the Chairman of the Board, the President or the Secretary.
The Assistant Treasurers shall, during the absence of the Treasurer,
perform the duties and functions and exercise the powers of the
Treasurer. Each Assistant Treasurer shall perform such other duties as
may be assigned to the Assistant Treasurer by the Board of Directors,
the President, the Chief Financial Officer or the Treasurer. The
Assistant Controllers shall, during the absence of the Controller,
perform the duties and functions and exercise the powers of the
Controller. Each Assistant Controller shall perform such other duties
as may be assigned to such officer by the Board of Directors, the
President, the Chief Financial Officer or the Controller.
SECTION 4.12. Removal. Any officer or agent may be removed from
office at any time by the affirmative vote of a majority of the Whole
Board or, except in the case of an officer or agent elected by the
Board, by the Chairman of the Board or the President. Such removal
shall be without prejudice to the contractual rights, if any, of the
person removed, provided that no elected officer shall have any
contractual rights against the Company for compensation by virtue of his
election as an officer beyond the date of the election of his successor,
his death, his resignation or his removal, whichever event shall first
occur, except as otherwise expressly provided in an employment contract
or under an employee deferred compensation plan.
SECTION 4.13. Vacancies. A newly created elected office and a
vacancy in any elected office because of death, resignation, or removal
may be filled by the Board of Directors for the unexpired portion of the
term at any meeting of the Board of Directors. Any vacancy in an office
appointed by the Chairman of the Board or the President because of
death, resignation, or removal may be filled by the Chairman of the
Board or the President.
ARTICLE V.
STOCK CERTIFICATES, BOOK-ENTRY ACCOUNTS AND TRANSFERS
SECTION 5.1. Stock Certificates and Transfers. The interest of
each stockholder of the Company shall be evidenced by certificates or by
registration in book-entry accounts without certificates for shares of
stock in such form as the appropriate officers of the Company may from
time to time prescribe. The shares of the stock of the Company shall be
transferred on the books of the Company by the holder thereof in person
or by his attorney, upon surrender for cancellation of certificates for
the same number of shares, with an assignment and power of transfer
endorsed thereon or attached thereto, duly executed, with such proof of
the authenticity of the transfer and payment of any applicable transfer
taxes as the Company or its agents may reasonably require or by
appropriate book-entry procedures.
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Certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution
prescribe, which resolution may permit all or any of the signatures on
such certificates to be in facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Company with the same effect as if he were such officer, transfer agent
or registrar at the date of issue.
SECTION 5.2. Lost, Stolen or Destroyed Certificates. No
certificate for shares of stock in the Company shall be issued in place
of any certificate alleged to have been lost, destroyed or stolen,
except on production of such evidence of such loss, destruction or theft
and on delivery to the Company of a bond of indemnity in such amount,
upon such terms and secured by such surety, as the Board of Directors or
any officer may in its or his discretion require.
ARTICLE VI.
MISCELLANEOUS PROVISIONS
SECTION 6.1. Fiscal Year. The fiscal year of the Company shall
begin on the first day of January and end on the thirty-first day of
December of each year.
SECTION 6.2. Dividends. The Board of Directors may from time to
time declare, and the Company may pay, dividends on its outstanding
shares in the manner and upon the terms and conditions provided by law
and the Certificate of Incorporation.
SECTION 6.3. Seal. The corporate seal shall have enscribed
thereon the words "Corporate Seal," the year of incorporation and
"Delaware" and around the margin thereof the name of the Company.
SECTION 6.4. Waiver of Notice. Whenever any notice is required to
be given to any stockholder or director of the Company under the
provisions of the General Corporation Law of the State of Delaware or
these By-Laws, a waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
Neither the business to be transacted at, nor the purpose of, any annual
or special meeting of the stockholders or the Board of Directors or
committee thereof need be specified in any waiver of notice of such
meeting.
SECTION 6.5. Audits. The accounts, books and records of the
Company shall be audited upon the conclusion of each fiscal year by an
independent certified public accountant selected by the Board of
Directors, and it shall be the duty of the Board of Directors to cause
such audit to be done annually.
SECTION 6.6. Resignations. Any director or any officer, whether
elected or appointed, may resign at any time by giving written notice of
such resignation to the Chairman of the Board, the President, or the
Secretary, and such resignation shall be deemed to be effective as
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of the close of business on the date said notice is received by the
Chairman of the Board, the President, or the Secretary, or at such later
time as is specified therein. No formal action shall be required of the
Board of Directors or the stockholders to make any such resignation
effective.
ARTICLE VII.
INDEMNIFICATION; ADVANCE OF EXPENSES
SECTION 7.1. Right of Indemnification Generally.
(A) Directors, Officers and Employees. Each person who was or is
made a party or is threatened to be made a party to or is involved in
any action, suit, or proceeding, whether civil, criminal, administrative
or investigative (hereinafter a "proceeding"), by reason of the fact
that he or she or a person of whom he or she is the legal representative
is or was a director, officer or employee of the Company or is or was
serving at the request of the Company as a director, officer, employee
or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee
benefit plans, shall be indemnified and held harmless by the Company to
the fullest extent authorized by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended against
all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith; provided, however, that except as provided in Section 7.3 of
this Article VII, the Company shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initi-
ated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors.
(B) Advance of Expenses; Undertaking. Each person referred to in
Section 7.1(A) of this Article VII shall be paid by the Company the
expenses incurred in connection with any proceeding described in Section
7.1(A) in advance of its final disposition, such advances to be paid by
the Company within 30 days after the receipt by the Company of a state-
ment or statements from the claimant requesting such advance or advances
from time to time; provided, however, that, if the General Corporation
Law of the State of Delaware requires, the advancement of such expenses
incurred by a director or officer in his or her capacity as a director
or officer (and not, unless otherwise required by law, in any other
capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an
employee benefit plan) prior to the final disposition of a proceeding,
shall be made only upon delivery to the Company of an undertaking by or
on behalf of such director or officer, to repay all amounts so advanced
if it shall ultimately be determined that such director or officer is
not entitled to be indemnified under this Article VII or otherwise.
(C) Contract Right. The right to indemnification conferred in
this Article VII and the right to be paid by the Company the expenses
incurred in connection with any such proceeding in advance of its final
disposition conferred in this Article VII each shall be a contract
right.
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SECTION 7.2. Written Request; Determination of Entitlement. To
obtain indemnification under this Article VII, a claimant shall submit
to the Company a written request, including therein or therewith such
documentation and information as is reasonably available to the claimant
and is reasonably necessary to determine whether and to what extent the
claimant is entitled to indemnification. Any determination regarding
whether indemnification of any person is proper in the circumstances
because such person has met the applicable standard of conduct set forth
in the General Corporation Law of the State of Delaware shall be made at
the option of the person seeking indemnification, by the directors as
set forth in the General Corporation Law of the State of Delaware or by
independent legal counsel selected by such person with the consent of
the Company (which consent shall not unreasonably be withheld).
SECTION 7.3. Recovery of Unpaid Claim. If a claim under Section
7.1 of this Article VII is not paid in full by the Company within 30
days after a written claim pursuant to Section 7.2 of this Article VII
has been received by the Company, the claimant may at any time
thereafter bring suit against the Company to recover the unpaid amount
of the claim and, if successful in whole or in part, the claimant shall
be entitled to be paid also the expense of prosecuting such claim. It
shall be a defense to any such action (other than actions brought to
enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if any
is required, has been tendered to the Company) that the claimant has
not met the standard of conduct which makes it permissible under the
General Corporation Law of the State of Delaware for the Company to
indemnify the claimant for the amount claimed, but the burden of proving
such defense shall be on the Company. Neither the failure of the
Company (including its directors, independent legal counsel or
stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Dela-
ware, nor an actual determination by the Company (including its
directors, independent legal counsel or stockholders) that the claimant
has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the
applicable standard of conduct.
SECTION 7.4. Exclusivity; Subsequent Modification. The right to
indemnification and the payment of expenses incurred in connection with
a proceeding in advance of its final disposition conferred in this
Article VII shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, By-Laws, agreement, vote of stockholders
or Directors or otherwise. No repeal or modification of this Article
VII shall in any way diminish or adversely affect the rights hereunder
of any director, officer or employee or of any agent who has been
expressly granted indemnification by the Company pursuant to Section 7.6
hereof in respect of any occurrence or matter arising prior to any such
repeal or modification.
SECTION 7.5. Insurance. The Company may maintain insurance, at
its expense, to protect itself and any director, officer, employee or
agent of the Company or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss,
whether or not the Company would have the power to indemnify such person
against such ex-
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pense, liability or loss under the General Corporation Law of the State
of Delaware. To the extent that the Company maintains any policy or
policies providing such insurance, each such director, officer or
employee, and each such agent to which rights to indemnification have
been granted as provided in Section 7.6 of this Article VII shall be
covered by such policy or policies in accordance with its or their terms
to the maximum extent of the coverage thereunder for any such director,
officer, employee or agent.
SECTION 7.6. Other Persons Granted Right of Indemnification. The
Company may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, and rights to be paid by the
Company the expenses incurred in defending any proceeding in advance of
its final disposition, to any agent of the Company to the fullest extent
of the provisions of this Article VII with respect to the indemnification
and advancement of expenses of directors, officers and employees of the Company.
SECTION 7.7. Illegality; Unenforceability. If any provision or
provisions of this Article VII shall be held to be invalid, illegal or
unenforceable for any reason whatsoever: (1) the validity, legality and
enforceability of the remaining provisions of this Article VII
(including, without limitation, each portion of any Section of this
Article VII containing any such provision held to be invalid, illegal or
unenforceable, that is not itself held to be invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby; and
(2) to the fullest extent possible, the provisions of this Article VII
(including, without limitation, each such portion of any Section of this
Article VII containing any such provision held to be invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable.
SECTION 7.8. Form and Delivery of Communications. Any notice,
request or other communication required or permitted to be given to the
Company under this Article VII shall be in writing and either delivered
in person or sent by telecopy, telex, telegram, overnight mail or
courier service, or certified or registered mail, postage prepaid,
return receipt requested, to the Secretary of the Company.
ARTICLE VIII.
CONTRACTS, PROXIES, ETC.
SECTION 8.1. Contracts. Except as otherwise required by law, the
Certificate of Incorporation or these By-Laws, any contracts or other
instruments may be executed and delivered in the name and on behalf of
the Company by such officer or officers of the Company as the Board of
Directors may from time to time direct. Such authority may be general
or confined to specific instances as the Board may determine. The
Chairman of the Board, the President, any Vice Chairman or any Vice
President may execute bonds, contracts, deeds, leases and other
instruments to be made or executed for or on behalf of the Company.
Subject to any restrictions imposed by the Board of Directors or the
Chairman of the Board, the President, any Vice Chairman or any Vice
President of the Company may delegate contractual powers to others
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under his jurisdiction, it being understood, however, that any such
delegation of power shall not relieve such officer of responsibility
with respect to the exercise of such delegated power.
SECTION 8.2. Proxies. Unless otherwise provided by resolution
adopted by the Board of Directors, the Chairman of the Board, the
President, any Vice Chairman or any Vice President, the Secretary or any
Assistant Secretary, may from time to time appoint an attorney or
attorneys or agent or agents of the Company, in the name and on behalf
of the Company, to cast the votes which the Company may be entitled to
cast as the holder of stock or other securities in any other
corporation, any of whose stock or other securities may be held by the
Company, at meetings of the holders of the stock or other securities of
such other corporation, or to consent in writing, in the name of the
Company as such holder, to any action by such other corporation, and may
instruct the person or persons so appointed as to the manner of casting
such votes or giving such consent, and may execute or cause to be
executed in the name and on behalf of the Company and under its
corporate seal or otherwise, all such written proxies or other
instruments as he may deem necessary or proper in the premises.
ARTICLE IX.
AMENDMENTS
SECTION 9.1. Amendments. These By-Laws may be amended or
repealed, or new By-Laws may be adopted, at any meeting of the Board of
Directors or of the stockholders, provided notice of the proposed change
was given in the notice of the meeting and, in the case of a meeting of
the Board of Directors, in a notice given not less than twelve hours
prior to the meeting; provided, however, that, in the case of amendment,
repeal or adoption by stockholders, notwithstanding any other provisions
of these By-Laws or any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote of the
holders of any series of Preferred Stock required by law, the
Certificate of Incorporation, any Preferred Stock designation, or these
By-Laws, the affirmative vote of the holders of at least 80 percent of
the voting power of all the then outstanding shares of the Voting Stock,
voting together as a single class, shall be required for the stock-
holders to adopt, amend or repeal any provision of these By-Laws.
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1998
MANAGEMENT REPORT
Management is responsible for the integrity, objectivity and
preparation of Solutia Inc.'s consolidated financial statements and all
of the related information appearing in this annual report. The
statements have been prepared 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 designed to provide 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
careful personnel selection and thorough 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 and for the period ended December 31, 1998,
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 24, 1999
AUDIT AND FINANCE COMMITTEE REPORT
The Audit and Finance Committee, composed of non-employee directors,
met six times during 1998. The committee reviews and monitors
the company's internal controls, financial reports, and accounting
practices as well as the scope and extent of the audits performed by
both the independent and internal auditors. The committee also
recommends to the full Board the selection of Solutia's principal
independent auditors, and it approves in advance all significant audit
and nonaudit services provided by these 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.
The Deloitte & Touche LLP report follows.
The internal and principal independent auditors meet with the
committee, with and without management representatives present, to
discuss the results of their examination, the adequacy of the company's
internal accounting controls, and the quality of the company's financial
reporting. The Audit and Finance Committee also reviews and monitors the
company's financial policies, including planning and structure, so that
they 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 24, 1999
18 SOLUTIA INC. 1998 ANNUAL REPORT
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1998
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Solutia Inc.:
We have audited the accompanying statements of consolidated
financial position of Solutia Inc. and subsidiaries as of December 31,
1998 and 1997, and the related statements of consolidated income,
shareholders' equity (deficit), and cash flow for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 16 to the financial statements, in 1997, the
company changed its method of accounting for environmental obligations
under the Resource Conservation and Recovery Act.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
St. Louis, Missouri
February 24, 1999
SOLUTIA INC. 1998 ANNUAL REPORT 19
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1998
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.
Solutia's strategic focus is built on key strengths, including
polymer chemistry, fiber technology, process engineering expertise,
technical service, and customer problem solving. These strengths 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.
During 1998, the Chemicals, Fibers and Polymers & Resins segments
accounted for approximately 31 percent, 34 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. As permitted by this standard, information
for years prior to 1997 was not restated to conform to the new
disclosure requirements because it was impractical to do so. Therefore,
the discussion of the company's results for periods prior to 1997 has
been prepared on the basis of one segment.
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, 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 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.
Financial data included in the company's consolidated financial
statements for periods prior to the Spinoff were prepared on a basis
that reflected 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 after 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 achieved impressive 1998 financial results in its first
full year as an independent company. Financial performance in 1998
reflected management's focus on earnings per share growth and cash flow
generation. The improvement over 1997 in earnings per share resulted
principally from lower average raw material costs, lower environmental
charges, and other cost reductions, partially offset by lower average
selling prices. Cash flow also benefited from improved working capital
management. During 1998, the company used its strong financial
performance to repay all of its short-term debt, to reinvest in itself
through share repurchases, and to prepare for the future through capital
projects that will lead to further cost reductions. The following
section provides a detailed discussion of Solutia's results of
operations for 1998 and 1997.
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RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
Net sales for 1998 were $2.84 billion, down 5 percent from $2.97 billion
in 1997. The decline was principally due to lower average selling
prices. However, operating income for 1998 increased 33 percent due to
lower average raw material costs, which directly offset average selling
price declines, lower environmental charges, and other cost reductions
in all segments, primarily related to personnel costs.
CHEMICALS SEGMENT
Net sales for Solutia's Chemicals segment declined by 8 percent during
1998 as compared to 1997 due to lower average selling prices in the
segment's intermediates business and lower sales volumes in the
intermediates and phosphorus derivatives businesses. Net sales for the
industrial products business were essen-
20 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
tially unchanged from 1997. Average selling price declines in
intermediates were caused primarily by sales contracts that contain
formula pricing tied to the cost of the raw material components of its
products. During 1998, the costs of certain key raw material feedstocks
fell, resulting in lower average selling prices. Lower phosphorus
derivative volumes were caused by competitor price reduction actions.
The segment's lower net sales were partially offset by lower raw
material and other costs which resulted in a net 2 percent decline in
segment profit. However, segment profit for 1998 as a percentage of net
sales was 26 percent compared with 1997's 24 percent due to other cost
reductions.
During 1998, Solutia announced that it was reviewing options for
its phosphorus derivatives business that included sale, alliance or
joint venture. Based on discussions with interested potential buyers,
the company is primarily pursuing the sale of the business but is still
considering all alternatives. Discussions with interested parties are
continuing.
FIBERS SEGMENT
Net sales for 1998 in the Fibers segment were down slightly as compared
with 1997 results as higher sales volumes in the carpet business were
offset by lower average selling prices in all segment businesses and by
lower Acrilan(R) acrylic fiber volumes. The improvement in carpet volumes
was due to strong builder and commercial sales and new introductions of
Wear-Dated(R) brand products. Price reductions in the Fibers segment were
caused by competitive pressures on carpet staple despite a first quarter
1998 price increase, and lower pricing of Acrilan(R) acrylic fibers to
maintain competitiveness, where desirable, in the business's export and
domestic markets. For both the carpet and Acrilan(R) acrylic fiber
products, the majority of the average selling price declines occurred
during the second half of the year. Year-over-year price declines caused
by lower priced imports also affected the nylon industrial products.
Volume reductions in the Acrilan(R) acrylic fiber business occurred
primarily in the second half of 1998 as weak economic conditions in Asia
caused producers to reduce selling prices in all regions and to increase
volumes of products shipped to other world areas.
Profit for the Fibers segment increased significantly on carpet
volume increases, reduced raw material costs, and other cost reductions,
which more than offset the decline in average selling prices. As the
result of these items, Fibers segment profit as a percentage of net
sales increased to 21 percent in 1998 from 16 percent in 1997.
POLYMERS & RESINS SEGMENT
Net sales for the Polymers & Resins segment declined 5 percent primarily
as the result of softer pricing and lower volumes. Lower average selling
prices were felt most significantly by the company's Saflex(R) plastic
interlayer unit and, to a lesser extent, by the resins business as
Solutia responded to competitor price reductions to maintain market
share. Lower volumes occurred in the nylon plastics and polymers
business and resulted from lower sales of textile polymer. This volume
decline was partially offset by increased volumes in the resins
business.
1998 profit for the Polymers & Resins segment was flat as compared
to 1997. Reduced raw material and other cost reductions offset the
effect of the lower net sales discussed above and changeover costs at
the Saflex(R) plastic interlayer production sites as they expanded
production of the new Saflex IIIG(TM) plastic interlayer product. However,
segment profit as a percentage of net sales increased to 27 percent for
1998 from 26 percent for 1997 as the result of the other cost
reductions.
OPERATING INCOME
Solutia's operating income for 1998 increased by 33 percent over 1997
due to lower environmental charges, discussed below, and higher segment
profit. Marketing, administrative and technological expenses were
essentially unchanged in 1998 as compared to 1997. However, the
comparison of operating income between 1998 and 1997 was affected by
several unusual items related to reversals of excess restructuring
reserves, inventory charges, the adoption of new accounting standards
and environmental-related charges.
During 1998 and 1997, Solutia reversed excess restructuring
reserves to adjust downward the recorded amounts as a result of reduced
cost estimates. A reversal of $3 million ($2 million aftertax, or $0.02
per share) was made in the second quarter of 1998 due to lower cost
estimates to complete the shutdown of certain facilities included in the
1996 plan. Reversals made in the third quarter 1998 and fourth quarter
1998 of $3 million ($2 million aftertax, or $0.02 per share) and $3
million ($2 million aftertax, or $0.02 per share), respectively, were
due to lower cost estimates to implement the company's employment
reduction plans. These lower cost estimates were due to higher than
anticipated attrition that has reduced employment levels without
additional cost to the company. The 1997 reversal of $8 million ($5
million after tax, or $0.04 per share) occurred in the second quarter
and became excess as the result of lower exit costs associated with the
sale and closure of certain nonstrategic facilities included in the 1995
restructuring actions.
<PAGE>
Operating income for 1998 was also affected by inventory charges
of $4 million ($3 million aftertax, or $0.03 per share) in the third
quarter and $6 million ($4 million aftertax, or $0.04 per share) in the
fourth quarter. The third quarter charge was taken to reduce certain
slow-moving inventories to their net realizable values. The fourth
quarter charge was primarily caused by losses on the disposition of
certain non-salable inventories.
SOLUTIA INC. 1998 ANNUAL REPORT 21
<PAGE>
<PAGE>
Operating income for 1998 also included stand-alone expenses for
certain general and administrative services that were provided by
Monsanto during 1997. As discussed in Note 1 of the "Notes to the
Consolidated Financial Statements," Monsanto provided these services
prior to the Spinoff under a cost allocation arrangement. If Solutia had
operated as a stand-alone entity for all of 1997, management estimates
that general and administrative service expenses would have been higher
by approximately $13 million in order to reflect the cost of replacing
the services represented by these allocations.
Operating income in 1997 was affected by the adoption of new
accounting standards and environmental-related charges taken in the
first, second and fourth quarters. The first quarter charge of $10
million ($6 million aftertax, or $0.05 per share) was associated with
the adoption of American Institute of Certified Public Accountants'
Statement of Position ("SOP") No. 96-1, "Environmental Remediation
Liabilities." The second quarter charge of $10 million ($6 million
aftertax, or $0.05 per share) was caused by environmental-related
litigation associated with the Brio Superfund site near Houston, Texas.
The fourth quarter charge of $72 million ($46 million aftertax, or $0.37
per share) was associated with environmental remediation liability
changes. These charges are discussed further in Note 16 of the "Notes to
Consolidated Financial Statements."
EQUITY EARNINGS FROM AFFILIATES
Equity Earnings from Affiliates were lower for 1998 as compared to 1997
primarily due to the lower earnings from the company's Quimica "M" S.A.
de C.V. ("Quimica") joint venture and the Flexsys, L.P. ("Flexsys")
joint venture in which Solutia has 49 percent and 50 percent ownership
interests, respectively. Quimica was adversely affected by changeover
costs for production of Saflex IIIG(TM) plastic interlayer and the
devaluation of the Mexican peso. Flexsys experienced lower earnings due
to start-up costs and operational difficulties associated with the joint
venture's new PPD2 facility. The PPD2 unit produces 4-amino-
diphenylamine, a product that extends the life of rubber products.
ECONOMIC CONDITIONS
Solutia is affected by economic conditions, particularly those in the
domestic housing industry, the domestic and international automotive
industries and the domestic and international textile industries. Each
of these industries is cyclical. Global competition and weakened general
economic conditions in certain world areas have led to declining average
selling prices. These factors are expected to result in continued
downward pressure on prices. However, these conditions also exert
downward pressure on the prices of many of the company's purchased major
raw materials. Average selling prices and sales volumes to the domestic
carpet industry are also affected by that industry's ongoing mill
consolidation, consumer trends toward alternative flooring materials,
and competition from lower-priced polyester staple.
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 and 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 the
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 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."
<PAGE>
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.
22 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
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 been providing previously. 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 and Advanced Elastomer Systems, L.P. 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 1996. Solutia has a 50 percent ownership interest in each of these
joint ventures.
LIQUIDITY AND CAPITAL RESOURCES
Solutia has historically generated sufficient cash from operations to
more than fund its capital needs. Capital expenditures for 1998 were
$158 million. These expenditures were used to fund various cost
reduction, maintenance and capacity expansion projects. The company
expects that its capital requirements will be approximately $300 million
in 1999, and $200 million to $250 million in 2000, principally as a
result of capacity expansion and cost reduction projects. Approximately
$216 million of these estimated capital requirements were committed at
December 31, 1998. A portion of these capital expenditures will be
funded from advance payments received from third parties participating
in these projects. Third party payments received during 1998 totaled $76
million.
Solutia's working capital as of December 31, 1998, increased to
$259 million from $106 million at December 31, 1997, primarily because
strong cash flow from operations facilitated the repayment of short-term
debt.
In the third quarter of 1998, Solutia completed the pay-down of
the approximately $429 million of short-term debt that had been
refinanced shortly after the Spinoff. Short-term debt balances were
reduced by $190 million during 1998. At December 31, 1998, 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, 1998. This credit facility gives
Solutia the financing flexibility to take advantage of investment
opportunities that may arise and to satisfy future funding requirements.
As of December 31, 1998, Solutia had a shareholders' deficit of $7
million. Shareholders' deficit was reduced significantly during 1998 by
the company's net income, but was partially offset by share repurchases.
The company's shareholders' deficit at December 31, 1997 of $131 million
resulted primarily from the assumption of $1.029 billion of debt and
$1.018 billion of postretirement liabilities from Monsanto in
conjunction with the 1997 Spinoff.
During the third quarter of 1998, the company completed the 5
million common share repurchase program that was authorized in September
1997. On October 1, 1998, Solutia announced that the board of directors
had authorized a second 5 million share repurchase program. The company
expects to complete this second program by the end of 1999. Shares
repurchased under both programs during 1998 totaled 5.5 million, at a
cost of $140 million. In addition, shares repurchased during 1998 for
Solutia's compensation and benefits programs were approximately 0.7
million shares at a cost of approximately $21 million.
The company believes that its cash flow from operations,
supplemented by periodic additional borrowings from its existing credit
facility, provide sufficient resources to finance its operations and
planned capital needs for the next 12 months.
<PAGE>
ENVIRONMENTAL MATTERS
Solutia continues its 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 Act; and the Comprehensive Environmental Response,
Compensation and Liability Act (commonly known as "Superfund"). 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
several of 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 INC. 1998 ANNUAL REPORT 23
<PAGE>
<PAGE>
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 1998 were approximately $17 million for
environmental capital projects and approximately $66 million for the
management of environmental programs, including the operation and
maintenance of facilities for environmental control, of which $22
million was charged against recorded environmental liabilities. The
company estimates that a total of approximately $25 million will be
spent during 1999 and 2000 on additional capital projects for
environmental protection and that expenses for the management of
environmental programs in 1999 and 2000 will continue at levels
comparable to 1998.
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.
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
potentially responsible party ("PRP") or defendant for actions that
occurred prior to September 1, 1997, the company will manage proceedings
and litigation against Monsanto and indemnify Monsanto for costs,
expenses, and judgments, if any are incurred by Monsanto, arising from
these liabilities. During 1998, Solutia received one notice from the EPA
alleging it as a PRP with respect to Superfund for product sold by
Monsanto in 1986.
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 $36 million as of December 31, 1998 for Superfund sites.
Major Superfund sites in this category include the noncompany-owned
sites at Brio and MOTCO in Texas, and Fike/Artel in West Virginia, which
account for $26 million of the accrued amount. The company spent
approximately $8 million in 1998 for remediation of Superfund sites.
Similar amounts can be expected in future years.
The company had an accrued liability of $93 million as of December
31, 1998, for shutdown 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. The estimate takes into
consideration factors such as existing technology, laws and agency
policy, and prior experience in remediation of contaminated sites. The
company spent $6 million in 1998 for remediation of these sites. Similar
amounts can be expected in the future.
The company had an accrued liability of $69 million as of December
31, 1998, for solid and hazardous waste remediation, and for 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 $8 million in
1998 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
OVERVIEW
The year 2000 ("Y2K") issue refers to the inability of a date-
sensitive computer program to recognize a two-digit date field
designated "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.
<PAGE>
Solutia began addressing its Y2K issues in 1996. The planning
phase of the process was completed during 1997. Effective December 31,
1998, Solutia adopted the Y2K Readiness Disclosure format of the
Chemical Manufacturers Association ("CMA"), of which the company is a
member. The CMA disclosure format uses four process categories and five
functional areas. Solutia has conformed its Y2K reporting to the CMA
disclosure format. The following sections contain a summary
of Solutia's Y2K readiness and detailed discussions of Solutia's Y2K
issues.
24 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
SUMMARY OF Y2K READINESS
The following table summarizes Solutia's Y2K readiness. The percentage
in each column indicates the completion of each process step listed.
<TABLE>
<CAPTION>
Contingency Planned
Inventory/ Plans Implementation
Assessment Remediation Testing Implementation Developed Date
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Business Applications 100% 70% 70% 70% See Mid-1999
Manufacturing and
Warehousing Equipment 100% 50% 50% 50% Comments 2nd Qtr. 1999
Information Technology
Technical Infrastructure 75% 0% 0% 0% Below Mid-1999
Environmental Operations
Systems 100% 50% 50% 50% 2nd Qtr. 1999
Business Partners 100% - - - 2nd Qtr. 1999
------------------------------------------------------------------------------------------------
</TABLE>
BUSINESS APPLICATIONS
Solutia inventoried and assessed its business applications during 1997.
At that time, the company determined that significant portions of its
software required modification or repair to function properly beyond
December 31, 1999. Solutia is addressing the majority of these Y2K
issues through the previously planned installation of software licensed
from SAP AG which is Y2K compliant. The implementation of SAP involves a
series of transitions, the first of which occurred in January 1997.
Through December 31, 1998, implementations were completed in accordance
with the transition schedule resulting in approximately 70 percent of
the company being on SAP. After December 31, the company decided to
delay the transitions to SAP scheduled for January 31, 1999, and March
31, 1999, by 30 days each to perform additional testing, to complete
personnel training, and to minimize problems with the transition. The
final transition to SAP is now scheduled to occur on April 30, 1999.
Critical issues that are not addressed by SAP are in the process of
being remediated. The company expects to complete remediation of all
critical business applications by the end of April 1999. Y2K integrated
testing of SAP and non-SAP systems will occur during mid-1999.
MANUFACTURING AND WAREHOUSING EQUIPMENT AND
ENVIRONMENTAL OPERATIONS SYSTEMS
The manufacturing and warehousing equipment and the environmental
operations systems areas include primary process control systems and
devices with embedded chips. Primary process control systems were
inventoried and assessed during late 1997. Remediation and testing of
these systems is continuing. The inventory and assessment of the
company's devices with embedded chip systems was completed during
December 1998. Remediation of the Y2K issues found has begun. Some
slippage from planned schedules occurred during 1998 as resources were
temporarily redirected to other Y2K areas. However, substantial
resources are being directed towards the remediation of Y2K issues
detected and the testing and implementation of repaired systems. Solutia
expects that work on the critical issues in these areas will be
completed on schedule by the end of the second quarter of 1999, with the
exception of a small portion of systems that will be repaired and tested
during planned plant shutdowns in the second half of 1999.
INFORMATION TECHNOLOGY TECHNICAL INFRASTRUCTURE
The information technology ("IT") technical infrastructure area is
primarily comprised of host server systems, computer networking
infrastructure, voice systems, and desktop computer workstations and
software. The inventory and assessment of known long lead-time items is
complete. Major projects were identified during 1998 and are scheduled
for completion during 1999. An exhaustive and comprehensive follow-up
investigation of this area to assure that no critical components were
overlooked is under way. The inventory phase of this investigation for
the manufacturing sites was completed during January 1999, while the
inventory of the office and warehouse sites is expected to be completed
during March 1999. The assessment, remediation and testing of any new
items found will be addressed by mid-1999.
BUSINESS PARTNERS
Solutia's business partners include its suppliers and service providers
(supply chain), and its customers. Solutia has identified those business
partners in the supply chain that provide materials, products or
services critical to the company's operations. During 1998, critical
suppliers' Y2K issues were assessed using questionnaires and other
inquiries. Approximately two-thirds of Solutia's critical suppliers
report that they have either completed their remediation efforts or have
plans to complete their remediation by mid-1999. Investigation of the
remaining Y2K issues with critical suppliers is continuing on schedule.
Audits of selected suppliers to verify the status and/or completion of
their remediation are planned for the first half of 1999.
<PAGE>
Solutia has been working with customers to address their Y2K
concerns regarding Solutia's ability to operate. Plans to address the
ability of our significant customers to accept our products after
December 31, 1999, will be determined as contingency plans are
developed.
SOLUTIA INC. 1998 ANNUAL REPORT 25
<PAGE>
<PAGE>
INTEGRATED TESTING
The company intends to perform integrated Y2K testing of critical
systems in all functional areas throughout 1999, with the majority of
such testing occurring during the second and third quarters of 1999.
Given the nature of Solutia's manufacturing and other operations, full-
scale integrated testing may not be practical in some areas and,
therefore, may be limited in scope to avoid significant disruption of
the company's operations. Statements of compliance from vendors and
other compliance evidence are expected to mitigate the risk of not
performing integrated testing in those areas.
CONTINGENCY PLANNING
After the end of 1998, Solutia completed the development of a
contingency planning process for Y2K issues. The process engages the
manufacturing sites in the evaluation of their existing contingency
plans in light of possible Y2K effects, such as the loss of electrical
and telephone utilities. Solutia expects that the Y2K contingency plans
for all manufacturing sites will be in place by the beginning of the
third quarter 1999. The contingency planning process is being modified
for use in non-manufacturing areas. Contingency plans for those areas
will be completed by the end of third quarter 1999. For both
manufacturing and non-manufacturing areas, the plans will include
procedures that attempt to minimize the impact of any unremediated and
unresolved Y2K issues on Solutia's operations and financial position.
COSTS
To date, the company has incurred approximately $7 million in costs
related to Y2K work, excluding the cost of SAP implementation.
Management currently estimates that additional costs to evaluate and
remediate the remaining issues will be $5 million to $10 million. These
costs will be expensed as incurred during 1999.
RISKS
Based on the status of the company's work to address its Y2K issues,
including the implementation of SAP, management does not expect the Y2K
issue to pose significant operational problems for the company. However,
if the SAP implementation is delayed beyond the second quarter of 1999
or the remediation of other issues is not completed in a timely manner,
Y2K could have a material adverse effect on the company, depending on
the nature and extent of any remaining unremediated or unresolved
issues. Furthermore, if the company's customers, suppliers, and service
providers fail to rectify their Y2K issues in their own systems the
resultant effect on the company may be material. Management anticipates
the most reasonably likely worst-case scenario would involve a temporary
shutdown of certain units if, in management's judgment, the company
cannot run certain processes safely from an environmental, safety and
health standpoint because of the failure of the company or a supplier to
resolve Y2K issues. Through the development of contingency plans, the
company expects to mitigate the effect that any such temporary shutdowns
would have on the company or third parties.
The estimated costs and date of completion of Y2K remediation are
based on management's best estimates, which were derived from numerous
assumptions about future events. These assumptions include the
availability of certain resources, third-party modification plans and
other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially. Specific factors
that might cause material differences include, but are not limited to,
the availability and cost of personnel trained in this area, the ability
to identify and correct all relevant computer codes, and the cost and
availability of replacements for devices with embedded chips.
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, 1998. 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.
This methodology is consistent with that used in the prior year.
<PAGE>
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.
26 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
As of December 31, 1998, Solutia had currency forward contracts to
purchase $34 million and to sell $34 million of other currencies,
principally the Belgian franc, with average maturities of 4 months. Net
unrealized hedging losses as of December 31, 1998, were not material.
Based on the company's overall currency rate exposure at December 31,
1998, 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, 1998, 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. This is consistent with the overall interest rate
exposure at December 31, 1997.
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
associated with the derivative instruments is not material to the
company's consolidated financial position, results of operations, or
cash flow.
EUROPEAN MONETARY UNION
On January 1, 1999, 11 member countries of the European Union adopted
the euro as their common legal currency. Effective that date, conversion
rates between the existing sovereign currency ("legacy currency") of
each of these participating countries and the euro were irrevocably
fixed, and the euro became available for non-cash transactions. The
legacy currencies of these countries will remain legal tender during a
transition period from January 1, 1999 to January 1, 2002. During this
transition period, parties may pay for goods and services using either
the euro or the relevant legacy currency. Currency conversion will be
performed using a triangulation method whereby one legacy currency is
converted to the euro and then to the second legacy currency. The
conversion to the euro will be completed in July 2002 when the legacy
currencies of the participating member countries cease to be legal
tender.
While the conversion to the euro is expected to increase cross-
border price transparency, and therefore to stimulate cross-border
competition within the single currency zone created by the participating
countries, the effect on the price of raw materials that Solutia
purchases is expected to generally offset the effect on the finished
products it sells. In addition, the conversion to the euro is expected
to have the positive effect of eliminating currency risk in cross-border
sales and reduce currency exchange costs.
Solutia's information systems have been updated to allow the
triangulation method of currency conversion to the requisite number of
decimal places in a timely fashion. The cost of the technological
updates was not material.
For the reasons stated above, management does not expect the
introduction of the euro to have a material effect on Solutia's
business, financial condition, or results of operations. If cross-border
price transparency causes the markets from which the company purchases
raw materials or to which it sells finished products to behave
differently than management expects, the introduction of the euro could
have a material effect on the company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting guidance for the capitalization of certain internal-use
software costs once certain criteria are met. This accounting standard
will be effective for the company beginning January 1, 1999. The
adoption of SOP 98-1 is not expected to have a material impact on the
company.
In April 1998, the American Institute of Certified Public
Accountants issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. This
statement will be effective for the company's financial statements for
the year ended December 31, 1999. The adoption of SOP 98-5 is not
expected to have a material impact on the company.
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 provides comprehensive and consistent standards for the
recognition and measurement of derivative and hedging activities. It
requires that derivatives be recorded on the Statement of Consolidated
Financial Position at fair value and establishes criteria for hedges of
changes in the fair value of assets, liabilities or firm commitments,
hedges of variable cash flows of forecasted transactions, and hedges of
foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives that do not meet the criteria
for hedges would be recognized in the Statement of Consolidated Income.
This statement will be effective for the company beginning January 1,
2000. The company is evaluating SFAS No. 133 and has not determined its
effect on the consolidated financial statements.
SOLUTIA INC. 1998 ANNUAL REPORT 27
<PAGE>
<PAGE>
1998
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
-------- -------- --------
Dollars in millions, except per share amounts
<S> <C> <C> <C>
NET SALES $2,835 $2,969 $2,977
Cost of goods sold 2,085 2,316 2,325
-------- -------- --------
GROSS PROFIT 750 653 652
Marketing expenses 145 143 172
Administrative expenses 136 133 167
Technological expenses 83 87 88
Restructuring expenses - net - - 192
-------- -------- --------
OPERATING INCOME 386 290 33
Equity earnings from affiliates 25 31 21
Interest expense (43) (41) (36)
Other income (expense) - net 7 10 15
-------- -------- --------
INCOME BEFORE INCOME TAXES 375 290 33
Income taxes 126 98 1
-------- -------- --------
NET INCOME $ 249 $ 192 $ 32
======== ======== ========
BASIC EARNINGS PER SHARE $ 2.16 $ 1.63 $ 0.28
======== ======== ========
DILUTED EARNINGS PER SHARE $ 2.03 $ 1.55 $ 0.27
======== ======== ========
Weighted average equivalent shares (in millions):
Basic 115.5 117.7 116.2
Effect of dilutive securities:
Common share equivalents - common stock issuable
upon exercise of oustanding stock options 7.3 6.0 3.6
-------- -------- --------
Diluted 122.8 123.7 119.8
======== ======== ========
</TABLE>
<TABLE>
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
------ ------ ------
Dollars in millions
<S> <C> <C> <C>
NET INCOME $249 $192 $ 32
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments 10 19 -
Minimum pension liability adjustments, net of tax of
$2 in 1998 and $4 in 1997 (3) (7) -
------ ------ ------
COMPREHENSIVE INCOME $256 $204 $ 32
====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
28 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
1998
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
<CAPTION>
As of December 31,
-----------------------
1998 1997
-------- --------
Dollars in millions, except per share amounts
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 89 $ 24
Trade receivables, net of allowances of $7 in 1998 and $6 in 1997 357 425
Miscellaneous receivables and prepaid expenses 126 136
Deferred income tax benefit 88 91
Inventories 331 325
-------- --------
TOTAL CURRENT ASSETS 991 1,001
PROPERTY, PLANT AND EQUIPMENT:
Land 17 17
Buildings 371 357
Machinery and equipment 2,786 2,707
Construction in progress 127 107
-------- --------
Total property, plant and equipment 3,301 3,188
Less accumulated depreciation 2,357 2,265
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 944 923
INVESTMENTS IN AFFILIATES 394 423
LONG-TERM DEFERRED INCOME TAX BENEFIT 274 300
OTHER ASSETS 162 121
-------- --------
TOTAL ASSETS $2,765 $2,768
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 278 $ 221
Wages and benefits 107 106
Restructuring reserves 18 40
Miscellaneous accruals 329 335
Short-term debt - 193
-------- --------
TOTAL CURRENT LIABILITIES 732 895
LONG-TERM DEBT 597 597
POSTRETIREMENT LIABILITIES 971 958
OTHER LIABILITIES 472 449
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
Issued: 118,400,635 shares in 1998 and 1997 1 1
Additional contributed capital (131) (119)
Treasury stock, at cost (5,629,677 and 992,828 shares in 1998
and 1997, respectively) (143) (22)
Unearned ESOP shares (25) (31)
Accumulated other comprehensive income 19 12
Reinvested earnings 272 28
-------- --------
TOTAL SHAREHOLDERS' DEFICIT (7) (131)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $2,765 $2,768
======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
SOLUTIA INC. 1998 ANNUAL REPORT 29
<PAGE>
<PAGE>
1998
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOW
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
------- ------- -------
Dollars in millions
<S> <C> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 249 $ 192 $ 32
Adjustments to reconcile to Cash From Operations:
Items that did not use (provide) cash:
Deferred income taxes 31 32 (45)
Depreciation and amortization 141 142 166
Restructuring expenses - net - - 192
Other 18 (39) 43
Working capital changes that provided (used) cash:
Trade receivables 68 (9) (43)
Inventories (6) (32) 20
Accounts payable and accrued liabilities 3 (115) (33)
Other 15 (45) 24
Other items 18 33 (20)
------- ------- -------
TOTAL CASH FROM OPERATIONS 537 159 336
------- ------- -------
INVESTING ACTIVITIES:
Property, plant and equipment purchases (158) (165) (192)
Acquisition and investment payments (8) (2) (17)
Investment and property disposal proceeds 22 9 4
------- ------- -------
CASH FROM INVESTING ACTIVITIES (144) (158) (205)
------- ------- -------
FINANCING ACTIVITIES:
Net transactions with Monsanto Company - 292 (131)
Long-term debt proceeds - 600 -
Net repayment of debt obligations (190) (840) -
Treasury stock purchases (161) (35) -
Dividend payments (5) (1) -
Common stock issued under employee stock plans 28 7 -
------- ------- -------
CASH FROM FINANCING ACTIVITIES (328) 23 (131)
------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 65 24 -
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 24 - -
------- ------- -------
END OF YEAR $ 89 $ 24 $ -
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
The effect of exchange rate changes on cash and cash equivalents was not
material.
Cash payments for interest (net of amounts capitalized) were $44 million
in 1998, $3 million in 1997 and $0 in 1996.
Cash payments for income taxes were $94 million in 1998, $30 million in
1997 and $0 in 1996.
30 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
1998
<TABLE>
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
------- --------- -------
Dollars in millions
<S> <C> <C> <C>
COMMON STOCK:
BALANCE, JANUARY 1 $ 1 $ - $ -
Issuance of 118,371,280 shares at Spinoff - 1
Issuance of 29,355 shares in 1997 for stock option
exercises - -
------- --------- -------
BALANCE, DECEMBER 31 $ 1 $ 1 $ -
------- --------- -------
ADDITIONAL CONTRIBUTED CAPITAL:
BALANCE, JANUARY 1 $(119) $ - $ -
Net liability transfer to Solutia at Spinoff - (101)
Post-Spinoff adjustments - (12)
Employee stock plans and ESOP (12) (6)
------- --------- -------
BALANCE, DECEMBER 31 $(131) $ (119) $ -
------- --------- -------
TREASURY STOCK:
BALANCE, JANUARY 1 $ (22) $ - $ -
Shares purchased (6,246,300 shares and 1,569,800
shares in 1998 and 1997, respectively) (161) (35)
Net shares issued under employee stock option plans
(1,609,451 shares and 576,972 shares in 1998 and
1997, respectively) 40 13
------- --------- -------
BALANCE, DECEMBER 31 $(143) $ (22) $ -
------- --------- -------
UNEARNED ESOP SHARES:
BALANCE, JANUARY 1 $ (31) $ - $ -
Transfer of ESOP reserve balance to Solutia at
Spinoff - (31)
Amortization of ESOP balance 6 -
------- --------- -------
BALANCE, DECEMBER 31 $ (25) $ (31) $ -
------- --------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
BALANCE, JANUARY 1 $ 12 $ - $ -
Accumulated currency adjustments 10 19
Minimum pension liability adjustments (3) (7)
------- --------- -------
BALANCE, DECEMBER 31 $ 19 $ 12 $ -
------- --------- -------
REINVESTED EARNINGS:
BALANCE, JANUARY 1 $ 28 $ - $ -
Net income 249 29
Dividends (5) (1)
------- --------- -------
BALANCE, DECEMBER 31 $ 272 $ 28 $ -
------- --------- -------
MONSANTO COMPANY EQUITY:
BALANCE, JANUARY 1 $ - $ 656 $ 755
Net income 32
Translation adjustments -
Net transactions with Monsanto Company prior to
Spinoff (131)
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, DECEMBER 31 $ - $ - $ 656
------- --------- -------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ (7) $ (131) $ 656
======= ========= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
SOLUTIA INC. 1998 ANNUAL REPORT 31
<PAGE>
<PAGE>
1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in millions, except per share amounts
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 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. Solutia has completed the transition
to services independent of Monsanto for many of these contracts and
anticipates the remaining transitions will be completed in accordance
with the transition timeline.
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 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 subsequently 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 were not included in the 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.
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
Basic Earnings per Share $1.33 $0.15
Diluted Earnings per Share $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.
<PAGE>
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 and $85 million in 1997 and 1996,
respectively. In preparation for the Spinoff, 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.
32 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
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 did not have 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 total net assets.
The allocation methodology followed in preparing the pre-Spinoff
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 health care 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.
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and temporary investments with
maturities of three months or less when purchased.
INVENTORY VALUATION
Inventories are stated at cost or market, whichever is less. Actual cost
is used to value raw materials and supplies. Standard cost, which
approximates actual cost, is used to value finished goods and goods in
process. Standard cost includes direct labor and raw materials, and
manufacturing overhead based on practical capacity. The cost of certain
inventories (78 percent as of December 31, 1998) 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.
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 years for
buildings and 10 years for machinery and equipment, by the straight-line
method.
<PAGE>
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.
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
SOLUTIA INC. 1998 ANNUAL REPORT 33
<PAGE>
<PAGE>
1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 collectability 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.
REVENUE RECOGNITION
Revenues are recorded when products are shipped.
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, the German
deutsche mark and the Brazilian real. Currency restrictions are not
expected to have a significant effect on Solutia's cash flow, liquidity
or capital resources.
INCOME TAXES
Subsequent to the Spinoff, Solutia became responsible for paying its own
income taxes and filing 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 were 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.
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.
EARNINGS PER SHARE
Effective December 31, 1997, Solutia adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under this
standard, the presentation of primary and fully diluted earnings per
share required by previous standards was 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
by 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.
COMPREHENSIVE INCOME
Effective January 1, 1998, Solutia adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes the standards for
reporting and displaying comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income
includes net income and several other items that were recognized
directly in equity under previous accounting standards.
<PAGE>
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
------------------------
<S> <C> <C>
Intercompany sales $42 $63
General and administrative services 12 85
Interest expense 26 36
</TABLE>
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
34 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
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
In December 1996, Solutia recorded pretax restructuring charges of $256
million ($164 million aftertax) to cover costs associated with the
closure or sale of certain facilities, asset write-offs, and work force
reductions of approximately 900 people across all regions and areas of
the company. These actions were necessary primarily because of excess
production capacity, coupled with insufficient demand for certain
products. Such charges included pretax amounts for asset impairments
totaling $56 million that was charged against cost of goods sold. Asset
values were written down to their discounted cash values, using
appropriate discount rates.
1998 actions taken under the 1996 restructuring plan included
continuing the shutdowns of certain facilities and headcount reductions
of approximately 50 people. The 50 people severed were in almost all
areas of the company and had left the company by the end of 1998.
Solutia also terminated approximately 100 individuals during December
1998 who will not leave the company until various dates in the first
half of 1999. Evaluations of the costs to complete the company's
restructuring plans yielded lower cost estimates for certain of the
restructuring actions. The second quarter 1998 review yielded lower cost
estimates to complete the shutdown of certain facilities and resulted in
the reversal of $3 million ($2 million aftertax) in that quarter. The
third and fourth quarter 1998 reviews yielded downward revisions of the
costs to implement the employment reduction plans due to higher than
anticipated attrition that has reduced employment levels without
additional cost to the company. As a result, the company reversed
restructuring reserves of $3 million ($2 million aftertax) in the third
quarter 1998 and $3 million ($2 million aftertax) in the fourth quarter.
Significant progress was made on the 1996 restructuring during 1997,
with employment being reduced by approximately 600 people. Employees
terminated were from all regions and areas of the company.
In December 1995, the board of directors of Monsanto approved a
plan of restructuring resulting in a pretax charge of $66 million ($57
million aftertax). The charge covered the costs of work force
reductions, business consolidations, facility closures, and the exit
from nonstrategic businesses and facilities. Significant progress was
made toward the completion of the 1995 restructuring during 1996. The
actions resulted in reduced employment of approximately 100 people and
the closure of certain facilities. Reviews of the 1995 restructuring
reserves during 1997 resulted in a second quarter reversal of $8 million
($5 million aftertax) due to lower exit costs associated with the sale
and closure of nonstrategic facilities. As of December 31, 1998, the
restructuring reserves established in 1995 had been utilized.
The table below summarizes the company's 1995 and 1996
restructuring charges and the costs to implement the restructuring
actions:
<TABLE>
<CAPTION>
Employee Shutdown Asset
Reductions of Facilities Impairments Total
--------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 22 $ 60 $ - $ 82
Charges 157 43 56 256
Amounts utilized (32) (49) - (81)
--------------------------------------------------------
Balance at December 31, 1996 $147 $ 54 $ 56 $ 257
--------------------------------------------------------
Amounts utilized (80) (9) (56) (145)
Adjustments - (8) - (8)
--------------------------------------------------------
Balance at December 31, 1997 $ 67 $ 37 $ - $ 104
--------------------------------------------------------
Amounts utilized (24) (16) - (40)
Adjustments (6) (3) - (9)
--------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 37 $ 18 $ - $ 55
========================================================
</TABLE>
Restructuring expenses were recorded based on estimates prepared
at the time the restructuring actions were approved by the board of
directors. The 1997 and 1998 adjustments to these estimates, shown in
the table above, were credited to costs of goods sold in the respective
year. The timetable for completing all employee-related actions planned
in the 1996 restructuring has extended beyond management's original
estimates due to the efforts required to complete the separation from
Monsanto and to complete the transition to new business systems and
methodologies. Management believes that the balance of these reserves as
of December 31, 1998 is adequate for completion of those activities
during 1999.
<PAGE>
5> INVESTMENTS IN AFFILIATES
At December 31, 1998, Solutia's investments in affiliates consisted
principally of its 50 percent interests in the Flexsys, L.P. ("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 100 percent of
the Flexsys and AES joint ventures follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales $838 $865 $779
Net income 94 78 64
FINANCIAL POSITION:
Total assets $976 $899 $853
Total liabilities 336 254 237
</TABLE>
SOLUTIA INC. 1998 ANNUAL REPORT 35
<PAGE>
<PAGE>
1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6> INVENTORY VALUATION
The components of inventories were:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Finished goods $ 252 $ 259
Goods in process 87 60
Raw materials and supplies 116 148
-------------------------
Inventories, at FIFO cost 455 467
Excess of FIFO over LIFO cost (124) (142)
-------------------------
TOTAL $ 331 $ 325
=========================
</TABLE>
Inventories at FIFO approximate current cost. The effects
of LIFO inventory liquidations were not significant in 1998
and 1997; liquidations increased pretax income by $5 million
in 1996.
7> INCOME TAXES
The components of income before income taxes were:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
United States $285 $187 $11
Outside United States 90 103 22
------------------------------------
TOTAL $375 $290 $33
====================================
</TABLE>
The components of income tax expense charged to operations were:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $ 66 $36 $ 13
U.S. state 3 7 2
Outside United States 25 23 31
------------------------------------
94 66 46
------------------------------------
Deferred:
U.S. federal 21 19 (21)
U.S. state 6 2 (1)
Outside United States 5 11 (23)
------------------------------------
32 32 (45)
------------------------------------
TOTAL $126 $98 $ 1
====================================
</TABLE>
Factors causing Solutia's effective tax rate to differ from the
U.S. federal statutory rate were:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
U.S. federal statutory rate 35% 35% 35%
U.S. state income taxes 2 2 1
Tax benefit of foreign sales corporation (2) (2) (23)
Taxes related to foreign income,
net of credits - - 3
Income from equity affiliates
recorded net of tax (2) (3) (13)
Other 1 2 -
------------------------------------
EFFECTIVE INCOME TAX RATE 34% 34% 3%
====================================
</TABLE>
<PAGE>
Deferred income tax balances were related to:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Property $(174) $(177)
Postretirement benefits 393 394
Restructuring reserves 31 51
Environmental liabilities 72 80
Inventory 5 (2)
Other 31 41
-------------------------
NET ASSET $ 358 $ 387
=========================
</TABLE>
Income taxes and remittance taxes have not been recorded on $60
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 $0 as of December 31, 1998 and $190 million as
of December 31, 1997. The weighted average interest rate on total debt
outstanding at December 31, 1997, was 6.99 percent. Interest expense on
commercial paper balances charged to income during 1998 and 1997, for
the period following the Spinoff, were at weighted average rates of 5.65
percent and 5.78 percent, respectively.
As of December 31, 1998, 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 Solutia's ability 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, 1998, and December 31, 1997.
LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
6.5% notes due 2002 $150 $150
7.375% debentures due 2027 300 300
6.72% debentures due 2037 150 150
Unamortized debt discount (3) (3)
------------------------
TOTAL $597 $597
========================
</TABLE>
The notes and debentures are unsecured obligations. Interest is
payable semiannually, on April 15 and October 15 of each year. The
36 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
holders of the 2037 debentures have the right to require repayment on
October 15, 2004. 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,
1998, and December 31, 1997, was $587 million and $605 million,
respectively. These estimates compare with the recorded amount of $597
million in both years.
The recorded amounts of cash, trade receivables, third-party
guarantees, and accounts payable approximate their fair values at both
December 31, 1998, and December 31, 1997. The estimated fair value of
the company's foreign currency forward contracts approximates their
notional amounts. Notional amounts at December 31, 1998, and December
31, 1997, for purchase contracts were $34 million and $22 million,
respectively, and for sell contracts were $34 million and $22 million,
respectively.
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, 1998, and
December 31, 1997. The fair-value estimates do not necessarily reflect
the values Solutia could realize in the current market.
10> POSTRETIREMENT BENEFITS - PENSIONS
Effective December 31, 1998, the company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," which standardizes, to the extent practicable, the disclosure
requirements for pensions and other postretirement benefits and which
requires disclosure of the components of the changes in the benefit
obligation and fair values of plan assets. Information for 1997 has been
restated to conform to the new presentation.
Pension benefits are based on the employee's age, years of
service, and 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. Prior to the Spinoff, the majority of
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
applicable active employees and for certain former employees who left
Monsanto in earlier years.
The company's net pension cost was $22 million in 1998 and $28
million in 1997. Net pension cost for 1997 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 in 1996. 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. For 1998 and the four
months of 1997 subsequent to the Spinoff, the company's net pension
costs were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Service costs for benefits earned $ 33 $ 11
Interest cost on benefit obligation 130 52
Assumed return on plan assets (147) (53)
Prior service costs 19 4
Transition asset (10) (4)
Unrecognized loss (3) (1)
-------------------------
TOTAL $ 22 $ 9
=========================
</TABLE>
Components of the changes in the projected benefit obligation are
as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
Projected benefit obligation at Spinoff $1,768
Projected benefit obligation at January 1 $1,824 -
Service costs 33 11
Interest cost 130 52
Actuarial gains and losses 214 58
Benefits paid (229) (75)
Plan amendments 11 10
-----------------------
PROJECTED BENEFIT OBLIGATION AT DECEMBER 31 $1,983 $1,824
=======================
</TABLE>
<PAGE>
Changes in the fair value of plan assets are as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
Fair value of plan assets at Spinoff $1,838
Fair value of plan assets at January 1 $1,834 -
Actual return on plan assets 288 68
Benefits paid (212) (72)
-----------------------
FAIR VALUE OF PLAN ASSETS AT DECEMBER 31 $1,910 $1,834
=======================
</TABLE>
Plan assets consist principally of common stocks and U.S.
government and corporate obligations. Contributions to these plans were
neither required nor made in 1998 and 1997 because Solutia's principal
pension plan is adequately funded, using assumed returns.
The funded status of Solutia's pension plans at the 1998 and 1997
year-ends were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Funded status $ (73) $ 10
Less:
Unrecognized initial net gain 228 269
Unrecognized prior service costs (184) (178)
Additional liability 19 14
Unrecognized subsequent net gain 23 33
-------------------------
ACCRUED NET PENSION LIABILITY $ 159 $ 128
=========================
</TABLE>
The accrued net pension liability was included in:
<TABLE>
<S> <C> <C>
Postretirement liabilities $168 $136
Less: Other assets 9 8
-------------------------
ACCRUED NET PENSION LIABILITY $159 $128
=========================
</TABLE>
SOLUTIA INC. 1998 ANNUAL REPORT 37
<PAGE>
<PAGE>
1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding plans with accumulated benefit obligations
in excess of plan assets is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Projected benefit obligation $27 $27
Accumulated benefit obligation 23 22
Fair value of plan assets - -
</TABLE>
The significant actuarial assumptions used to estimate the
projected benefit obligation for the company's principal pension plan
were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------
<S> <C> <C>
Discount rate 7.00% 7.25%
Assumed long-term rate of return on plan assets 9.50% 9.50%
Annual rates of salary increase (for plans that
base benefits on final compensation level) 4.00% 4.00%
</TABLE>
11> POSTRETIREMENT BENEFITS - HEALTH CARE AND OTHER
As discussed in Note 10 above, Solutia adopted SFAS No. 132 effective
December 31, 1998. Disclosures for periods prior to 1998 have been
restated.
The majority of 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. In connection with the Spinoff,
Solutia assumed retiree medical liabilities for its applicable active
employees and for approximately two-thirds of the retired U.S. employees
of Monsanto.
During the second quarter of 1998, Solutia amended certain of its
postretirement health care plans, primarily to adjust cost-sharing
provisions. The amendment resulted in a $161 million reduction in the
company's accumulated postretirement benefit obligation, which is being
amortized over the average remaining service life of plan participants
of approximately 12 years.
Solutia's postretirement benefit costs were $54 million in both
1998 and 1997. The 1997 postretirement benefit cost 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. 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. For the year ended December 31, 1998 and the
four months of 1997 subsequent to the Spinoff, the company's
postretirement benefit costs were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Service costs for benefits earned $ 11 $ 4
Interest cost on benefit obligation 54 20
Prior service costs (12) -
Unrecognized net gain/(loss) 1 (1)
------------------------
TOTAL $ 54 $23
========================
</TABLE>
<PAGE>
Information regarding the changes in the accumulated benefit
obligation and the status of Solutia's postretirement health care plans,
life insurance plans, and employee disability plans follows:
<TABLE>
<CAPTION>
1998 1997
----------------------
<S> <C> <C>
Accumulated benefit obligation at Spinoff $901
Accumulated benefit obligation at January 1 $ 918 -
Service costs 11 4
Interest cost 54 20
Participant contributions 1 -
Actuarial gains and losses (19) 17
Benefits paid (78) (24)
Plan amendments (161) -
----------------------
ACCUMULATED BENEFIT OBLIGATION AT DECEMBER 31 726 918
Unrecognized benefits from prior service 176 27
Unrecognized subsequent net loss (11) (32)
----------------------
ACCRUED LIABILITY $ 891 $913
======================
</TABLE>
The accrued liability was included in:
<TABLE>
<S> <C> <C>
Miscellaneous accruals $ 88 $ 91
Postretirement liabilities 803 822
----------------------
ACCRUED LIABILITY $ 891 $913
======================
</TABLE>
Postretirement benefit costs were determined using the following
rate assumptions:
<TABLE>
<CAPTION>
1998 1997
---------------------
<S> <C> <C>
Discount rate 7.00% 7.25%
Assumed trend rate for health care costs 5.00% 5.00%
Ultimate trend rate for health care costs 5.00% 5.00%
</TABLE>
A 1 percent change in the assumed health care cost trend rates
would have the following effect as of December 31, 1998:
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
----------------------------------------
<S> <C> <C>
Effect on total service and
interest cost components $1 $ 1
Effect on postretirement
benefit obligation 7 10
</TABLE>
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 $16
million in 1998, $10 million in 1997, and $11 million in 1996.
38 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
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 stock
and use the proceeds to acquire Solutia common stock. The divestiture of
Monsanto common stock and the purchase of Solutia common stock were
completed in early 1998. The trust held approximately 10.7 million
shares of Solutia common stock at December 31, 1998.
A portion of the ESOP shares are allocated each year to employee
savings accounts as matching contributions. During 1998 and 1997,
622,598 shares and 232,674 shares, respectively, were allocated to
participants' accounts under the plan, leaving 3,887,519 unallocated
shares as of December 31, 1998. 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>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Total ESOP expense $6 $5 $3
Interest portion of total ESOP expense 2 3 2
Cash contributions 7 - -
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 incentives to officers and employees of the company and its
subsidiaries 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 to
the company's officers and employees. Shares used may be either newly
issued shares and/or treasury shares. Under the 1997 Plan, the exercise
price of a stock option must be no less than the fair market value of
the company's 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 10 years. As of December 31, 1998, approximately
3,064,732 shares of company's common stock remained available for grants
under the Plan.
During 1998, non-qualified stock options to purchase 26,000 shares
of the company's common stock were granted under the 1997 Plan to
current executive officers and other senior executives as a group, and
non-qualified stock options to purchase 231,567 shares were granted to
other employees at an average exercise price of $26.98 per share. Total
shares covered by options granted under the 1997 Plan to current
executive officers and other senior executives as a group and other
employees were 1,072,000 and 3,751,067, respectively, as of December 31,
1998. The options granted to the company's executive officers and other
senior executives are performance options that vest upon achievement of
specified share price targets. 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.
<PAGE>
Effective January 1, 1996, Solutia adopted 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 No. 123,
Solutia's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
NET INCOME:
As reported $ 249 $ 192 $ 32
Pro forma 224 159 18
DILUTED EARNINGS PER SHARE:
As reported $2.03 $1.55 $0.27
Pro forma 1.82 1.29 0.15
</TABLE>
Compensation expense resulting from the fair value method of SFAS
No. 123 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 use of the Black-Scholes option-pricing model.
SOLUTIA INC. 1998 ANNUAL REPORT 39
<PAGE>
<PAGE>
1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following weighted-average assumptions were used to calculate
the expense attributable to the company for Monsanto Options granted to
company employees in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Expected dividend yield 0.3% 1.5%
Expected volatility 27.0% 25.0%
Risk-free interest rates 6.3% 6.0%
Expected option lives (years) 4.0 4.0
</TABLE>
The following weighted-average assumptions were used for grants of
Solutia options in 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Expected dividend yield 0.2% 0.2%
Expected volatility 28.0% 25.0%
Risk-free interest rates 5.1% 5.9%
Expected option lives (years) 5.0 4.0
</TABLE>
The weighted-average fair values of options granted during 1998,
1997 and 1996 were $9.33, $4.83, and $6.43 per share, respectively.
A summary of the status of the company's stock option plans for
year ended December 31, 1998, and 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
-------------------------------------------------------------
Granted 257,567 26.98
Exercised (1,833,225) 12.19
Expired (475,637) 16.22
-------------------------------------------------------------
DECEMBER 31, 1998 22,946,490 25,766,433 $14.77
=============================================================
</TABLE>
The following table summarizes information about stock options
outstanding as of December 31, 1998:
OPTIONS OUTSTANDING:
<TABLE>
<CAPTION>
Weighted-Average
Range of Remaining Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price
---------------------------------------------------------------
<C> <C> <C> <C>
$ 3 to 7 4,964,597 4.2 years $ 5.84
8 to 11 49,679 6.9 years 10.09
12 to 15 1,537,049 7.2 years 12.63
16 to 18 14,331,393 8.0 years 16.44
19 to 23 4,656,874 8.7 years 19.32
24 to 29 226,841 9.4 years 27.53
---------------------------------------------------------------
$ 3 to 29 25,766,433 7.4 years $14.77
===============================================================
</TABLE>
<PAGE>
OPTIONS EXERCISABLE:
<TABLE>
<CAPTION>
Range of Weighted-Average
Exercise Prices Shares Exercise Price
------------------------------------------
<C> <C> <C>
$ 3 to 7 4,964,597 $ 5.84
8 to 11 46,179 10.09
12 to 15 1,531,849 12.62
16 to 18 14,330,393 16.44
19 to 23 2,073,472 19.32
24 to 29 - -
------------------------------------------
$ 3 to 29 22,946,490 $14.14
==========================================
</TABLE>
14> ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 provides comprehensive and consistent standards for the
recognition and measurement of derivative and hedging activities. It
requires that derivatives be recorded on the Statement of Consolidated
Financial Position at fair value and establishes criteria for hedges of
changes in the fair value of assets, liabilities or firm commitments,
hedges of variable cash flows of forecasted transactions, and hedges of
foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives that do not meet the criteria
for hedges would be recognized in the Statement of Consolidated Income.
This statement will be effective for the company beginning January 1,
2000. The company is evaluating SFAS No. 133 and has not determined its
effect on the consolidated financial statements.
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 shareholders 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
40 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
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, 1998, there were no
preferred shares issued or outstanding.
16> COMMITMENTS AND CONTINGENCIES
Commitments, principally in connection with uncompleted additions to
property, were approximately $216 million as of December 31, 1998.
Solutia was contingently liable as a guarantor for bank loans totaling
approximately $14 million as of December 31, 1998. In addition, as of
December 31, 1998, the company was contingently liable under letters of
credit, primarily related to environmental remediation, of $88 million.
Solutia's future minimum payments under noncancelable operating leases
and unconditional purchase obligations are $20 million for 1999, $17
million for 2000, $14 million for 2001, $12 million for 2002, $46
million for 2003 and $57 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, 1998 and 1997, the unamortized deferred credits were
approximately $137 million and approximately $59 million, respectively.
The more significant concentrations in Solutia's trade receivables
at year-end were:
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
U.S. chemical industry $55 $130
U.S. carpet industry 51 73
European glass industry 36 -
European chemical industry - 41
</TABLE>
Management does not anticipate losses on its trade receivables in
excess of established allowances.
Solutia's Statement of Consolidated Financial Position included
accrued liabilities of $198 million and $217 million as of December 31,
1998 and 1997, respectively, for the remediation of identified waste
disposal sites. Expenditures related to remediation activities were $22
million in 1998, $39 million in 1997, and $59 million in 1996. Solutia
recorded charges against cost of goods sold 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 SOP 96-1,
"Environmental Remediation Liabilities." SOP 96-1 establishes
authoritative guidance regarding the recognition, measurement and
disclosure of environmental remediation liabilities. A charge to cost of
goods sold 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 against cost of goods sold of
approximately $38 million ($24 million aftertax) associated with these
RCRA environmental liabilities.
Uncertainties related to all of the company's environmental
liabilities include 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 have a material adverse effect on Solutia's
consolidated financial position, liquidity, or profitability in any one
year.
<PAGE>
Monsanto is a party to a number of lawsuits and claims relating to
Solutia, for which Solutia assumed responsibility in the Spinoff. In
addition, Solutia is also a named party in a number of lawsuits and
claims directly. Solutia intends to defend all suits and claims
vigorously. Such matters arise out of the normal course of business and
relate to product liability; government regulation, including
environmental issues; employee relations; and other issues. Certain of
the lawsuits and claims seek damages in very large amounts. Although the
results of litigation cannot be predicted with certainty, management's
belief is that the final outcome of such litigation will not have a
material adverse effect on Solutia's consolidated financial position,
liquidity or profitability in any one year, as applicable.
17> SUPPLEMENTAL DATA
Supplemental income statement data were:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Raw material and energy costs $994 $1,102 $1,059
Employee compensation and benefits 757 746 715
Current income and other taxes 176 149 134
Rent expense 26 28 29
Technological expenses:
Research and development 60 60 81
Engineering, commercial
development and patent 23 27 7
--------------------------------
Total technological expenses 83 87 88
</TABLE>
SOLUTIA INC. 1998 ANNUAL REPORT 41
<PAGE>
<PAGE>
1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Interest expense:
Total interest cost $49 $49 $41
Less capitalized interest 6 8 5
-------------------------------
Net interest expense 43 41 36
Currency losses including equity in
affiliates' currency gains and losses 2 6 2
</TABLE>
18> SEGMENT AND GEOGRAPHIC DATA
Effective December 31, 1997, Solutia adopted 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, upholstery 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.
Solutia's three reportable segments are groupings of the company's
10 business units, which are managed to focus on the company's key
technological strengths of polymer chemistry, fiber technology, process
engineering expertise, technical service, and customer problem solving.
Business units sharing similar economic characteristics and similarities
in the areas of products, production processes, types of customers, and
methods of distribution, were aggregated.
During 1998, Solutia announced that it was reviewing options for
its phosphorus derivatives business that included sale, alliance or
joint venture. Solutia is primarily pursuing the sale of the business,
but is still considering all alternatives. Upon completion of this
divestiture, chemicals segment results will be restated to reflect the
company's ongoing segments.
Accounting policies of the segments are the same as those
described in the summary of significant accounting policies in Note 2.
However, segment profit reflects only 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.
<PAGE>
Solutia's 1998 and 1997 segment information follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
NET INTERSEGMENT Net Intersegment
SEGMENT: SALES SALES PROFIT Sales Sales Profit
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chemicals $ 884 $ 7 $ 226 $ 965 $ 18 $ 231
Fibers 962 - 200 979 - 161
Polymers & Resins 994 - 270 1,041 5 272
--------------------------------------- ---------------------------------------
SEGMENT TOTALS 2,840 7 696 2,985 23 664
RECONCILIATION TO CONSOLIDATED TOTALS:
Sales eliminations (7) (7) (23) (23)
Other revenues 2 7
Less unallocated service costs:
Cost of goods sold (70) (148)
Marketing, administrative and
technological expenses (240) (226)
Equity earnings from affiliates 25 31
Interest expense (43) (41)
Other income (expense)-net 7 10
CONSOLIDATED TOTALS:
------------------------------- -------------------------------
NET SALES $2,835 $ - $2,969 $ -
===============================-------- ===============================--------
INCOME BEFORE INCOME TAXES $ 375 $ 290
======== ========
</TABLE>
42 SOLUTIA INC. 1998 ANNUAL REPORT<PAGE>
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------------------------------
1998 1997
-------------------------------------------- ------------------------------------------
CAPITAL DEPRECIATION AND Capital Depreciation and
SEGMENT: ASSETS EXPENDITURES AMORTIZATION Assets Expenditures Amortization
-------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chemicals $ 637 $ 87 $ 38 $ 601 $ 50 $ 37
Fibers 377 8 25 400 33 26
Polymers & Resins 592 30 38 571 55 41
-------------------------------------------- ------------------------------------------
SEGMENT TOTALS 1,606 125 101 1,572 138 104
RECONCILIATION TO CONSOLIDATED TOTALS:
Unallocated amounts 1,159 33 40 1,196 27 38
-------------------------------------------- ------------------------------------------
CONSOLIDATED TOTALS $2,765 $158 $141 $2,768 $165 $142
============================================ ==========================================
</TABLE>
Solutia's geographic information for 1998 and 1997 follows:
<TABLE>
<CAPTION>
Net Sales Long-Lived Assets
----------------------- ---------------------
1998 1997 1998 1997
----------------------- ---------------------
<S> <C> <C> <C> <C>
U.S. $2,009 $2,030 $820 $803
Other countries 826 939 124 120
----------------------- ---------------------
CONSOLIDATED TOTALS $2,835 $2,969 $944 $923
======================= =====================
</TABLE>
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 1998 $ 720 $ 745 $ 703 $ 667 $2,835
1997 719 770 749 731 2,969
Gross Profit 1998 187 206 188 169 750
1997 176 189 173 115 653
Operating Income 1998 99 115 95 77 386
1997 95 97 88 10 290
Net Income 1998 64 72 58 55 249
1997 65 62 56 9 192
Basic Earnings per Share 1998 0.55 0.62 0.50 0.49 2.16
1997 0.56 0.53 0.47 0.08 1.63
Diluted Earnings per Share 1998 0.51 0.58 0.47 0.46 2.03
1997 0.54 0.51 0.46 0.06 1.55
Common Stock Price:
1998 HIGH 32 30 5/16 30 15/16 28 1/2 32
LOW 24 3/16 25 9/16 21 1/2 18 11/16 18 11/16
1997 High - - 21 1/2 27 3/4 27 3/4
Low - - 18 11/16 19 1/2 18 11/16
</TABLE>
Net income in the second, third and fourth quarters of 1998
includes aftertax reversals of excess restructuring reserves established
in 1996 of $2 million, $2 million and $2 million, respectively. In the
third quarter of 1998, net income includes an aftertax charge of $3
million to reduce the carrying value of certain slow-moving inventories
to their net realizable value. Net income for the fourth quarter of 1998
includes an aftertax charge of $4 million that was caused by losses on
the disposition of certain non-salable inventories.
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.
Under SFAS No. 128, "Earnings per Share," the quarterly and total
year calculations of basic and diluted earnings per share are based on
weighted average shares outstanding for that quarterly or total year
period, respectively. As a result, the sum of diluted earnings per share
for the quarterly periods may not equal total year earnings per share.
Because Solutia was not formed as an independent public company
until September 1, 1997, common stock price information for the first
and second quarters of 1997 is not available.
SOLUTIA INC. 1998 ANNUAL REPORT 43
<PAGE>
<PAGE>
1998
FINANCIAL SUMMARY
Dollars in millions, except per share amounts
<TABLE>
<CAPTION>
Historical Unaudited Pro Forma<F1>
-------------------------------------------------------------- -------------------------
OPERATING RESULTS: 1998 1997 1996 1995 1994 1997 1996
-------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES<F2> $ 2,835 $ 2,969 $2,977 $2,964 $3,097 $2,960 $2,962
GROSS PROFIT 750 653 652 721 729 647 649
As percent of net sales 26% 22% 22% 24% 24% 22% 22%
MARKETING, ADMINISTRATIVE AND
TECHNOLOGICAL EXPENSES 364 363 427 410 439 393 420
As percent of net sales 13% 12% 14% 14% 14% 13% 14%
OPERATING INCOME<F3> 386 290 33 258 256 254 37
As percent of net sales 14% 10% 1% 9% 8% 9% 1%
INCOME BEFORE INCOME TAXES 375 290 33 231 228 235 9
NET INCOME<F4> 249 192 32 147 149 157 17
As percent of net sales 9% 6% 1% 5% 5% 5% <1%
SHARE DATA:
-------------------------------------------------------------- -------------------------
BASIC EARNINGS PER SHARE<F5> $ 2.16 $ 1.63 $ 0.28 $ 1.30 $ 1.30 $ 1.33 $ 0.15
DILUTED EARNINGS PER SHARE<F5> 2.03 1.55 0.27 1.27 1.27 1.27 0.14
DIVIDENDS PER SHARE 0.04 0.01 - - - - -
COMMON STOCK PRICE:
HIGH 32 27 3/4 - - - - -
LOW 18 11/16 18 11/16 - - - - -
CLOSE 22 3/8 26 11/16 - - - - -
PRICE/EARNINGS RATIO ON YEAR-END
STOCK PRICE 11 17 - - - - -
NUMBER OF REGISTERED SHAREHOLDERS 41,864 57,894 - - - - -
YEAR-END SHARES OUTSTANDING
(IN THOUSANDS) 112,771 117,408 - - - - -
SHARES REPURCHASED (IN THOUSANDS) 6,246 1,570 - - - - -
AVERAGE DAILY TRADING VOLUME
(IN THOUSANDS) 401 1,053 - - - - -
OTHER DATA:
-------------------------------------------------------------- -------------------------
INTEREST EXPENSE<F6> $ 43 $ 41 $ 36 $36 $ 29 $ 60 $ 64
INCOME TAXES 126 98 1 84 79 78 (8)
DEPRECIATION AND AMORTIZATION 141 142 166 162 219 142 166
TOTAL ASSETS 2,765 2,768 2,483 2,462 2,435 - -
CAPITAL EXPENDITURES 158 165 192 179 187 - -
INTERCOMPANY CHARGES<F7> - 12 85 72 69 - -
LONG-TERM DEBT<F6> 597 597 - - - - -
EMPLOYEES (YEAR-END) 8,700 8,800 - - - - -
-------------------------------------------------------------- -------------------------
<PAGE>
<FN>
<F1> The unaudited pro forma financial information is presented for
illustrative purposes only and has been included in this summary
because it produces more meaningful comparisons than the
historical financial information. 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 and $400
million in 1994 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 for restructuring and other
actions of $1 million in 1998, $84 million in 1997, $248 million
in 1996, $46 million in 1995, and $34 million in 1994.
<F4> Net income includes charges for restructuring and other actions of
$1 million or $0.01 per share in 1998, $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, and $21 million, or $0.18
per share in 1994.
<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 that management believes to be reasonable.
</TABLE>
44 SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>
1998
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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 dates 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>
Dollars in millions,
except per share amounts 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
=========================================== ========================================
BASIC EARNINGS PER SHARE $ 1.63 $(0.30) $ 1.33 $ 0.28 $(0.13) $ 0.15
=========================================== ========================================
DILUTED EARNINGS PER SHARE $ 1.55 $(0.28) $ 1.27 $ 0.27 $(0.13) $ 0.14
=========================================== ========================================
Basic Weighted Average Shares 117.7 116.2
=========================================== ========================================
Diluted Weighted Average Shares 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>
SOLUTIA INC. 1998 ANNUAL REPORT 45
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of Solutia's subsidiaries as of December
31, 1998, 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>
24
<PAGE>
EXHIBIT 23
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, 333-35689, 333-47911 and
333-51081) of our opinions dated February 24, 1999 (which includes
an explanatory paragraph as to a change in the method of accounting
in 1997), appearing in and incorporated by reference in this annual
report on Form 10-K of Solutia Inc. for the year ended December 31,
1998.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
St. Louis, Missouri
March 15, 1999
25
<PAGE>
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,
as amended; (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.
Non-Employee Director Compensation Plan; (iii) the Registration
Statement on Form S-8 and any Amendments thereto to be filed with the
Commission under the Act, covering the registration of additional
securities of the Company to be issued under the Solutia Inc. Savings
and Investment Plan; and (iv) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683,
333-35689, 333-47911, and 333-51081, all on Form S-8, which have
previously been filed with the Commission under the Act, covering the
registration of securities of the Company; 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 19th day of January, 1999.
/s/ Robert G. Potter
--------------------------------------
Robert G. Potter
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 19th day of January, 1999, 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/ 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>
<PAGE>
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, as amended; (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. Non-Employee Director
Compensation Plan; (iii) the Registration Statement on Form S-8 and any
Amendments thereto to be filed with the Commission under the Act,
covering the registration of additional securities of the Company to be
issued under the Solutia Inc. Savings and Investment Plan; and (iv) any
Amendments to Registration Statements Nos. 333-34561, 333-34587,
333-34589, 333-34591, 333-34593, 333-34683, 333-35689, 333-47911, and
333-51081, all on Form S-8, which have previously been filed with the
Commission under the Act, covering the registration of securities of the
Company; 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 21st day of January, 1999.
/s/ John C. Hunter
--------------------------------------
John C. Hunter III
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 21st day of January, 1999, 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/ 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>
<PAGE>
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, as amended; (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. Non-Employee Director Compensation
Plan; (iii) the Registration Statement on Form S-8 and any Amendments thereto
to be filed with the Commission under the Act, covering the registration of
additional securities of the Company to be issued under the Solutia Inc.
Savings and Investment Plan; and (iv) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683,
333-35689, 333-47911, and 333-51081, all on Form S-8, which have
previously been filed with the Commission under the Act, covering the
registration of securities of the Company; 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 6th day of January, 1999.
/s/ Robert A. Clausen
--------------------------------------
Robert A. Clausen
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 6th day of January, 1999, 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/ Mary K. McBride
--------------------------------------
Notary Public
My Commission Expires: Mary K. McBride
Notary Public - State of Missouri
My Commission Expires 2/12/2002
St. Louis County
<PAGE>
<PAGE>
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, as amended;
(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. Non-Employee Director
Compensation Plan; (iii) the Registration Statement on Form S-8 and any
Amendments thereto to be filed with the Commission under the Act,
covering the registration of additional securities of the Company to be
issued under the Solutia Inc. Savings and Investment Plan; and (iv) any
Amendments to Registration Statements Nos. 333-34561, 333-34587,
333-34589, 333-34591, 333-34593, 333-34683, 333-35689, 333-47911, and
333-51081, all on Form S-8, which have previously been filed with the
Commission under the Act, covering the registration of securities of the
Company; 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 5th day of January, 1999.
/s/ Roger S. Hoard
--------------------------------------
Roger S. Hoard
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 5th day of January, 1999, 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>
<PAGE>
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,
as amended; (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.
Non-Employee Director Compensation Plan; (iii) the Registration
Statement on Form S-8 and any Amendments thereto to be filed with the
Commission under the Act, covering the registration of additional
securities of the Company to be issued under the Solutia Inc. Savings
and Investment Plan; and (iv) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683,
333-35689, 333-47911, and 333-51081, all on Form S-8, which have
previously been filed with the Commission under the Act, covering the
registration of securities of the Company; 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 19th day of January, 1999.
/s/ Robert T. Blakely
--------------------------------------
Robert T. Blakely
STATE OF CONNECTICUT )
) SS
COUNTY OF FAIRFIELD )
On this 19th day of January, 1999, 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/ John D. Sabia
--------------------------------------
Notary Public
My Commission Expires: 8/31/99
<PAGE>
<PAGE>
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,
as amended; (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.
Non-Employee Director Compensation Plan; (iii) the Registration
Statement on Form S-8 and any Amendments thereto to be filed with the
Commission under the Act, covering the registration of additional
securities of the Company to be issued under the Solutia Inc. Savings
and Investment Plan; and (iv) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683,
333-35689, 333-47911, and 333-51081, all on Form S-8, which have
previously been filed with the Commission under the Act, covering the
registration of securities of the Company; 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 6th day of January, 1999.
/s/ Joan T. Bok
--------------------------------------
Joan T. Bok
COMMONWEALTH OF MASSACHUSETTS )
) SS
COUNTY OF SUFFOLK )
On this 6th day of January, 1999, 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
--------------------------------------
Notary Public
My Commission Expires: Michelle McGee
Notary Public
My Commission Expires Jan. 28, 2005
<PAGE>
<PAGE>
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,
as amended; (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.
Non-Employee Director Compensation Plan; (iii) the Registration
Statement on Form S-8 and any Amendments thereto to be filed with the
Commission under the Act, covering the registration of additional
securities of the Company to be issued under the Solutia Inc. Savings
and Investment Plan; and (iv) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683,
333-35689, 333-47911, and 333-51081, all on Form S-8, which have
previously been filed with the Commission under the Act, covering the
registration of securities of the Company; 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 6th day of January, 1999.
/s/ Paul H. Hatfield
--------------------------------------
Paul H. Hatfield
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
On this 6th day of January, 1999, 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/ Lamontez G. Westfall
--------------------------------------
Notary Public
My Commission Expires: Lamontez G. Westfall
Notary Public - Notary Seal
State of Missouri
St. Louis County
My Commission Expires: April 18, 2000
<PAGE>
<PAGE>
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, as amended;
(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. Non-Employee Director
Compensation Plan; (iii) the Registration Statement on Form S-8 and any
Amendments thereto to be filed with the Commission under the Act,
covering the registration of additional securities of the Company to be
issued under the Solutia Inc. Savings and Investment Plan; and (iv) any
Amendments to Registration Statements Nos. 333-34561, 333-34587,
333-34589, 333-34591, 333-34593, 333-34683, 333-35689, 333-47911, and
333-51081, all on Form S-8, which have previously been filed with the
Commission under the Act, covering the registration of securities of the
Company; 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 18th day of January, 1999.
/s/ Robert H. Jenkins
--------------------------------------
Robert H. Jenkins
STATE OF ILLINOIS )
) SS
COUNTY OF WINNEBAGO )
On this 18th day of January, 1999, 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/ Christine M. Mattingly
--------------------------------------
Notary Public
My Commission Expires: 8/9/01
"Official Seal"
Christine M. Mattingly
Notary Public, State of Illinois
My Commission Expires 08/09/01
<PAGE>
<PAGE>
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, as amended; (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. Non-Employee Director Compensation Plan;
(iii) the Registration Statement on Form S-8 and any Amendments thereto
to be filed with the Commission under the Act, covering the registration
of additional securities of the Company to be issued under the Solutia
Inc. Savings and Investment Plan; and (iv) any Amendments to
Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591,
333-34593, 333-34683, 333-35689, 333-47911, and 333-51081, all on Form
S-8, which have previously been filed with the Commission under the Act,
covering the registration of securities of the Company; 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 15th day of January, 1999.
/s/ H. M. Love
--------------------------------------
Howard M. Love
COMMONWEALTH OF PENNSYLVANIA )
) SS
COUNTY OF ALLEGHENY )
On this 15th day of January, 1999, 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, Allegheny Co.
My Commission Expires April 14, 1999
<PAGE>
<PAGE>
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,
as amended; (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.
Non-Employee Director Compensation Plan; (iii) the Registration
Statement on Form S-8 and any Amendments thereto to be filed with the
Commission under the Act, covering the registration of additional
securities of the Company to be issued under the Solutia Inc. Savings
and Investment Plan; and (iv) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683,
333-35689, 333-47911, and 333-51081, all on Form S-8, which have
previously been filed with the Commission under the Act, covering the
registration of securities of the Company; 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 11th day of January, 1999.
/s/ Frank A. Metz, Jr.
--------------------------------------
Frank A. Metz, Jr.
STATE OF CALIFORNIA )
) SS
COUNTY OF RIVERSIDE )
On this 11th day of January, 1999, 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/ James A. Shaunty
--------------------------------------
Notary Public
My Commission Expires: Sept. 14, 2002
Official Seal
James A. Shaunty
Comm. #1193916
Notary Public - California
Riverside County
My Commission Expires
September 14, 2002
<PAGE>
<PAGE>
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,
as amended; (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.
Non-Employee Director Compensation Plan; (iii) the Registration
Statement on Form S-8 and any Amendments thereto to be filed with the
Commission under the Act, covering the registration of additional
securities of the Company to be issued under the Solutia Inc. Savings
and Investment Plan; and (iv) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683,
333-35689, 333-47911, and 333-51081, all on Form S-8, which have
previously been filed with the Commission under the Act, covering the
registration of securities of the Company; 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 11th day of January, 1999.
/s/ William D. Ruckelshaus
--------------------------------------
William D. Ruckelshaus
STATE OF WASHINGTON )
) SS
COUNTY OF KING )
On this 11th day of January, 1999, 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: 11/12/2007
<PAGE>
<PAGE>
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,
as amended; (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.
Non-Employee Director Compensation Plan; (iii) the Registration
Statement on Form S-8 and any Amendments thereto to be filed with the
Commission under the Act, covering the registration of additional
securities of the Company to be issued under the Solutia Inc. Savings
and Investment Plan; and (iv) any Amendments to Registration Statements
Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683,
333-35689, 333-47911, and 333-51081, all on Form S-8, which have
previously been filed with the Commission under the Act, covering the
registration of securities of the Company; 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 22nd day of January, 1999.
/s/ John B. Slaughter
--------------------------------------
John B. Slaughter
STATE OF CALIFORNIA )
) SS
COUNTY OF LOS ANGELES )
On this 22nd day of January, 1999, 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>
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 24, 1999, 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 1st day of
March, 1999.
/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. and
Subsidiaries for the year ended December 31, 1998, and the Statement
of Consolidated Financial Position as of December 31, 1998. 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 89
<SECURITIES> 0
<RECEIVABLES> 364
<ALLOWANCES> 7
<INVENTORY> 331
<CURRENT-ASSETS> 991
<PP&E> 3,301
<DEPRECIATION> 2,357
<TOTAL-ASSETS> 2,765
<CURRENT-LIABILITIES> 732
<BONDS> 597
<COMMON> 1
0
0
<OTHER-SE> (8)
<TOTAL-LIABILITY-AND-EQUITY> 2,765
<SALES> 2,835
<TOTAL-REVENUES> 2,835
<CGS> 2,085
<TOTAL-COSTS> 2,085
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 375
<INCOME-TAX> 126
<INCOME-CONTINUING> 249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 249
<EPS-PRIMARY> 2.16
<EPS-DILUTED> 2.03
</TABLE>
