-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KagHvv4bR5a1yofyvBXKHIzKfj3s0uFG0nGOM9cIMgU/4nIW2EL7f6E0iPeNDjxh XaMzo5JWw4X9nqOIOGa58A== 0001068800-99-000089.txt : 19990317 0001068800-99-000089.hdr.sgml : 19990317 ACCESSION NUMBER: 0001068800-99-000089 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLUTIA INC CENTRAL INDEX KEY: 0001043382 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 431781797 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13255 FILM NUMBER: 99565773 BUSINESS ADDRESS: STREET 1: 10300 OLIVE BLVD STREET 2: P O BOX 66760 CITY: ST LOUIS STATE: MO ZIP: 63166-6760 BUSINESS PHONE: 3146741000 MAIL ADDRESS: STREET 1: 10300 OLIVE BLVD STREET 2: P O BOX 66760 CITY: ST LOUIS STATE: MO ZIP: 63166-6760 FORMER COMPANY: FORMER CONFORMED NAME: QUEENY CHEMICAL CO DATE OF NAME CHANGE: 19970804 10-K405 1 SOLUTIA INC. FORM 10-K ==================================================================== 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 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-13255 --------- SOLUTIA INC. ------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 43-1781797 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER 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 -------------- 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 ------------------- --------------------- $.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 ---- (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). ==================================================================== 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. 1 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. 2 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"). 3 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. 4 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. 5 ("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 6 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. 7 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 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 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:
Plant Site Business Units Served - ---------- --------------------- 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
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:
Plant Site Business Units Served - ---------- --------------------- 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
10 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 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 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 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 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:
Year First Became an Executive Name-Age Present Position with Registrant Officer Other Business Experience since January 1, 1994 - ------------------------------------------------------------------------------------------------------------------------------- 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 Year First Became an Executive Name-Age Present Position with Registrant Officer Other Business Experience since January 1, 1994 - ------------------------------------------------------------------------------------------------------------------------------- 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.
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 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 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 SCHEDULE V SOLUTIA INC. ------------ VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
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 - ------------------------------------------------------------------------------------------------------------------- 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
19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SOLUTIA INC. By: /s/ ROGER S. HOARD ------------------------------- Roger S. Hoard Vice President and Controller (Principal Accounting Officer) Date: March 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.
SIGNATURE TITLE DATE --------- ----- ---- Chairman, Chief Executive Officer and March 16, 1999 - --------------------------------------------- Director (Principal Executive Officer) Robert G. Potter President and Director March 16, 1999 - --------------------------------------------- John C. Hunter III 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 Director March 16, 1999 - --------------------------------------------- Robert T. Blakely Director March 16, 1999 - --------------------------------------------- Joan T. Bok Director March 16, 1999 - --------------------------------------------- Paul H. Hatfield 20 Director March 16, 1999 - --------------------------------------------- Robert H. Jenkins Director March 16, 1999 - --------------------------------------------- Howard M. Love Director March 16, 1999 - --------------------------------------------- Frank A. Metz, Jr. Director March 16, 1999 - --------------------------------------------- William D. Ruckelshaus Director March 16, 1999 - --------------------------------------------- John B. Slaughter 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.
/s/ KARL R. BARNICKOL ------------------------------------ Karl R. Barnickol Attorney-in-Fact 21 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 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 EX-3.(B) 2 BY-LAWS 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"). 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- 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- (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- 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- 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 -6- 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. -7- 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. -8- 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. -9- 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 -10- 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. -11- 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 -12- 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. -13- 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- -14- 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 -15- 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. -16- EX-13 3 PORTIONS OF ANNUAL REPORT 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 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 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. 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 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. 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 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." 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 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. 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 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. 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 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.
Contingency Planned Inventory/ Plans Implementation Assessment Remediation Testing Implementation Developed Date ------------------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------------------
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. 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 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. 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 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. 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 1998 STATEMENT OF CONSOLIDATED INCOME
Year Ended December 31, ------------------------------------- 1998 1997 1996 -------- -------- -------- Dollars in millions, except per share amounts 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 ======== ======== ========
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
Year Ended December 31, ------------------------------------ 1998 1997 1996 ------ ------ ------ Dollars in millions 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.
28 SOLUTIA INC. 1998 ANNUAL REPORT 1998 STATEMENT OF CONSOLIDATED FINANCIAL POSITION
As of December 31, ----------------------- 1998 1997 -------- -------- Dollars in millions, except per share amounts 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.
SOLUTIA INC. 1998 ANNUAL REPORT 29 1998 STATEMENT OF CONSOLIDATED CASH FLOW
Year Ended December 31, ------------------------------------ 1998 1997 1996 ------- ------- ------- Dollars in millions 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.
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 1998 STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
Year Ended December 31, ------------------------------------- 1998 1997 1996 ------- --------- ------- Dollars in millions 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.
SOLUTIA INC. 1998 ANNUAL REPORT 31 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:
1997 1996 ------------------------- 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
The pro forma information is presented for illustrative purposes only and may not be indicative of the results that would have been obtained had the transactions actually occurred on the dates assumed, nor is it necessarily indicative of the future consolidated results of operations. The final determination of the assets contributed to Solutia and the liabilities assumed by Solutia was made pursuant to the agreements entered into between Monsanto and Solutia in connection with the Spinoff. As of the date of the Spinoff, a net liability transfer to Solutia was affected directly through the "Monsanto Company Equity" account in the Statement of Consolidated Financial Position. Monsanto provided certain general and administrative services to Solutia, including finance, legal, treasury, information systems and human resources. The cost allocated to Solutia for these services was based upon the percentage relationship between the net assets utilized in Solutia's operations and Monsanto's total net assets, as well as other methods which management believes to be reasonable. These allocations were $12 million 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 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. 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 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. 3> INTERCOMPANY TRANSACTIONS Transactions with Monsanto prior to the Spinoff, included in the Statement of Consolidated Income, are summarized as follows:
Year Ended December 31, ------------------------ 1997 1996 ------------------------ Intercompany sales $42 $63 General and administrative services 12 85 Interest expense 26 36
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 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:
Employee Shutdown Asset Reductions of Facilities Impairments Total -------------------------------------------------------- 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 ========================================================
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. 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:
1998 1997 1996 ------------------------------------ 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
SOLUTIA INC. 1998 ANNUAL REPORT 35 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6> INVENTORY VALUATION The components of inventories were:
1998 1997 ------------------------- 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 =========================
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:
1998 1997 1996 ------------------------------------ United States $285 $187 $11 Outside United States 90 103 22 ------------------------------------ TOTAL $375 $290 $33 ====================================
The components of income tax expense charged to operations were:
1998 1997 1996 ------------------------------------ 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 ====================================
Factors causing Solutia's effective tax rate to differ from the U.S. federal statutory rate were:
1998 1997 1996 ------------------------------------ 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% ====================================
Deferred income tax balances were related to:
1998 1997 ------------------------- 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 =========================
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:
1998 1997 ------------------------ 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 ========================
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 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:
1998 1997 ------------------------- 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 =========================
Components of the changes in the projected benefit obligation are as follows:
1998 1997 ----------------------- 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 =======================
Changes in the fair value of plan assets are as follows:
1998 1997 ----------------------- 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 =======================
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:
1998 1997 ------------------------- 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 =========================
The accrued net pension liability was included in: Postretirement liabilities $168 $136 Less: Other assets 9 8 ------------------------- ACCRUED NET PENSION LIABILITY $159 $128 =========================
SOLUTIA INC. 1998 ANNUAL REPORT 37 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information regarding plans with accumulated benefit obligations in excess of plan assets is as follows:
1998 1997 ------------------------ Projected benefit obligation $27 $27 Accumulated benefit obligation 23 22 Fair value of plan assets - -
The significant actuarial assumptions used to estimate the projected benefit obligation for the company's principal pension plan were as follows:
1998 1997 --------------------- 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%
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:
1998 1997 ------------------------ 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 ========================
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:
1998 1997 ---------------------- 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 ======================
The accrued liability was included in: Miscellaneous accruals $ 88 $ 91 Postretirement liabilities 803 822 ---------------------- ACCRUED LIABILITY $ 891 $913 ======================
Postretirement benefit costs were determined using the following rate assumptions:
1998 1997 --------------------- 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%
A 1 percent change in the assumed health care cost trend rates would have the following effect as of December 31, 1998:
1-PERCENTAGE- 1-PERCENTAGE- POINT INCREASE POINT DECREASE ---------------------------------------- Effect on total service and interest cost components $1 $ 1 Effect on postretirement benefit obligation 7 10
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 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:
1998 1997 1996 ------------------------------------ Total ESOP expense $6 $5 $3 Interest portion of total ESOP expense 2 3 2 Cash contributions 7 - - Dividends paid on ESOP shares held - - -
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. 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:
1998 1997 1996 ---------------------------------------- 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
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 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:
1997 1996 ------------------------ 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
The following weighted-average assumptions were used for grants of Solutia options in 1998 and 1997:
1998 1997 ------------------------ 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
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:
OUTSTANDING ------------------------------------- EXERCISABLE WEIGHTED-AVERAGE SHARES SHARES EXERCISE PRICE ------------------------------------------------------------- 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 =============================================================
The following table summarizes information about stock options outstanding as of December 31, 1998: OPTIONS OUTSTANDING:
Weighted-Average Range of Remaining Weighted-Average Exercise Prices Shares Contractual Life Exercise Price --------------------------------------------------------------- $ 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 ===============================================================
OPTIONS EXERCISABLE:
Range of Weighted-Average Exercise Prices Shares Exercise Price ------------------------------------------ $ 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 ==========================================
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 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:
1998 1997 ----------------------- U.S. chemical industry $55 $130 U.S. carpet industry 51 73 European glass industry 36 - European chemical industry - 41
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. 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:
1998 1997 1996 -------------------------------- 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
SOLUTIA INC. 1998 ANNUAL REPORT 41 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 1997 1996 ------------------------------- 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
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. Solutia's 1998 and 1997 segment information follows:
Year Ended December 31, ------------------------------------------------------------------------------------ 1998 1997 --------------------------------------- --------------------------------------- NET INTERSEGMENT Net Intersegment SEGMENT: SALES SALES PROFIT Sales Sales Profit --------------------------------------- --------------------------------------- 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 ======== ========
42 SOLUTIA INC. 1998 ANNUAL REPORT
As of December 31, --------------------------------------------------------------------------------------- 1998 1997 -------------------------------------------- ------------------------------------------ CAPITAL DEPRECIATION AND Capital Depreciation and SEGMENT: ASSETS EXPENDITURES AMORTIZATION Assets Expenditures Amortization -------------------------------------------- ------------------------------------------ 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 ============================================ ==========================================
Solutia's geographic information for 1998 and 1997 follows:
Net Sales Long-Lived Assets ----------------------- --------------------- 1998 1997 1998 1997 ----------------------- --------------------- U.S. $2,009 $2,030 $820 $803 Other countries 826 939 124 120 ----------------------- --------------------- CONSOLIDATED TOTALS $2,835 $2,969 $944 $923 ======================= =====================
19> QUARTERLY DATA - UNAUDITED
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ----------------------------------------------------------------------------------- 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
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 1998 FINANCIAL SUMMARY Dollars in millions, except per share amounts
Historical Unaudited Pro Forma -------------------------------------------------------------- ------------------------- OPERATING RESULTS: 1998 1997 1996 1995 1994 1997 1996 -------------------------------------------------------------- ------------------------- NET SALES $ 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 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 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 $ 2.16 $ 1.63 $ 0.28 $ 1.30 $ 1.30 $ 1.33 $ 0.15 DILUTED EARNINGS PER SHARE 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 $ 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 - 12 85 72 69 - - LONG-TERM DEBT 597 597 - - - - - EMPLOYEES (YEAR-END) 8,700 8,800 - - - - - -------------------------------------------------------------- ------------------------- 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. 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. 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. 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. 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. 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. 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.
44 SOLUTIA INC. 1998 ANNUAL REPORT 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.
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 ------------------------------------------- ---------------------------------------- NET SALES $2,969 $ (9) $2,960 $2,977 $ (15) $2,962 Cost of Goods Sold 2,316 (1) 2,313 2,325 3 2,313 1 3 (3) (18) ------------------------------------------- ---------------------------------------- GROSS PROFIT 653 (6) 647 652 (3) 649 Marketing, Administrative, and Technological Expenses 363 14 393 427 14 420 (9) (67) 25 46 Restructuring Expenses - net 192 192 ------------------------------------------- ---------------------------------------- OPERATING INCOME 290 (36) 254 33 4 37 Interest Expense (41) (19) (60) (36) (28) (64) Other Income (Expense) - net 41 41 36 36 ------------------------------------------- ---------------------------------------- INCOME BEFORE INCOME TAXES 290 (55) 235 33 (24) 9 Income Taxes 98 (20) 78 1 (9) (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 =========================================== ======================================== NOTES To record the estimated effect of new selling prices and arrangements on former intercompany sales from Solutia to Monsanto. To record the assumed increase in retiree medical and pension costs as a result of the Spinoff. To record the estimated effect of transactions with the P4 joint venture formed by Monsanto in conjunction with the Spinoff. 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. 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. 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. 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.
SOLUTIA INC. 1998 ANNUAL REPORT 45 EX-21 4 SUBSIDIARIES OF THE REGISTRANT 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.
Percentage of Voting Power Owned by Solutia ------------- Monchem International, Inc.................................. 100 Solutia Europe N.V./S.A..................................... 100
24 EX-23 5 CONSENT OF EXPERT 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 EX-24.(A) 6 POWER OF ATTORNEY 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 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 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 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 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 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 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 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 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 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 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 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 EX-24.(B) 7 CERTIFICATE 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 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. 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 89 0 364 7 331 991 3,301 2,357 2,765 732 597 1 0 0 (8) 2,765 2,835 2,835 2,085 2,085 0 2 43 375 126 249 0 0 0 249 2.16 2.03
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